Download Technical Line: New Venezuelan currency regime — same

No. 2015-04
20 April 2015
Technical Line
New Venezuelan currency regime —
same accounting and reporting
considerations
In this issue:
Overview ....................................... 1
Background ................................... 2
Looking back at 2014.................. 2
Recent developments and
outlook for 2015....................... 3
Cap on profits earned in
Venezuela .............................. 5
Foreign currency accounting
considerations .......................... 5
Remeasurement of monetary
assets and liabilities ................ 5
Other accounting and financial
reporting considerations ........... 6
What you need to know
• The new currency exchange system requires companies with operations in Venezuela to
again reconsider the exchange rate(s) they use to remeasure their Venezuelan bolivardenominated monetary assets and liabilities and related revenues and expenses.
• Companies will need to consider their specific transactions and their ability to transact
through the various exchange mechanisms to determine which exchange rate(s) to use.
• Economic conditions in Venezuela and changes in the currency exchange mechanisms
also raise a number of other financial reporting issues.
• Companies with significant operations in Venezuela should provide disclosures about
their exposure to Venezuela, including how they are affected by recent developments.
Disclosures .................................... 8
Appendix: Use of exchange rates. 10
Overview
Now that Venezuela has revamped its foreign currency exchange system, companies with
operations in Venezuela should reconsider the exchange rate(s) they use to remeasure their
bolivar-denominated monetary assets and liabilities and related revenues and expenses.
Companies should also consider supplementing their disclosures to reflect their consideration
of recent events.
In February 2015, the government said it merged its two supplementary foreign currency
exchange systems (i.e., Sistema Complementario de Administración de Divisas, or SICAD 1,
and Sistema Cambiario Alternativo de Divisas, or SICAD 2) into a single mechanism called
EY AccountingLink | www.ey.com/us/accountinglink
SICAD. The government also introduced the Sistema Marginal de Divisas (Marginal Currency
System, or SIMADI) to compete with the unofficial parallel currency exchange market (the
black market). As a result, companies will need to consider whether to use the new SIMADI rate
of about 193 bolivars (Bs) per US dollar (USD) as of 31 March 2015, the new SICAD rate of
12 Bs per USD or the official rate of 6.3 Bs per USD.
To determine which rate(s) to use to remeasure specific bolivar-denominated monetary assets
and liabilities, a company should consider (1) its legal ability to convert currency or to settle
transactions using a specific rate and (2) its intent to use a particular mechanism, including
whether the rate available through that mechanism is published or readily determinable. The
second criterion is important because entities can use different exchange mechanisms with
different rates for many transactions.
Determining the appropriate exchange rate(s) for financial reporting purposes will depend on
a company’s individual facts and circumstances. Complicating this determination is the
increasing lack of exchangeability across all exchange mechanisms. Many questions remain
about whether Venezuela’s supply of US dollars will be sufficient to meet demand and how
exchanges will be handled under the new currency exchange system.
This publication addresses the US GAAP requirements for remeasuring foreign currencyDetermining the
denominated monetary assets, liabilities and related revenues and expenses and some of the
factors companies need to consider when determining the appropriate exchange rate or rates
appropriate
for remeasurement. Other accounting and disclosure considerations are also discussed.
exchange rate(s)
Background
for financial
The Venezuelan government has maintained currency controls and a fixed official exchange
reporting purposes rate since February 2003. Since 2010, the Venezuelan economy has been considered highly
inflationary1 under Accounting Standards Codification 830.2 For years, the Venezuelan
will depend on a
government has limited a company’s ability to repatriate profits (i.e., pay dividends) and
obtain
US dollars to pay for imported goods and services.
company’s
Looking back at 2014
individual facts
2014, the Venezuelan Ministry of Finance reported that the National Foreign Trade Center
and circumstances. In
(CENCOEX) authorized total disbursements of $20.4 billion for imports, operations and other
corporate and individual currency needs, the lowest level of disbursements to the private
sector since 2003. The amount was 31% lower than in 2013 and 38% lower than in 2012.
According to Ecoanalítica, a financial advisory and economic research organization,
approximately 31% of Venezuela’s domestic demand is met by imports, and 76% of imports
are used as inputs for goods produced in country.3 As a result, the private sector’s ability to
obtain US dollars has a significant effect on the Venezuelan economy, especially the supply of
goods and services in the domestic market.
The problem is that Venezuela’s supply of US dollars has shrunk as the price of crude oil, the
country’s main export and source of US dollars, has fallen.
Before the February 2015 announcement, Venezuela had three legal mechanisms to
exchange currency, but not all exchange mechanisms and rates were available to all entities.
The official rate4 has been reserved for “essential goods,” while the SICAD 1 auction rate was
used for specific authorized transactions, industries and business activities. All companies
incorporated or domiciled in Venezuela were allowed to obtain US dollars through SICAD 25
and purportedly for any purpose.
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Based on our review of financial statements that 82 companies with Venezuelan operations or
exposure to bolivar-denominated monetary assets filed with the US Securities and Exchange
Commission (SEC), nearly half of the companies used the SICAD 2 rate of 50 Bs per USD for
remeasurement as of 31December 2014. The breakdown of rates used by these companies
illustrates the diversity in practice.
Breakdown of rates used by companies as of 31 December 2014
Official rate
SICAD 1
SICAD 2
Multiple
Total
FX rate expressed as
Bs per USD
6.3
12
50
*
NA
Number of companies
19
15
38
10
82
Percentage
23
18
47
12
100
* These companies used more than one legally available exchange rate to remeasure their bolivar-denominated
monetary assets and liabilities and related revenues and expenses.
In our review, we also found that there was diversity in practice among companies in the same
industry. See the appendix for more details.
Recent developments and outlook for 2015
Since its inception,
the SIMADI system
reportedly hasn’t
been able to
meet the private
sector’s demand
for US dollars.
In February 2015, the Venezuelan government said it merged its SICAD 1 and SICAD 2 foreign
currency exchange systems and issued Exchange Agreement No. 33 establishing regulations for
foreign exchange transactions conducted through the new SIMADI system. SIMADI is intended to
compete with the black market by establishing a legal trading system based on supply and
demand. It’s available to individuals and both public and private companies, except for banks
and other financial institutions that are authorized to facilitate exchanges through SIMADI.
These financial institutions are prohibited from accessing SIMADI for their own accounts.
The government has said that both the official rate and the new SICAD rate would be available
to companies importing essential goods (e.g., certain food, medicine, raw materials), with the
majority of such imports being settled at the most favorable rate of 6.3 Bs per USD. However,
the government has not published any new rules or regulations that clarify exactly which
activities, industries or transactions will be eligible to transact at these rates. Allowing certain
companies to transact at the two most favorable exchange rates, subject to the country’s
profit cap laws, is intended to make many necessities affordable for Venezuelan citizens.
Since its inception, the SIMADI system reportedly hasn’t been able to meet the demand from the
private sector due to a lack of supply of US dollars and complex rules, among other reasons. As a
result, the bolivar continues to be devalued. For example, on the first day of operation, the SIMADI
exchange rate was approximately 172 Bs per USD, compared with approximately 177 Bs per
USD on the black market. As of the date of this publication, the SIMADI rate was approximately
197 Bs per USD, compared with approximately 276 Bs6 per USD on the black market.
The following exchange mechanisms and rates are legally available, depending on facts and
circumstances, as of 31 March 2015:
•
Through CENCOEX at the official rate of 6.3
•
Through CENCOEX at the new SICAD rate of 12
•
Through the SIMADI system at the negotiated rate of approximately 193
We understand that the new SICAD rate will be established through periodic auctions
regulated by the government in a process similar to the one the government previously used
to set the SICAD 1 rate. However, there have been no public auctions since October 2014,
3 | Technical Line New Venezuelan currency regime — same accounting and reporting considerations 20 April 2015
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which is why the SICAD rate has remained unchanged at 12 Bs per USD. Until auctions
resume, any currency exchanged at the SICAD rate will be through CENCOEX.
In January 2014, when use of the SICAD 1 exchange rate was significantly expanded through
Exchange Agreement No. 25, the Venezuelan government said the published exchange rate
resulting from the latest SICAD auction would be used for the following transactions and activities:
It is unclear
what types of
transactions and
activities will be
subject to the new
SICAD rate.
•
Foreign investments and payments of royalties; use and exploitation of patents, trademarks,
licenses and franchises; as well as contracts for technology import and technical assistance
•
International public air transportation service for passengers, cargo and mail duly
authorized by the Venezuelan government
•
Operations inherent in the insurance activity
•
Contracts for leasing and services; use and exploitation of patents, trademarks, licenses
and franchises, as well as import of intangible goods; payment of network rental
agreements and installation; repair and maintenance of imported machinery, equipment
or software of the telecommunications sector
•
Cash for traveling abroad, including payment of purchases with credit cards while
traveling abroad and of electronic commerce transactions with suppliers abroad
•
Remittances to relatives living abroad
•
Payments for operations inherent in national civil aviation
It is unclear whether the new SICAD rate will apply to these types of transactions and
activities. It is also unclear whether companies that interpreted the term “foreign
investments” in Exchange Agreement No. 25 to mean that future dividend remittances would
be transacted at the exchange rate established through the SICAD auction process will be able
to continue to make that assertion. Companies may need to change the rate they use to
remeasure their net monetary assets, depending on what the government says about how the
new SICAD rate can be used.
How we see it
With slumping crude oil prices and significant debt payments coming due later this year,
the Venezuelan government has fewer US dollar reserves available to meet the private
sector’s demands this year. As a result, entities may have a harder time obtaining US
dollars this year than at any time since currency controls were first implemented.
In its Week III March 2015 Weekly Report, Ecoanalítica said “the drop in oil prices implies a drop
of 48.0% in the country’s foreign currency revenues and a deficit of US$25.58 billion, which,
given the lack of financing options, will have to be offset by an adjustment in demand and, as
always, private sector imports are the first on the list when it comes to implementing cuts.”
If Ecoanalítica and other analysts are correct, companies doing business in Venezuela may
experience less exchangeability in 2015 unless oil prices recover significantly and
Venezuela changes its monetary policy. Currency exchanges at either the official or SICAD
rate to pay dividends remain unlikely for the foreseeable future. Such capital outflows
likely will occur only through the new SIMADI system, assuming liquidity in that market
improves and other operational challenges are addressed. According to the Venezuelan
Central Bank, during the first six weeks of the new system’s operation, only 1.4% of all
authorized foreign exchange transactions occurred through SIMADI compared with initial
estimates of 5% to 7%.
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Cap on profits earned in Venezuela
It’s our understanding that an entity’s compliance with Venezuela’s profit cap law will continue
to be a prerequisite to obtain US dollars through any of the exchange mechanisms controlled
by the government.
The law,7 which was enacted in January 2014, limits profit margins by product and service and
sets a cap of 30% above the cost structure (as defined) of the good or service. The National
Superintendence for Defense of Socioeconomic Rights is in charge of its enforcement and
monitors compliance by importers, producers, suppliers and retailers. Some entities have been
required to demonstrate their compliance with this law by furnishing performance certificates,
which are subject to government audit.
Foreign currency accounting considerations
Remeasurement of monetary assets and liabilities
ASC 830 requires each foreign currency transaction to be recorded in the functional currency
of the reporting entity at the date it’s recognized, using the exchange rate in effect at that
date. Under US GAAP, the functional currency of a Venezuelan foreign entity of a US dollar
functional currency parent is the US dollar because Venezuela is considered to have a highly
inflationary economy. Consequently, all bolivar-denominated assets, liabilities, revenues,
expenses, gains and losses are considered foreign currency transactions of that Venezuelan
foreign entity. As a result, monetary assets and liabilities are remeasured at each balance
sheet date using the rate at which the item could be settled at that date.
The exchange rate(s) a company uses for remeasurement may vary by transaction type,
based on the entity’s legal ability to convert currency or to settle transactions using the
specified rate. Determining which currency exchange mechanisms and rates are legally
available to a reporting entity in Venezuela requires careful consideration of the recent
announcements by the Venezuelan government. The assistance of legal counsel or
Venezuelan regulatory authorities (e.g., CENCOEX) may be required.
If more than one exchange mechanism is legally available, a company should generally base its
decision on its intent to use a particular mechanism to settle the specified transaction and whether
the rate available through that mechanism is published or readily determinable at the reporting
date. The probability of transacting through a particular mechanism should also be considered
(i.e., whether the volume and frequency of exchange activity through a particular mechanism
will support the entity’s currency needs). If exchangeability is lacking across all exchange
mechanisms, a company should use the published rate for the legally available exchange
mechanism that most faithfully reflects the economics of the company’s business activity.
How we see it
The SEC staff has said a company’s decision to use a particular exchange rate or rates
should be based on careful consideration of the various exchange mechanisms and entityspecific facts and circumstances. There is no rebuttable presumption that registrants that
previously used the SICAD 2 exchange rate should now use the SIMADI rate.
The SEC staff also said it would not impose a higher burden of proof on companies that
conclude that a rate other than SIMADI is appropriate to remeasure their foreign currencydenominated monetary assets and liabilities. However, the SEC staff expects companies to
make these determinations consistently. For example, absent a change in facts and
circumstances, a company that previously concluded that it was not eligible to transact at
either the official rate or the SICAD 1 rate would generally be expected to use the SIMADI
rate, now that the SICAD 2 system no longer exists.
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Companies also need to make disclosures about the factors management considered in
choosing a particular exchange rate(s) and the effects on the reported results. Warnings
about possible changes in exchange rates also should be considered.
Other accounting and financial reporting considerations
The Venezuelan government reported a contraction in gross domestic product (GDP) in 2014
and an inflation rate of 68.5%. Some analysts are projecting a further contraction in GDP this
year and an inflation rate of more than double the 2014 rate. Venezuela’s deteriorating
economy and its currency exchange controls and profit cap law raise a number of financial
reporting issues beyond the foreign currency matters discussed above. These accounting and
financial reporting considerations include:
•
The decision
to deconsolidate
a Venezuelan
operation should
be based on entityspecific facts and
circumstances and
will require
significant judgment.
Consolidation: ASC 810-10-15-10 states that control of a majority-owned subsidiary may
not rest with the majority owner under certain circumstances, including if the subsidiary
operates under foreign exchange restrictions, control or other governmentally imposed
uncertainties so severe that they cast significant doubt on the parent’s ability to control
the subsidiary. ASC 830 further indicates if a lack of exchangeability is other than
temporary, a reporting entity should carefully consider whether it is appropriate to
consolidate, combine or apply the equity method to the foreign operation.8
While companies should consider the totality of their individual facts and circumstances,
we generally do not believe that a lack of exchangeability in and of itself would result in
the deconsolidation of a foreign subsidiary or change the accounting for an investment in
a foreign operation from the equity method to the cost method. In addition to limitations
on exchangeability, factors to consider would include:
•
Pricing and/or profit cap restrictions
•
Requirements to source materials from one or more state-owned companies
•
Requirements to pay employee salaries for idle workforce
•
Government prescription on the specific products and quantities to be produced
How we see it
The decision to deconsolidate a Venezuelan operation (or to change the accounting for an
investment from the equity method to the cost method) should be based on entity-specific
facts and circumstances and will require significant judgment. Preclearance with the SEC’s
staff is generally recommended for companies that believe they have lost control (or
significant influence) over their Venezuelan operations.
•
Cash: SEC Regulation S-X Rule 5-02 requires separate disclosure of cash with restrictions
on its withdrawal or usage, including a description of the provisions of any restrictions. To
be classified as cash without restrictions, cash should be readily available for the payment
of an obligation and free from any contractual restriction that limits its use in satisfying
such an obligation. Companies experiencing difficulties converting significant amounts of
bolivars into US dollars that do not have ongoing operations in Venezuela should consider
whether those holdings should be classified as restricted cash.
•
Accounts receivable and revenue recognition: ASC 3109 states that a loss from
uncollectible receivables should be accrued when (1) it is probable that an asset has been
impaired and (2) the amount of the loss can be reasonably estimated. Further, the inability
to make a reasonable estimate of the amount of the loss may affect the method for
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recognizing revenue. Companies unable to collect their US dollar-denominated receivables
from customers in Venezuela (including the Venezuelan government) should consider that
fact in determining their allowance for doubtful accounts and revenue recognition for
future transactions.
•
Investments in debt and equity securities:10 According to ASC 320,11 a security is
considered impaired when its fair value is below its cost basis. For investments in debt and
equity securities classified as available for sale (AFS) and denominated in a foreign
currency, a company should compare the functional-currency-equivalent fair value
measured at the current exchange rate to the cost basis measured at the historical
exchange rate (i.e., the rate on the day the security was acquired). When a security is
impaired, an entity should assess whether the impairment is other than temporary.
An impaired AFS debt security is considered other-than-temporarily impaired if (1) the
holder has the intent to sell the impaired debt security, (2) it is more likely than not the
holder will be required to sell the impaired debt security before recovery or (3) the holder
does not expect to recover the entire amortized cost basis of the security — even if it does
not intend to sell the security.
In the first two situations, the amount of other-than-temporary impairment (OTTI)
recognized in earnings is equal to the difference between the impaired debt security’s
amortized cost basis and its functional-currency-equivalent fair value.
In the third situation, the resulting OTTI is separated into the amount representing credit
loss (which is recognized in earnings) and the amount related to all other factors — including
a decline in fair value attributed to changes in exchange rates that is considered to be
temporary (which is recognized in other comprehensive income). Importantly, a decline in
fair value attributed to changes in exchange rates that the holder does not expect to
recover should be recognized in earnings.
The model for determining whether foreign-currency denominated held-to-maturity (HTM)
debt securities are impaired is the same as that for AFS debt securities, except for the
treatment of changes in value attributed to changes in currency exchange rates. Foreign
currency transaction gains or losses related to HTM debt securities are recognized in
earnings in the period in which exchange rates change. As a result, the current exchange
rate is used to measure both the functional-currency-equivalent fair value and amortized
cost basis of the HTM debt security when determining whether the security is impaired.
ASC 320 requires an evaluation of whether and when an AFS equity security will recover in
value and whether the investor has the intent and ability to hold that equity security until it
recovers in value. As declines in fair value become more severe, a company must do more
analysis and collect more objective evidence to support an assertion that it anticipates a
recovery in fair value and has the intent and ability to hold the security until it recovers. If an
impairment is other than temporary, the cost basis (measured at the historical exchange rate) of
the impaired equity security would be written down to the functional-currency-equivalent fair
value (measured at the current exchange rate) and the loss should be recognized in earnings.
How we see it
Deteriorating economic conditions in Venezuela and the new currency exchange
mechanisms resulting in the indirect devaluation of the bolivar may require companies to
recognize and disclose OTTI of investments in debt and equity securities.
Regardless of whether a company determines that a decline in fair value of an investment
in a security below cost is temporary or other than temporary, the company should
document how it reached its conclusion.
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•
Long-lived assets: When evaluating whether property, plant or equipment is impaired in
accordance with ASC 36012 companies should remember that the impairment evaluation
is performed using the functional currency of the entity in which the long-lived assets
reside, not the local currency.
Long-lived assets are evaluated for impairment when events or changes in circumstances
indicate that their carrying amounts may not be recoverable. Companies should consider
how recent economic and political developments in Venezuela may affect their capital and
operating strategies and whether changes to those strategies will affect the recoverability
of their assets.
•
Goodwill and indefinite-lived intangibles: Indefinite-lived intangible assets and goodwill
are subject to annual impairment tests as well as interim impairment tests if impairment
indicators are present. Management should consider whether economic or political
developments in Venezuela trigger the need for an interim impairment test.
•
Inventory: Under ASC 33013 inventory measured at the lower of cost or market in an
entity’s books of record that are maintained in a foreign currency requires a unique
application of ASC 830. First, inventory carried at cost in the foreign currency should be
remeasured to the functional currency using historical exchange rates. Next, the
remeasured historical cost is compared with market (as defined in ASC 330) stated in the
functional currency. If the historical cost (remeasured in the functional currency) is greater
than market, the inventory should be written down to market, even if a write-down would
not otherwise be required in the foreign currency books of record. Based on application of
local profit cap laws and depending on the remeasurement rate used, companies may need
to impair their inventory balances.
Disclosures
Companies with exposure to Venezuela should challenge their disclosures in the notes to their
financial statements and in the business, risk factors and management’s discussion and
analysis (MD&A) sections of their SEC filings, as appropriate.
Throughout 2014 and so far this year, the SEC staff has issued a number of comments related to
currency issues in Venezuela. To date the SEC staff has not objected to the exchange rate used
by registrants, but it has focused its comments on how issuers have considered the multiple
legal exchange rates that exist in Venezuela and how issuers determined the appropriate rate.
The SEC staff also has requested additional disclosures related to these judgments. Given the
recent currency exchange reforms, we expect this trend of comments to continue.
Disclosures that companies should consider, subject to materiality, include:
•
A discussion of an entity’s operations in Venezuela, including the nature and extent of
business activities in that country
•
•
Qualitative disclosures supplemented with quantitative information, in a manner that
management believes is most meaningful (e.g., disclosure of disaggregated financial
information such as summarized balance sheet, income statement and cash flow data
or net assets)
A discussion of exchange rates used to remeasure bolivar-denominated monetary assets and
liabilities, including a discussion of the company’s ability to actually transact at such rates
•
Whether items were remeasured at a different rate than in the previous period
(e.g., items remeasured at the SIMADI rate in the current period that were
remeasured at the SICAD 2 rate in the previous period)
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•
Whether multiple exchange rates are used and, if so, (1) the basis for applying different
rates and (2) the limitations and uncertainties of each selected rate (e.g., the amount
of currency available at such rates, the company’s ability to transact through specified
exchange mechanisms and to realize the rates established through those mechanisms
(both historically and projected))
•
The amount of bolivars pending government approval for settlement at each rate and
the length of time pending
•
The effect of exchange restrictions on the company’s cash flows available to meet
capital and short-term funding requirements, including possible changes in profitability
that may result from any additional expected currency devaluation, change in exchange
rates to be used for remeasurement purposes or the existing law capping profits that can
be earned in Venezuela
•
Recognized impairments and debt covenant violations attributed to changes in exchange
rates or other factors attributed to the entity’s operations in Venezuela
Next steps
The Venezuelan government may issue more regulations or take other steps that may
affect a company’s decision on which exchange rate(s) to use for financial reporting
purposes. Companies should continue to closely monitor developments.
Endnotes:
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EY | Assurance | Tax | Transactions | Advisory
© 2015 Ernst & Young LLP.
All Rights Reserved.
SCORE No. BB2970
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ASC 830-10-45-11 states that a highly inflationary economy is one that has a cumulative inflation rate of
approximately 100% or more over a three-year period.
ASC 830, Foreign Currency Matters.
“The debacle of CENCOEX: Foreign currency is in few hands,” Ecoanalítica, Week III March 2015 Weekly Report.
The official exchange rate of 6.3 Bs to the US dollar has remained unchanged since the government formally
devalued the currency in February 2013.
The SICAD 2 rate was intended to be the closest legal rate to a market-based rate, which was obtained through
registered financial institutions and exchange houses.
Dolartoday.com.
Decree No. 600 with Rank, Value and Force of Master Law of Fair Prices in Official Gazette No. 40,340.
See ASC 830-20-30-2 and ASC 830-30-45-9.
ASC 310, Receivables.
Portions of the discussion on investments in debt and equity securities were clarified subsequent to the initial
issuance of this publication.
ASC 320, Investments — Debt and Equity Securities.
ASC 360, Property, Plant, and Equipment.
ASC 330, Inventory.
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9 | Technical Line New Venezuelan currency regime — same accounting and reporting considerations 20 April 2015
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Appendix: Use of exchange rates
The following graphs show the breakdown, by industry, of exchange rates 82 companies used
in financial statements they filed with the SEC as of 31 December 2014.
Population of companies by industry
40
Number of companies
35
30
25
20
15
10
5
0
Official rate
9
8
Number of companies
7
6
5
4
3
2
1
0
Food & beverage
Manufacturing
Oil, gas & mining
Pharmaceutical
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Technology
EY AccountingLink | www.ey.com/us/accountinglink
SICAD 1 rate
9
Number of companies
8
7
6
5
4
3
2
1
0
SICAD 2 rate
18
Number of companies
16
14
12
10
8
6
4
2
0
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Multiple rates
6
Number of companies
5
4
3
2
1
0
Airlines
Food & beverage
Manufacturing
Pharmaceutical
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