The foreign exchange legislation in Venezuela moved into a new phase early this year. The exchange mechanism is a moving target that continues to challenge overseas parents.
Most entities with foreign operations are familiar with the judgment on functional currency so the rest should be easy – right? Once the functional currency is selected, simply translate it. In some countries however, it is not that simple.
Let's take Venezuela. Exchange rate legislation in Venezuela was amended earlier this year to create a new mechanism (SICAD II). Prior to this, there were two official exchange rates (CENCOEX and SICAD I). SICAD II introduces the ability for both individuals and entities to buy and sell foreign exchange with significantly fewer restrictions than other mechanisms. If SICAD II operates as described, it seems like good news for entities trying to get funds out of Venezuela. But what are the accounting implications?
The creation of SICAD II means that there are now three official exchange rates. All three published exchange rates qualify as a spot rate and can be used to translate monetary assets and liabilities. Judgment is required to determine which rate best reflects the rate that will be available for dividends and this judgement should then be disclosed in the Financial Statements. For more guidance, see In Brief – Exchange rates in Venezuela.
However, before the subsidiary is translated, IAS 29 should be applied if the country is hyperinflationary, which Venezuela is. For countries where hyperinflation applies, see Hyperinflationary economies at 31 December 2013.
So watch this space - translating your foreign subsidiary might require a bit more thought. Venezuela is the latest to receive attention but Argentina might be the next on the list. Its history of exchange restrictions reflects some similar patterns and it continues to be on the watch list for hyperinflation.
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