9.5 Highly Inflationary Economies

Entities with material operations in an economy at risk for being highly inflationary are encouraged to closely monitor the economic environment within the country and to ensure that appropriate processes are in place for identifying relevant inflation data. Entities with material operations in economies at risk for being highly inflationary are encouraged to carefully consider the requirements in ASC 275 related to disclosing risks and uncertainties resulting from certain concentrations, including concentrations associated with foreign operations and therefore with exposure to foreign exchange risk.

Entities should consider providing additional disclosures, if material, about their operations when these operations are considered highly inflationary and may have multiple exchange rates. Relevant disclosures may include the following:

• The overall environment in the highly inflationary economy and its effect on the entity’s financial statements both historically and currently. This disclosure can include information about (1) price controls, inflation, and foreign currency exchange limitations or restrictions; (2) changes in the entity’s revenues and associated costs; and (3) any triggering events, impairment indicators, or impairments.
• The extent of the entity’s exposure to the highly inflationary operations, including the nature of the entity’s activities in the highly inflationary economy (e.g., imports, manufacturing, and size of operations) and other meaningful financial information, such as disaggregated financial information about the highly inflationary operations (e.g., summarized balance sheets, income statements, and cash flow statements).
• A description of the possible effects of the currency exchange limitations or government restrictions on the entity’s operations, including how such limitations or restrictions may affect the entity’s liquidity, cash flows, or debt covenants. An entity should also describe how the existence of such limitations or restrictions affects the application of the entity’s accounting policies.
• The exchange rate(s) used for remeasurement and the basis for judgments applied in determining the rate(s), including:

  • If multiple exchange rates are used, how each rate was determined, what transactions each rate applies to, and the relative significance of the various exchange rates.
  • Any volume restrictions or limitations on a particular exchange rate.
  • Any assumptions used in the determination of the appropriate exchange rate.
  • Any risks or uncertainties related to the entity’s ability to settle at the exchange rate selected.
  • A description of the use of any exchange rates that differ from those used in prior reporting periods.

In addition to the above, an entity should consider the following disclosures:

• The impact of remeasurement on the financial statements, including (1) the amount of any foreign exchange gain or loss that arises from using the various rates for remeasurement and (2) the financial statement line item in which the gain or loss is recorded.
• If applicable, ongoing disclosure of variable interests, if any, in foreign VIEs in accordance with the disclosure requirements of ASC 810.

For more information about highly inflationary economies, see Chapter 7.