9.5 Highly Inflationary Economies

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9.5 Highly Inflationary Economies

The SEC staff continues to focus on accounting and disclosure considerations related to the foreign currency exchange environment in countries whose economies (1) are highly inflationary or (2) risk becoming highly inflationary. Registrants 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.

SEC Regulation S-K, Item 303, requires registrants to disclose in their MD&A any known trends, events, or uncertainties that are reasonably likely to have a material effect on their liquidity, capital resources, or results of operations. SEC Regulation S-K, Items 305 and 503(c), require registrants to disclose risks, including risk factors and market risks. The SEC staff has emphasized that registrants should present tailored risk factors in their filings and avoid using boilerplate language.

The SEC staff has also historically provided informal guidance for registrants with foreign operations that may be subject to material risks and uncertainties, such as political risks, currency risks, and business climate and taxation risks. The staff has reminded registrants that the effects on their consolidated operations of an adverse event related to these risks may be disproportionate to the size of their foreign operations. Therefore, the staff has historically encouraged registrants to discuss in their MD&A any trends, risks, and uncertainties related to their operations in individual countries or geographic areas and possibly to supplement such disclosures with disaggregated financial information about those operations.

SEC Considerations

The SEC staff has indicated in informal discussions that a registrant should consider providing additional disclosures, if material, about its operations if these operations are considered highly inflationary and may have multiple exchange rates. The following disclosures are consistent with those recommended by the SEC staff:

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 the recent scrutiny related to highly inflationary economies, see Chapter 7.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.