Audit and Enterprise Risk Services
Consolidation and Disclosure Considerations Related to Venezuelan Operations
Financial Reporting Alert 14-5
This alert discusses considerations related to accounting and disclosure under U.S. GAAP in connection with an entity’s Venezuelan operations.
Through recent discussions with the SEC staff, we are aware that the SEC staff recently did not object to a registrant’s conclusion to deconsolidate its Venezuelan operations as of December 2014. We understand that the two primary arguments cited by the registrant were (1) an other-than-temporary lack of currency exchangeability and (2) the existence of several government limitations on the registrant’s ability to control its Venezuelan operations. Examples of government intervention might include restrictions on (1) labor force reductions, (2) decisions about product mix or pricing, and (3) sourcing of raw materials or other inputs into the production process.
Regarding the lack of currency exchangeability, ASC 830-20-30-21 notes, in part:
If the lack of exchangeability is other than temporary, the propriety of consolidating, combining, or accounting for the foreign operation by the equity method in the financial statements of the reporting entity shall be carefully considered.
Further, ASC 810-10-15-10 notes, in part:
A majority-owned subsidiary shall not be consolidated if control does not rest with the majority owner — for instance, if [the] subsidiary operates under foreign exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent’s ability to control the subsidiary.
An entity’s evaluation of whether deconsolidation of a foreign subsidiary is appropriate should be based on the entity's specific facts and circumstances. We believe that in making such a determination with respect to operations in Venezuela, an entity should consider factors that include, but may not be limited to, the following:>
The mere fact that currency exchangeability is lacking or that government controls exist may not in and of itself create a presumption that an entity should deconsolidate its Venezuelan operations, nor does the ability to exchange some volume of currency create a presumption that continued consolidation of Venezuelan operations is appropriate. However, the existence of the above factors represents negative evidence that an entity should consider in determining whether deconsolidation is appropriate on the basis of the entity’s specific facts and circumstances.
If an entity ultimately concludes that deconsolidation is appropriate, the entity still must determine the appropriate date for deconsolidation, including the appropriate currency exchange rate to use for remeasuring its deconsolidated investment and any other outstanding monetary balances that are no longer eliminated in consolidation (provided that they are not considered fully impaired).
In light of the SEC staff's recent decision, an entity should provide clear disclosure of the basis for its consolidation/deconsolidation conclusion regarding an investment in Venezuelan operations. An entity that continues to consolidate may wish to consider disclosing its intention to continue monitoring developments in coming quarters, along with a description of the possible financial statement impact, if estimable, of deconsolidation were that to occur.
In addition, as historically recommended by the staff of the SEC’s Division of Corporation Finance, an entity should consider providing disclosures such as the following (to the extent that the entity’s Venezuelan operations and its disclosures about them are material):
We believe that an entity should also consider the following disclosures:
Because of the complexity of these accounting and disclosure issues, we encourage entities with material Venezuelan operations to continue to consult with their accounting advisers and legal counsel.
For further considerations related to the accounting under U.S. GAAP in connection with the foreign currency exchange environment in Venezuela, refer to Financial Reporting Alert 14-1.2
1 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification."
2 Financial Reporting Alert 14-1, “Foreign Currency Exchange Accounting Implications of Recent Government Actions in Venezuela.”