Volume 19, No. 3

 

A Currency Affair: Venezuelan Vagaries:  Venezuela isn’t famous just for its oil exports and flamboyant leaders. It’s also been a self-contained producer of inflation, with consequent unpleasant effects on its populace. It’s also going to have unpleasant effects on the financial statements of U.S. multinational firms doing business in Venezuela. Starting in 2010, the consolidated financial statements of the parents will have to take into account the highly inflationary economy of Venezuela. That means a change in accounting methodology that will result in the recognition of remeasurement gains or losses directly in earnings. Previously, translation gains or losses were not visible in earnings: they were tucked away in stockholders’ equity. Now they’ll be more visible.

The results of the change in accounting are not always straightforward; investors will find non-comparability exists in the years before and after the change. Further hampering intercompany comparability for investors: there are several different exchange rates that may be used in remeasuring financial statements, and any single rate is not always the right one for all companies doing business in Venezuela. Estimating changes in the reporting of foreign operations is not a “do it yourself” exercise that investors can prepare for themselves, leaving them at the mercy of the firms making disclosures about their Venezuelan exposure. There are no rigorous, paint-by-numbers disclosure requirements that ensure all relevant information will be released; investors’ best chances for receiving relevant information come from the SEC’s open-ended requirements for MD&A.

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