Argentina Breaches “Highly Inflationary” July 1, 2018*

Time is running out. Economic conditions in Argentina have deteriorated, with interest rates exceeding 40%, the Argentine peso (ARS) depreciating more than 50% vs. the U.S. dollar (USD) in the last year, and inflation rates approaching 4% per month.

These kinds of economic conditions have likely had a significant impact on your Argentine operations and if it hasn’t already, will impact accounting process for companies with Argentine operations. If you have an Argentine subsidiary that is local currency functional, it will need to be changed to reporting currency functional effective immediately. Auditors are expecting that accounting change by July 1 for calendar quarter companies.

Under ASC 830, entities that operate in a highly inflationary economy must adopt their parent’s reporting currency as their functional currency. A “highly inflationary” economy is defined in ASC 830 as an economy that has experienced cumulative 3-year inflation rates that exceed 100%. Although there have been various inflation statistics that measure Argentine inflation over the past 3 years, there is broad consensus that all the measures indicate that the 3-year cumulative rate has now exceeded 100%. All of the Big 4 accounting firms have recently released communications confirming Argentina should now be considered a highly inflationary economy.

• Recent developments related to the classification of Argentina as a highly inflationary economy under U.S. GAAP – Deloitte
• Monitoring inflation in Argentina – PWC

What are the immediate implications?

Hedge Programs: Although very few companies cash flow hedge Argentine exposures, there are a number of them who balance sheet hedge this currency. Cash Flow hedges of USD purchases from the parent will no longer qualify, as the exposure currency (USD) cannot be the functional currency (USD) under ASC815. Balance sheet hedges do not require special hedge accounting treatment, however it is highly likely that the prior ARS exposure notional (generally the interco balances) will change substantively as result of the functional currency change.

Translation Change: There is no earnings impact associated with a functional currency change. ASC830 assures companies that “Previously issued financial statements shall not be restated for any change in the functional currency.” When the functional currency changes from a ARS to the USD, cumulative translation adjustments for prior periods remain in equity and the translated amounts for nonmonetary assets at the end of the prior period (at the balance sheet rate) become the accounting basis for those assets in the period of the change and subsequent periods. Given the highly inflationary threshold was reached at mid-year for most companies, the annual accounting will reflect 2 different translation approaches. There will be zero earnings impact on the date of the change in functional currency.

Disclosure: ASC 210-10-45 notes that “Adoption … of an accounting principle necessitated by transactions or events that are clearly different in substance from those previously occurring” are not considered to be changes in accounting principle. However, the functional currency change would likely be mentioned in the notes to the financial statements.

In summary, companies using the dollar as their reporting currency that have subsidiaries using the Argentine peso as their functional currency need to change to using the U.S. dollar as that subsidiaries functional currency. This accounting should be applied as of the beginning of the first quarter following the determination that the economy has become highly inflationary (July 1 2018, for calendar quarter reporters). Private companies with no interim reporting requirements will have until the first of their next fiscal year to make the change. In the future, should the Argentine economy no longer be considered highly inflationary based on updated inflation statistics, and the decrease in inflation is not considered temporary, reverting to the Argentine peso as the functional currency may be appropriate.

Please contact us should you need any assistance relating to the impact of Argentina’s highly inflationary economy on your financial reporting process.