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