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Contents
Overview .................................................................................... 2
1.
Background .......................................................................... 2
1.1 Looking back at 2014 ....................................................... 3
2.
3.
4.
5.
Disclosures ........................................................................... 9
June 2015
Overview
Now that Venezuela has revamped its foreign currency exchange system,
companies with operations in Venezuela should reconsider the exchange rate(s)
they use to translate their bolivar-denominated monetary assets and liabilities
and related revenues and expenses. Entities should also consider supplementing
their disclosures to reflect their consideration of recent events.
In February 2015, the Venezuelan Government (the Government) announced
that it merged its two supplementary foreign currency exchange systems
(i.e., Sistema Complementario de Administracin de Divisas, or SICAD 1, and
Sistema Cambiario Alternativo de Divisas, or SICAD 2) into a single mechanism
called SICAD. The Government also introduced the Sistema Marginal de Divisas
(Marginal Currency System, or SIMADI) to compete with the unofficial parallel
currency exchange market (the black market). As a result, companies will need
to consider whether to use the new SIMADI rate of approximately 198 bolivars
(Bs) per US dollar (USD) as of 4 June 2015, the new SICAD rate of Bs12 per US
dollar or the official rate of Bs6.3 per US dollar.
To determine which rate(s) to use to translate Venezuelan foreign operations
and to translate specific bolivar-denominated monetary assets and liabilities,
a company should consider: (1) its legal ability to convert currency or to settle
transactions using a specific rate and (2) its intent to use a particular
mechanism, including whether the rate available through that mechanism is
published or readily determinable. The second criterion is important because
entities can use different exchange mechanisms with different rates for many
transactions.
Determining the
appropriate exchange
rate(s) for financial
reporting purposes will
depend on an entitys
individual facts and
circumstances.
1. Background
The Government has maintained currency controls and a fixed official
exchange rate since February 2003. Since 2010, the Venezuelan economy
has been considered highly inflationary under IAS 29 Financial Reporting
in Hyperinflationary Economies. For years, the Government has limited a
companys ability to repatriate profits (i.e., pay dividends) and obtain
US dollars to pay for imported goods and services.
June 2015
SICAD 1
SICAD 2
Multiple
Total
FX rate expressed
as Bs per USD
6.3
12
50
NA
Number of
companies
19
15
38
10
82
Percentage
23
18
47
12
100
* These companies used more than one legally available exchange rate to remeasure their
bolivar-denominated monetary assets and liabilities and related revenues and expenses.
1
2
The debacle of CENCOEX: Foreign currency is in few hands, Ecoanaltica, Week III
March 2015 Weekly Report.
The official exchange rate of 6.3 Bs to the US dollar has remained unchanged since the
government formally devalued the currency in February 2013.
The SICAD 2 rate was intended to be the closest legal rate to a market-based rate, which was
obtained through registered financial institutions and exchange houses.
June 2015
How we see it
An entitys decision to use a particular exchange rate or rates should be
based on careful consideration of the various exchange mechanisms and
entity-specific facts and circumstances. Absent a change in facts and
circumstances, a company that previously concluded that it was not eligible
to transact at either the official rate or the SICAD 1 rate would generally be
expected to use the SIMADI rate, now that the SICAD 2 system no longer
exists.
SIMADI is intended to compete with the black market by establishing a legal
trading system based on supply and demand. Its available to individuals and
both public and private companies, except for banks and other financial
institutions that are authorised to facilitate exchanges through SIMADI.
These financial institutions are prohibited from accessing SIMADI for their
own accounts.
The Government has said that both the official rate and the new SICAD rate
would be available to entities importing essential goods (e.g., certain food,
medicine, raw materials), with the majority of such imports being settled at the
most favourable rate of Bs6.3 per US dollar. However, the Government has not
published any new rules or regulations that clarify exactly which activities,
industries or transactions will be eligible to transact at these rates. Allowing
certain entities to transact at the two most favourable exchange rates, subject
to the countrys profit cap laws, is intended to make many necessities affordable
for Venezuelan citizens.
Since its inception, the SIMADI system reportedly has not been able to meet the
demand from the private sector due to a lack of supply of US dollars and
complex rules, among other reasons. As a result, the bolivar continues to be
devalued. For example, on the first day of operation, the SIMADI exchange rate
was approximately Bs172 per US dollar, compared with approximately Bs177
per US dollar on the black market. As of the date of this publication, the SIMADI
rate was approximately Bs198 per US dollar, compared with approximately
Bs4284 per USD on the black market.
The following exchange mechanisms and rates were legally available, depending
on facts and circumstances, as of 31 March 2015:
Dolartoday.com.
June 2015
We understand that the new SICAD rate will be established through periodic
auctions regulated by the Government in a process similar to the one the
Government previously used to set the SICAD 1 rate. However, there have
been no public auctions since October 2014, which is why the SICAD rate has
remained unchanged at Bs12 per USD. Until auctions resume, any currency
exchanged at the SICAD rate will be through CENCOEX.
In January 2014, when use of the SICAD 1 exchange rate was significantly
expanded through Exchange Agreement No. 25, the Venezuelan government
announced that the published exchange rate resulting from the latest SICAD
auction would be used for the following transactions and activities:
It is unclear whether the new SICAD rate will apply to these types of
transactions and activities. It is also unclear whether companies that interpreted
the term foreign investments in Exchange Agreement No. 25 to mean
that future dividend remittances would be transacted at the exchange rate
established through the SICAD auction process will be able to continue to make
that assertion. Entities may need to change the rate they use to translate their
net monetary assets, depending on what the Government says about how the
new SICAD rate can be used.
June 2015
How we see it
With slumping crude oil prices and significant debt payments coming due
later this year, the Government has fewer US dollar reserves available to
meet the private sectors demands this year. As a result, entities may have a
harder time obtaining US dollars this year than at any time since currency
controls were first implemented.
In its Week III March 2015 Weekly Report, Ecoanaltica said, the drop in oil
prices implies a drop of 48.0% in the countrys foreign currency revenues
and a deficit of US$25.58 billion, which, given the lack of financing options,
will have to be offset by an adjustment in demand and, as always, private
sector imports are the first on the list when it comes to implementing cuts.
If Ecoanaltica and other analysts are correct, entities doing business in
Venezuela may experience less exchangeability in 2015 unless oil prices
recover significantly and Venezuela changes its monetary policy. Currency
exchanges at either the official or SICAD rate to pay dividends remain
unlikely for the foreseeable future. Such capital outflows likely will occur only
through the new SIMADI system, assuming liquidity in that market improves
and other operational challenges are addressed. According to the
Venezuelan Central Bank, during the first six weeks of the new systems
operation, only 1.4% of all authorised foreign exchange transactions
occurred through SIMADI compared with initial estimates of 5% to 7%.
Decree No. 600 with Rank, Value and Force of Master Law of Fair Prices in Official Gazette
No. 40,340.
June 2015
June 2015
How we see it
The nature of the restriction on the use of cash and cash equivalents must
also be assessed to determine if the balance is ineligible for inclusion in cash
equivalents because the restriction results in the investment ceasing to be
highly liquid or readily convertible.
6
7
8
IFRS 10.B23(a)(vii)
IFRS 12.13(a)(i)
IAS 7.49
June 2015
5. Disclosures
Entities with exposure to Venezuela should challenge the disclosures in their
financial statements. Where material, disclosures that entities should consider
include:
A discussion that IAS 29 has been applied and the financial statements and
the corresponding figures for previous periods that have been restated for
changes in the general purchasing power of the functional currency
June 2015
Whether multiple exchange rates are used and, if so: (1) the basis for
applying different rates; and (2) the limitations and uncertainties of each
selected rate (e.g., the amount of currency available at such rates, the
entitiys ability to transact through specified exchange mechanisms and
to realise the rates established through those mechanisms (both
historically and projected))
Next steps
The Venezuelan Government may issue more regulations or take other steps
that may affect an entitys decision on which exchange rate(s) to use for
financial reporting purposes. Entities should continue to closely monitor
developments in this area.
June 2015
10
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