Here is an example of hyperinflation accounting (change from functional currency (ARS) to presentation currency (USD)) and a limited disclosure on hedge accounting for a net investment in a foreign operation (Third-party financing of EUR operations in EUR-denominated notes).
(Source: www.ft.com, ‘American companies count cost of Argentina inflation’ by Alistair Gray in New York and Benedict Mander in Buenos Aires APRIL 7, 2019)
‘Rampant inflation in Argentina has forced US companies to stop using the peso to account for their business in the country, triggering multimillion-dollar foreign exchange losses.
US accounting rules are requiring American businesses to use the dollar as their “functional currency” in Argentina because cumulative inflation over the past three years has exceeded 100 per cent.
Recently disclosed annual results showed the resulting costs to several New York-listed groups which were required to implement the bookkeeping change under Generally Accepted Accounting Principles last summer.
Companies to quantify the hit to profits included the insurer Assurant, which took a $17.3m charge, the security company Brink’s ($8m) and the staffing company ManpowerGroup ($2.5m). Most said the costs were immaterial in the context of their global operations.
Eduard Loiacono, capital markets partner at PwC Argentina, said the change in the functional currency meant “that from one day to the next, you need to measure all of your transactions in US dollars”.
At the same time, he added, subsidiaries in Argentina also still needed to account in pesos to satisfy local requirements. “It’s challenging, and also more work. But US companies have no choice but to do this.” Mr Loiacono said.
Ciro Buttacavoli, partner at Grant Thornton, said the use of the dollar instead of the peso could lead to “vastly different” figures being reported. He said that the shift could require US companies to book income or losses, because it meant they had to remeasure their assets and liabilities.
Assurant said in its annual report that the shift to using the dollar for it Argentine operation caused it to recalculate “non-US dollar denominated monetary assets and liabilities”.
The accounting headache is the latest difficulty facing multinational business in Argentina. Continued economic volatility is one of the main factors that has deterred companies from investing more in the country under President Mauricio Macri.
“High inflation is bad for business, both for foreigners and locals,“ said Juan Manuel Waquer, head of the American Chamber of Commerce in Buenos Aires. “Clearly it’s not an agreeable environment for attracting investment.”
He added: “Companies want predictability, and in such a high inflation environment it’s very difficult to make plans.” ‘
Link to Assurant annual report 2018 (in PDF):
Excerpts from Form 10-K ManpowerGroup Inc. For the Fiscal Year Ended December 31, 2018
Item 1A Risk Factors
Foreign currency fluctuations may have a material adverse effect on our operating results.
Although we report our results of operations in United States dollars, the majority of our revenues and expenses are denominated in currencies other than the United States dollar, and unfavorable fluctuations in foreign currency exchange rates could have a material adverse effect on our reported financial results. Highly inflationary economies of certain foreign countries, such as Argentina in 2018, can result in foreign currency devaluation, which may also negatively impact our reported financial results.
Foreign exchange losses in 2018 were $1.4 million compared to $0.8 million in 2017. The increase in foreign exchange losses in 2018 compared to 2017 was primarily due to the $2.5 million translation loss in Argentina as a result of the highly-inflationary designation of its economy as of July 1, 2018, partially offset by favorable foreign currency impacts from translation of amounts denominated in currencies other than functional currencies in a few of our reporting units and translation gains resulting from intercompany transactions between our foreign subsidiaries and the United States in 2018.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies Example of hyperinflation accounting
Foreign Currency Translation Example of hyperinflation accounting
The financial statements of our non-United States subsidiaries have been translated in accordance with the accounting guidance on foreign currency translation. Under the accounting guidance, asset and liability accounts are translated at the current exchange rates and income statement items are translated at the average exchange rates each month. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss, which is included in shareholders’ equity. Example of hyperinflation accounting
As of July 1, 2018, the Argentina economy was designated as highly-inflationary and was treated as such for accounting purposes starting in the third quarter of 2018.
A portion of our Euro-denominated notes is accounted for as a hedge of our net investment in our subsidiaries with a Euro-functional currency. For this portion of the Euro-denominated notes, since our net investment in these subsidiaries exceeds the amount of the related borrowings, net of tax, the related translation gains or losses are included as a component of accumulated other comprehensive loss. Example of hyperinflation accounting
Hedging of the net investment in a foreign operation
In addition, the last part of the note above shows an application of IFRIC 16 Hedges of a Net Investment in a Foreign Operation.