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Technical Alert N 2015-02

Current financial reporting issues
Consolidation considerations for Venezuelan
subsidiaries applying International Financial
Reporting Standards (IFRS)

Assurance
January 2015

Technical Alert N 2015-02

January 2015

Current financial reporting issues

Consolidation considerations for Venezuelan subsidiaries applying
International Financial Reporting Standards (IFRS)
Issue
For the application of the IFRS, Venezuela is considered a hyperinflationary economy, and the
government maintains a regime of strict controls, mainly foreign exchange and price controls.
Multinational companies are facing significant difficulty in repatriating earnings from Venezuelan
subsidiaries. There is significant uncertainty about exchange rates available, the amount that can be
repatriated at a given exchange rate and the timing of repatriation. There is some speculation that the
current exchange rate mechanisms may change. There is a continuing high level of government
regulation (that is, fair price regulation and labor law) that might impose limitations on some
decision-making powers of management.
Some have questioned whether continuing uncertainty and difficulty in repatriation mean that
multinational companies should consider de-consolidation of their Venezuelan subsidiaries under
IFRS.

Impact
Multinational companies should only de-consolidate Venezuelan subsidiaries if they no longer meet
the 3 criteria for control under IFRS 10. Uncertainty about repatriation of profits and current exchange
difficulties alone are unlikely to result in a loss of control under IFRS 10. However, each circumstance
should be addressed on its individual merits.
1. An investor controls an investee if it has all of the following elements [IFRS 10 para 7 (a)(c)]: power
over the investee;
2. Exposure, or rights, to variable returns from its involvement with the investee; and
3. The ability to use its power over the investee to affect the amount of the investors returns.
If one or more of the elements of control changes an entity should reassess control.
An investor will lose control of its subsidiary when the investor no longer has the power to direct its
relevant activities and hence loses the ability to vary its returns. This is a high hurdle. Where an entity
has power, it must demonstrate that it has no exposure to variable returns to determine it does not
have control. Difficulty in repatriating earnings, and uncertainty about the exchange rate, is not the
same as a loss of control.
This follows from paragraph B83 of IFRS 10 that states An investor that has power over an investee
can lose control of an investee if the investor ceases to be entitled to receive returns or to be exposed to
obligations.

Technical Alert N 2015-02

January 2015
A parent that continues to direct the relevant activities of its investee in Venezuela meets the power
criterion. It is likely to remain exposed to the variable returns. Those returns could be positive or
negative and are not only financial in nature (see IFRS 10 paras B56 and B57).
A full assessment of control should be performed and include the following:

The parents permanent inability to repatriate any profits or benefits from its Venezuelan
operation;
The impact of government regulations on the ability to make decisions relating to all relevant
activities of the Venezuelan operation, for example capital structure, product pricing and labor
relations; and
The political and economic situation within Venezuela, including expropriation of all assets of the
Venezuelan operation.

Different multinational parents may find themselves in different circumstances. Each fact pattern
should be carefully considered, however, we believe that most multinational parents with subsidiaries
in Venezuela will continue to consolidate in the current environment.

Previous exceptions to consolidation

A much earlier version of the consolidation guidance under IFRS (IAS 27, revised in 2003 as part of
the first (Improvements) contained a number of exceptions to consolidation including foreign
exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast
significant doubt on the parent's ability to control the subsidiary.
This specific exception has been removed from IFRS; however, it does remain as a consideration under
Generally Accepted Accounting Principles in the U.S. (US GAAP). A parent needs to consider whether
that significant doubt about control exists. An entity should also consider the level of disclosure
required to meet the requirement to disclose significant judgments and assumptions made in its
control assessment. [IFRS 12 para 7]. An entity is also required to disclose significant restrictions on its
ability to access or use the assets and settle the liabilities of the group. [IFRS 12 para 13].

Related topics
See related technical publication 2014-06 (http://pwc.to/1koNB2Z) for our most recent guidance on
Venezuela and exchange rates. Further changes to the foreign exchange market in Venezuela may
occur.

Contact us
Manuel E. Pereyra G.
manuel.pereyra@ve.pwc.com
+58 (212) 700 61 17
@manuelpereyra

Carlos Vzquez
vazquez.carlos@ve.pwc.com
+58 (212) 700 61 86

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