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Accounting rules for exchange rates in hyperinflationary economies not in sync with reality, senior accountants say

The FASB should consider taking up a project related to exchange rates in hyperinflationary economies as tricky reporting issues have cropped up, senior accountants told the board on March 7, 2023.

Some firms are uncertain about what is the appropriate exchange rate to use in certain facts or circumstances, they said, part of discussions by the Financial Accounting Standards Advisory Council (FASAC).

“GAAP requires everybody to use the official exchange rate but in a lot of countries – and we’ve experienced this in Venezuela and Argentina - there are alternate mechanisms to get the cash out of a country and you’re precluded essentially from using those exchange rates (the government rates) for your financial statements,” Howard Guild, chief accounting officer at Schlumberger Limited, said. “And a lot of cases you end up reporting these results that are kind of fantasy world, they don’t represent economic reality at all,” he said. “So, one of our thoughts was maybe it would be good to take up a project whereby we identify when it would be appropriate to move away from the official exchange rate, what sort of facts or circumstances would be appropriate for something like that.”

The issue was raised during a closed FASAC session that addressed trends that have emerged in the financial reporting arena, the discussions indicated.

“We talked about when a country or currency becomes hyperinflationary and who really determines that particularly when you have blue chip or market rates versus government official rates,” Lara Long, vice president, chief accounting officer at AGCO Corp, explained during the meeting. “And I think as was the case a long time ago on determining hyperinflationary with Argentina, for instance, the government rate was lower than those market blue chip rates,” she said. “Now we flipped into an opposite issue and so we talked about whether there should be standard setting by the FASB, whether or not the FASB should take up this issue – who’s responsible for determining hyperinflationary.”

The FASAC is a 35-member panel of senior financial executives from some of the nation’s largest companies. The body functions as the main advisory council to the FASB on accounting projects toward the establishment of U.S. Generally Accepted Accounting Principles (GAAP). It is chaired by former PwC LLP Partner Michael Morrow.

The topic of inflation accounting rules was also raised last year to FASB Chair Richard Jones during a May 2022 financial reporting conference. Jones was asked whether the board was open to revising old inflation accounting rules from the 1980s. He heard at that time that accounting for inflation had become a top reporting issue because prices have been increasing as fast as during the 1980s when FASB Statement (SFAS) No. 33, Financial Reporting and Changing Prices, was in place. SFAS No. 33 was codified in FASB ASC 255, Changing Prices.

Higher interest rates and a higher inflationary environment have been a concern of companies as this is tied to various topics, according to FASAC discussions. However, some members said that they did not see the need for novel standards, as the issues could be addressed through current FASB projects.

“A hodge-podge of topics” are tied to rates and inflation, Greg Wachsman, vice president, equity research analyst at VOYA Investment Management, said.

In a closed session, some members talked broadly about the FASB’s current project on disaggregation of income statement expenses, and said the board should prioritize getting some more breakouts between wages and labor and other costs that might have different inflationary sort of trends, said Wachsman. “We talked about pensions in a higher rate environment and about higher discount rates and how sometimes certain accounting choices can lead to somewhat counter-intuitive impacts in terms of how that impacts pension expense for similar types of companies in the same industry,” he said. “We talked about the impact of rates and how to think about that flowing through the income statement for companies that have debt or securities that are hedged and sort of thinking about the hedge accounting and whether we feel like we have the ability to think through those impacts."

Other topics

Other newer topics that were raised included advertising, discontinued operations, gross versus net under revenue rules when there are multiple parties involved, and in process research and development. Projects that the FASB is either researching or has added to its agenda such as software costs, digital reporting, the statement of cash flows and financial key performance indicators for business entities were also mentioned.

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