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6.2 Determining whether an economy is highly inflationary
Publication date: 31 May 2022
us Foreign currency guide
Reporting entities are responsible for monitoring inflation in countries in which they have operations, and should have proper procedures and controls in place to make this determination.
ASC 830-10-45-11 describes when an economy is considered highly inflationary.
Excerpt from ASC 830-10-45-11
For the purposes of this requirement, a highly inflationary economy is one that has cumulative inflation of approximately 100 percent or more over a 3-year period.
The example in ASC 830-10-55-24 indicates that the three-year cumulative inflation rate is the compound inflation rate over the three-year period (including interim periods).
If the three-year cumulative inflation rate exceeds 100%, the economy should be considered highly inflationary in all instances. Projected declines in future periods should not be considered. However, when the three-year cumulative inflation rate is significant, but less than 100%, inflation rate trends (increasing or decreasing) and other relevant economic factors should be considered to determine whether the economy should be considered highly inflationary. Similarly, ASC 830-10-55-25 illustrates a fact pattern in which a drop in the three-year cumulative inflation rate below 100% may not mean the economy is no longer highly inflationary if the trend continues to be high, indicating the drop is only temporary.
Although ASC 830 does not require the use of a specific inflation index, a broad-based measure of general inflation should be used, similar to the US Consumer Price Index (e.g., inflation data reported to the International Monetary Fund). Generally, it is not appropriate to use an index based on company or industry data only.
Sometimes, the determination of when an economy has become highly inflationary requires significant judgement. For example, sometimes the inflation data reported by a country may not be reliable.
6.2.1 The role of the International Practices Task Force
The International Practices Task Force (IPTF) of the Center for Audit Quality’s SEC Regulations Committee meets periodically with the staff of the SEC to discuss and focus on emerging international accounting and reporting issues relating to SEC rules and regulations. In an effort to facilitate greater consistency, the IPTF developed a framework for compiling inflation data to assist reporting entities in monitoring inflation statistics in connection with their determination of the inflationary status of countries in which they operate. The considerations discussed by the IPTF may help registrants (and private companies) determine which economies should be considered highly inflationary. These considerations are discussed in the Monitoring Inflation in Certain Countries discussion document available on the Center for Audit Quality website (www.thecaq.org).
Question FX 6-1
If a country’s economy is deemed highly inflationary, when should the guidance in ASC 830 regarding foreign entities in highly inflationary economies be adopted?
If a country’s economy is deemed highly inflationary, when should the guidance in ASC 830 regarding foreign entities in highly inflationary economies be adopted?
PwC response
Reporting entities that are SEC registrants should apply the guidance in ASC 830 at the beginning of the quarter following the date the economy was deemed highly inflationary. For example, if a foreign economy is determined to be highly inflationary as of December 1, 20X1, a reporting entity would apply the guidance for highly inflationary economies as of the beginning of its next quarter (e.g., January 1, 20X2).
Private companies that do not have interim reporting requirements may choose to assess the economies in which it has foreign entities as of the beginning of each reporting period. If a country’s economy is highly inflationary, the guidance in ASC 830 may be applied prospectively as of the beginning of the next reporting period. For example, if a foreign economy is determined to be highly inflationary as of May 1, 20X1, a calendar year-end reporting entity may apply the guidance for highly inflationary economies as of January 1, 20X2.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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