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6.4 Accounting once an economy is no longer highly inflationary
Publication date: 31 May 2022
us Foreign currency guide
When a reporting entity determines that an economy is no longer highly inflationary, a foreign entity operating in that economy will likely need to change its functional currency back to the local currency.
If the foreign entity determines the local currency is its functional currency, its account balances (measured in the reporting currency of its parent) should be measured into the local currency using the spot exchange rate on the date the local currency is determined to be the new functional currency.
If an entity’s subsidiary’s functional currency changes from the reporting currency to the local currency because the economy ceases to be considered highly inflationary, the entity shall restate the functional currency accounting bases of nonmonetary assets and liabilities at the date of the change as follows:
- The reporting currency amounts at the date of change shall be translated into the local currency at current exchange rates.
- The translated amount shall become the new functional currency accounting basis for the nonmonetary assets and liabilities.
Monetary assets and liabilities should also be restated in the new functional currency using the current exchange rates at the time it has been determined that the economy ceases to be highly inflationary. Equity accounts should be restated using historical rates.
This guidance differs from the guidance in ASC 830-10-45-9 regarding changes from a parent company’s reporting currency to another currency in circumstances other than an economy being deemed no longer highly inflationary. In those circumstances, the CTA account balance is adjusted as if the new functional currency had always been the functional currency (see FX 3.3.1). Under the guidance in ASC 830-10-45-15, there is no adjustment to the CTA account during the period in which the economy was highly inflationary.
Example FX 6-4 illustrates the accounting for a change in functional currency of a foreign entity when an economy ceases to be highly inflationary.
EXAMPLE FX 6-4
Change in functional currency due to a country’s economy ceasing to be highly inflationary
This example is a continuation of Examples FX 6-1 and FX 6-2.
The table below shows the following Iguazu Inc financial statement information at December 31, 20X5: (1) the balance sheet in the local currency (ARS), (2) the exchange rate used to remeasure accounts into the functional currency (USD), and (3) the balance sheet in the USD functional currency.
The exchange rate on December 31, 20X5 is USD 1 = ARS 925.
Account | ARS balance at 12/31/X5 | Exchange rate | USD balance at 12/31/X5 |
Cash | ARS 1,510,000 | USD 1 = ARS 925 | USD 1,632 |
Accounts receivable | ARS 1,092,000 | USD 1 = ARS 925 | USD 1,181 |
Inventory | ARS 40,000 | USD 1 = ARS 800 | USD 50 |
Fixed assets | ARS 700,000 | USD 1 = ARS 800 | USD 875 |
Total assets | ARS 3,342,000 | USD 3,738 | |
Accounts payable | ARS 250,000 | USD 1 = ARS 925 | USD 270 |
Accrued expenses | ARS 450,000 | USD 1 = ARS 925 | USD 487 |
Loan from USA Corp | ARS 925,000 | USD 1 = ARS 925 | USD 1,000 |
Total liabilities | ARS 1,625,000 | USD 1,757 | |
Common stock | ARS 100,000 | USD 1 = ARS 500 | USD 200 |
APIC | ARS 420,000 | USD 1 = ARS 500 | USD 840 |
Cumulative translation adjustment (CTA) | (USD 687) | ||
Retained earnings | ARS 1,197,000 | USD 1,628 | |
Total shareholder’s equity | ARS 1,717,000 | USD 1,981 | |
Total liabilities and equity | ARS 3,342,000 | USD 3,738 |
On January 1, 20X6, Argentina is no longer deemed to be highly inflationary. The spot exchange rate on that date is USD 1 = ARS 925.
How should Iguazu Inc account for the change in functional currency?
Analysis
The monetary and nonmonetary US dollar balances should be translated into Argentine pesos using the exchange rate on January 1, 20X6.
In remeasuring Iguazu Inc’s financial statements from USD to ARS, Iguazu Inc’s nonmonetary asset balances will change from the amounts as stated in its local books and records. This adjustment is determined by taking the sum of Iguazu Inc’s nonmonetary assets (USD 50 inventory + USD 875 fixed assets) and multiplying it by the difference between the exchange rate on the date Iguazu Inc transitioned to a functional currency of US dollars (USD 1 = ARS 800) and the current exchange rate (USD 1 = ARS 925).
ASC 830 does not provide guidance on how to recognize this adjustment. We believe it is reasonable to recognize it as an adjustment to opening retained earnings on the date of the change in functional currency from USD to ARS.
Account | USD balances on 1/1/X6 | Exchange rate | ARS balances at 1/1/X6 |
Cash | USD 1,632 | USD 1 = ARS 925 | ARS 1,510,000 |
Accounts receivable | USD 1,181 | USD 1 = ARS 925 | ARS 1,092,000 |
Inventory | USD 50 | USD 1 = ARS 925 | ARS 46,250 |
Fixed assets | USD 875 | USD 1 = ARS 925 | ARS 809,375 |
Total assets | USD 3,738 | ARS 3,457,625 | |
Accounts payable | USD 270 | USD 1 = ARS 925 | ARS 250,000 |
Accrued expenses | USD 487 | USD 1 = ARS 925 | ARS 450,000 |
Loan from USA Corp | USD 1,000 | USD 1 = ARS 925 | ARS 925,000 |
Total liabilities | USD 1,757 | ARS 1,625,000 | |
Common stock | USD 200 | USD 1 = ARS 500 | ARS 100,000 |
APIC | USD 840 | USD 1 = ARS 500 | ARS 420,000 |
Cumulative translation adjustment (CTA) | (USD 687) | ||
Retained earnings | USD 1,628 | ARS 1,312,625 | |
Total shareholder’s equity | USD 1,981 | ARS1,832,625 | |
Total liabilities and equity | USD 3,738 | ARS 3,457,625 |
Note that in this example, the CTA balance (that remained frozen during the highly inflationary period) remains on the parent’s books and will be adjusted prospectively.
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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