After consulting with staff at the Securities and Exchange Commission, a Center for Audit Quality task force says companies with operations in Venezuela should consider new accounting for those operations because the economy there is considered inflationary.

The Center for Audit Quality issued an alert advising companies with operations in Venezuela they should take a close look at the Venezuelan economy in light of Accounting Standards Codification Topic 830 Foreign Currency Matters. The International Practices Task Force, a sub-committee of the CAQ SEC Regulations Committee, says its analysis of the criteria suggests Venezuela should be considered inflationary for accounting purposes.

That triggers some changes in accounting and financial reporting for companies that have operations in Venezuela, says Carol Banford, managing partner for Grant Thornton. “It’s important because in countries where you have high inflation, the financial statements actually have less and less meaning each year as the inflation increases,” she says.

To keep financial statements relevant, companies with subsidiaries in inflationary economies are required to convert the subsidiary’s results of operations from the local currency to the parent company’s currency to report from a more stable platform, she says. “You use the parent company’s currency to translate the subsidiary’s financial information, so the financial information coming forward for the subsidiary is meaningful and stable,” she said. “You tend to get more realistic information that way.”

With SEC staff’s guidance, the Task Force determined Venezuela should be considered inflationary for financial reporting periods beginning Dec. 1, 2009. Other countries also considered inflationary as of late September include Myanmar and Zimbabwe, while countries on the watch list include the Democratic Republic of Congo, Ethiopia, Guinea, Iran, Iraq, and the tiny island nations of Seychelles and São Tomé and Príncipe.

Banford says the determination likely affects a limited number of companies now, but it does put companies on alert to pay attention to national economies where they operate as countries begin to emerge from recession and economic crisis.

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