The Financial Accounting Standards Board has codified a workaround blessed by the Securities and Exchange Commission for companies that may have ended up with some odd results in accounting for activities in Venezuela, where the economy is considered inflationary.

FASB published Accounting Standards Update No. No. 2010-19 to update the rules in Accounting Standards Codification Topic 830 on Foreign Currency to reflect an SEC staff announcement made at a March meeting of FASB’s Emerging Issues Task Force. The SEC previously addressed inflationary accounting through an alert published by the Center for Audit Quality.

The recent guidance focuses on foreign currency issues related to investments or operations in Venezuela. When a given national economy is inflationary, U.S. companies doing business there are required to convert results of operations from a local currency to the parent company’s currency to report from a more stable platform.

The SEC said it has received a number of inquiries on the topic. Companies have wavered on whether to use an official exchange rate set by the Venezuelan government or a parallel rate that can be obtained through a series of transactions through brokers. The parallel rate may provide companies with more liquidity and may differ significantly from the official rate, the SEC said.

Running the numbers through a few different illustrations, companies may end up with reported balances for financial reporting purposes that differ from the actual U.S. dollar-denominated balances, the SEC said, and the differences could be significant. Where this happens, the SEC is looking for some disclosures, according to the codified announcement.

Such disclosures should explain the rates used for remeasurement and translation and describe why the actual U.S. dollar balances differ from amounts reported for financial reporting purposes. They should also specify the relevant line items and the impact on reported income.

The SEC staff acknowledged companies may have already filed 2009 financial statements without such disclosures, and it’s not asking them to recast those financial statements. Going forward, however, the SEC said proper application of ASC 830-45-11, which says “financial statements of a foreign entity in a highly inflationary economy shall be remeasured as if the functional currency were the reporting currency,” should address the issue.

SEC staff also acknowledged FASB’s EITF is discussing certain issues related to foreign currency, including the accounting for multiple exchange rates, so the guidance is interim until a final solution is developed.

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