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AssuranceJanuary 2015

www.pwc.com/ve

Technical Alert N 2015-02

Current financial reporting issues

Consolidation considerations for Venezuelansubsidiaries applying International FinancialReporting Standards (IFRS)

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Current financial reporting issuesConsolidation considerations for Venezuelan subsidiaries applyingInternational Financial Reporting Standards (IFRS)

Issue

For the application of the IFRS, Venezuela is considered a hyperinflationary economy, and thegovernment maintains a regime of strict controls, mainly foreign exchange and price controls.Multinational companies are facing significant difficulty in repatriating earnings from Venezuelansubsidiaries. There is significant uncertainty about exchange rates available, the amount that can berepatriated at a given exchange rate and the timing of repatriation. There is some speculation that thcurrent exchange rate mechanisms may change. There is a continuing high level of governmentregulation (that is, fair price regulation and labor law) that might impose limitations on somedecision-making powers of management.

Some have questioned whether continuing uncertainty and difficulty in repatriation mean thatmultinational companies should consider de-consolidation of their Venezuelan subsidiaries underIFRS.

Impact

Multinational companies should only de-consolidate Venezuelan subsidiaries if they no longer meetthe 3 criteria for control under IFRS 10. Uncertainty about repatriation of profits and current exchandifficulties alone are unlikely to result in a loss of control under IFRS 10. However, each circumstancshould be addressed on its individual merits.

1. An investor controls an investee if it has all of the following elements [IFRS 10 para 7 (a)(c)]: powover the investee;

2. Exposure, or rights, to variable returns from its involvement with the investee; and3. The ability to use its power over the investee to affect the amount of the investors returns.

If one or more of the elements of control changes an entity should reassess control.

An investor will lose control of its subsidiary when the investor no longer has the power to direct itsrelevant activities and hence loses the ability to vary its returns. This is a high hurdle. Where an entihas power, it must demonstrate that it has no exposure to variable returns to determine it does not

have control. Difficulty in repatriating earnings, and uncertainty about the exchange rate, is not thesame as a loss of control.

This follows from paragraph B83 of IFRS 10 that states An investor that has power over an investeecan lose control of an investee if the investor ceases to be entitled to receive returns or to be exposedobligations.

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Technical Alert N 2015-02January 2015

A parent that continues to direct the relevant activities of its investee in Venezuela meets the powercriterion. It is likely to remain exposed to the variable returns. Those returns could be positive ornegative and are not only financial in nature (see IFRS 10 paras B56 and B57).

A full assessment of control should be performed and include the following:

The parents permanent inability to repatriate any profits or benefits from its Venezuelanoperation;

The impact of government regulations on the ability to make decisions relating to all relevantactivities of the Venezuelan operation, for example capital structure, product pricing and laborrelations; and

The political and economic situation within Venezuela, including expropriation of all assets of theVenezuelan operation.

Different multinational parents may find themselves in different circumstances. Each fact patternshould be carefully considered, however, we believe that most multinational parents with subsidiari

in Venezuela will continue to consolidate in the current environment.

Previous exceptions to consolidation

A much earlier version of the consolidation guidance under IFRS (IAS 27, revised in 2003 as part ofthe first (Improvements) contained a number of exceptions to consolidation including foreignexchange restrictions, controls, or other governmentally imposed uncertainties so severe that they casignificant doubt on the parent's ability to control the subsidiary.

This specific exception has been removed from IFRS; however, it does remain as a consideration undGenerally Accepted Accounting Principles in the U.S. (US GAAP). A parent needs to consider wheth

that significant doubt about control exists. An entity should also consider the level of disclosurerequired to meet the requirement to disclose significant judgments and assumptions made in itscontrol assessment. [IFRS 12 para 7]. An entity is also required to disclose significant restrictions onability to access or use the assets and settle the liabilities of the group. [IFRS 12 para 13].

Related topics

See related technical publication 2014-06 (http://pwc.to/1koNB2Z) for our most recent guidance onVenezuela and exchange rates. Further changes to the foreign exchange market in Venezuela mayoccur.

http://pwc.to/1koNB2Zhttp://pwc.to/1koNB2Z

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Esta publicacin no abarca todos los temas, se enfoca en la seleccin de aquellos temas que se consideran generalmente ms relevantes. Se deben consultar tod

las normas de auditora relevantes y, cuando sea aplicable, las leyes y regulaciones vigentes en Venezuela.

Aunque se han realizado todos los esfuerzos razonables para resumir de manera precisa los aspectos considerados ms relevantes, la informacin contenida en e

publicacin podra no ser exhaustiva o se podra haber omitido algo que pudiera ser relevante para un lector particular. Por lo tanto, esta publicacin no pretende se

estudio de todos los aspectos de las NIA o un sustituto de la lectura de las normas e i nterpretaciones cuando se trate asuntos especficos. Espieira Pacheco y

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esta publicacin. Los lectores no deben actuar basados en esta publicacin sin previamente buscar asesora profesional especfica.

2015 Espieira, Pacheco y Asociados (PricewaterhouseCoopers). Todos los derechos reservados. PwC se refiere a la firma venezolana Espieira, Pacheco y Asociados (PricewaterhouseCoopersel contexto, a la red de firmas miembro de PricewaterhouseCoopers International Limited, cada una de las cuales es una entidad legal separada e independiente. RIF J-00029977-3

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