In a recent meeting, a representative of the SEC accounting staff noted that the SEC staff is focusing on how companies with operations in Venezuela are affected by the various foreign currency exchange mechanisms in Venezuela and price and profitability controls. The SEC staff member noted that these developments affect the foreign currency exchange rate that companies use in their financial statements to reflect their assets, liabilities, revenues, expenses, and gains and losses that are denominated in Venezuelan bolivars and can affect whether a company consolidates its Venezuela operations. Pre-filing consultation of the SEC staff prior to deconsolidation, and perhaps also the selection of the exchange rate, may be appropriate.

Companies must determine the appropriate exchange rate to use in preparing their financial statements by considering, under their individual facts and circumstances, their legal access to U.S. dollars under each of the available foreign currency exchange mechanisms, the mechanism they intend to use, as well as the availability of published exchange rates. Given the ambiguity of some of the Venezuelan government announcements related to these exchange mechanisms, parent companies have consulted lawyers as to the available mechanism for, among other things, dividends to parent companies. Because the exchange rates related to the different exchange mechanisms vary from 6.3 bolivars to one U.S. dollar to more than 50 bolivars to one U.S. dollar, the effect of the selected exchange rate can be significant.

In addition, companies will have to determine whether they can continue to consolidate their Venezuelan subsidiaries. U.S. GAAP provides that consolidation may not be appropriate when, among other things, a “subsidiary operates under foreign currency restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent’s ability to control the subsidiary.”

Since 2013, companies with operations in Venezuela have reflected impairments resulting from the deteriorating foreign currency exchange rate and expanded their disclosures about the Venezuela situation in their Management’s Discussion and Analysis and in the financial statement footnotes. The SEC staff has also focused on the expanded disclosures and has issued comments requesting additional information about the implications of the foreign exchange rate system on companies’ operations.