(Reference: AICPA International Practices Task Force - November 4, 1999 meeting)
CHILEAN TECHNICAL BULLETIN NO. 45 and 64
Prepared by Wayne Carnall, PWC
Technical Bulletin 64 (TB 64) on Accounting Treatment for Permanent Foreign Investments became effective January 1, 1999. It supersedes Technical Bulletin 51 (TB 51) which in turn superseded Technical Bulletin 45 (TB 45). Accordingly, this is the third standard on accounting for foreign operations that the Chilean standard setters have issued in the last 4 years.
At the meeting of the AICPA International Practices Task Force on August 15, 1996, the staff of the SEC indicated that they did not object to a conclusion that TB 45 was part of a comprehensive basis of adjusting for inflation, and accordingly, differences compared to US GAAP did not need to be eliminated in the reconciliation to US GAAP.
Under TB 64, the accounting for foreign operations that is followed depends on how the foreign subsidiary is classified. TB 64 has three categories:
- Foreign subsidiary operates as an extension of the Chilean parent
- Foreign subsidiary operates in a stable country
- Foreign subsidiary operates in an unstable country.
If the foreign subsidiary operates as an extension of the Chilean parent the accounting that is followed is the same as if the subsidiary was actually in Chile. The accounting is conceptually consistent with the methodology contained in SFAS 52 for similar situations.
If the foreign subsidiary operates in a stable country, all amounts (including income statement) from the local currency financial statements are translated into Chilean pesos at the year end exchange rate. The effects of differences in (i) inflation in Chile and (ii) devaluation of the Chilean peso to the foreign currency, on the beginning of the year investment in the foreign subsidiary are recorded directly to equity as an "Accumulated Exchange Difference Adjustment". This is similar to the cumulative translation adjustment under US GAAP. The adjustment is determined in the following steps:
- Start – Investment in foreign entity in BOY pesos
- Adjust investment for Chilean inflation for the year - balance in constant pesos
- Add net income/loss of foreign entity in pesos
- Compare the resulting amount to the equity of the foreign entity
- The difference is recorded as the "Accumulated Exchange Difference Adjustment"
The accumulated exchange difference adjustment represents the difference between inflation in Chile and the devaluation of the currency from which the company uses to measure its transactions.
If the foreign subsidiary operates in an unstable country there is a two step process. First, the amounts are remeasured from the local currency into US dollars in a manner similar to that under US GAAP if the foreign subsidiary operated in a highly inflationary environment and the reporting currency was the US dollar. That is, the US dollar is considered the "functional currency" or currency for measurement. The second step is to translate into pesos using the same methodology as described above for stable country.
The definition of a stable or unstable country is flexible. In practice, all countries in South America are considered to be unstable and only countries such as the US, Japan, Germany etc. are considered to be stable. The vast majority of foreign operations of Chilean companies are in unstable countries.
DIFFERENCES BETWEEN TB 45 AND TB 64
There are two primary differences between TB 45 and TB 64
- The amount recorded as the Accumulated Exchange Difference Adjustment directly to equity under TB 64 was recorded as part of income under TB 45.
- Under Technical Bulletin 45, goodwill was considered to be an asset of the parent and adjusted using the Chilean inflation rate. Under TB 64, goodwill is measured in the currency of the subsidiary – more conceptually consistent with US GAAP.
DISCLOSURES
Paragraph 50 of TB 64 provides some very specific disclosure requirements. However, to understand the mechanics of applying the standard, it would appear that the following additional items might warrant disclosure.
- Description of methodology used to translate foreign operations
- Indication of which countries are considered to be stable Vs unstable
- Disclose the amount of the foreign exchange gain/loss included in income that is attributable to operations in unstable countries – i.e., the effect of remeasuring transactions into US dollars.
- Year-end and average exchange rates – this will allow an investor to estimate the effect of using the year end exchange rates
- Average rates of inflation for the period – this will allow investors, with the information in the point above, to estimate what the results would have been had the amounts been presented in pesos of equivalent purchasing power.
- Other
CHILEAN TECHNICAL BULLETIN NO. 45 and 64
EXAMPLE
FACTS
-
Chilean Parent company is formed on December 31, 1992 and is capitalized with Ch$ 700,000 cash.
-
On the same day all the cash is converted into US$ 2,000 using the exchange rate of US$ 1 = Ch$ 350 and invested in a Brazilian entity.
-
The Brazilian entity maintains its books in reals, but its functional currency is deemed to be the US dollar because Brazil is considered to be an unstable environment. Therefore, all amounts are remeasured into US dollars using a method similar to that presented in SFAS 52 for a company that uses the US dollar as the reporting currency.
-
The Brazilian entity uses the US$ 2,000 to purchase fixed assets on December 31, 1992.
-
At December 31, 1992, the balance sheets of the two entities would be as follows.
| Chilean Parent |
| Investment in Brazilian entity |
Ch$ 700,000 |
|
| Common stock |
Ch$ 700,000 |
|
| |
| Brazilian Entity |
| Fixed assets |
US$ 2,000 |
|
| Equity |
US$ 2,000 |
|
The consolidated financial statements in Chilean pesos would present fixed assets and common stock at Ch$ 700,000.