At its November 2012 meeting with the SEC staff, the Center for Audit Quality’s SEC Regulations Committee’s International Practices Task Force (IPTF) discussed whether South Sudan’s economy should be considered highly inflationary. The SEC staff affirmed that South Sudan’s economy should be treated as highly inflationary for US GAAP purposes no later than the first reporting period (including annual and interim periods) beginning on or after January 1, 2013.
Determining whether an economy is highly inflationary
Under US GAAP, an economy is considered highly inflationary when its cumulative three-year inflation exceeds 100%. If the cumulative three-year rate is high, but less than 100%, historical inflation rate trends (increasing or decreasing) and other pertinent economic factors should be considered to determine whether classification as highly inflationary is appropriate. If an entity is operating in a highly inflationary economy, the financial statements are remeasured as if the reporting currency of the parent company is the functional currency of the foreign entity.
Due to the timing of South Sudan’s inception, index data is only available beginning in 2010. However, South Sudan’s index increased approximately 66 percent from 2010 to 2011. By the end of 2012, its index was projected to increase an additional 60%. Thus, by the end of 2012, its two-year cumulative inflation rate is projected to be 166%, which is high enough to qualify as a highly inflationary economy.
At its November 2012 meeting with IPTF, the SEC staff affirmed that registrants should treat South Sudan as highly inflationary for US GAAP purposes no later than the first reporting period (including annual and interim periods) beginning on or after January 1, 2013.
Accounting and reporting implications
Determination of an economy as highly inflationary has significant accounting and reporting implications. For example:
Listings of countries that are considered highly inflationary, or are no longer considered highly inflationary, are included in the minutes to the IPTF's meetings. These minutes are available on the Center for Audit Quality’s website.
All companies that have foreign operations in South Sudan will be affected by the recent determination to treat South Sudan as highly inflationary.
For US GAAP reporting purposes, South Sudan should be treated as a highly inflationary economy no later than the first reporting period (including annual and interim periods) beginning on or after January 1, 2013.
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Kenneth O. Miller
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