Monitoring inflation in Argentina

In brief , PwC US Jun 26, 2018

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Did you know that Argentina will need to be classified as “highly inflationary” next quarter?

What happened?

The inflation rate in Argentina has exceeded projections over the past three quarters. As a result, the indices (Index Compilations) currently being used to monitor inflation in Argentina indicate three-year cumulative inflation rates that have increased significantly. The International Practices Task Force (IPTF) of the Center for Audit Quality (CAQ) discussed the inflationary status of Argentina on May 16, 2018 and categorized Argentina as a country with a projected three-year cumulative inflation rate greater than 100%.

Why is this important?

The level of inflation in Argentina has been of significant interest for several years. Monitoring inflation in Argentina has been made more difficult due to a lack of consistency in the consumer price indices reported by the country’s prior administration. As a result, the IPTF has calculated 3-year cumulative inflation using three different indices. The first two are CPI indices and are calculated using nearly the same compilation of indices. They differ only in that one uses a San Luis province index for the period from November 2015 to April 2016 and the other uses a city of Buenos Aires index for that period. The third index is the National Wholesale Price Index (WPI). The WPI is included for consideration largely because of concern about the accuracy of the other indices for certain periods, and the fact that it had been consistently calculated for all 3 years. This contrasts with accuracy concerns with the CPI indices in the early periods in the current three year time horizon. However, at the current time, the impact these data concerns have on the calculation of cumulative inflation is insignificant.

In the fourth quarter of 2016, several US accounting firms submitted a white paper to the SEC staff of the Office of the Chief Accountant. In this paper, the firms recommended that, based on the IPTF’s calculations as of September 30, 2016, Argentina should not be considered highly inflationary under US GAAP for the reporting period from October 1, 2016 to December 31, 2016. The SEC staff responded that it would not object to this conclusion. Throughout 2017, the inflation data as calculated by the IPTF remained relatively consistent with the data as of September 30, 2016. In fact, the first half of 2017 saw some improvement in the indices while the year end 2017 data was consistent with year-end 2016.

In the first quarter of 2018, the inflation rates being reported began to increase more dramatically, including the 3-year cumulative WPI, which increased from 77% to 95%.

A highly inflationary economy is one that has cumulative inflation of approximately 100% or more over a 3-year period. This assumes a consistently determined, accurate consumer price index. If the calculation results in the cumulative inflation rate being less than 100%, historical inflation rate trends and other pertinent economic factors should be considered to determine if the economy is highly inflationary.

Given the lack of a consistently calculated CPI in Argentina, judgment was necessary to make a determination as to whether the economy was highly inflationary. A positive factor was that the administration that took office in December of 2015 seemed to be executing on sound economic policy.

The inflation rate in Argentina began to exceed projections in the latter part of 2017 and the first quarter of 2018. The three-year cumulative inflation rates as published by the IPTF in their Document for Discussion dated May 16, 2018 are as follows:

Based on the trend in the above data, reporting entities will need to begin to account for operations in the country of Argentina as highly inflationary no later than July 1, 2018. In addition to the cumulative inflation rates, reporting entities should consider the recent devaluation of the Argentinian Peso and the fact that (1) the Argentinian Central Bank recently increased interest rates to 40%, (2) the problematic historical indices have a minimal impact on the calculation, and (3) the IMF recently provided Argentina with a $50 billion credit line.

Reporting entities are required to have sufficient processes and controls in place to monitor inflation in the countries in which they operate.

 

What's next?

Reporting entities with operations in Argentina should be prepared to account for Argentina as highly inflationary no later than the first day of its next fiscal period (July 1, 2018 for calendar year-end companies).

While GAAP is clear on the trigger for treating economies as highly inflationary, the SEC staff is expected to comment in the near-term regarding the related accounting.  

 

To have a deeper discussion contact:

John Bishop

Partner, National Professional Services Group, PwC US

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John F. Horan

Managing Director, National Professional Services Group, PwC US

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David Schmid
IFRS & US Standard Setting Leader, National Professional Services Group, PwC US
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