Telefonica S.A. – Annual report – 31 December 2021
Note 2. Basis of presentation of the consolidated financial statements (extract)
Note 3. Accounting policies (extract)
a) Hyperinflationary economies
Venezuela has been considered a hyperinflationary economy since 2009. In light of the worsening of the economic and political crisis in Venezuela and in the absence of official rates that are representative of the situation in the country, the Group maintains as a policy for the purposes of the consolidated financial statements the estimation of an exchange rate, known as synthetic exchange rate, that matches the progression of inflation and reflects the economic and financial position of the Group’s Venezuelan operations in a more accurate way.
The synthetic exchange rate is calculated considering the inflation rates that are published. On an annual basis, these rates are 686.4%, 2,959.8% and 9,585.5% for 2021, 2020 and 2019, respectively.
The exchange rate used to translate inflation-adjusted bolivar-denominated items in the consolidated financial statements is the synthetic exchange rate as of the closing date of each reporting period, amounting to 16.47 digital bolivars per U.S. dollar, 2,094,405 bolivars per U.S. dollar and 68,448 bolivars per U.S. dollar as of December 31, 2021, 2020 and 2019, respectively. In turn, the official reference exchange rate at December 31, 2021 was 4,597 VED/USD (1,107,199 VES/USD and 46,621VES/USD at December 31, 2020 and 2019, respectively).
The use of a synthetic exchange rate versus the official reference exchange rate does not have a significant impact given the contribution of Telefónica Venezolana to the consolidated financial position and to the Group’s results and cash flows for the year.
In 2018 Argentina became a hyperinflationary economy (see Note 2). In order to restate its financial statements, the Company uses the series of indices defined by resolution JG No. 539/18 issued by the Federación Argentina de Consejos Profesionales de Ciencias Económicas (FACPCE), based on the National Consumer Price Index (IPC) published by the Instituto Nacional de Estadística y Censos (INDEC) of the Argentine Republic and the Wholesale Internal Price Index (IPIM) published by FACPCE. The cumulative index at December 31, 2021, 2020 and 2019 is 582.5%, 385.9% and 283.4%, respectively, while on an annual basis the index for 2021 is 51% (36% and 30% in 2020 and 2019, respectively).
The exchange rate used to translate inflation-adjusted items denominated in Argentine pesos in the 2021 financial statements is the closing exchange rate as of December 31, 2021 which was 116.37 Argentine pesos per euro (103.23 and 67.26 Argentine pesos per euro at December 31, 2020 and 2019, respectively).
The Group includes in a single line item (“Translation Differences”) all the equity effects derived from hyperinflation. This is as follows: (a) the restatement for inflation of the financial statements of the Group companies operating in hyperinflationary economies, and (b) the effects of translating their respective financial statements into euros using the exchange rate at the end of the period.
b) Translation methodology
The income statements and statements of cash flows of the Telefónica Group’s foreign subsidiaries (except Venezuela and Argentina) were translated into euros at the average exchange rates for the year, as a rate that approximates the exchange rates at the dates of the transactions.
Note 17. Equity (extract)
f) Translation differences
The breakdown of the accumulated contribution of translation differences attributable to equity holders of the parent at December 31 is as follows:
The negative translation differences of Telefónica United Kingdom accumulated in equity at June 1, 2021 have been reclassified to the income statement as a result of the establishment of VMED O2 UK Ltd (see Note 2), for an amount of 3,135 million euros.
Likewise, the negative translation differences associated with the sale of the Telxius Group tower divisions and Telefónica de Costa Rica have also been reclassified to the income statement for the amount of 37 and 21 million euros, respectively.
Since 2018, the Group includes all the equity effects derived from hyperinflation, i.e.: (a) the restatement for inflation of the financial statements of the Group companies operating in hyperinflationary economies, and (b) the effects of translating their respective financial statements into euros using the exchange rate at the end of the period, in a single line item under the heading Retained Earnings.
In March 2020, the International Financial Reporting Standards Committee (IFRIC) released its interpretation in this regard, indicating that these impacts should be recorded either separately, the former in Retained Earnings and the latter in Translation Differences, or jointly recognized as Translation Differences under the heading Other Comprehensive Income.
As a result, in 2020 the Group adopted this presentation policy and now presents the equity effects of hyperinflation under Translation Differences, within Other Comprehensive Income, rather than under the heading Retained Earnings. The consolidated net equity is not modified by this change in presentation. In accordance with IAS 8, financial information for previous years presented for comparative purposes has been restated so that the information is comparable. Consequently, the Retained Earnings heading no longer includes the cumulative effects arising from hyperinflation in Venezuela and Argentina, which have been reclassified to Translation Differences amounting to 5,664 million euros at December 31, 2019 and 5,406 million euros at December 31, 2018.