Telefonica S.A. – Annual report – 31 December 2022
Industry: telecoms
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 174.3%, 686.4% and 2,959.8% for 2022, 2021 and 2020, 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 45.18 digital bolivars per U.S. dollar, 16.47 digital bolivars per U.S. dollar and 2,094,405 bolivars per U.S. dollar as of December 31, 2022, 2021 and 2020, respectively. In turn, the official reference exchange rate at December 31, 2022 was 17.489 VED/USD (4.597 VED/USD and 1,107,199VES/USD at December 31, 2021 and 2020, 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. 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, 2022, 2021 and 2020 is 1,134.6%, 582.5% and 385.9%, respectively, while on an annual basis the index for 2022 is 95% (51% and 36% in 2021 and 2020, respectively).
The exchange rate used to translate inflation-adjusted items denominated in Argentine pesos in the 2022 financial statements is the closing exchange rate as of December 31, 2022 which was 189.08 Argentine pesos per euro (116.37 and 103.23 Argentine pesos per euro at December 31, 2021 and 2020, 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 were reclassified to the 2021 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 were also reclassified to the income statement for the amount of 37 and 21 million euros, respectively.
Accounts examples 