IAS 29 - Financial Reporting in Hyperinflationary Economies (detailed review)

Objective

In a hyperinflationary economy, reporting of operating results and financial position in the local currency without restatement is not relevant, as money loses its purchasing power at such a rate that comparison of amounts of events and transactions which have taken place at different times is misleading.
This standard prescribes the guidelines which are used by the entity whose currency is the currency of the hyperinflationary economy, to restate its financial statements in the measuring unit current at the end of accounting period.

Scope

The requirements of this standard are applicable to the individual and consolidated financial statements of the entity whose currency is the currency of the hyperinflationary economy.

• This standard does not define the absolute rate which constitutes the hyperinflation. However, it describes the attributes of the economic environment of the country which Indicates hyperinflation. These include the following:

a) Whose general population normally maintains their amounts of local currency in the form of non-monetary assets or in a relatively stable foreign currency to maintain its purchasing power

b) Whose general population holds monetary amounts in terms of a relatively stable foreign currency not in terms of the local currency and prices may be denominated in that currency

c) The sale and purchase transactions on credit are established at prices which includes the compensation for the expected loss of purchasing power during the credit period

d) The cumulative inflation rate over the three years exceeds or equal to 100%.

• This standard is applicable to the financial statements of the entity from the start of the accounting period in which it identifies the existence of hyperinflation in the country in whose currency it reports.

Restatements of Financial Statements

In case of hyperinflationary economy, whether the financial statements are prepared on the basis of historical cost method or current cost method, these are relevant only if these are reflected in terms of currency unit at the end of the accounting period. Therefore, this standard is applicable to the financial statements of entity which prepares its financial statements in the currency of a hyperinflationary economy as follows:

• This standard requires that the financial statements of such an entity should be restated to the currency unit current at the end of accounting period, whether these are prepared on the basis of historical cost method or current cost method, along with the comparative and other information in respect of earlier periods

• The gain or loss on restatement to the net monetary position at the end of reporting period will be reported to statement of profit or loss

1. Historic Cost Financial Statements

Statement of Financial Position

The entity will use general price index at reporting date, to restate the items in the statement of financial position to the currency units current at the end of reporting period as follows:

• All the non-monetary assets and liabilities will be restated from the currency units at the date of purchase to the currency units current at the end of reporting period using general price index such as plant & machinery, intangible assets and investment property

• However, the non-monetary assets which are already stated at the amounts current at the end of reporting period, will not be restated such as inventory at net realizable value and investments at fair value on reporting date

• If some non-monetary assets are stated at the amounts other than the currency units current at the date of purchase (such as when a non-current asset has been revalued after the date of purchase), in this case such assets will be restated from the date of re-measurement to the to the currency units current at the end of reporting period

• If the payment of a non-monetary asset is deferred in future without the interest charge, then such asset will be restated from the date of payment rather than from the date of purchase to the currency units current at the end of reporting period

• Monetary assets and liabilities such as receivables and payables are not restated as these are already stated at the currency units current at the end of reporting period

• The restated amount of the non-monetary assets should be not exceed its recoverable value, if this is the case then the asset will be written down to its recoverable value

• The financial statements of the associate or joint venture which reports in a hyperinflationary economy will be first restated to the currency units current at the end of reporting period before the application of equity method

• The components of equity are restated from the general price index at the start of the period or at the date when these components arose if it is later

• If general price index is not available at the end of reporting then the entity will use the estimated movement in exchange rate between the functional currency and the relatively stable foreign currency

• The general price index should reflect the change in general purchasing power.

• The retained earnings will be taken as a balancing figure

• The restatement of assets and liabilities to the currency units at the end of reporting period may result it carrying values of such assets and liabilities being different from their respective tax bases, however such differences will be accounted for as per IAS 12

Statement of Profit or Loss

The entity is required to restate all the income and expenses from the date of relevant transaction to the currency units current at the end of reporting period.

Statement of cashflows

The cash flows reported by the entity in the statement of cash flows should be the amounts at the end of reporting period.

Comparative Information:

The entity should also restate the comparative amounts relating to the previous reporting period to the currency units at the end of reporting period using the general price index, irrespective of whether these are prepared on the basis of historical cost method or a current cost method. The entity should also restate the financial information disclosed in the previous periods.

2. Current Cost Financial Statements

Statement of Financial Position

The items in the statements of financial position stated at current cost at the end of reporting period need not to be restated as these are already stated at currency units current at the end of reporting period. All other items will be restated using general price index at the end of reporting period.

Statement of Profit or Loss

The incomes and expenses in the statement of profit or loss are stated at their current amounts at the date of transaction therefore, all the incomes and expenses should be restated from the amounts at the date of transaction to the currency units current at the end of reporting period.

Consolidated Financial Statements

If a parent has subsidiary which reports in the currency of a hyperinflationary economy, then the financial statements of such subsidiary will be restated to the currency units at the end of reporting period using the general price index at reporting period of the country in which it reports before consolidation. If such a subsidiary is a foreign subsidiary then its financial statements will be first restated to the currency units at the end of reporting period before translating into the presentation currency of the parent.

Economy Ceases to be Hyperinflationary

If the entity’s economy ceases to be hyperinflationary, then entity will cease the application of the requirements of this standard for the preparation of its financial statements and it will use the carrying values of the previous period for subsequent accounting.

Disclosures

The standard requires the entity to disclose the following:

• The information that the financial statements of the current period and comparative year information are restated to the currency units at the end of current reporting period to reflect the change in purchasing power

• The accounting policy of the entity for the preparation of financial statements. Whether these are prepared on the basis of historical cost method or current cost method

• The general price index at the end of reporting period

 

Worked Example

AB Ltd operates in a country whose economy is subject to hyperinflation. The financial statements of the entity for the year ended 31 December 2011 are as follows:

Assets:	Zlotys’000
Plant & Machinery	1,800
Inventory	5,400
Cash	700
Total Assets	7,900
Equity & Liabilities
Share Capital (Issued at 31 December 2007)	800
Retained Earnings	4,700
Non Current Liabilities	1,000
Current Liabilities	14,00
Total Equity & Liabilities	7,900

• The plant and machinery was purchased on 31 December 2009.
• The inventory is stated at cost of 30 June 2011.
• The non-current liabilities entail a loan which was raised on 31 December 2011.

The general price index is as follows:

Year	General Price Index
31 December 2007	100
31 December 2008	130
31 December 2009	150
31 December 2010	240
31 December 2011	300

Required:

Prepare the statement of financial position restated to the currency units at 31 December 2011.

Solution:

Assets:	Zlotys’000
Plant & Machinery (1,800 × 300 / 150)	3,600
Inventory (5,400 × 300 / 270)	6,000
Cash	700
Total Assets	10,300
Equity & Liabilities
Share Capital (800 × 300 / 100)	2,400
Retained Earnings (Balancing Figure)	5,500
Non Current Liabilities	1,000
Current Liabilities	14,00
Total Equity & Liabilities	10,300

Notes:

• The inventory is restated assuming that general price index will increase proportionately as 270 (240 + 300 / 2)

• The cash, loan and current liabilities are monetary items therefore, these are not restated