Business Terms Print Email

Hyperinflation is actually the process when the prices become out of control and they increase rapidly. Hyperinflation in the economy results in the decrease in the value of money as the demand supply formula loses its original shape.

According to the international accounting standards hyperinflation is the cumulative rate over three year, therefore increase in price level can be 5 percent on daily basis. International accounting standard under IAS 29 states the standards so as to give a meaningful explanation economy that is facing hyperinflation. It stated that the financial statements should be stated I the measuring unit at the balance sheet date and comparative figures should be restated at the same current measuring unit for prior periods. Monetary terms items are not to be restated if the measuring unit has already been applied to them in the balance sheet. Restatements are always made by using a general price index.

Although IAS 29 does not state the procedure at which there will be hyperinflation still it allows judgment so as to allow restatements to take place. There are some characteristics of hyperinflation such as when the public converts the currency into non-monetary assets, they start buying foreign currency, people start purchasing on credit to as to make up with the purchasing power and the cumulative inflation rate exceeds 100 percent or over 3 years. This is the time of hyperinflation but still it should be judged as to when be the time to make restatements. The financial statements should also disclose the loss or gain monetary terms during hyperinflation and the whether historical cost or current cost approach has been used.

IAS 29 clearly provides guidance to identify hyperinflation in the economy but international accounting standard board does not state the jurisdiction. There are audit quality monitors and task forces that monitor the hyperinflationary countries regularly. These forces work on the same pattern to identify the hyperinflationary countries as IAS 29. These forces also generate reports as to which countries shall be declared hyperinflationary and which ones should be on the watch list. The need to identify hyperinflationary countries exists as it brings adverse effects to the overall economy and therefore can affect the neighboring countries as well.

Login to ReadyRatios


Have you forgotten your password?

Are you a new user?

Login As
You can log in if you are registered at one of these services: