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Who should report hyperinflation?
An entity's functional currency is the currency
of a hyperinflationary economy
Financial statements should be prepared in an entity's
functional currency .
Where the functional currency is the currency of
a hyperinflationary economy, the entity, whether
preparing consolidated, stand-alone financial statements
or financial information for incorporation into
another's financial statements, should restate financial
statements in terms of the measuring unit current
at the balance sheet date [IAS29R.8]. These financial
statements are referred to as purchasing power adjusted
financial statements. Section 17.7 sets out the
procedures for restatement.
Entities cannot avoid these requirements [IAS21R.14].
The determination of the functional currency is
based on economic circumstances relevant to the
entity and is not a free choice [IAS 21R.9-14].
An entity reporting in a hyperinflationary economy
cannot avoid the use of IAS 29 by adopting as its
functional currency a hard currency. [IAS21R.14]
A parent entity whose functional currency is that
of a hyperinflationary economy may have a subsidiary
that operates in an economy that is not hyperinflationary.
The parent's results must be restated for the effects
of hyperinflation; however, the subsidiary's results
should not be restated but should be consolidated
in accordance with the general guidance for foreign
operations [IAS29R.35].
A subsidiary's functional currency is the
currency of a hyperinflationary economy
The requirement to report hyperinflation also needs
to be considered by any entity located outside the
hyperinflationary environment preparing IFRS consolidated
financial statements. The consolidation may include
a foreign operation (such as a subsidiary, associate,
joint venture or branch) that reports in the currency
of a hyperinflationary economy [IAS29R.35-36].
Entities operating in a hyperinflationary
economy presenting financial statements in a stable
currency
Entities operating in a hyperinflationary environment
may present financial statements in a currency other
than the functional currency (for example the euro
or US dollar) [IAS21R.38]. When an entity reports
in a stable currency, it should ensure that the
financial statements have appropriately dealt with
the impact of hyperinflation [IAS21R.43]. Entities
should first restate the local-currency IFRS financial
statements to the measuring unit current at the
balance sheet date [IAS29R.7-8] [IAS21R.43]. Using
the closing exchange rate, the entity should then
translate the current period amounts, including
balance sheet, income statement, cash flows and
changes in equity into the stable currency. Comparatives
should be those that were presented as current year
amounts in the relevant prior year financial statements
presented in the stable currency [IAS21R.42]. There
is no adjustment to the comparatives for either
subsequent changes in price levels or subsequent
changes in exchange rates
Entities reporting to a parent in a stable
currency
A foreign operation operating in a hyperinflationary
economy may be required for group purposes to report
to its overseas parent in a stable currency, usually
the parent's functional currency. IFRS require that
the foreign operation should restate its local currency
IFRS financial statements for hyperinflation, before
translation into the parent's functional currency
[IAS21R.14, 38-47] .
Restatement procedures - overview
The requirements to restate financial statements for
the effects of hyperinflation apply from the beginning
of the reporting period in which an entity identifies
the existence of hyperinflation in the country of
its functional currency [IAS29R.1].
IFRS require the restatement of all financial statements,
including the cash flow statements, into current
purchasing power at the balance sheet date [IAS29R.7-8,33].
This process requires a number of procedural steps
plus the application of judgement. Consistent application
of procedures is more important than the precise
accuracy of the results [IAS29R.10].
The restatement procedures consist of the following:
| a) |
selection of a general price index; |
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| b) |
segregation of monetary and non-monetary
items; |
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| c) |
restatement of non-monetary
items, including deferred tax; |
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| d) |
restatement of the income statement; |
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| e) |
calculation and proof of the monetary
gain or loss; |
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| f) |
preparation of the cash flow statement
with recognition of inflationary effects; and |
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| g) |
restatement of corresponding figures. |
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The effect of the restatement of non-monetary items
is included in the income statement as the net monetary
gain or loss. The calculation and proof of the monetary
gain or loss is described in section 17.6.
Selection of a general price index
IFRS require the use of a general price index to
reflect changes in purchasing power. Most governments
issue several periodic price indices that vary in
their scope. IFRS do not indicate which index to
use. However, entities that report in the currency
of the same economy should attempt to use the same
index [IAS29R.37].
The most reliable indicators of changes in general
price levels are the consumer price index and the
wholesale price index. Differences in the scope
and the weighting of items included in the two indices
may indicate slightly different rates of inflation
in the short-term. The two indices should however
show approximately the same rate of inflation over
the long-term.
Once the index has been selected, conversion factors
need to be calculated based on the increase in the
general price index in order to restate historical
cost amounts to current purchasing power .
Segregation of monetary and non-monetary items
An entity should restate all balance sheet amounts
not expressed in terms of the measuring unit current
at the balance sheet date [IAS29R.11]. Balance sheet
items should be segregated into monetary and non-monetary
items [IAS29R.11-25] . Monetary items
represent money held, assets or liabilities to be
received or to be paid in fixed or determinable
amounts of money. Monetary items are already in
current purchasing power, hence are not restated
[IAS29R.12].
Most balance sheet items are obviously monetary
or non-monetary [IAS29R.13-14]. Determining whether
a component is monetary is dependent on its underlying
characteristics. For example, the provision for
doubtful accounts is considered monetary because
receivables are monetary. The provision for inventory
obsolescence is non-monetary because inventory is
non-monetary.
Restatement of non-monetary items
The entity should restate all non-monetary components
of the balance sheet, excluding retained earnings
and any revaluation surplus, by applying a general
price index from the dates on which hyperinflation
was first applied to the item, to the balance sheet
date [IAS29R.15]. Restated retained earnings, excluding
current-year earnings, are the balancing figure
derived from all the other amounts in the opening
restated balance sheet [IAS29R.24].
The restatement of specific non-monetary items
is complex. Detailed guidance is included in Solution
17.8 in respect of the following
items:
| a) |
prepaid expenses; |
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| b) |
advances paid on purchases; |
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| c) |
inventories; |
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| d) |
investments in associates ; |
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| e) |
property plant and equipment; |
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| f) |
construction in progress; |
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| g) |
intangible assets; |
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| h) |
advances received; |
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| i) |
deferred income; |
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| j) |
provisions; and |
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| k) |
shareholders' equity . |
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Deferred tax is addressed in Solution 17.12 .
Alternatively, refer to Financial Reporting in
Hyperinflationary Economies - Understanding IAS
29 , which provides
more detailed guidance.
Items recognised at fair value
Some non-monetary assets, such as PPE, marketable
equity securities and investment properties may
be recognised at fair value at the balance sheet
date [IAS19R.29] [IAS38R.64] [IAS39R.45-57] [IAS40.24]
[IAS41R.12-13]. The historical cost amounts should
be restated in order to obtain the appropriate monetary
gain or loss. The restated carrying amount should
then be compared to the fair values and the difference,
if any, charged or credited to the income statement
or shareholders' equity in accordance with the appropriate
IFRS
.
Net realisable value and recoverable amount
An asset's net realisable value or recoverable amount
may be less than its restated amount. Application
of the lower of cost and market value or impairment
rules would therefore result in a write-down to
net realisable value or recoverable amount in the
restated financial statements, even if no write-down
of the asset was required in the historical cost
financial statements [IAS29R.19]
.
Restatement of the income statement
The historical cost income statement generally recognises
revenues and expenses at prices current at the transaction
date. To report the effect of hyperinflation, these
items should be restated in terms of the measuring
unit current at the balance sheet date [IAS29R.26,30].
Provided inflation occurs at a relatively stable
rate throughout the year, the entity may restate
transactions on a monthly average basis .
Guidance about the restatement of the income statement
is included in Solution 17.12 in
respect of the following items:
| a) |
revenue; |
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| b) |
cost of goods sold; |
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| c) |
depreciation, amortisation and
realisation of prepaid expenses and deferred
income; |
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| d) |
bad debts; |
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| e) |
other items in the income statement; |
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| f) |
taxation on income ; |
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| g) |
deferred taxation. |
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Alternatively, reference to Financial Reporting
in Hyperinflationary Economies - Understanding IAS
29 is appropriate for more detailed guidance.
The calculation and proof of the monetary gain or loss
One of the two main objectives of reporting hyperinflation
is to account for the financial gain or loss which
arises from holding monetary assets or liabilities
during a reporting period (the monetary gain or
loss). The monetary gain or loss is calculated based
on the entity's monetary position [IAS29R.27,28,31].
Theoretically it is possible to calculate the gain
or loss on the entity's daily net monetary position.
The costs of such a calculation, however, would
be onerous. The monetary position can however be
derived from the basic equation:
All monetary assets and liabilities (net monetary
position) held during the year are represented in
the financial statements either by non-monetary
assets and liabilities recognised on the balance
sheet, or by transactions recognised in the income
statement if they have been realised. The monetary
gain or loss may be calculated by restating non-monetary
items (including the income statement that is a
part of shareholders' equity) to year-end purchasing
power and comparing the restated values to the historical
cost amounts or, where balances existed at the beginning
of the year, to the historical amounts restated
to the beginning of the year purchasing power [IAS29R.27].
The monetary gain or loss may also be estimated
by applying the change in a general price index
to the weighted average difference between monetary
assets and monetary liabilities [IAS29R.27]. The
weighted average of the opening monetary position
and the monetary position at year-end may be used
for the purpose of this calculation .
A large difference may arise however between the
monetary gain or loss in the income statement and
the estimate as calculated by the proof if the monetary
position has not been relatively constant throughout
the year. Therefore, if the monetary position is
changing significantly, a more accurate proof of
the monetary gain or loss would be obtained by using
the quarterly or monthly weighted average monetary
position in the proof calculation outlined above.
An approximation of the monetary gain or loss can
be calculated using average monetary positions during
the period as a reasonableness test of the monetary
gain or loss derived by restating the non-monetary
assets and liabilities.
Preparation of the cash flow statement
IFRS require that all items in the cash flow statement
be expressed in a measuring unit current at the
balance sheet date [IAS29R.33]. Therefore, all items
are restated by applying the relevant conversion
factors from the date the transaction originated
. The entity should provide separate
disclosure of the effects of inflation on operating,
investing and financing activity and on cash and
cash equivalents .
There are three main elements to consider when
preparing the hyperinflationary cash flow statement:
| a) |
net income before tax is adjusted for the
monetary gain or loss for the period; |
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| b) |
the effect of inflation on
operating, financing and investing activity
is disclosed separately; and |
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| c) |
the monetary loss on cash and
cash equivalents is presented separately. |
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Restatement of prior year comparatives
The prior-year comparatives should be restated
in terms of the measuring unit current at the end
of the latest reporting period. The current-year
conversion factor is applied to the prior-year financial
statements if prior-year financial statements have
already been prepared to conform to hyperinflationary
reporting [IAS29R.34].
Economies ceasing to be hyperinflationary
When an economy ceases to be hyperinflationary
and an entity discontinues hyperinflationary reporting,
management should treat the amounts expressed in
the measuring unit current at the end of the previous
reporting period as the basis for the carrying amounts
in its subsequent financial statements [IAS29R.38]
.
Entities preparing IFRS financial statements for
the first time in economies which have ceased to
be hyperinflationary, but where hyperinflationary
accounting was followed, will need to make a cumulative
adjustment to the non-monetary items in the balance
sheet. All adjustments to non-monetary items will
be charged or credited to retained earnings except
for the hyperinflation adjustments relating to the
comparative period(s) which should be included in
the income statement for the relevant period(s)
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Disclosure
Entities should describe in their accounting policy
note the methodology used in applying IAS 29 [IAS29R.39(b),40].
The following specific information should be disclosed
in accordance with IFRS:
| a) |
that the financial statements and the corresponding
figures for previous periods have been restated
for the changes in the general purchasing power
of the functional currency and, as a result,
are stated in terms of the measuring unit current
at the balance sheet date; |
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| b) |
the identity and level of the
price index at the balance sheet date and the
movement in the index during the current and
the previous reporting period; and |
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| c) |
while the standard does not require
it, it is useful to disclose the three-year
cumulative inflation rate at the balance sheet
date for each period presented in the financial
statements [IAS29R.39(a)-(c)]. |
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