Financial Reporting in Hyperinflationary Economies (IAS 29)

The International Accounting Standard 29 (IAS 29) addresses the complexities of financial reporting in hyperinflationary economies. Initially issued in 1989 and reformatted in 1994, IAS 29 provides guidelines for entities operating in environments where the local currency experiences significant loss of purchasing power.

Introduction

In hyperinflationary economies, traditional reporting of operating results and financial positions in local currency without restatement becomes irrelevant due to the rapid loss of purchasing power. IAS 29 prescribes guidelines for entities whose functional currency is that of a hyperinflationary economy, mandating the restatement of financial statements to reflect the measuring unit current at the end of the accounting period.

Objective and Scope

The primary objective of IAS 29 is to establish how an entity should restate its financial statements when its functional currency is that of a hyperinflationary economy. The standard does not specify an absolute rate for hyperinflation, leaving it to the judgment of the entity. Key indicators of hyperinflation include:

The population's preference for non-monetary assets or stable foreign currencies.
Monetary amounts perceived in terms of stable foreign currencies.
Sales and purchases on credit that account for expected losses in purchasing power.
Interest rates, wages, and prices linked to a price index.
Cumulative inflation rates exceeding 100% over three years.

Definitions

Understanding key terms is crucial for applying IAS 29:

Inflation: A systematic decrease in purchasing power that creates significant financial reporting challenges.
Monetary Items: Assets, liabilities, or capital amounts fixed by contract or statute, not adjusted for changes in purchasing power.

Restatement of Financial Statements

Entities operating in hyperinflationary economies must restate their current period financial statements in terms of the measuring unit at the end of the reporting period, including comparative figures from previous periods. The two approaches for restating financial statements are:

Current Purchasing Power (Historical Cost) Approach: Recognizes changes in general purchasing power but does not alter the underlying measurement bases. Restated items cannot exceed their recoverable amounts and include gains or losses on the entity's net monetary position as a separate line item in profit or loss.
Current Cost Approach: Adjusts financial statements to reflect changes in specific prices of assets held, with the current cost or replacement cost expressed in a measuring unit current at the end of the period.

Statement of Financial Position

In preparing the statement of financial position, all non-monetary assets and liabilities must be restated from their historical currency units to the current currency units at the end of the reporting period using a general price index. Non-monetary assets already stated at current amounts, such as inventory at net realizable value, are not restated. If payment for a non-monetary asset is deferred without interest, the asset is restated from the date of payment rather than the purchase date. Additionally, the financial statements of associates or joint ventures in hyperinflationary economies must be restated before applying the equity method.

Statement of Profit or Loss

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

Worked Example

Consider the financial statements of AB Ltd operating in a hyperinflationary economy for the year ended 31 December 2018:

Assets:	Zlotys’000
Plant & Machinery	1,800
Inventory	5,400
Cash	700
Total Assets	7,900
Equity & Liabilities
Share Capital (Issued at 31 December 2014)	800
Retained Earnings	4,700
Non-Current Liabilities	1,000
Current Liabilities	1,400
Total Equity & Liabilities	7,900

The general price index for the relevant years is as follows:

Year	General Price Index
31 December 2014	100
31 December 2015	130
31 December 2016	150
31 December 2017	240
31 December 2018	300

To prepare the restated statement of financial position as of 31 December 2018, the following calculations are made:

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	5,500 (Balancing Figure)
Non-Current Liabilities	1,000
Current Liabilities	1,400
Total Equity & Liabilities	10,300

Other Issues

IAS 29 addresses various considerations, including the necessity for a general price index that reflects changes in purchasing power, implications of deferred taxes arising from differences between restated amounts and their carrying values, and the requirement for all items in the statement of cash flows to be expressed in the measuring unit current at the end of the reporting period. When an economy ceases to be hyperinflationary, the entity must use amounts expressed in the measuring unit current at the end of the last reporting period as the basis for subsequent financial statements.

Disclosures

Disclosures in restated financial statements are essential for clarity regarding the basis of dealing with inflation effects. Entities must report that both current and comparative financial statements have been restated for changes in the general purchasing power of the functional currency and identify whether the restatements were based on historical cost or current cost. Additionally, information about general price levels and changes during the reporting periods must be provided.

Conclusion

Understanding and applying IAS 29 is crucial for entities operating in hyperinflationary economies to ensure accurate financial reporting and maintain the relevance of financial information in the face of rapidly changing economic conditions.

Financial Reporting Under IAS 29 in Hyperinflation

Financial Reporting Under IAS 29 in Hyperinflation