In hyperinflationary economies, money loses its purchasing power at a speed faster than the normal purchasing power – i.e., rapid, excessive and out-of-control general price increases in an economy. During this time, general prices for goods and services rise exponentially and hence, erodes the real value of the local currency. In order to make the financial information of a hyperinflation economy meaningful, IAS 29 governs the financial reporting requirements. This standard should be applied by entities whose functional currency is the currency of hyperinflationary economies. Examples of hyperinflation economies are Venezuela, Hungary, Zimbabwe and Yugoslavia where these countries experienced an inflation rate of 50% or more per month over time.
Let us now dive deeper into the financial reporting requirements in IAS 29.
#1: How does IAS 29 define hyperinflationary economies?
IAS 29 does not establish any threshold or rate at which an economy is deemed or considered a hyperinflationary economy. However, IAS 29 provides characteristics of a hyperinflationary economy. It states that hyperinflation is generally indicated by characteristics of the economic environment of a country, which includes the following:
- The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency.
- The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices for goods and services may also be quoted in that currency.
- Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the credit period is short.
- Interest rates, wages and prices are linked to a price index.
- The cumulative inflation rate over three years is approaching or exceeds 100%.
All the factors above should be considered together instead of in isolation from one another. For example, an economy may also be considered as a hyperinflationary economy if the cumulative inflation rate over three year is 85%.
#2: What do we do when preparing financial statements of entities whose functional currency is the currency of hyperinflationary economies?
When an entity prepares its financial statements in the currency of a hyperinflationary economy, IAS 29 requires an entity to determine the impact of changes in purchasing power and to restate its comparatives information. In this regard, the financial statements must be stated in terms of the measuring unit current at the end of the reporting period. The corresponding numbers for the previous period and any information relating to prior period(s) must also be stated in terms of the measuring unit current at the end of the reporting period. Any gain or loss on the net monetary position must be included in profit or loss and must be disclosed separately.
IAS 29 provides certain procedures to be followed to prepare financial statements for a hyperinflationary economy. This is explained in the subsequent questions.
#3: What is historical cost financial statements and current cost financial statements?
Historical cost financial statements is a financial statement prepared based on historical purchasing power. As we know that in a hyperinflationary economy, the purchasing power increases drastically such that the historical cost purchasing power information is no longer comparable to the current purchasing power. Because of this, entities will need to restate their historical cost financial statements to reflect the purchasing power or general price index current at the end of the reporting period. Items stated at the current cost are not restated because they are already expressed in terms of the measuring unit current at the end of the reporting period. Take note that IAS 29 also does not encourage entities to present financial statements before restatement, even as supplementary financial information.
#4: What are the requirements to prepare the statement of financial position for comparative or opening financial statements?
IAS 29 requires amounts presented in the statement of financial position to be expressed in terms of the measuring unit current at the end of the reporting period.
Monetary items at the beginning of the reporting period and corresponding figures will need to be restated to reflect the purchasing power at the current reporting period. For example, Entity A has a cash balance of CU100 as at 31 December 2019 (using the 2019 purchasing power index). This amount will be indexed up -i.e., their opening balance is increased by the change in the price index during the reporting period. Monetary items also need to be restated for the purpose of comparative information in current year financial statements to express the measuring unit as at the current financial reporting date.
Non-monetary items will also need to be restated and expressed in measuring unit current at the end of the reporting period. Some of the non-monetary items are carried at cost or cost less depreciation while some others are carried at amounts current at dates other than the acquisition or the reporting date. For example, property, plant and equipment which has been revalued at some date after its acquisition. For these items, the carrying amount is restated from the date of their revaluation. On the other case, non-monetary items are restated from the dates of their purchase/acquisition or dates on which the cost of purchase and cost of conversion were incurred.
#5: What are the requirements to prepare the statement of profit or loss and other comprehensive income?
IAS 29 requires that all items in the statement of comprehensive income are expressed in terms of the measuring unit current at the end of the reporting period. Accordingly, all amounts will be restated by applying the general price index.
#6: How do we prepare the statement of cash flows?
All items in the statement of cash flows are expressed in terms of the measuring unit current at the end of the reporting period.
#7: How do we record the gain or loss on net monetary position?
Gain or loss on the net monetary position is derived as the difference resulting from the restatement of non-monetary assets, owners’ equity and items in the statement of comprehensive income as well as the adjustment of index-linked assets and liabilities. IAS 29 clearly states that gain or loss on the net monetary position is recognised in profit or loss and must be disclosed separately.
#8: What are the requirements in relation to comparative information disclosed in the financial statements?
Comparative information forms part of a complete set of financial statements. This includes comparative information disclosed in the notes to the financial statements. More discussion on this topic is covered in Considerations for the presentation of financial statements.
Information that is disclosed in respect of the earlier period(s) – i.e., the comparative numbers in the notes to the financial statements – are also restated and expressed in terms of the measuring unit current at the end of the reporting period.
#9: What are the consideration for the preparation of consolidated financial statements?
Sometimes, a parent may have a subsidiary that reports in the currency of hyperinflationary economy. In such a case, the financial statements of the subsidiary needs to be restated by applying the general price index of such currency before they are included in the consolidated financial statements of the parent. This is also applied when the parent also reports in the currency of a hyperinflationary economy. Where such a subsidiary is a foreign subsidiary, its restated financial statements are translated at closing rates.
#10: What happened when the economy ceases to be hyperinflationary?
When an economy ceases or stops to be hyperinflationary (and an entity discontinues the preparation and presentation of financial statements under IAS 29), entity 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.
Reporting for entities in hyperinflationary economies can be complex and lots of judgment need to be exercised in the preparation of financial statements. Nevertheless, these 10 key takeaways summarise the key considerations on such matter.
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