IFRIC Update, March 2010, Staff Paper 14 IAS 27 (2007), Consolidated and Separate
(Agenda reference
13), Determining the
Financial Statements, IASB, 2007 Bound
functional currency of an investment holding
Volume, para. 30.
company, IASB, January 2010 and Staff Paper
15 For example, IAS
27, Separate Financial
(Agenda reference
4A), Determining the
Statements, IASB, paras.
16(b)(iii) and
functional currency of an investment holding
17(b)(iii), IFRS
3, Business Combinations,
company, IASB, March 2010.
IASB, para. B63(e) and IFRS 10, Consolidated
3
IFRIC Update, November 2014.
Financial Statements, IASB, para. 23.
4
IFRIC Update, June 2018.
16 IFRIC Update, September 2010, p.2.
5 Staff Paper (Agenda reference
2), IAS 21 –
17
Staff Paper (Agenda reference
7D), CTA
Extreme long-term lack of exchangeability, IASB,
Recycling in IAS
27R Transactions, IASB,
June 2018 and 22nd Extract from EECS’s
March 2010 and Staff Paper (Agenda
database of enforcement decisions, ESMA,
reference 11), Repayment of investment/CTA,
April 2018, Decision Ref. EECS/0118-09.
IASB, July 2010, paras. 10(a) and 11.
6
IFRIC Update, June 2018.
18 IFRIC Update, September 2010, p.2.
7
Exposure Draft of Revised IAS 21, IASB, May
19 IFRIC Update, July 2009.
2002, para. 14.
20 IFRIC Update, January 2016.
8
IAS
12
(2007),
Income Taxes, 2007 Bound 21 IFRIC Update, November 2014 and IFRIC
Volume, IASB, para. 78.
Update, June 2018.
9 In this context, IAS 21 does not actually refer to
22 Staff Paper (Agenda reference
16), Foreign
those requirements relating to the treatment of
exchange restrictions and hyperinflation, IASB,
exchange differences arising from the translation
July 2014.
process. However, we believe that any resulting
23 IASB Update, May 2016.
exchange differences should be recognised as
24 IFRIC Update, June 2018.
discussed at 5.3 above.
1175
Chapter 16
Hyperinflation
1 INTRODUCTION ............................................................................................ 1177
1.1
Background ........................................................................................................... 1177
1.2 Hyperinflationary
economies
...........................................................................
1178
1.3 Restatement
approach
........................................................................................
1178
2 THE REQUIREMENTS OF IAS 29 ................................................................ 1179
2.1
The context of IAS 29 ......................................................................................... 1179
2.2 Scope
..................................................................................................................... 1180
2.3 Definition
of
hyperinflation
..............................................................................
1180
2.4
The IAS 29 restatement process ....................................................................... 1181
3 SELECTION OF A GENERAL PRICE INDEX ................................................... 1181
3.1
Selecting a general price index ......................................................................... 1181
3.2
General price index not available for all periods ......................................... 1182
4 ANALYSIS AND RESTATEMENT OF THE STATEMENT OF FINANCIAL
POSITION ...................................................................................................... 1182
4.1
Monetary and non-monetary items ................................................................ 1183
4.1.1
Monetary or non-monetary distinction ......................................... 1183
4.1.2 Monetary
items
...................................................................................
1185
4.1.3
Non-monetary items carried at current cost ................................ 1186
4.1.4
Non-monetary items carried at historical cost ............................. 1186
4.2
Inventories ........................................................................................................... 1188
4.3
Restatement of associates, joint ventures and subsidiaries ........................ 1189
4.4
Calculation of deferred taxation ...................................................................... 1190
5 RESTATEMENT OF THE STATEMENT OF CHANGES IN EQUITY ............... 1192
6 RESTATEMENT OF THE STATEMENT OF PROFIT AND LOSS AND
OTHER COMPREHENSIVE INCOME ............................................................. 1193
6.1
Restatement of interest and exchange differences ...................................... 1195
1176 Chapter 16
6.2
Calculation of the gain or loss on the net monetary position .................... 1195
6.3
Measurement of reclassification adjustments within equity ..................... 1196
7 RESTATEMENT OF THE STATEMENT OF CASH FLOWS ............................ 1198
8 RESTATEMENT OF COMPARATIVE FIGURES ............................................. 1199
9 INTERIM REPORTING .................................................................................. 1199
10 TRANSITION................................................................................................. 1199
10.1 Economies becoming hyperinflationary ........................................................ 1199
10.2 Economies ceasing to be hyperinflationary .................................................. 1201
10.3 Economies exiting severe hyperinflation ...................................................... 1203
11 TRANSLATION TO A DIFFERENT PRESENTATION CURRENCY ................ 1203
12 DISCLOSURES.............................................................................................. 1204
List of examples
Example 16.1:
Accounting for hyperinflation under IAS 29 .................................. 1179
Example 16.2:
Restatement of property, plant and equipment ............................ 1187
Example 16.3:
Borrowing costs and net realisable value adjustments ............... 1188
Example 16.4:
Restatement of deferred taxation ................................................... 1190
Example 16.5:
Restatement of equity ........................................................................ 1193
Example 16.6:
Restatement of historical cost statement of profit
and loss
and other comprehensive income .................................................. 1194
Example 16.7:
Measurement of reclassification adjustments ................................ 1197
Example 16.8:
Economies ceasing to be hyperinflationary in an interim
period ....................................................................................................1202
1177
Chapter 16
Hyperinflation
1 INTRODUCTION
1.1 Background
Accounting standards are applied on the assumption that the value of money (the unit
of measurement) is constant over time, which normally is an acceptable practical
assumption. However, when the effect of inflation on the value of money is no longer
negligible, the usefulness of historical cost based financial reporting is often significantly
reduced. High rates of inflation give rise to a number of problems for entities that
prepare their financial statements on a historical cost basis, for example:
• historical cost figures expressed in terms of monetary units do not show the ‘value
to the business’ of assets;
• holding gains on non-monetary assets that are reported as operating profits do not
represent real economic gains;
• financial information presented for the current period is not comparable with that
presented for the prior periods; and
• ‘real’ capital can be reduced because profits reported do not take account of the
higher replacement costs of resources used in the period. Therefore, if calculating a
nominal ‘return on capital’ based on profit, and not distinguishing this properly from
a real ‘return of capital’, the erosion of capital may go unnoticed in the financial
statements. This is the underlying point in the concept of capital maintenance.
The IASB’s The Conceptual Framework for Financial Reporting discusses the concept
of capital maintenance, which raises the issue of how an entity defines capital. In
general terms, an entity maintains its capital if it has as much capital at the end of the
period as it had at the beginning, the issue being how this evaluation is measured. Whilst
there are different concepts of capital maintenance, IFRS is ultimately based on the
financial capital maintenance concept.
Under the financial capital maintenance concept, the capital of the entity will be
maintained if the financial amount of net assets at the end of a period is at least equal to
the financial amount of net assets at the beginning of that period, excluding contributions
from and distributions to owners during the period. [CF(2010) 4.59(a)]. To facilitate the
1178 Chapter 16
evaluation of capital maintenance in a hyperinflationary environment, IAS 29 – Financial
Reporting in Hyperinflationary Economies – was adopted in April 2001.
The IASB and IFRS Interpretations Committee (Interpretations Committee) have only
since addressed the subject of hyperinflation to clarify the provisions of the standard.
In 2005, IFRIC 7 – Applying the Restatement Approach under IAS 29 Financial
Reporting in Hyperinflationary Economies – was issued to provide guidance on
applying IAS 29 in the reporting period in which an entity’s functional currency first
becomes hyperinflationary (see 10.1 below). In 2010 the IASB issued an amendment to
IFRS 1 – First-time Adoption of International Financial Reporting Standards – for
countries that exit severe hyperinflation (see 10.3 below).
1.2 Hyperinflationary
economies
For entities used to working in economies with low inflation it is easy to overlook that
there are countries where inflation is a major economic concern. In some of these
countries, inflation has reached such levels that (1) the local currency is no longer a useful
measure of value in the economy and (2) the general population may prefer not to hold
its wealth in the local currency. Instead, they hold their wealth in a stable foreign currency
or non-monetary assets. Such a condition is often referred to as hyperinflation.
There are several characteristics that need to be considered under IFRS to determine
whether hyperinflation exists. The IASB does not monitor inflation rates in specific
jurisdictions, nor conclude on the applicability of the characteristics to these
jurisdictions. Conversely, under US GAAP hyperinflation is clearly defined and deemed
to exist when the cumulative rate of inflation over a three-year period exceeds 100%.
For the purposes of reporting under US accounting standards, the International
Practices Task Force (IPTF), a task force of the SEC Regulations Committee, monitors
the inflation status of different countries.
As the IPTF’s criteria are similar to those used under IFRS, this provides a useful guide
for entities reporting under IFRS. However, it should be noted that hyperinflation
accounting may need to be applied earlier under IFRS than US accounting standards as
IAS 29 applies from the beginning of the reporting period in which hyperinflation is
identified and the IPTF usually only meet in May and November each year. Minutes of
these meetings are publicly available.1
In practice, few countries are considered hyperinflationary by the IPTF. For the
purposes of IAS 29, the same countries are usually considered hyperinflationary, but
where the assessment of the characteristics is unclear, consensus is at times facilitated
by local regulators and professional bodies.
1.3 Restatement
approach
The problems of historical cost based financial reporting may reach such a magnitude
under hyperinflationary circumstances that financial reporting in the hyperinflationary
currency is no longer useful. Therefore, a solution is needed to allow meaningful
financial reporting by entities that operate in these hyperinflationary economies.
IAS 29 requires a restatement approach, whereby financial information recorded in the
hyperinflationary currency is adjusted by applying a general price index and expressed
Hyperinflation
1179
in the measuring unit current at the end of the reporting period (i.e. the accounting value
is adjusted for a factor of current purchasing power). This process aims to improve
comparability between periods by restating financial information for changes in the
purchasing power of money.
2
THE REQUIREMENTS OF IAS 29
2.1
The context of IAS 29
The underlying premise of IAS 29 is that ‘reporting of operating results and financial
position in the local [hyperinflationary] currency without restatement is not useful’.
[IAS 29.2]. The standard’s approach is therefore to require that:
(a) the financial statements of an entity whose functional currency is the currency of
a hyperinflationary economy shall be stated in terms of the measuring unit current
at the end of the reporting period;
(b) the corresponding figures for the previous period required by IAS 1 – Presentation
of Financial Statements – and any information in respect of earlier periods shall
also be stated in terms of the measuring unit current at the end of the reporting
period; and
(c) the gain or loss on the net monetary posit
ion shall be included in profit or loss and
separately disclosed. [IAS 29.8-9].
IAS 29 requires amounts recorded in the statement of financial position, not already
expressed in terms of the measuring unit current at the end of the reporting period, to
be restated in terms of the current measuring unit at the end of the reporting period, by
applying a general price index. [IAS 29.11]. The example below illustrates how this would
apply to the statement of financial position of an entity:
Example 16.1: Accounting for hyperinflation under IAS 29
An entity that operates in a hyperinflationary economy is required under IAS 29 to restate all non-monetary
items in its statement of financial position to the measuring unit current at the end of the reporting period by
applying a general price index as follows:
Before
Historical
Year-end
After
restatement
general price
general price
restatement
(HC)
index*
index
(HC)
Plant and equipment 225
150
600
900
Inventory
250
500
600
300
Cash 100
100
Total assets
575
1,300
Accounts payable
180
180
Long-term debt 250
250
Equity **
145
870
575
1,300
* General price index at the date of purchase
** The restatement of equity is not illustrated here, but discussed at 5 below.
1180 Chapter 16
The simplified example above already raises a number of questions, such as:
• Which items are monetary and which are non-monetary?
• How does the entity select the appropriate general price index?
• What was the general price index when the assets were acquired?
The standard provides guidance on the restatement to the measuring unit current at the
end of the reporting period, but concedes that the consistent application of these
inflation accounting procedures and judgements from period to period is more
important than the precise accuracy of the resulting amounts included in the restated
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 233
