financial statements. [IAS 29.10]. The requirements of the standard look deceptively
straightforward but their application may represent a considerable challenge. These
difficulties and other aspects of the practical application of the IAS 29 method of
accounting for hyperinflation are discussed below.
2.2 Scope
IAS 29 shall be applied by all entities whose functional currency is the currency of a
hyperinflationary economy. [IAS 29.1].
The standard should be applied in an entity’s separate financial statements (if prepared)
and its consolidated financial statements, as well as by parents that include such an
entity in their consolidated financial statements.
If an entity whose functional currency is that of a hyperinflationary economy
wishes to present the financial statements in a different presentation currency, or
if their parent has a different presentation currency, the financial statements of the
entity first have to be restated under IAS 29. Only then, can the financial statements
be translated under IAS 21 – The Effects of Changes in Foreign Exchange Rates
(see 11 below).
Almost all entities operating in hyperinflationary economies will be subject to the
accounting regime of IAS 29, unless they can legitimately argue that the local
hyperinflationary currency is not their functional currency as defined by IAS 21 (see
Chapter 15 at 4). [IAS 21.14].
2.3 Definition
of
hyperinflation
Determining whether an economy is hyperinflationary in accordance with IAS 29
requires judgement. The standard does not establish an absolute inflation rate at
which hyperinflation is deemed to arise. Instead, it considers the following
characteristics of the economic environment of a country to be strong indicators of
the existence of hyperinflation:
(a) the general population prefers to keep its wealth in non-monetary assets or in a
relatively stable foreign currency. Amounts of local currency held are immediately
invested to maintain purchasing power;
(b) the general population regards monetary amounts not in terms of the local
currency but in terms of a relatively stable foreign currency. Prices may be quoted
in that currency;
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(c) 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 period is short;
(d) interest rates, wages and prices are linked to a price index; and
(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%. [IAS 29.3].
The above list is not exhaustive and there may be other indicators that an economy is
hyperinflationary, such as the existence of price controls and restrictive exchange
controls. In determining whether an economy is hyperinflationary, condition (e) is
quantitatively measurable while the other indicators require reliance on more
qualitative evidence.
IAS 29 expresses a preference that all entities that report in the currency of the same
hyperinflationary economy apply this Standard from the same date. Nevertheless, once
an entity has identified the existence of hyperinflation, it should apply IAS 29 from the
beginning of the reporting period in which it identified the existence of hyperinflation.
[IAS 29.4].
Identifying when a currency becomes hyperinflationary, and, just as importantly, when
it ceases to be so, is not easy in practice and is frequently hampered by a lack of reliable
statistics. The consideration of trends and the application of common sense is important
in this judgement, as are consistency of measurement and of presentation. As discussed
at 1.2 above, the IPTF monitors hyperinflationary countries for US GAAP and this may
be useful for IFRS reporters. Transition into and out of hyperinflationary economies
are discussed further at 10 below.
2.4
The IAS 29 restatement process
Restatement of financial statements in accordance with IAS 29 can be seen as a process
comprising the following steps:
(a) selection of a general price index (see 3 below);
(b) analysis and restatement of the statement of financial position (see 4 below);
(c) restatement of the statement of changes in equity (see 5 below);
(d) restatement of the statement of profit and loss and other comprehensive income
(see 6 below);
(e) calculation of the gain or loss on the net monetary position (see 6.2 below);
(f) restatement of the statement of cash flows (see 7 below); and
(g) restatement of comparative figures (see 8 below).
3
SELECTION OF A GENERAL PRICE INDEX
The standard requires entities to use a general price index that reflects changes in
general purchasing power. Ideally all entities that report in the same hyperinflationary
currency should use the same price index. [IAS 29.37].
3.1
Selecting a general price index
It is generally accepted practice to use a Consumer Price Index (CPI) for this purpose,
unless that index is clearly flawed. National statistical offices in most countries issue
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several price indices that potentially could be used for the purposes of IAS 29.
Important characteristics of a good general price index include the following:
• a wide range of goods and services has been included in the price index;
• continuity and consistency of measurement techniques and underlying assumptions;
• free from bias;
• frequently updated; and
• available for a long period.
The entity should use the above criteria to choose the most reliable and most readily
available general price index and use that index consistently. It is important that the
index selected is representative of the real position of the hyperinflationary
currency concerned.
3.2
General price index not available for all periods
IAS 29 requires an entity to make an estimate of the price index if the general price
index is not available for all periods for which the restatement of long-lived assets is
required. The entity could base the estimate, for example, on the movements in the
exchange rate between the functional currency and a relatively stable foreign currency.
[IAS 29.17]. It should be noted that this method is only appropriate if the currency of the
hyperinflationary economy is freely exchangeable, i.e. not subject to currency controls
and ‘official’ exchange rates. Entities should also be mindful that, especially in the short
term, the exchange rate may fluctuate significantly in response to factors other than
changes in the domestic price level.
Entities could use a similar approach when they cannot find a general price index that
meets the minimum criteria for reliability (e.g. because the national statistical office in
the hyperinflationary economy may be subject to significant political bias). However,
this would only be acceptable if there was a widespread consensus that all available
general price indices are fatally flawed.
4
ANALYSIS AND RESTATEMENT OF THE STATEMENT OF
FINANCIAL POSITION
A broad outline of the process
to restate assets and liabilities in the statement of
financial position in accordance with the requirements of IAS 29 is shown in the
diagram below:
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Start
Yes
Is the statement of financial
No
position item non-monetary?
Non-monetary
Monetary assets
assets and liabilities
and liabilities
Are the assets
valued on a
Is the monetary
historical or
item index linked?
current cost basis?
Historical cost basis
Current cost basis
Yes
No
Restate
non-monetary
No restatement
Restatement of the
assets and
required
index linked item
liabilities
Remove
capitalised interest
Perform an
impairment test*
Statement of financial position adjusted for the effects of hyperinflation
* IAS 29 requires the restated amount of a non-monetary item to be reduced in accordance with the
appropriate IFRS when the restated amount exceeds its recoverable amount. [IAS 29.19].
The above flowchart does not illustrate the restatement of investees and subsidiaries
(see 4.3 below), deferred taxation (see 4.4 below) and equity (see 5 below).
4.1
Monetary and non-monetary items
4.1.1
Monetary or non-monetary distinction
Monetary items are not restated as they are already expressed in the measurement
unit current at the end of the reporting period. Therefore an entity needs to determine
whether or not an item is monetary in nature. Most statement of financial position
items are readily classified as either monetary or non-monetary as is shown in the
table below:
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Monetary items
Non-monetary items
Assets Assets
Cash and cash equivalents
Property, plant and equipment
Debt securities
Intangible assets
Loans
Investments in equity securities
Trade and other receivables
Assets held for sale
Inventories
Construction contract work-in-progress
Prepaid costs
Investment properties
Liabilities
Liabilities
Trade and other payables
Deferred income
Borrowings
Tax payable
However, there are instances where classification of items as either monetary or non-
monetary is not always straightforward. IAS 29 defines monetary items as ‘money held
and items to be received or paid in money’. [IAS 29.12]. IAS 21 expands on this definition
by defining monetary items as ‘units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency’. [IAS 21.8].
IAS 21 further states that the essential feature of a monetary item is a right to receive
(or an obligation to deliver) a fixed or determinable number of units of currency.
Examples given by IAS 21 are pensions and other employee benefits to be paid in cash,
provisions that are to be settled in cash and cash dividends that are recognised as a
liability. [IAS 21.16]. More obvious examples are cash and bank balances, trade
receivables and payables, and loan receivables and payables.
IAS 21 also states that ‘a contract to receive (or deliver) a variable number of the entity’s
own equity instruments or a variable amount of assets in which the fair value to be received
(or delivered) equals a fixed or determinable number of units of currency is a monetary
item.’ [IAS 21.16]. Although no examples of such contracts are given in IAS 21, it should
include those contracts settled in the entity’s own equity shares that would be presented
as financial assets or liabilities under IAS 32 – Financial Instruments: Presentation.
Conversely, the essential feature of a non-monetary item is the absence of a right to
receive (or an obligation to deliver) a fixed or determinable number of units of currency.
Examples given by IAS 21 are amounts prepaid for goods and services (e.g. prepaid
rent); goodwill; intangible assets; inventories; property, plant and equipment; and
provisions that are to be settled by the delivery of a non-monetary asset. [IAS 21.16].
IFRS 9 – Financial Instruments – states that all equity instruments are non-monetary.
[IFRS 9.B5.7.3]. Therefore, equity investments in subsidiaries, associates or joint ventures
would also be considered non-monetary items. IAS 29 provides separate rules on
restatement of such investees (see 4.3 below).
Even with this guidance there may be situations where the distinction is not clear.
Certain assets and liabilities may require careful analysis before they can be
classified. Examples of items that are not easily classified as either monetary or non-
monetary include:
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(a) provisions: these can be monetary, non-monetary or partly monetary. For
example, a warranty provision would be:
(i) entirely monetary when customers only have a right to return the product
and obtain a cash refund equal to the amount they originally paid;
(ii) non-monetary when customers have the right to have any defective product
replaced; and
(iii) partly monetary if customers can choose between a refund and a replacement
of the defective product.
Classification as either a monetary or a non-monetary item is not acceptable in (iii)
above. To meet the requirements of IAS 29, part of the provision should be treated
as a non-monetary item and the remainder as a monetary item;
(b) deferred tax assets and liabilities: characterising these as monetary or non-
monetary can be difficult as explained in 4.4 below;
(c) associates and joint ventures: IAS 29 provides separate rules on restatement of
investees that do not rely on the distinction between monetary and non-monetary
items (see 4.3 below);
(d) deposits or progress payments paid or received: if the payments made are regarded
as prepayments or as progress payments then the amounts should be treated as
non-monetary items. However, if the payments made are in effect refundable
deposits then the amounts should probably be treated as monetary items; and
(e) index-linked assets and liabilities: classification is particularly difficult when
interest rates, lease payments or prices are linked to a price index.
In summary, the practical application of the monetary/non-monetary distinction can be
complex and will require judgement on the part of preparers of financial statements.
Further examples of problem areas in the application of the monetary/non-monetary
distinction are discussed in Chapter 15 at 5.4.
4.1.2 Monetary
items
Generally, monetary items are not restated to reflect the effect of inflation, because
they already reflect their purchasing power at the end of the reporting period. However,
monetary assets and liabilities linked by agreement to changes in prices, such as i
ndex-
linked bonds and loans, should be adjusted in accordance with the terms of the
underlying agreement to show the repayment obligation at the end of the reporting
period. [IAS 29.13]. This adjustment should be offset against the gain or loss on the net
monetary position (see 6.2 below). [IAS 29.28].
This type of restatement is not a hyperinflation accounting adjustment, but rather a gain
or loss on a financial instrument. Accounting for inflation linked bonds and loans under
or IFRS 9 may well lead to complexity in financial reporting. Depending on the specific
wording of the inflation adjustment clause, such contracts may give rise to embedded
derivatives and gains or losses will have to be recorded either in profit or loss or other
comprehensive income depending on how the instrument is classified under IFRS 9
(see Chapter 44 at 6.3.5).
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4.1.3
Non-monetary items carried at current cost
Non-monetary items carried at current cost are not restated because they are already
expressed in terms of the measuring unit current at the end of the reporting period.
[IAS 29.29]. Current cost is not defined by the standard, but the IASB’s Conceptual
Framework provides the following definition: ‘Assets are carried at the amount of cash
or cash equivalents that would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted amount of cash or cash
equivalents that would be required to settle the obligation currently’. [CF(2010) 4.55(b)].
IAS 29 expands this definition by including net realisable value and fair value into the
concept of ‘amounts current at the end of the reporting period’. [IAS 29.14]. In summary,
this would include items carried at a value that reflects purchasing power at the balance
sheet date.
It is important to note that non-monetary items that were revalued at some earlier date
are not necessarily carried at current cost, and need to be restated from the date of their
latest revaluation. [IAS 29.18].
In many hyperinflationary economies, national legislation may require entities to adjust
historical cost based financial information in a way that is not in accordance with IAS 29
(for example, national legislation may require entities to adjust the carrying amount of
tangible fixed assets by applying a multiplier). Though financial information adjusted in
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 234
