Learning Outcomes
After reading this article, you will be able to explain when an economy is considered hyperinflationary under IAS 29, outline the required restatement of financial statements, and calculate monetary gains or losses arising from hyperinflation. You will also be equipped to evaluate exam scenarios involving monetary gain or loss computations and their impact on financial reporting.
ACCA Strategic Business Reporting (SBR) Syllabus
For ACCA Strategic Business Reporting (SBR), you are required to understand the recognition and accounting implications when a reporting entity operates in a hyperinflationary economy. This article focuses on:
- The criteria used to identify a hyperinflationary economy according to IAS 29
- The requirements for restatement of financial statements under hyperinflation
- Determining and explaining the concept of a monetary gain or loss
- Computing the monetary gain or loss as part of financial reporting
- Critically assessing how hyperinflation affects users’ interpretation of financial statements
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Under IAS 29, which sign most clearly indicates that an economy is hyperinflationary?
- Annual inflation rate exceeds 100%
- Prices are stable but population expects increases
- The local currency is widely used for contracts
- The currency has a fixed exchange rate
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What is classified as a monetary item under IAS 29?
- Inventory
- Land
- Trade receivables
- Plant and equipment
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True or False? The monetary gain or loss represents the effect of holding net monetary assets or liabilities during a period of inflation.
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Briefly describe the process for calculating a monetary gain or loss in hyperinflationary financial statements.
Introduction
Entities operating in hyperinflationary economies must follow IAS 29 Financial Reporting in Hyperinflationary Economies. This standard requires the restatement of financial statements to reflect current purchasing power, enabling comparability and relevance for users. A key aspect is the computation of a monetary gain or loss, which adjusts the results for changes in the real value of monetary items during inflation. Understanding the principles behind these adjustments is essential for handling exam questions in this area.
Key Term: Hyperinflationary Economy
An economy is considered hyperinflationary under IAS 29 when the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency, prices are linked to a price index, and the cumulative inflation rate over three years approaches or exceeds 100%.Key Term: Monetary Items
Assets and liabilities that are fixed or determinable in terms of money, such as cash, receivables, and payables.Key Term: Monetary Gain or Loss
The net result of holding monetary assets and liabilities during periods of inflation—reflecting the loss in purchasing power of net monetary assets or the gain from net monetary liabilities.
When is an Economy Hyperinflationary?
IAS 29 applies only when hyperinflation distorts financial information. Indicators include:
- General population preferring non-monetary or stable foreign currency assets
- Prices linked to a price index
- Sales and purchases on credit are made at prices to compensate for expected inflation
- Cumulative inflation rate over three years is around or exceeds 100%
Management must assess all available evidence, not just inflation rates.
Exam Warning
In exams, do not focus solely on the 100% rule—cite multiple indicators, as IAS 29 does not provide a strict threshold.
Restatement of Financial Statements
When hyperinflation is present, entities must:
- Restate non-monetary assets and liabilities (e.g., property, plant, equipment, inventory, share capital) using a general price index
- Recognise all items in terms of the measuring unit current at the reporting date
- Statement of profit or loss items are restated from the transaction date to the end of the period
- Comparative amounts are also restated
Monetary items (such as cash or payables) are not restated, as they are already expressed in current terms.
Computation of Monetary Gain or Loss
Restating non-monetary items for inflation creates a mismatch with the unchanged monetary items. The monetary gain or loss represents the effect of holding monetary assets or liabilities during inflation.
- Entities with net monetary assets lose purchasing power as inflation rises (monetary loss).
- Entities with net monetary liabilities gain purchasing power (monetary gain).
This is recognised in profit or loss.
Worked Example 1.1
Scenario:
At 1 January 20X5, Entity Z in a hyperinflationary economy had:
- Cash and receivables (monetary assets): $2,000,000
- Payables and loans (monetary liabilities): $1,500,000
The general price index at 1 January 20X5 was 100; at 31 December 20X5 it was 160. No new monetary items were added or settled within the year.
Required: Calculate the monetary gain or loss recognised in Entity Z's profit or loss for 20X5.
Answer:
Net monetary position at start:
Net monetary assets = $2,000,000 (assets) – $1,500,000 (liabilities) = $500,000
Inflation rate = 60% (index from 100 to 160)
Purchasing power loss = $500,000 × (160 – 100) / 100 = $500,000 × 0.6 = $300,000 (loss)
Entity Z recognises a monetary loss of $300,000 in profit or loss.
Worked Example 1.2
Scenario:
Entity Y holds only monetary liabilities of $400,000 at the start of the year (index increases from 200 to 260). There are no monetary assets.
Required:
What is the monetary gain or loss for the year?
Answer:
Net monetary liabilities: $400,000
Inflation rate: 30% ((260 – 200) / 200)
Purchasing power gain = $400,000 × 0.3 = $120,000
Entity Y records a monetary gain of $120,000 in profit or loss.
Revision Tip
List key monetary and non-monetary items and double-check index adjustments when calculating gains and losses.
Key Steps in Calculating Monetary Gain or Loss
- Determine opening balances of monetary assets and liabilities.
- If major changes occur during the period, adjust for additions and settlements at the date they happen.
- Net the monetary assets and liabilities to find the opening net position.
- Apply the change in the general price index to compute the gain or loss.
- Recognise the result in profit or loss on the restated statement.
Worked Example 1.3
Scenario:
Entity Q started the year with $900,000 monetary assets and $1,800,000 monetary liabilities, and the price index increased from 110 to 154.
Required:
Compute the monetary gain or loss.
Answer:
Net monetary position = $900,000 – $1,800,000 = ($900,000) (net monetary liabilities)
Inflation rate: (154 – 110) / 110 ≈ 40%
$900,000 × 0.4 = $360,000 (gain)
Entity Q records a $360,000 monetary gain in profit or loss.
Impact on Financial Reporting and Analysis
- Adjusted figures increase comparability across periods and between entities.
- The disclosed monetary gain or loss ensures the effects of hyperinflation are visible to users.
- Analysis should focus on real, not merely nominal, changes in financial position.
Summary
IAS 29 mandates restatement of accounts in hyperinflationary economies and calculation of a monetary gain or loss to reflect the change in purchasing power. Calculate the monetary adjustment by applying the inflation rate to the net monetary position. The result affects reported profit or loss for the period.
Key Point Checklist
This article has covered the following key knowledge points:
- Identify when IAS 29 applies using economic indicators
- Restate non-monetary items using a general price index
- Define monetary items and net monetary position
- Calculate the monetary gain or loss for the period
- Recognise and present the monetary gain or loss in profit or loss
- Interpret the impact of hyperinflation adjustments on financial statements
Key Terms and Concepts
- Hyperinflationary Economy
- Monetary Items
- Monetary Gain or Loss