Hyperinflationary economies (ias 29) - Transition and subseq...

Learning Outcomes

After reading this article, you will be able to explain the indicators of hyperinflation under IAS 29, outline the steps required during transition to hyperinflationary accounting, and apply the procedures for restating financial statements in subsequent reporting periods. You will also be equipped to accurately discuss exam scenarios and common pitfalls in the application of IAS 29.

ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand the accounting implications when an entity operates in a hyperinflationary economy, particularly the requirements under IAS 29. Focus your revision on the following syllabus points:

• Identify when an economy is considered hyperinflationary under IAS 29
• Describe the transition process to hyperinflationary accounting, including how opening balances are restated
• Apply the rules for restating financial statements during initial and subsequent periods where IAS 29 applies
• Account for group reporting and consolidation considerations for entities in hyperinflationary economies
• Explain the key disclosures required under IAS 29

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.

1. List two key indicators that an economy is hyperinflationary according to IAS 29.
2. What is the general approach for restating non-monetary assets during the first period IAS 29 is applied?
3. How are comparative financial statements restated upon initial transition to hyperinflationary accounting?
4. True or false? After transition, subsequent period statements are restated from the date of initial application of IAS 29.

Introduction

IAS 29 Hyperinflationary Economies mandates specific adjustments to financial statements when an entity’s functional currency is subject to extreme inflation. The standard’s aim is to ensure financial information remains useful for decision-making despite rapid erosion of purchasing power. This article sets out the recognition of hyperinflation, the transition process to applying IAS 29, and the treatment of items in following reporting periods.

Key Term: Hyperinflation
A situation where an economy’s currency loses significant purchasing power over a short period, typically when the cumulative inflation rate approaches or exceeds 100% over three years.

Identifying a Hyperinflationary Economy

IAS 29 is applied once an economy is considered hyperinflationary. There is no single absolute threshold, but the following factors are considered:

• Prices, interest, and wages are linked to a price index
• Sales and purchases are often on a credit basis with a very short collection period
• The general population prefers holding wealth in non-monetary assets or a stable foreign currency
• Inflation is so severe that historical cost financial statements lose relevance
• Cumulative inflation rate is approaching or exceeds 100% over three years

Key Term: Restatement
The process of adjusting all figures in the financial statements to units of current purchasing power at the period end.

Transition to Hyperinflationary Accounting

Transition refers to the first period in which IAS 29 is applied. All amounts (including prior year comparatives and opening balances) must be restated in the measuring unit current at the end of the reporting period.

Transition Steps

1. Determine the Date of Adoption
   Apply IAS 29 from the beginning of the reporting period in which the economy is identified as hyperinflationary.

2. Restate the Statement of Financial Position

   • Non-monetary items (e.g., property, plant and equipment, inventory, equity) are restated using a general price index from the date of their acquisition to the reporting date.
   • Monetary items (e.g., cash, receivables, payables) are not restated as they are already in current terms.

3. Restate the Statement of Profit or Loss and OCI

   • All items of income and expense are restated by applying the change in the general price index from transaction date to the period end.

4. Comparative Information
   Restated comparative statements are presented as if the recording currency had always been hyperinflationary.

Key Term: Monetary Items
Assets or liabilities to be received or paid in fixed or determinable units of currency.

Key Term: Non-monetary Items
Items whose value changes with inflation, such as property, plant and equipment and inventories.

Restatement of Financial Statements: First and Subsequent Periods

Restating the Opening Balances

Upon first applying IAS 29:

• Equity items (such as share capital, reserves) are restated from their original recognition date.
• Gains or losses from net monetary position are recognised in profit or loss.

Subsequent Reporting Periods

In future periods, financial statements are restated using the same methods:

• Non-monetary balances from the prior period are carried forward at their restated value and brought forward indexes are used as the new base.
• Income and expenses are restated using current period index adjustment.

Worked Example 1.1

An entity in Country Z applies IAS 29 for the first time in 20X3. On 1 January 20X1, it purchased equipment for 10,000 units. The price index was 100 on 1 Jan 20X1 and 250 on 31 Dec 20X3.

Question:
How is the equipment restated in the 20X3 financial statements under IAS 29?

Answer:
Restate the cost as:
10,000 × (250/100) = 25,000 units
Depreciation charges for 20X1, 20X2, and 20X3 are restated similarly and deducted from the indexed cost to arrive at the carrying amount at the reporting date.

Worked Example 1.2

During 20X3, Entity X made sales on 1 July 20X3 of 5,000 units. The price index was 200 on the sales date and 250 at year end.

Question:
What amount is reported as revenue in the restated statement of profit or loss?

Answer:
Adjust revenue: 5,000 × (250/200) = 6,250 units.

Gains or Losses on Net Monetary Position

A core principle of IAS 29 is recognition of gains or losses from holding monetary assets and liabilities as inflation erodes value. Monetary liabilities (such as loans) result in gains; assets result in losses. The net effect goes to profit or loss.

Key Term: Gain (Loss) on Net Monetary Position
The profit or loss arising from the difference between the inflation-adjusted value of monetary assets and liabilities.

Disclosures

Entities applying IAS 29 must disclose:

• The fact that the entity's financial statements have been restated, and the price index used
• The amount of gain or loss on the net monetary position
• How comparative figures have been restated
• Description of the method and index used for restatement

Group Financial Statements and Hyperinflation

If a subsidiary’s functional currency is hyperinflationary, its financial statements must be restated under IAS 29 before being translated for consolidation purposes.

• For foreign operations, first restate in the local currency of the subsidiary; then translate to the parent’s presentation currency using closing rates.

Ceasing Hyperinflationary Accounting

IAS 29 is applied only while the economy continues to be hyperinflationary. If inflation falls below the threshold and the economy stabilises, restatement ceases, and future financial statements are presented at historical cost (or as otherwise required) from that point forward.

Exam Warning

Failure to restate both opening balances and comparative figures, or neglecting to present the gain or loss on net monetary position in profit or loss, are common errors in the exam. Carefully check index dates and calculations for each item.

Summary

IAS 29 ensures the financial statements of entities in hyperinflationary economies reflect current purchasing power. Transition requires restating all historical figures using a suitable index. Monetary and non-monetary items are treated differently, and all gains or losses on the net monetary position must be reported. Ongoing compliance requires restatement each period until the economy stabilises.

Key Point Checklist

This article has covered the following key knowledge points:

• Identify when IAS 29 applies by using the standard’s indicators for hyperinflation
• Restate financial statements on transition, including opening balances and comparatives
• Restate monetary and non-monetary items using a general price index
• Recognise gains or losses on the net monetary position in profit or loss
• Implement proper disclosures under IAS 29
• Apply group consolidation rules for subsidiaries in hyperinflationary economies

Key Terms and Concepts

• Hyperinflation
• Restatement
• Monetary Items
• Non-monetary Items
• Gain (Loss) on Net Monetary Position