IAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES
Objective of IAS 29
The objective of IAS 29 is to establish specific standards for entities reporting in the currency of a hyperinflationary economy, so that the financial information provided is meaningful.
Restatement of Financial Statements
The basic principle in IAS 29 is that the financial statements of an entity that reports in the currency of a hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet date. Comparative figures for prior period(s) should be restated into the same current measuring unit. [IAS 29.8]
Restatements are made by applying a general price index. Items such as monetary items that are already stated at the measuring unit at the balance sheet date are not restated. Other items are restated based on the change in the general price index between the date those items were acquired or incurred and the balance sheet date.
A gain or loss on the net monetary position is included in net income. It should be disclosed separately. [IAS 29.9]
The restated amount of a non-monetary item is reduced, in accordance with appropriate IFRSs, when it exceeds its the recoverable amount. [IAS 29.19]
The Standard does not establish an absolute rate at which hyperinflation is deemed to arise – but allows judgement as to when restatement of financial statements becomes necessary. Characteristics of the economic environment of a country which indicate the existence of hyperinflation include: [IAS 29.3]
- 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;
- 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;
- 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;
- interest rates, wages, and prices are linked to a price index; and
- the cumulative inflation rate over three years approaches, or exceeds, 100%.
IAS 29 describes characteristics that may indicate that an economy is hyperinflationary. However, it concludes that it is a matter of judgement when restatement of financial statements becomes necessary.
When an economy ceases to be hyperinflationary and an entity discontinues the preparation and presentation of financial statements in accordance with IAS 29, it 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. [IAS 29.38]
- Gain or loss on monetary items [IAS 29.9]
- The fact that financial statements and other prior period data have been restated for changes in the general purchasing power of the reporting currency [IAS 29.39]
- Whether the financial statements are based on an historical cost or current cost approach [IAS 29.39]
- Identity and level of the price index at the balance sheet date and moves during the current and previous reporting period [IAS 29.39]
Which jurisdictions are hyperinflationary?
IAS 29 defines and provides general guidance for assessing whether a particular jurisdiction’s economy is hyperinflationary. But the IASB does not identify specific jurisdictions. The International Practices Task Force (IPTF) of the AICPA’s Centre for Audit Quality monitors the status of ‘highly inflationary’ countries. The Task Force’s criteria for identifying such countries are similar to those for identifying ‘hyperinflationary economies’ under IAS 29. From time to time, the IPTF issues reports of its discussions with SEC staff on the IPTF’s recommendations of which countries should be considered highly inflationary, and which countries are on the Task Force’s inflation ‘watch list’. On 18 February 2010 the CAQ issued Alert #2010-11 Monitoring Inflation Status of Certain Countries, which states the following view of the Task Force: