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Hyperinflation

PAS 29 Financial Reporting in Hyperinflationary Economy

Hyperinflation is indicated by

The general population prefers to keep its wealth in nonmonetary assets or in a relatively stable
foreign currency

Accordingly, amounts held in local currency are immediately invested in nonmonetary assets or
stable foreign currency to maintain purchasing power

The general population regards monetary amounts not in terms of local currency but in terms of a
relatively stable foreign 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 same is short

Interest rates, wages, and prices are linked to a price index

The cumulative rate over 3 years is approaching or exceeds 100%

Although PAS 29 sets out characteristics that may indicate hyperinflationary judgement, it also states that
hyperinflation is a matter of judgment.

PAS 29, paragraph 8 provides that financial statements that reports in the currency of a
hyperinflationary economy, whether they are based on historical cost approach or current cost approach,
shall be stated in terms of the measuring unit current at the end of the reporting period.

Presentation of the information required under PAS 29 as a supplement to unrestated financial


statements is not permitted.

Restatement of financial statements of an entity that reports in the currency of a hyperinflationary


economy is accomplished by means of Constant Peso Accounting and Current Cost Accounting.

Judgement shall also be exercised whether an economy ceases to be hyperinflationary. The criterion is
whether the cumulative inflation rate drops below 100% in a three year period.

When an economy ceases to be hyperinflationary, an entity shall discontinue the preparation and
presentation of FS under a condition of hyperinflationary economy. The amounts expressed in the
measuring unit current at the end of the previous reporting period shall be the carrying amounts in
subsequent financial statements.

Constant Peso Accounting

Constant peso accounting [Purchasing power/Price level accounting] is the restatement of


conventional/historical financial statements in terms of the current purchasing power of the peso through
the use of index number.

Nominal Peso Accounting traditional concept of preparing FS based on historical cost.


Monetary Items money held & assets and liabilities to be received or paid in fixed or determinable
amount of money [right to receive or an obligation to deliver a fixed or determinable amount of money]
Monetary Items are fixed in a sense that the amounts ultimately realizable/ultimately payable are the
same amounts that appear on the historical statements

By their very nature, monetary items are already expressed in terms of current pesos and therefore
realizable/payable at no more than their face or stated amounts. (These items are no longer restated)

Nonmonetary Items Items that do not fit the description of monetary items (process of exclusion)
Peso amounts reported in the financial statements differ from the amounts that are ultimately realizable or
payable [absence of the right to receive or an obligation to deliver a fixed or determinable amount of
money]

Gain or Loss in Purchasing Power In a period of Inflation, there is a purchasing power loss incurred
on Monetary Assets and purchasing power gain realized in Monetary Liabilities. The opposite holds in a
period of Deflation (Gain Monetary Asset, Loss Monetary Liabilities)

Formula for Restatement

Index Number at the end of reporting period


x Historical Cost
Index Number on acquisition date

Procedures for Restatement

1.) Restatement is made by applying the general price index


2.) Items in FS are classified as monetary or nonmonetary.
3.) Monetary items not restated.
4.) Nonmonetary items restated. (Some nonmonetary items are carried at amounts current at the
end of the reporting period such as Net Realizable Value and Fair Value and thus not restated)
5.) Some nonmonetary items are carried at amount current at date other than acquisition date (i.e.
Revalued PPE) In such case, the carrying amounts are restated from the date of revaluation.
6.) All Items in IS are restated by applying the change in the general price index from the dates when
the items of income and expense were initially recorded. However, for practical purposes, the
average index may be used.
7.) General purchasing power gain or loss is computed, this pertains only to monetary items. The
gain or loss on purchasing power is included in profit and loss and is separately disclosed.
8.) The restated amounts of PPE, goodwill and other intangible asset are reduced when it exceeds
recoverable amount.
9.) Any revaluation surplus recognized previously is eliminated.
10.) Retained Earnings would be the balancing figure in the restated statement of financial position.
11.) When Comparative Statements are prepared, the monetary items of the preceding year are
expressed in terms of the index number at the end of the current year.

Current Cost Accounting

Current Cost Accounting is a method of measuring assets, liabilities, income and expenses at current
cost at the end of the reporting period. The essence of which is the recognition of a holding gain or a
holding loss.

Current Replacement Cost is the estimated cost to acquire a similar asset at current purchase price.
Holding Gain or Loss when replacement cost is greater than historical cost, there is a holding gain.
Otherwise, it is a loss. Holding Gain or Loss may either be realized or unrealized. \RGHG\

Unrealized Holding Gain or Loss pertains to assets still unsold or unused, while Realized Holding Gain or
Loss pertains to assets already sold or used.

Disclosures for hyperinflationary Financial Statements

a) The fact that the financial statements have been restated for changes in the general purchasing
power of the reporting currency.
b) Whether the Financial Statements are based on historical cost approach or current cost approach.
c) The nature and level of the price index at the end of the reporting period and the movement in the
index during the current and previous reporting period.

PFRS for SMES and Full PFRS are the same in all aspects of accounting for an entity whose
functional currency is the currency of a hyperinflationary economy