Financial Reporting in Hyperinflationary Economies

PAS 29 prescribes the restatement procedures for the financial statements of an entity whose
functional currency is the currency of a hyperinflationary economy.

Inflation is normally ignored in accounting due to the stable monetary unit assumption.
However, when inflation is very high, it can no longer be ignored. This is because financial statements
are stated in terms of money and when money loses its purchasing power at a very high rate, the
financial statements become misleading. The financial statements therefore must be restated otherwise
they are useless.

Price level change-is the increase or decrease in the price of goods or services in a given market during a
given interval. Includes:

1. General Price Level Change- is increase or decrease in the OVERALL level of prices of goods or
services throughout the economy measured using a general price index.
2. Specific Price Level Change- is increase or decrease in the price of a SPECIFIC good or service.
 Specific forces-changes in supply and demand and technological changes may cause
individual prices to increase or decrease significantly and independently of each other.
 General forces- may result in changes in the general level of prices and therefore in the
general purchasing power of money.

Purchasing power- means the goods and services that money can buy.

General Price Level Changes and Purchasing Power of Money have INVERSE RELATIONSHIP

1. Inflation- If General Price level INCREASES, Purchasing power of money has DECREASED.
2. Deflation-If General Price level DECREASES, Purchasing power of money has INCREASED.

Hyperinflation

- refers to loss of purchasing power of money at such rate that comparison of amounts from
transactions and other event that have occurred at different times,
even within the same accounting period, is MISLEADING.

- occurs when inflation is very high.

- general price level within a specific economy increases rapidly wherein the functional currency loses
its real value very quickly.

- a matter of judgment

Indicators of Hyperinflation

Hyperinflation is indicated by characteristics of economic environment of a country which

include, but are not limited to the following:
 1. 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.
2. The general population regards monetary amounts not in terms of the local currency but in
terms of a relative stable foreign currency. Prices may be quoted in that currency.
3. 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.
4. Interest rates, wages and prices are linked to a price index; and
5. The cumulative inflation rate over three years is approaching, or exceeds, 100%.

Restatement of Financial Statements

The financial statements of an entity operating in a hyperinflationary economy, whether prepared based
on the historical cost approach or current cost approach should be restated using the constant peso
accounting.

The two restatements addressed under PAS 29 are:

a. Historical cost (Nominal cost) to Constant Peso; and

b. Current cost to Constant Peso

Summary of restatement procedures --- Historical to Constant Peso

1) Identify monetary and non-monetary items because only non-monetary statement of financial
position items not already stated at the measuring unit current as of end of reporting period are
restated.

2) Non-monetary items stated at NRV or FV as at the end of reporting period need not be restated.
Financial instruments and other items measured at FV and inventories measured at NRV are not
restated.

3) Non-monetary items that are measured qt revalued amounts where revaluation was made at some
earlier date shall be restated from the date of the revaluation. If revaluation is made as at the end of
reporting period, no restatement is necessary.

4) If it is the entity's first time to apply PAS 29, any revaluation surplus in equity is eliminated. The
revalued non-monetary items shall be restated from their acquisition dates to the end pf reporting
period.

5) The restated amount of a non-monetary item is reduced when it exceeds its recoverable amount,
e.g., inventories are reduced to their NRV in accordance with PAS 2 and PPE and intangible assets are
reduced to their recoverable amounts in accordance with PAS 36.

6) When comparative statements are prepared, both monetary and non-monetary items of the
preceding period are expressed in terms of the index number at the end of the current year.

7) Retained earnings is the balancing figure in the restated statement pf financial position.
8) Determine the current price index as of end of reporting period by reference tp a general price index,
most commonly the "CPI-U." This will be the numerator in all fractions used in the restatement
procedures.

9) Determine the historical price indices for items to be restated. This will be the denominators in the
fractions used in the restatement procedures. If it is impracticable to determine the historical price
indices, the average price index may be used.

10) All items in the statement of profit or loss and other comprehensive income are restated.

11) The gain or loss on net monetary position (general purchasing power gain or loss) is determined
from the monetary items. The gain or loss on net monetary position is recognized in profit or loss.

12) To check the accuracy of the derived restated amounts, a restated statement of changes in equity is
prepared. The balances of equity accounts in the restated statement of changes in equity should tally
with the balances in the restated statement of financial position.

13) All items in the restatement cash flows shall be restated to the measuring unit current as of the end
of reporting period.

The formula for restatement is:

Historical cost x current price index* / historical price index**

*index as of end of reporting period

**index as of acquisition date. However, when it is impracticable to determine the historical price
indices, such as for transactions recurring very frequently, an entity may use the average general price
index for period.

Investments accounted for using the equity method

When the entity holds an investment that is accounted for using the equity method, and the investee
reports in the currency of a hyperinflationary economy, the following steps are followed:

 the statement of financial position and statement of comprehensive income of the investee are
restated in accordance with PAS 29 in order to calculate the investor’s share of its net assets and
profit or loss; and

 when the restated financial statements of the investee are expressed in a foreign currency, they
are translated at closing rates.

Borrowing Costs

The part of borrowing costs that compensates for the inflation is recognized as an expense in the period
in which the costs are incurred.

Assets and liabilities having a predefined link to price changes

- adjust in accordance with the particular agreements

Assets acquired through issuance of noninterest-bearing liabilities

- When assets are acquired on deferred payment terms with no explicit charge for interest, and it is
impracticable to impute an amount of interest, the Standard allows that such assets are restated from
the payment date and not the date of purchase.

Current Cost Accounting

Current cost accounting involves the restatement of historical cost in terms of current cost.

The Current cost of an asset is the current replacement cost of the asset owned, adjusted for
the value of any operating advantages and disadvantages of the assed owned. However, it may not
exceed the recoverable amount which is higher of the fair value less cost to sell(NRV) or the value in
use.

Determining of Current Cost

The use of current cost as the attribute of assets to be measured is implemented either by
indexation or by direct pricing.

Indexation – it refers to specific indices that are generated either internally or externally for particular
classes of goods and services.

Direct Pricing is made by reference to current invoice prices, vendors’ price list or standard
manufacturing costs that reflects current costs.

Holding Gains and Losses

The application of current cost accounting involves the recognition of holding gains and holding
losses in that statement of profit or loss and other comprehensive income.

Current cost > Historical Cost = Holding Gain

Current cost < Historical cost = holding loss

Holding gains and losses may be classified as either realized, if the asset is used, sold, or
consumed during the period. And unrealized if the asset is unused or unsold.

Financial statements prepared under current cost accounting

A current cost statement of financial position reflects non-monetary assets at their current cost.

A current cost statement of profit or loss and other comprehensive income reflects depreciation expense
and cost of goods sold at their current cost. Holding gains and losses are recognized on non-monetary
assets restated to current cost.

A current cost statement of cash flow is the same as that of a historical cost accounting. No restatement
is necessary because items in the statement of cash flows are already stated in terms of current cost at
transaction dates.
Current cost to Constant Peso

Summary of restatement procedure – Current cost to Constant Peso

1. Identify monetary and non-monetary items because only non-monetary items not already stated at
the measuring unit current as of end of reporting period are restated. Monetary items are not restated.

2. Non-monetary items in the statement of financial position stated at current cost as of the end of
reporting period are not restated.

3. All items in the statement of profit or loss and other comprehensive income are restated to constant
pesos.

4. Restatement of items to constant pesos, items are multiplied by a CPI fraction ( Current price index
divided by Historical price index) except when impracticable, the average price index may be used.

For depreciation expense based on average current cost the denominator to be used in the
fraction is the average price index for the year.

5. Holding gains and losses shall be adjusted for inflation. The inflation adjusted holding gains (losses)
are computed as the difference between current cost restated to constant pesos and historical cost
restated to constant pesos.

Adjusted Realized Holding Gain (loss)

Current cost adjusted to constant peso basis (CC/CP) xxx

Less: Historical cost adjusted to constant peso basis (HC/CP) (xxx)

Realized Holding Gain (Loss) xxx

Adjusted Unrealized Holding Gain (loss)

Carrying amount at current cost basis (CC only) xxx

Less: Carrying amount at Historical cost adjusted to constant

peso basis (HC/CP) (xxx)

Unrealized Holding Gain (Loss) xxx

6. The effect of inflation on net monetary items is calculated and recognized in profit or loss as a gain or
loss on net monetary position (purchasing power gain or loss).
TAXES

The restatement of financial statements in accordance to PAS 29 may result to differences

between the carrying amount of the individual assets and liabilities in the statement of financial position
and their tax bases. These differences are accounted for under PAS 12 Income taxes. Although, deferred
tax asset and deferred tax liabilities are monetary items, they still need to be restated when applying
PAS 29 because they are affected by the movements in non-monetary assets.

However, deferred taxes are not restated by indexation. Instead, computed as the difference
between the restated carrying amount of the non-monetary item and its tax base. Since there is
generally no tax relief for inflation, the tax base of the related non-monetary need not be adjusted for
inflation.

Consolidated Financial Statements

A parent that reports in the currency of a hyperinflationary economy may have subsidiaries that also
report in the currencies of hyperinflationary economies.

 Financial statements of any such subsidiary need to be RESTATED by applying GENERAL

PRICE INDEX of the country in whose currency it reports BEFORE they are included in
the consolidated financial statements issued by its parent.
 When Subsidiary is a foreign subsidiary, its Restated Financial Statements are
TRANSLATED AT CLOSING RATES.

Different Ends of Reporting Periods

If financial statements with different ends of the reporting periods are CONSOLIDATED

 ALL ITEMS whether non–monetary or monetary, NEED TO BE RESTATED into the measuring
unit current at the date of the consolidated financial statements.

Economies ceasing to be Hyperinflationary

When economy ceases to be hyperinflationary and an entity discontinues the preparation and
presentation of financial statements prepared in accordance of PAS 29:

 It shall treat the amounts expressed in the measuring unit current at the end of the previous
reporting period as the BASIS for the carrying amount in its subsequent financial statements.

Disclosures

Disclosures

1. The fact that the financial statements, including corresponding figures, have been restated for
changes in the general purchasing power of the reporting currency.

2. Whether the financial statements are based on historical cost or current cost.
3. The identity and level of the price index at the end of the reporting period and the movements during
the current and previous reporting periods.

REFERENCES:

1. Accounting for Business Combinations (2020) - Zeus Vernon B. Millan

2. Conceptual Framework & Accounting Standards (2018) - Zeus Vernon B. Millan
3. https://library.croneri.co.uk/cch_uk/igaap-va/a37-5-1