IAS 29 - FINANCIAL REPORTING IN HYPER INFLATIONARY ECONOMIES

Overview

IAS 29 Financial Reporting in Hyperinflationary Economies applies where an entity's functional currency is that of a hyperinflationary economy. The standard does not prescribe when hyperinflation arises but requires the financial statements (and corresponding figures for previous periods) of an entity with a functional currency that is hyperinflationary to be restated for the changes in the general pricing power of the functional currency.

IAS 29 was issued in July 1989 and is operative for periods beginning on or after 1 January 1990.

Summary of IAS 29

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]

Disclosure

• 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'. The IPTF's meeting notes from the 20 November 2012 meeting state the following view of the Task Force:

Countries with three-year cumulative inflation rates exceeding 100%:

• Belarus
• South Sudan (although South Sudan only became independent of Sudan in July 2011 and data is not yet available to calculate a three-year cumulative inflation rate, the two-year cumulative inflation rate is projected to be 166% by the end of 2012)

Countries where the three-year cumulative inflation rates had exceeded 100% in recent years:

• Democratic Republic of Congo
• Venezuela

The Staff would expect registrants to continue to treat the economy of Venezuela as highly-inflationary and to cease treating the economy of the Democratic Republic of Congo as highly-inflationary no later than the first reporting period beginning on or after January 1, 2013.

Countries (a) with projected three-year cumulative inflation rates between 70% and 100%; (b) where the last known three-year cumulative inflation rates previously exceeded 100% and current actual inflation data has not been obtained; or (c) with a significant increase in inflation during the current period

• Ethiopia
• Islamic Republic of Iran
• Sudan
• Guinea
• Republic of Yemen