FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES-IAS 29
Since we are talking of accounting standards which are acceptable internationally, thus the quality of such standards making them stable and dependent in the long run for better presentation of financial information is of great importance. Permanency of economic, natural and political factors have great role to play in the growth and stability of circumstances in which wealth of a nation grows. The stable economies are considered to be preferred destinations for the international investors to invest and grow their wealth along with the growth of that country. This may have been a reason to create an accounting standard guiding us how to neutralize the impact of hyperinflationary nature of an economy by adjusting the accounts in a way to make them more relevant and reliable in the international scenario.
IAS-29 i.e. Financial Reporting in Hyperinflationary Economies deals with a situation where in an entity finds it difficult to report its performance due to currency of a hyperinflationary economy. Unless suitably dealt with, reporting of financial information will present distorted picture of an entity which if considered by the users may prove fatal while making business decisions.
Hyperinflationary economies have not been defined by the standard in an exhaustive manner but economies with following characteristics may be treated as hyperinflationary economies.
Þ 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.
Þ The general population regards monetary amounts not in terms of local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency.
Þ Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if period is short.
Þ Interest rates, wages, and are linked at a price index: and
Þ The cumulative inflation rate over three years approaches, or exceeds 100%
Again it is a matter of judgment as to when a economy will said to be out of hyperinflationary state. The commonly used principle is when cumulative inflation rate over three years falls below 100%. It is assumed that all the entities will stop implementation of IAS 29 from the same date to comply with the principles of comparability and basis of uniformity.
Restatement of financial statements in the case of an entity working in a situation where functional currency is passing through the hyperinflationary economic syndrome is generally expected to be carried as per IAS 29. But in a situation where the parent company is situated at a place where functional currency is passing through hyperinflationary economic conditions but its subsidiary is situated out of such place, the financial statements of parent company only has to be restated as per IAS 29. In case functional currency of subsidiary is passing through hyperinflationary economic and not the parent company under such circumstances only financial statements of subsidiary have to be restated and not the parent company.
The procedure to restatement of Financial Statements is to identify non-monetary and monetary items in the statement of financial position (Balance Sheet). Non monetary items can be plant, property, inventories, investments, goodwill and intangible assets. Monetary assets are cash, receivables, payables and loans which are fixed in monetary terms. Non-monetary items are adjusted using general price index, the reason being that such assets are stated at amounts that were current at their date of acquisition which is usually different from the date at which financial statements are prepared. No adjustment is to be carried in case of monetary items the reason being that all such items are already carried at amounts that are current at the end of the reporting period.
Items disclosed in profit & loss or other comprehensive statement of account need to be expressed in the terms of measuring unit current at the end of the reporting period. This requires amounts to be restated by applying the change in the general price index from the dates when the items of income and expenditure were initially recorded to the date to which the statement of financial is prepared. The gain or loss on the net monetary position is included in net income.
An entity need to disclose by providing explanation with respect to financial statements and the comparative information to the fact that measuring unit has been applied at the end of reporting period to take into account general inflationary increases. Basis of preparation of financial statements have to be disclosed e.g. historical cost method. Changes in the price index should be disclosed comprising of rate at the end of the reporting period and the movement of index in the current and previous period.
DILIP K RAINA –Chartered Accountant
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