CHAPTER 9_Hyperinflationary Economies_BUSCOM

(PAS 29) Financial Reporting in Hyperinflationary Economies

Normally, FS are prepared using STABLE MONETARY UNIT ASSUMPTION.

STABLE MONETARY UNIT ASSUMPTION (STUA) states that money is the appropriate unit of
measurement for economic activities.

Purchasing power of money (PPM) is

GPL PPM GPL PPM stable therefore Price Level Changes
(Inflation or Deflation) are ignored

PPM is the value of money or goods and

services money can buy

However, If price level changes(PLC) are no longer negligible, the usefulness of FS under STUA is
undemined. Valuations becomes misleading and comparibility is reduced, therefore it needs to be
restated.

Price level Changes(PLC) is the increase or decrease in the price of goods on a given market.

 General Price Level Change (GPLC)_Overall

 Specific Price Level Change (SPLC)_Specific
 Consumer Price Index(CPI)_Average change

Hyperinflation refers to the loss of purchasing power that comparison of amounts from transactions
becomes misleading. Hyperinflation occurs when inflation is very high and the fuctional currency of
money loses its value.

PAS 29 does not established an absolute rate that hyperinflation is deemed to arise. IT IS A MATTER OF
JUDGEMENT

Example:
  CUMULATIVE INFLATION OVER THREE YEARS EXCEED 100%
 Inflation in YEAR 1_26%
 Inflation in YEAR 2_ 32.76% (26% X 126%)
 Inflation in YEAR 3 _41.28% (32.76% x 126%)

CPI Change in CPI Annual inflation rate Explanation

Jan. 1 2024 100
Dec. 31 2024 130 30 30.00 30/100 x 100
Dec. 31 2025 180 50 38.46 50/130 x 100
Dec. 31 2026 220 40 22.22 40/180 x 100
Requirement: What is the cumulative inflation rate in 2026 to be used in determining if there is
hyperinflation

Solution: Alternative Solution:

Current Year CPI (Dec. 31 2026) 220 30 30

Less: CPI in base year (Jan. 1 2024) -100 30x130% 39
Cumulative increase in CPI 120 39x130% 51
Divided by: CPI in Base year (Jan. 1 2024) 100 Total 120
Cumulative inflation rate for the previous 3 years 120%

CORE PRINCIPLE

FS whose functional currency is hyperinflationary economy, whether historical cost or current cost
approach, shall be stated in measuring unit current at the end of the reporting period and any previous
information shall also be stated in measuring unit current at the end of the reporting period.

Gain or Loss on net monetary position shall be included in P/L and seperately disclosed

Restatement of FS

FS in hyperinflationary economy , whether prepared using historical cost or current cost approach shall
be restated using constant peso accounting

 Historical cost
 Historical exchange price experienced in actual transaction.
 FS are prepared without regards to changes in price levels.
 Except:
 When entity is required or chooses to measure other than historical cost.
 Example:
 PPE measured at FV under revaluation model
 Inventory at NRV under lower of cost or NRV

 Current Cost
  Cost that would be incurred at present time.
 Non-monetary Assets (NMA) are restated to current cost USING specific price index or
thru direct pricing

 Constant Peso
 Pesos that are restated to reflect the change in purchasing power.
 Either historical or current cost, both are restated in the current measuring unit at the
end of the reporting period USING general price index

Historical Cost to Constant Peso

 NON-MONETARY ITEMS are RESTATED, they are NOT express in measuring unit current at the
end of reporting period.

 MONETARY ITEMS are NOT RESTATED, they are ALREADY EXPRESSED in terms of measuring
unit current at the end of reporting period.

o Monetary items are money received or paid in fixed determinable amount of money
without reference to future prices of goods or services. All other items are Non-
monetary EXCEPT RETAINED EARNINGS, a balancing figure after restatement.

Monetary Items Non-Monetary Items

Assets Assets
Cash and Cash Equivalents Inventories
Loans and Receivables and their related allowances Property, Plant, Equipment (PPE)
Financial Assets(FA) at Amortized Cost Intangible Assets
Finance Lease Receivables Financial Assets at Fair Value
Prepaid interest "deduction to financial Liability" Advances and prepayments not collectible to cash
e.g. discount on note payable e.g. Advances to Suppliers
Cash Surrender Value Prepaid Insurance
Prepaid Rent
Liabilities Liabilities
Accounts Payable Financial Liabilities at Fair Value
Notes Payable Unearned Liabilities not payable in cash
Bonds Payable e.g. Advances from customers
Finance Lease Payables Unearned Rent
Financial Liabilities(FL) at amortized cost Deferred Revenues
Accrued Expenses Payable in fixed and determinable amounts Warranty obligations by future delivery of services
Refundable Deposits
e.g. security deposits on lease Equity
deposits for returnable containers Share Capital
Dividends Payable Share Premium

Non-monetary items measured @ NRV or FV at end of Note:

reporting period Financial Assets and Liabilities @Fair Value

Non-Monetary Items measured @ revalued amounts as at Advances, prepayments and unearned not collectible
end of reporting period or payable in fixed determinable amount
Exercise 1: Identify monetary and non-monetary

Monetary
Cash 15 Trade Accounts Payable 40
Accounts Receivable 40 Income tax Payables 10
Financial Assets @amortize cost 60 Utilities Payables 20
Bonds measured @amortized cost 30 Cash Dividends Payable 10
Cash Surrender Value 20 Bonds Payable 40
165 120

45

Non Monetary Items @ cost or cost less depreciation(Average or date of acquisition)

 Expressed at amounts current at their date of acquisition

 RESTATED COST or cost less depreciation, by applying its historical cost and accumulated
depreciation to the change in GPI from the date of acquisition to the END of reporting period.

Non-Monetary Items @ Other than cost (need not be restated)

 Measured @ NRV or FV at the end of reporting period

 Measured @revalued amounts
 The following NON-MONETARY NEED NOT BE RESTATED
 INVENTORIES @NRV at the end of reporting period
 HELD FOR TRADING SECURITIES AND FVOCI @ FV at the end of reporting period
 INVESTMENT PROPERTIES @FV at the end of reporting period
 BIOLOGICAL ASSETS AND HELD FOR SALE ASSETS @ FV less cost to sell at the end of
reporting period
 However, NON-MONETARY ITEMS, revalued at earlier date needs to be restated at the date of
revaluation.

Impairment after restatement (Restated in its recoverable amount)

 Restated amount is reduced if it exceeds recoverable amount, being RECOVERABLE AMOUNT

ITS RESTATED AMOUNT

Investment in Associates (Restated under PAS 29, then Restated under PAS 21)
 Restated first under PAS 29, then translated at current rate under PAS 21

Borrowing cost(Recognized as expense in which period it incurred)

Index-Linked Assets and Liabilities (Restated at adjusted agreement amount)
 Assets and Liabilities linked by agreement to changes in prices such as index linked bonds and
loans, are ADJUSTED IN ACCORDANCE WITH AGREEMENT, in order to ascertain the amount
outstanding at the end of the period.

First Period application of PAS 29 (Owner’s equity are restated using GENERAL PRICE INDEX)
 Components of Owner’s Equity and any revaluation surplus are RESTATED USING GENERAL
PRICE INDEX, from dates the components were contributed.
o Except: Retained Earnings
 Any previous period revaluation surplus are ELIMINATED.
 Retained earnings are DERIVED from all the other amounts in the restated FS.
 At the end of reporting period, all components of owner’s equity are restated by applying GPI
from the BEGINNING PERIOD OR DATE OF CONTRIBUTION.

Statement of Profit or Loss and other Comprehensive Income (All items is restated)
 All items shall be restated in MEASURING UNIT CURRENT AT THE END OF THE REPORTING
PERIOD from the dates they were initially recorded.
 If not possible to determine GPI, AVERAGE GENERAL PRICE INDEX may be use for the period.

Formula for Restatement:

Current Price Index (end of reporting period)

Historical Cost X
Historical Price Index ( acquisition date)
If Historical price index is not applicable, you may use AVERAGE GENERAL PRICE INDEX

Gain or Loss in Net Monitary Position (Recognized in profit or loss)

Statement of Cash Flows(Restated, measuring unit current at the end of the reporting period)

CORRESPONDING FIGURES FOR THE PREVIOUS REPORTING PERIOD, whether based on historical or
current, both are restated by applying GENERAL PRICE INDEX, so that comparative financial
statements are presented in terms of measuring unit current at the end of reporting period