“ Chapter 9 Financial

Reporting in
Hyperinflationary
Economies ”

ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced

Accounting 2) - (by: MILLAN)
 Learning Objectives
 Definethe stable monetary unit
assumption. Provide the exception to this
concept.
 State the core principle under PAS 29.
 Restate a statement of financial position
and an income statement in accordance
with PAS 29.

ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting 2) - (by: MILLAN)

 The Stable Monetary
Assumption
 Under the stable monetary assumption, the
purchasing power of money is assumed to
be stable. Therefore, inflation is ignored.
 The exception to this concept is
hyperinflation.

ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced

Accounting 2) - (by: MILLAN)
Hyperinflation
 Hyperinflation occurs when inflation is
“very high.”

 PAS 29 does not establish an absolute

rate at which hyperinflation is deemed to
arise. This is a matter of judgment.
Indicators of hyperinflation
1. The general population prefers to keep its wealth in non-monetary
assets or in a relatively stable foreign currency.
2. The general population regards monetary amounts in relatively
stable foreign 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%.
Financial Reporting in
Hyperinflationary Economy
 The financial statements of an entity whose functional
currency is the currency of a hyperinflationary economy shall
be stated in terms of the current measuring unit at the end of
the reporting period.
 The comparative information for the previous period shall also
be stated in terms of the current measuring unit at the end of
the reporting period.
 Monetary and Nonmonetary Items

Monetary Items
 Money held and items to be received or paid in fixed or
determinable amount of money without reference to future
prices of specific goods or services
Non-Monetary Items
 The peso amount of which they are presented in the FS
differ from what they are actually realized or represents
Examples of Monetary assets

1. Cash and cash equivalents

2. Loans and receivables and their related
allowances
3. Financial assets at amortized cost (debt
instruments)
4. Finance lease receivables
5. Cash surrender value
Examples of Monetary liabilities
1. Financial liabilities at amortized cost (debt instruments), e.g., accounts, notes,
bonds, and finance lease payables.
2. Accrued expenses payable in fixed and determinable amounts of money.
3. Refundable deposits, e.g., security deposits on leases to be returned to tenants at
the end of the lease term and deposits for returnable containers.
4. Dividends payable

 All other items that cannot be classified as monetary items are non-monetary
items, except of “retained earnings.” Retained earnings is the a balancing figure
after restatement.
Examples of Nonmonetary assets

1. Physical assets such as inventories, property, plant, and

equipment, and investment properties and their related
accumulated depreciation
2. Intangible assets
3. Financial assets measured at fair value
4. Advances and prepayments not collectible in cash such
as advances to suppliers, prepaid insurance, prepaid
rent, and the like.
 Examples of Nonmonetary
liabilities

1. Financial liabilities measured at fair value

2. Unearned items not payable in cash such as advances from customers, unearned
rent, deferred revenues, and the like.
3. Warranty obligations to be settled by future delivery of services (e.g., free repair
service) or replacement with other non-monetary items (e.g., free replacement of
parts or replacement of the good purchased).

 Equity items such as share capital and share premium are also nonmonetary items
and thus restated.
Price level changes
 General price level changes and the purchasing
power of money have an inverse relationship.
 If the general price level increases, this means
that the purchasing power of money has
decreased – a condition known as inflation.
 If the general price level decreases, this means
that the purchasing power of money has
increased – a condition known as deflation.
Illustration: Identify monetary and non-monetary items:
The information below is taken from records of ABC CO.
Cash 15 Trade Accounts Payable 40

Accounts Receivable-net of allowance 40 Income Tax Payable 10

Financial Assets held for Trading 15 Utilities Payable 20
Financial Assets held for FVOCI 20 Cash Dividends Payable 10

Financial Assets at Amortized Cost 60 Bonds Payable 40

Inventories 60 Warranty Obligation 20
Advances to Suppliers 10 Deferred Revenue 15
Prepaid Expenses 5 Share Capital 130
Property, Plant, and Equipment 80 Share Premium 20
Cash Surrender Value 20 Revaluation Surplus 10

Investment in Funds consisting of: Cumulative Translation differences 20

Shares of Stocks 5 Non-Controllig Interest 5
Bonds Measured at Amortized
Cost 30 Retained Earnings 20
TOTAL ASSETS 360 Total Liabilities and Equity 360
 Solution: NET MONETARY ITEMS
Cash 15 Trade Accounts Payable 40

Accounts Receivable-net of allowance 40 Income Tax Payable 10

Financial Assets at Amortized Cost 60 Utilities Payable 20
Cash Surrender Value 20 Cash Dividends Payable 10
Investment in Funds consisting of: Bonds Payable 40

Bonds Measured at Amortized Cost 30 Total Liabilities and Equity 120

TOTAL MONETARY ASSETS 165

NET MONETARY ITEMS = TOTAL MONETARY ASSETS –

TOTAL MONETARY LIABILITIES
NET MONETARY ITEMS = (165-120) = 45
 Restatement of financial
statements

PAS 29 discusses two approaches in

restating the FS:
• Historical Cost to Constant Peso
• Current Cost to Constant Peso

ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced

Accounting 2) - (by: MILLAN)
Hyperinflationary Economy

HISTORICAL COST Otherwise known as Nominal

cost, the Historical exchange
price in an actual transaction

Current Cost Current replacement or current

repurchase cost that is stated at
the current specific price index
Cost to be incurred at the
present time

Constant Peso Pesos that are restated to reflect

changes in purchasing power on
the general price index
 Hyperinflationary Economy
Monetary Items Non-monetary Nominal Accounts
Items
Not restated Current Year NRV/FV measured Not Applicable
Balances at reporting date
Restated Prior Year At cost All nominal
Balances NRV/ measured Accounts
dates other than
reporting date
GPI NUMERATOR Current GPI/Reporting date GPI
GPI Denominator GPI on the reporting GPI on transaction date, or average GPI
date the monetary only for practical purposes.
item was initially
reported

Retained Earnings is neither monetary nor non-monetary item, it is just a

balancing figure
Illustration 1: Restatement of
financial statements – Historical to
Constant peso
 Additional Information:
 The land and Building were acquired on April 1, 20x0
 The Share Capital was issued on March 1, 20x0
 Sales, Purchase, and expenses (except interest expense) were incurred
evenly during the year
 Interest Expense was recognized and paid on December 31, 20x2
 Dividends of 300, 000 were declared ad paid on December 31, 20x2
 Selected values of general price indices (GPI) are shown below:
MARCH 1, 20x0 . . . . . . . . . . . . . . . . . . . . . . . . 100
APRIL 1, 20X0 . . . . . . .. . . . . . . . . . . . . . . . . . . 100
AVERAGE for 20X1 . . . . . . . . . . . . . . . … . . . . 110
DECEMBER 31, 20X1. . . . . . . . . . . . . . . . . . . . .120
AVERAGE FOR 20X2 . . . . .. . . . . . . . . . . . . . . . . 125
DECEMBER 31, 20X2 . .. . . . . . .. .. . . . . . .. . . . . .140
 Additional Information:
 The land and Building were acquired on April 1, 20x0
 The Share Capital was issued on March 1, 20x0
 Sales, Purchase, and expenses (except interest expense) were incurred
evenly during the year
 Interest Expense was recognized and paid on December 31, 20x2
 Dividends of 300, 000 were declared ad paid on December 31, 20x2
 Selected values of general price indices (GPI) are shown below:
MARCH 1, 20x0 . . . . . . . . . . . . . . . . . . . . . . . . 100
APRIL 1, 20X0 . . . . . . .. . . . . . . . . . . . . . . . . . . 100
AVERAGE for 20X1 . . . . . . . . . . . . . . . … . . . . 110
DECEMBER 31, 20X1. . . . . . . . . . . . . . . . . . . . .120
AVERAGE FOR 20X2 . . . . .. . . . . . . . . . . . . . . . . 125
DECEMBER 31, 20X2 . .. . . . . . .. .. . . . . . .. . . . . .140
 Restatement of financial statements

 All items in the statement of profit or loss and other

comprehensive income are restated.

ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced

Accounting 2) - (by: MILLAN)
 Formula for restatement

*When it is impracticable to determine the historical price indices, such as

for transactions recurring very frequently, the average general price index
for the period may be used.

ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced

Accounting 2) - (by: MILLAN)
 Gain or loss on net monetary position

The gain or loss on the net monetary position (also called ‘purchasing power
gain or loss’) is recognized in profit or loss.
 OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting 2) - (by: MILLAN)

 END

ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting 2) - (by: MILLAN)