1.1 Background

Accounting standards are applied on the assumption that the value of money (the unit of measurement) is constant over time, which normally is an acceptable practical assumption. However, when the effect of inflation on the value of money is no longer negligible, the usefulness of historical cost based financial reporting is often significantly reduced. High rates of inflation give rise to a number of problems for entities that prepare their financial statements on a historical cost basis, for example:

• historical cost figures expressed in terms of monetary units do not show the ‘value to the business’ of assets;
• holding gains on non-monetary assets that are reported as operating profits do not represent real economic gains;
• financial information presented for the current period is not comparable with that presented for the prior periods; and
• ‘real’ capital can be reduced because profits reported do not take account of the higher replacement costs of resources used in the period. Therefore, if calculating a nominal ‘return on capital’ based on profit, and not distinguishing this properly from a real ‘return of capital’, the erosion of capital may go unnoticed in the financial statements. This is the underlying point in the concept of capital maintenance.

The IASB's The Conceptual Framework for Financial Reporting discusses the concept of capital maintenance, which raises the issue of how an entity defines capital. In general terms, an entity maintains its capital if it has as much capital at the end of the period as it had at the beginning, the issue being how this evaluation is measured. Whilst there are different concepts of capital maintenance, IFRS is ultimately based on the financial capital maintenance concept.

Under the financial capital maintenance concept, the capital of the entity will be maintained if the financial amount of net assets at the end of a period is at least equal to the financial amount of net assets at the beginning of that period, excluding contributions from and distributions to owners during the period. [CF(2010) 4.59(a)]. To facilitate the evaluation of capital maintenance in a hyperinflationary environment, IAS 29 – Financial Reporting in Hyperinflationary Economies – was adopted in April 2001.

The IASB and IFRS Interpretations Committee (Interpretations Committee) have subsequently addressed the subject of hyperinflation only to clarify the provisions of the standard. In 2005, IFRIC 7 – Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies – was issued to provide guidance on applying IAS 29 in the reporting period in which an entity's functional currency first becomes hyperinflationary (see 10.1 below). In 2010 the IASB issued an amendment to IFRS 1 – First-time Adoption of International Financial Reporting Standards – for countries that exit severe hyperinflation (see 10.3 below).

1.2 Hyperinflationary economies

For entities used to working in economies with low inflation it is easy to overlook that there are countries where inflation is a major economic concern. In some of these countries, inflation has reached such levels that (1) the local currency is no longer a useful measure of value in the economy and (2) the general population may prefer not to hold its wealth in the local currency. Instead, they hold their wealth in a stable foreign currency or non-monetary assets. Such a condition is often referred to as hyperinflation.

There are several characteristics that need to be considered under IFRS to determine whether hyperinflation exists. The IASB does not monitor inflation rates in specific jurisdictions, nor conclude on the applicability of the characteristics to these jurisdictions. Conversely, under US GAAP hyperinflation is clearly defined and deemed to exist when the cumulative rate of inflation over a three-year period exceeds 100%. For the purposes of reporting under US accounting standards, the International Practices Task Force (IPTF), a task force of the SEC Regulations Committee, monitors the inflation status of different countries.

As the IPTF's criteria are similar to those used under IFRS, this provides a useful guide for entities reporting under IFRS. However, it should be noted that hyperinflation accounting may need to be applied earlier under IFRS than US accounting standards as IAS 29 applies from the beginning of the reporting period in which hyperinflation is identified and the IPTF usually only meet in May and November each year. Minutes of these meetings are publicly available.¹

In practice, few countries are considered hyperinflationary by the IPTF. For the purposes of IAS 29, the same countries are usually considered hyperinflationary, but where the assessment of the characteristics is unclear, consensus is at times facilitated by local regulators and professional bodies.

1.3 Restatement approach

The problems of historical cost based financial reporting may reach such a magnitude under hyperinflationary circumstances that financial reporting in the hyperinflationary currency is no longer useful. Therefore, a solution is needed to allow meaningful financial reporting by entities that operate in these hyperinflationary economies.

IAS 29 requires a restatement approach, whereby financial information recorded in the hyperinflationary currency is adjusted by applying a general price index and expressed in the measuring unit current at the end of the reporting period (i.e. the accounting value is adjusted for a factor of current purchasing power). This process aims to improve comparability between periods by restating financial information for changes in the purchasing power of money.

2.1 The context of IAS 29

The underlying premise of IAS 29 is that ‘reporting of operating results and financial position in the local [hyperinflationary] currency without restatement is not useful’. [IAS 29.2]. The standard's approach is therefore to require that:

1. the financial statements of an entity whose functional currency is the currency of a hyperinflationary economy shall be stated in terms of the measuring unit current at the end of the reporting period;
2. the corresponding figures for the previous period required by IAS 1 – Presentation of Financial Statements – and any information in respect of earlier periods shall also be stated in terms of the measuring unit current at the end of the reporting period; and
3. the gain or loss on the net monetary position shall be included in profit or loss and separately disclosed. [IAS 29.8‑9].

IAS 29 requires amounts recorded in the statement of financial position, not already expressed in terms of the measuring unit current at the end of the reporting period, to be restated in terms of the current measuring unit at the end of the reporting period, by applying a general price index. [IAS 29.11]. The example below illustrates how this would apply to the statement of financial position of an entity:

The simplified example above already raises a number of questions, such as:

• Which items are monetary and which are non-monetary?
• How does the entity select the appropriate general price index?
• What was the general price index when the assets were acquired?

The standard provides guidance on the restatement to the measuring unit current at the end of the reporting period, but concedes that the consistent application of these inflation accounting procedures and judgements from period to period is more important than the precise accuracy of the resulting amounts included in the restated financial statements. [IAS 29.10]. The requirements of the standard look deceptively straightforward but their application may represent a considerable challenge. These difficulties and other aspects of the practical application of the IAS 29 method of accounting for hyperinflation are discussed below.

2.2 Scope

IAS 29 shall be applied by all entities whose functional currency is the currency of a hyperinflationary economy. [IAS 29.1].

The standard should be applied in an entity's separate financial statements (if prepared) and its consolidated financial statements, as well as by parents that include such an entity in their consolidated financial statements.

If an entity whose functional currency is that of a hyperinflationary economy wishes to present the financial statements in a different presentation currency, or if their parent has a different presentation currency, the financial statements of the entity first have to be restated under IAS 29. Only then, can the financial statements be translated under IAS 21 – The Effects of Changes in Foreign Exchange Rates (see 11 below).

Almost all entities operating in hyperinflationary economies will be subject to the accounting regime of IAS 29, unless they can legitimately argue that the local hyperinflationary currency is not their functional currency as defined by IAS 21 (see Chapter 15 at 4). [IAS 21.14].

2.3 Definition of hyperinflation

Determining whether an economy is hyperinflationary in accordance with IAS 29 requires judgement. The standard does not establish an absolute inflation rate at which hyperinflation is deemed to arise. Instead, it considers the following characteristics of the economic environment of a country to be strong indicators of the existence of hyperinflation:

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 relatively 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%. [IAS 29.3].

The above list is not exhaustive and there may be other indicators that an economy is hyperinflationary, such as the existence of price controls and restrictive exchange controls. In determining whether an economy is hyperinflationary, condition (e) is quantitatively measurable while the other indicators require reliance on more qualitative evidence.

IAS 29 expresses a preference that all entities that report in the currency of the same hyperinflationary economy apply this Standard from the same date. Nevertheless, once an entity has identified the existence of hyperinflation, it should apply IAS 29 from the beginning of the reporting period in which it identified the existence of hyperinflation. [IAS 29.4].

Identifying when a currency becomes hyperinflationary, and, just as importantly, when it ceases to be so, is not easy in practice and is frequently hampered by a lack of reliable statistics. The consideration of trends and the application of common sense is important in this judgement, as are consistency of measurement and of presentation. As discussed at 1.2 above, the IPTF monitors hyperinflationary countries for US GAAP and this may be useful for IFRS reporters. Transition into and out of hyperinflationary economies are discussed further at 10 below.

2.4 The IAS 29 restatement process

Restatement of financial statements in accordance with IAS 29 can be seen as a process comprising the following steps:

1. selection of a general price index (see 3 below);
2. analysis and restatement of the statement of financial position (see 4 below);
3. restatement of the statement of changes in equity (see 5 below);
4. restatement of the statement of profit and loss and other comprehensive income (see 6 below);
5. calculation of the gain or loss on the net monetary position (see 6.2 below);
6. restatement of the statement of cash flows (see 7 below); and
7. restatement of comparative figures (see 8 below).

3.1 Selecting a general price index

It is generally accepted practice to use a Consumer Price Index (CPI) for this purpose, unless that index is clearly flawed. National statistical offices in most countries issue several price indices that potentially could be used for the purposes of IAS 29. Important characteristics of a good general price index include the following:

• a wide range of goods and services has been included in the price index;
• continuity and consistency of measurement techniques and underlying assumptions;
• free from bias;
• frequently updated; and
• available for a long period.

The entity should use the above criteria to choose the most reliable and most readily available general price index and use that index consistently. It is important that the index selected is representative of the real position of the hyperinflationary currency concerned.

3.2 General price index not available for all periods

IAS 29 requires an entity to make an estimate of the price index if the general price index is not available for all periods for which the restatement of long-lived assets is required. The entity could base the estimate, for example, on the movements in the exchange rate between the functional currency and a relatively stable foreign currency. [IAS 29.17]. It should be noted that this method is only appropriate if the currency of the hyperinflationary economy is freely exchangeable, i.e. not subject to currency controls and ‘official’ exchange rates. Entities should also be mindful that, especially in the short term, the exchange rate may fluctuate significantly in response to factors other than changes in the domestic price level.

Entities could use a similar approach when they cannot find a general price index that meets the minimum criteria for reliability (e.g. because the national statistical office in the hyperinflationary economy may be subject to significant political bias). However, this would only be acceptable if there was a widespread consensus that all available general price indices are fatally flawed.

4.1 Monetary and non-monetary items

4.1.4 Non-monetary items carried at historical cost

Non-monetary items carried at historical cost, or cost less depreciation, are stated at amounts that were current at the date of their acquisition. The restated cost, or cost less depreciation, of those items is calculated as follows:

Application of this formula to property, plant and equipment, inventories of raw materials and merchandise, goodwill, patents, trademarks and similar assets appears to be straightforward, but does require detailed records of their acquisition dates and accurate price indices at those dates. [IAS 29.15]. It should be noted though that IAS 29 permits certain approximations as long as the procedures and judgements are consistent from period to period. [IAS 29.10]. Where sufficiently detailed records are not available or capable of estimation, IAS 29 suggests that it may be necessary to obtain an ‘independent professional assessment’ of the value of the items as the basis for their restatement in the first period of application of the standard, but also notes that this will only be in rare circumstances. [IAS 29.16].

When an entity purchases an asset and payment is deferred beyond normal credit terms, it would normally recognise the present value of the cash payment as its cost. [IAS 16.23]. When it is impracticable to determine the amount of interest, IAS 29 provides relief by allowing such assets to be restated from the payment date rather than the date of purchase. [IAS 29.22].

Once the calculation discussed above has been completed, additional adjustments may need to be made. In order to arrive at the final restated cost of the non-monetary items, the provisional restated cost needs to be adjusted for borrowing costs and impairment, if applicable, as follows: [IAS 29.19, 21]

IAS 29 only permits partial capitalisation of borrowing costs, unlike the full capitalisation that is ordinarily required by IAS 23 – Borrowing Costs (see Chapter 21), because of the risk of double counting as the entity would both restate the capital expenditure financed by borrowing and capitalise that part of the borrowing costs that compensates for the inflation during the same period. [IAS 29.21]. The difficulty when borrowing costs are capitalised is that IAS 29 only permits capitalisation of borrowing costs to the extent that those costs do not compensate for inflation. The standard does not provide any guidance on how an entity should go about determining the component of borrowing costs that compensates for the effects of inflation. Therefore, entities will need to develop an appropriate methodology.

It is possible that an IAS 29 inflation adjustment based on the general price index leads to non-monetary assets being stated above their recoverable amount. Therefore, IAS 29 requires that the restated amount of a non-monetary item is reduced, in accordance with the appropriate standard, when it exceeds its recoverable amount from the item's future use (including sale or other disposal). [IAS 29.19]. This requirement should be taken to mean that any overstatement of non-monetary assets not within the scope of IFRS 9 should be calculated and accounted for in accordance with IAS 36 – Impairment of Assets – or the measurement provisions of IAS 2 – Inventories (see 4.2 below). That is, the asset is written down to its recoverable amount or net realisable value and the loss is recognised in profit or loss.

The example below illustrates how, after it has restated the historical cost based carrying amount of property, plant and equipment by applying the general price index, an entity adjusts the net book value restated for hyperinflation for these considerations:

Where an entity's functional currency becomes hyperinflationary and it applies IAS 29 for the first time, IFRIC 7 requires the application of IAS 29 as if the economy had always been hyperinflationary. [IFRIC 7.3]. Therefore, such an entity should consider whether an impairment trigger is present at the beginning of the current period and, if any impairment is identified, determine whether it relates to the current period or whether it should have been recognised earlier. In making such a determination in practice there are likely to be a number of complexities including the degree of hindsight that might be involved.

4.2 Inventories

Inventories of finished and partly finished goods should be restated from the dates on which the costs of purchase and of conversion were incurred. [IAS 29.15]. This means that the individual components of finished goods should be restated from their respective purchase dates. Similarly, if production takes place in several distinct phases, the costs associated with each of those phases should be restated from the date that the cost was incurred.

Given the large number of transactions affecting an entity's inventory position, it may be difficult to determine the date of acquisition of individual items of inventory. Therefore, entities commonly approximate the ageing of inventories based on inventory turnover. Similarly, the level of the general price index at the date of acquisition is often determined at the average level for the month because an up-to-date price index is not available for each day of the month. Determining the appropriate level of the general price index can be difficult when the price index is updated relatively infrequently and the entity's business is highly seasonal.

IAS 29 requires restatement of inventory by applying a general price index, which could result in an overvaluation when the price of inventory items increases at a different rate from the general price index. At the end of each period it is therefore essential to ensure that items of inventory are not valued in excess of their net realisable value. Any overstated inventories should be written down to net realisable value under IAS 2. [IAS 29.19].

4.3 Restatement of associates, joint ventures and subsidiaries

IAS 29 provides separate rules for the restatement of associates and joint ventures that are accounted for under the equity method. If the investee itself operates in the same hyperinflationary currency, the entity should restate the statement of financial position, statement of profit and loss and other comprehensive income of the investee in accordance with the requirements of IAS 29 in order to calculate its share of the investee's net assets and results of operations. [IAS 29.20]. The standard does not permit the investment in the investee to be treated as a single indivisible item for the purposes of the IAS 29 restatement. Restating the financial statements of an associate before application of the equity method will often be difficult because the investor may not have access to the detailed information required. The fact that the investor can exercise significant influence or has joint control over an investee often does not mean that the investor has unrestricted access to the investee's books and records at all times.

When the investor does not operate in the hyperinflationary currency, but the investee does, the same processes described above are still required to be completed prior to the equity accounting process. Once restated, the results of the investee are translated into the investor's presentation currency at the closing rate. [IAS 29.20]. IAS 21 contains a similar provision that requires that all current year amounts related to an entity (i.e. investee), whose functional currency is the currency of a hyperinflationary economy, to be translated at the closing rate at the date of the most recent statement of financial position (see Chapter 15 at 6.1). [IAS 21.42].

If a parent that reports in the currency of a hyperinflationary economy has a subsidiary that also reports in the currency of a hyperinflationary economy, then the financial statements of that subsidiary must first be restated by applying a general price index of the country in whose currency it reports before they are included in the consolidated financial statements issued by its parent. [IAS 29.35]. When an investor has a subsidiary whose functional currency is the currency of a hyperinflationary economy, IAS 21 further clarifies that all current year amounts related to the subsidiary should be translated at the closing rate at the date of the most recent statement of financial position (see Chapter 15 at 6.1). [IAS 21.42].

If a parent that reports in the currency of a hyperinflationary economy has a subsidiary that reports in a currency that is not hyperinflationary, the financial statements of that subsidiary should be translated in accordance with paragraph 39 of IAS 21 (see Chapter 15 at 6.1). [IAS 21.39].

In addition, IAS 29 requires that when financial statements with different reporting dates are consolidated, all items, whether non-monetary or monetary are restated into the measuring unit current at the date of the consolidated financial statements. [IAS 29.36].

4.4 Calculation of deferred taxation

Determining whether deferred tax assets and liabilities are monetary or non-monetary is difficult because:

• deferred taxation could be seen as a valuation adjustment that is either monetary or non-monetary depending on the asset or liability it relates to, or
• it could also be argued that any deferred taxation payable or receivable in the very near future is almost identical to current tax payable and receivable. Therefore, at least the short-term portion of deferred taxation, if payable or receivable, should be treated as if it were monetary.

IFRIC 7 provides guidance to facilitate the first time application of IAS 29. Although the interpretation notes that there continues to be a difference of opinion as to whether deferred taxation is monetary or non-monetary, [IFRIC 7.BC21-BC22], the debate has been settled for practical purposes because:

• IAS 12 – Income Taxes – requires deferred taxation in the closing statement of financial position for the year to be calculated based on the difference between the carrying amount and the tax base of assets and liabilities, without making a distinction between monetary and non-monetary items; and
• IFRIC 7 requires an entity to remeasure the deferred tax items in any comparative period in accordance with IAS 12 after it has restated the nominal carrying amounts of its non-monetary items at the date of the opening statement of financial position of the reporting period by applying the measuring unit at that date. These remeasured deferred tax items are then restated for the change in the measuring unit between the beginning and the end of reporting period. [IFRIC 7.4].

The following example, which is based on the illustrative example in IFRIC 7, shows how an entity should restate its deferred taxation in the comparative period. [IFRIC 7.IE1‑IE6].

IAS 29 refers to IAS 12 for guidance on the calculation of deferred taxation by entities operating in hyperinflationary economies. [IAS 29.32]. IAS 12 recognises that IAS 29 restatements of assets and liabilities may give rise to temporary differences when equivalent adjustments are not allowed for tax purposes. [IAS 12.IE.A18]. Where IAS 29 adjustments give rise to temporary differences, IAS 12 requires the following accounting treatment:

1. the deferred tax income or expense is recognised in profit or loss; and
2. if, in addition to the restatement, non-monetary assets are also revalued, the deferred tax movement relating to the revaluation is recognised in other comprehensive income and the deferred tax relating to the restatement is recognised in profit or loss. [IAS 12.IE.A18].

For example, deferred taxation arising on revaluation of property, plant and equipment is recognised in other comprehensive income, just as it would be if the entity were not operating in a hyperinflationary economy. On the other hand, restatement in accordance with IAS 29 of property, plant and equipment that is measured at historical cost is recognised in profit or loss. Thus the treatment of deferred taxation related to non-monetary assets valued at historical cost and those that are revalued, is consistent with the general requirements of IAS 12.

6.1 Restatement of interest and exchange differences

A common question is whether an entity should restate exchange differences under IAS 29, because the standard considers that ‘foreign exchange differences related to invested or borrowed funds, are also associated with the net monetary position’. [IAS 29.28]. Nevertheless, the standard requires that all items in the statement of profit and loss and other comprehensive income are expressed in terms of the measuring unit current at the end of the reporting period. ‘Therefore all amounts need to be restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded in the financial statements’. [IAS 29.26].

Interest and exchange differences should therefore be restated for the effect of inflation, as are all other items in the statement of profit and loss and other comprehensive income, and be presented on a gross basis. However, it may be helpful if they are presented together with the gain or loss on net monetary position in the statement of profit and loss and other comprehensive income. [IAS 29.28].

6.2 Calculation of the gain or loss on the net monetary position

In theory, hyperinflation only affects the value of money and monetary items and does not affect the value, as distinct from the price, of non-monetary items. Therefore, any gain or loss because of hyperinflation will be the gain or loss on the net monetary position of the entity. By arranging the items in an ordinary statement of financial position, it can be shown that the monetary position minus the non-monetary position is always equal to zero:

Theoretically, the gain or loss on the net monetary position can be calculated by applying the general price index to the entity's monetary assets and liabilities. This would require the entity to determine its net monetary position on a daily basis, which would be entirely impracticable given the resources required to prepare daily IFRS compliant accounts as well as the difficulties in making the monetary/non-monetary distinction (see 4.1 above). The standard therefore allows the gain or loss on the net monetary position to be estimated by applying the change in a general price index to the weighted average for the period of the difference between monetary assets and monetary liabilities. [IAS 29.27, 31]. Due care should be exercised in estimating the gain or loss on the net monetary position, as a calculation based on averages for the period (or monthly averages) can be unreliable if addressed without accurate consideration of the pattern of hyperinflation and the volatility of the net monetary position.

However, as shown in the above table, any restatement of the non-monetary items must be met by an equal restatement of the monetary items. Therefore, in preparing financial statements it is more practical to assume that the gain or loss on the net monetary position is exactly the reverse of the restatement of the non-monetary items. A stand-alone calculation of the net gain or loss can be used to verify the reasonableness of the restatement of the non-monetary items.

The gain or loss on the net monetary position as calculated above, as well as any adjustments on inflation-linked instruments (see 4.1.2 above), should be included in profit or loss and disclosed separately. It may be helpful to present it together with items that are also associated with the net monetary position such as interest income and expense, and foreign exchange differences related to invested or borrowed funds. [IAS 29.28].

6.3 Measurement of reclassification adjustments within equity

IAS 29 does not provide guidance on the measurement basis of reclassifications from other comprehensive income. For example, it is not clear when a debt instrument at fair value through other comprehensive income is sold, whether the amount reclassified into profit and loss is based on the amounts historically recorded in other comprehensive income, or alternatively based on an inflation adjusted amount. Another example is the case of cash flow hedges where gains or losses in an earlier reporting period are recycled to profit and loss to offset against the gains or losses of the hedged item at a later date.

The conflict arises due to the manner in which the statement of profit and loss and other comprehensive income is constructed, including the need to classify items in other comprehensive income as amounts to be recycled, or not. The need to classify items in other comprehensive income into items that are recycled to profit or loss, or not, would indicate that amounts initially recorded in other comprehensive income should be recycled at amounts as originally recorded. While this may satisfy the requirements for other comprehensive income, this leads to a loss of relevant information in the statement of profit and loss and other comprehensive income. Using the examples cited above, the gain or loss on disposal of a debt instrument at fair value through other comprehensive income would no longer be presented in terms of the index being used for purposes of restating amounts in profit or loss. In the case of a cash flow hedge, the offset that would also be expected in profit or loss is also lost. The alternative view would be to recycle amounts that have been restated in terms of the current index that is being applied. This is illustrated in the example below.

While the approach of adjusting for hyperinflation would ensure relevant information in the statement of profit and loss and other comprehensive income, it would lead to different amounts being originally recorded and subsequently recycled in other comprehensive income.

As no direct guidance is given in IAS 29, the development of an accounting policy in terms of the IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors – hierarchy would be required. In developing such an accounting policy an entity would need to apply judgement and consider the objective of the standard that gives rise to the amounts that are recycled to profit or loss. The basic accounting requirements before the application of IAS 29 for the hedge accounting example cited above is currently contained in IFRS 9 (or IAS 39 – Financial Instruments: Recognition and Measurement – if the hedge accounting requirements of IFRS 9 have not yet been adopted). Understanding the objective of hedge accounting and what risks have been hedged in the designated relationship would be relevant inputs in developing an appropriate accounting policy. Once developed, the general recommendation of IFRS to apply procedures and judgements consistently should be followed for a particular class of equity reclassification. As there are numerous different types of reclassifications within equity, an entity may need to determine a relevant policy for each class of adjustment that could occur.

10.1 Economies becoming hyperinflationary

When the functional currency of an entity becomes hyperinflationary it must start applying IAS 29. The standard requires that the financial statements and any information in respect of earlier periods should be stated in terms of the measuring unit current at the end of the reporting period. [IAS 29.8]. IFRIC 7 clarifies that items should be restated fully retrospectively. In the first year in which the entity identifies the existence of hyperinflation, the requirements of IAS 29 should be applied as if the economy had always been hyperinflationary. The opening statement of financial position at the beginning of the earliest period presented in the financial statements should be restated as follows:

• non-monetary items measured at historical cost should be restated to reflect the effect of inflation from the date the assets were acquired and the liabilities were incurred or assumed; and
• non-monetary items carried at amounts current at dates other than those of acquisition or incurrence should be restated to reflect the effect of inflation from the dates those carrying amounts were determined. [IFRIC 7.3].

What is less obvious is how an entity (a parent), which does not operate in a hyperinflationary economy, should account for the restatement of an entity (a subsidiary) that operates in an economy that became hyperinflationary in the current reporting period when incorporating it within its consolidated financial statements. This issue has been clarified by IAS 21 which specifically prohibits restatement of comparative figures when the presentation currency is not hyperinflationary. [IAS 21.42(b)]. This means that when the financial statements of a hyperinflationary subsidiary are translated into the non-hyperinflationary presentation currency for consolidation into the financial statements of the parent, the comparative amounts are not adjusted.

However, the impact on interim financial statements of such a parent may be more difficult to resolve. For example, a non-hyperinflationary parent (with a December year-end) may own a subsidiary whose functional currency is considered hyperinflationary from, say, 1 July 2020 onwards. The subsidiary's second quarter results would not have been adjusted for the impact of hyperinflation, while its third quarter results would reflect the effects of hyperinflation for the period from the beginning of the year to the reporting date. This results in the parent needing to reflect a ‘catch up effect’ in its third quarter or full year reporting. As the prior year comparative figures cannot be restated under IAS 21, the full effect would be included in the current period. [IAS 21.42(b)]. However, paragraph 4 of IAS 29 specifically states that the standard ‘…applies to the financial statements of any entity from the beginning of the reporting period in which it identifies the existence of hyperinflation in the country in whose currency it reports’.

If separate information is presented for each quarter, it is not clear how this effect should be taken into consideration in preparing the parent's third quarter results, specifically whether the year-to-date results are adjusted as though the subsidiary was hyperinflationary from the beginning of the year or only from the beginning of the third quarter. Possible approaches would include:

• reporting the difference between the year-to-date profit for the third quarter and the year-to-date profit for the second quarter in which the subsidiary is restated under IAS 29 (i.e. with purchasing power adjustments to 30 June); or
• reporting the third quarter profits as the difference between the year-to-date profit in which the subsidiary is restated under IAS 29, less the year-to-date second quarter profits as they were actually reported (i.e. non-hyperinflation based results).

As there is no clear guidance on the appropriate method of quantification, entities should adopt a consistent approach and disclose this judgement and the impact thereof on the financials if it has a significant impact, as required by IAS 1. The first approach is consistent with the requirement that the year-end accounts will be prepared as if the economy had been hyperinflationary from the beginning of 2020, will provide a better basis for comparison in 2020 and result in individual quarters in 2019 being more comparable. Nevertheless, IAS 34 does not specifically address the issue of restating previous interim periods upon first application of IAS 29 and we consider the second approach to also be acceptable. In particular, if the hyperinflationary subsidiary is relatively small within the overall consolidated accounts of the parent, then the benefit of restating previous interim periods will often be limited.

Additional questions arising in respect of the preparation of quarterly interim financial statements in the scenario described above would include:

• Would the parent entity need to re-issue interim reports that had been issued earlier in the current year?
• In the period that the subsidiary's economy become hyperinflationary, would the parent entity adjust the comparative interim information for hyperinflation (and year to date interim information) for the same interim period in the prior year?
• In the first quarter of the following financial period (2021), would the parent entity adjust the comparative information for hyperinflation (and year to date interim information) for the same interim period in the prior year (2020)?

Although the subsidiary will apply the requirements of IAS 29 on a retrospective basis, the parent will incorporate the results of the subsidiary into the group financial statements as required by IAS 21. Hyperinflation only commenced after the end of the interim reports, which is a non-adjusting event in accordance with IAS 10 – Events after the Reporting Period. Hence in response to the first question, the interim financial statements were compliant with the requirements of the standards, and the parent would not be required to re-issue prior interim financial statements in the year that the subsidiary's functional currency becomes hyperinflationary, although we believe re-issue is permissible.

Hyperinflationary adjustments would only occur in the interim financial statements of the parent from the date that the subsidiary became hyperinflationary onwards. Further, IAS 21 would preclude the restatement of comparative interim financial statements as contemplated in the second question above. [IAS 21.42(b)].

The issue addressed in the third question is not specifically addressed by IAS 21 or IAS 34. We consider that the parent entity is allowed but not required to restate its comparative (2020) interim statements in its 2021 reporting. These specific requirements of IAS 34 are considered in Chapter 41 at 9.6.2.

10.2 Economies ceasing to be hyperinflationary

Determining when a currency stops being hyperinflationary is not easy in practice. It is important to review trends, not just at the end of the reporting period but also subsequently. In addition, consistency demands that the financial statements do not unnecessarily fall in and out of a hyperinflationary presentation, where a more careful judgement would have avoided it.

When an economy ceases to be hyperinflationary, entities should discontinue preparation and presentation of financial statements in accordance with IAS 29. The amounts expressed in the measuring unit current at the end of the previous reporting period will be treated as the deemed cost of the items in the subsequent statement of financial position. [IAS 29.38].

The previous reporting period used as the basis for the carrying amounts going forward may be the last annual reporting period or it may be an interim period depending on whether the entity prepares interim reports. Therefore, for interim reporters, it should be noted that, an amalgamation of interim periods during which IAS 29 was applied with those where it was not, may result in financial statements that are difficult to interpret. This is shown in Example 16.8 below.

The following extract illustrates the effect of ceasing to be hyperinflationary on financial results.

10.3 Economies exiting severe hyperinflation

IFRS 1 includes an exemption for entities that have been subject to severe hyperinflation before the date of transition to IFRS, or on reapplication into IFRS after being unable to prepare IFRS compliant financial statements. Severe hyperinflation has both of the following characteristics:

1. a reliable general price index is not available to all entities with transactions and balances in the currency; and
2. exchangeability between the currency and a relatively stable foreign currency does not exist. [IFRS 1.D27].

This exemption was included in response to a specific issue that occurred in Zimbabwe in 2008. In Zimbabwe the ability to produce financial statements had been completely undermined by severe hyperinflation. In response to this situation, an exemption was created in IFRS 1 which would be available to any entity that is either adopting IFRS for the first time, or is reapplying IFRS due to severe hyperinflation. In practice, the existence of severe hyperinflation (as described by the standard) is a rare economic occurrence (see Chapter 5 at 5.17).