Economies that cease to be hyperinflationary

for Accounting Professionals

IAS 29 Financial reporting in hyperinflationary economies

2011 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IAS 29 Financial reporting in hyperinflationary economies

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Robin Joyce

Professor of the Chair of

International Banking and Finance

Financial University under the Government of the Russian Federation

Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2011 Updated http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 2

CONTENTS

Background

Scope

3

4

Benefits of purchasing power-adjusted financial statements ..................... 5

Objectives of IAS 29

Intra-group reporting

Transition to IFRS

5

5

6

Applying IAS 29 6

Selection of the price index 6

Segregation of monetary and non-monetary items .... 7

Restatement of non-monetary items ........................... 8

Calculation of monetary gain or loss ......................... 10

Restatement of comparatives .................................... 11

Economies that cease to be hyperinflationary .......... 11

Restatement procedures for non-monetary balance sheet items .................. 12

Restatement of the income statement ....................... 20

http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

Adjustments or reclassifications made to statutory financial statements to arrive at IFRS historical financial statements ... 22

Monetary gain or loss 24

Cash flow statement (see IAS 7 workbook) ............... 30

SUMMARY 32

Multiple choice questions 37

Answers to multiple choice questions ...................... 39

APPENDIX 1 - IFRIC Interpretation 7 .......................... 40

Background

Whether the functional currency (see IAS 21 workbook) of an undertaking is hyperinflationary is decided collectively, not by an individual accountant. The Russian Rouble ceased to be hyperinflationary in 2003 by collective agreement.

Unless the Rouble becomes hyperinflationary again, the use of IAS

29 in the Russian Federation will be limited to the consolidation of subsidiaries, joint ventures and associates which have functional currencies that are still officially recognised as hyperinflationary.

Scope

IAS 29 shall be applied to the financial statements, including the consolidated financial statements, of any undertaking whose functional currency is the currency of a hyperinflationary economy.

Inflation-adjusted financial statements are an extension to, not a departure from, historical cost accounting. IAS 29 aims to overcome the limitations of historical cost financial reporting in hyperinflationary environments.

In a hyperinflationary economy, reporting of operating results and financial position in the local currency without restatement is not useful and comparisons of results over time mean little. As prices rise, the value of money (the general purchasing power) falls, as you can buy less with each unit of currency.

Money loses purchasing power at such a rate that comparison of amounts from transactions and other events that have occurred at different times, sometimes even within the same accounting period, is misleading.

Financial statements unadjusted for inflation do not properly reflect the company’s position at the balance sheet date, the results of its operations or cash flows.

IAS 29 does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgement when restatement of financial statements in accordance with IAS 29 becomes necessary. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IAS 29 Financial Reporting in Hyperinflationary Economies

Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:

1. the general population prefers to keep its wealth in non-monetary assets (preferring barter to cash) 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;

EXAMPLE: Quoting prices in a foreign currency

Early in 2007, Russia’s Duma proposed legislation to ban the quotation of prices in any currency other than the Rouble.

This step recognised that prices within Russia to both individuals and to businesses were being quoted in US$ and Euros, rather than in the national currency, due to the previous instability of the

Rouble.

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%.

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It is preferable that all undertakings that report in the currency of the same hyperinflationary economy apply IAS 29 from the same date

(which is what normally happens).

Nevertheless, IAS 29 applies to the financial statements of any undertaking from the start of the reporting period in which it identifies the existence of hyperinflation in the country in whose currency it reports.

EXAMPLE: Economies ceasing to be hyperinflationary

If the cumulative inflation in an economy deemed to be hyperinflationary drops below 100% in a three-year period, has hyperinflation ceased?

The economy has probably ceased to be hyperinflationary.

However, this quantitative measure should be evaluated in the context of overall economic developments and trends.

Although judgement is involved in determining when an economy is no longer hyperinflationary, all undertakings should cease to apply

IAS 29 from the same date to ensure financial statements are comparable between undertakings.

Benefits of purchasing power-adjusted financial statements

Financial statements that are expressed under IAS 29 in a measuring unit that is current at the balance sheet date provide several benefits: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng




They provide management, shareholders and other users with comparable information from period to period, relating to the underlying results of operations, capital maintenance and trends in performance;



They enable management to make more reliable decisions on capital expenditure plans, as the financial statements are more relevant; and



They become more useful to international investors and other users of financial statements in that they are comparable with other undertakings in the same industry.

Objectives of IAS 29

The IAS 29 approach is to restate all balances recorded in the financial statements (including comparative numbers) to the yearend general purchasing power of the functional currency.

The effects of the IAS 29 restatement on the financial statements will depend on the magnitude of inflation and the composition of the undertaking’s assets and liabilities.

Intra-group reporting

A foreign subsidiary operating in a hyperinflationary economy may be required for group purposes to report to its overseas parent in a stable currency, usually the group’s functional currency (see IAS 21 workbook). IAS 21 requires the foreign subsidiary to restate its local currency IFRS financial statements in accordance with IAS 29 before translation into the group’s functional currency.

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Transition to IFRS

IFRS 1 (first-time adoptors) requires retrospective application of the wording of IFRS standards effective at the reporting date of the undertaking's first IFRS financial statements

– that is, as if the current wording of each of the effective standards had always been applied – unless the standard provides an exemption. This includes retrospective application of the current wording of IAS 29.

Applying IAS 29

IAS 29 requires management to restate the financial statements, including the cash flow statements, into the current purchasing power at the balance sheet date.

This should be done in a number of steps, and judgement should be applied. The consistent application of procedures is more important than the precise accuracy of the results.

The restatement procedures are summarised as:



the selection of a general price index,



the segregation of monetary and non-monetary items,



the restatement of non-monetary items,



the restatement of the income statement,



the calculation and proof of the monetary gain or loss, http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng




the preparation of the cash flow statement with recognition of inflationary effects, and



the restatement of corresponding figures.

Selection of the price index

IAS 29 requires the use of a general price index to reflect changes in purchasing power. Most governments issue periodic price indices that vary in their scope, but all undertakings that report in the currency of the same economy should use the same index.

The most reliable indicator of changes in general price levels is the consumer price index. The consumer price index is normally closest to the concept of the general price index required by IAS 29 because it is at the end of the supply chain and reflects the impact of prices on the general population’s consumption basket.

The most important attributes for a reliable general price index are:



a wide range of reference, such as inclusion of most of the goods and services produced in the economy, in order to reflect varying price fluctuations;



an accurate reflection of price changes;



the availability of prior-year indices, as well as those of the current year;

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

regular, preferably monthly, updating; and



consistency, uniformity and continuity.

Conversion factors need to be calculated based on the increase in the general price index in order to restate historical cost amounts to current purchasing power.

Example

An item of property, plant or equipment was purchased in

December 2XX0 at a price of 200 million currency units.

The restated fixed asset cost at 31 December 2XX2, determined using the conversion factors below, is 200 x 4.114 = 822.8 million currency units, current at 31 December 2XX2.

G ENERAL

PRICE INDEX

C ONVERSION FACTOR

31 December

2XX0:

54.224 4.114 (223.100/ 54.224)

31 December

2XX2:

223.100 1.000 (223.100/223.100)

Note: The more time has passed since the date of purchase, the higher the index will be that will be applied to the asset. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Segregation of monetary and non-monetary items

Management should restate all balance sheet amounts that are not expressed in terms of the measuring unit current at the balance sheet date.

Monetary items do not need to be restated, as they represent money held, to be received or to be paid.

Monetary items are therefore already expressed in current purchasing power.

All balance sheet (SFP) items must be segregated into monetary and non-monetary items. Most balance sheet items are obviously monetary or non-monetary. In less straightforward cases, the determination as to whether a component is monetary depends on its underlying characteristics.

For example, the provision for doubtful receivables is considered monetary because receivables are monetary. The provision for inventory obsolescence is non-monetary because inventory is nonmonetary.

Examples of monetary assets and liabilities are:

Assets

Cash and amounts due from banks

Marketable debt securities

Trade receivables

Notes receivable

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Other receivables

Liabilities

Trade payables

Accrued expenses and other payables

Current income taxes and withholding taxes payable

Borrowings

Notes payable

Assets and liabilities other than monetary items are called nonmonetary items. All elements of s hareholders’ equity are nonmonetary once paid in or accumulated.

Examples of non-monetary items are:

Assets

Prepaid expenses

Advances paid on purchases*

Inventories

Marketable equity securities

Investments in associates

Property, plant and equipment

Intangible assets http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Liabilities

Advances received on sales*

Deferred income (for example, government grants)

Shareholders’ equity

* Advances paid or received are considered non-monetary if they are linked to specific purchases or sales; otherwise they should be considered monetary.

Restatement of non-monetary items

Non-monetary assets and liabilities are restated in terms of the measuring unit current at the balance sheet date, using the increase in the general price index from the transaction date when they arose to the balance sheet date.

Specific issues arise when restatement increases the carrying amount of assets beyond the net realisable value or if nonmonetary assets are carried at fair value.

Income statement

The historical cost income statement generally reports revenues and costs that were current when the underlying transaction or event occurred. All items in the income statement should be expressed in terms of the measuring unit current at the balance sheet date.

All amounts should therefore be restated by applying the change in the general price index from the dates when the items of income

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and expenses originated. Income statements are normally restated on a monthly basis.

Income statement items, such as interest income and expense, and foreign exchange differences related to invested or borrowed funds are also associated with the net monetary position. These items are adjusted for inflation and, along with the monetary gain or loss, presented as separate line items in the income statement. These items are normally presented below an operating profit subtotal.

IAS 29 Financial Reporting in Hyperinflationary Economies http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 9


Calculation of monetary gain or loss

One of the two main objectives of IAS 29 is to account for the financial gain or loss that arises from holding monetary assets or liabilities during a reporting period (the monetary gain or loss).

All monetary assets and liabilities (net monetary position) held during the year are represented in the financial statements either by nonmonetary assets and liabilities recorded on the balance sheet, or by transactions recorded in the profit and loss account or directly in equity.

The monetary gain or loss is calculated based on the undertaking’s monetary position. The monetary position can be derived from the equation below:

Assets

 monetary

 non-monetary

Liabilities

 monetary

 non-monetary

Shareholders’ equity

Therefore:

Monetary assets

Monetary liabilities

Nonmonetary assets

Nonmonetary liabilities

Shareholders’ equity

The monetary gain or loss may be calculated by restating nonmonetary items (including the income statement and transactions recorded directly in equity) to year-end purchasing power and comparing the restated values to the historical cost amounts or, where balances existed at the start of the year, to the historical amounts restated to the start of the year purchasing power.

It is also possible to calculate the gain or loss on the undertaking’s daily net monetary position. The costs of such a calculation, however, would be onerous. An approximation of the monetary gain or loss can be calculated using average monetary positions during the period as a test of the reasonableness of the monetary gain or loss derived by restating the non-monetary assets and liabilities.

Monetary position

Non-monetary position position http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 10


Restatement of comparatives

The prior-year comparatives are restated in terms of the measuring unit current at the end of the latest reporting period. If prior-year financial statements have already been prepared to conform with

IAS 29, the current-year conversion factor is applied to the prioryear financial statements.

Economies that cease to be hyperinflationary

Judgement should be applied to determine when an economy ceases to be hyperinflationary. A number of qualitative and quantitative indicators should be considered - for example, stabilisation of the price level and increased preference to keep wealth in the local rather than stable foreign currency or nonmonetary assets.

Although much of the weight is given to a decrease in the cumulative three-year inflation below 100%, other qualitative factors may indicate that the price stabilisation is only temporary and the country is therefore not out of hyperinflation. It is not beneficial for an undertaking ’s financial reporting to go in and out of hyperinflation within a short period of time.

An undertaking should cease applying IAS 29 at the end of the reporting period that is previous to the date on which the country moves out of hyperinflation.

The amounts in the financial statements as at that date should be considered as the carrying amounts for the subsequent financial statements - that is, those restated amounts should be the cost bases of the non-monetary items in subsequent balance sheets. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

EXAMPLE - Economies that cease to be hyperinflationary 1

A country moves out of hyperinflation at 31 October 2005, an undertaking’s last financial statements for the year ended 31

December 2004 would be used to derive cost bases for nonmonetary items at any balance sheet date on or after

1 November 2005.

This IAS 29 requirement results in ignoring inflation for a period of

10 months, from 1 January 2005 to 31 October 2005.

The inflation in the last period before moving out of hyperinflation should be insignificant because the decrease in inflation reflects one of the reasons for an economy ceasing to be hyperinflationary.

An undertaking may have presented interim reports before the country moves out of hyperinflation. These interim reports should not be subsequently amended to exclude hyperinflationary restatement.

An undertaking should consider the closing date of the last interim report as the ‘end of the previous reporting period’ for the purpose of deriving the cost bases for non-monetary items at subsequent balance sheet dates in post-hyperinflationary periods.

Undertakings preparing IFRS financial statements for the first time in economies that have ceased to be hyperinflationary will need to make a cumulative adjustment to the non-monetary items in the balance sheet. All adjustments to non-monetary items will be charged or credited to retained earnings.

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EXAMPLE - Economies that cease to be hyperinflationary 2

An economy ceased to be hyperinflationary at 31 October 2005.

A ’s last interim financial statements are for six months to 30 June

2005, and its last year-end financial statements are for the year to

31 December 2004.

T prepares only annual financial statements, and its last reporting date was 31 December 2004.

How should these companies apply IAS 29 in their financial statements for 2005?

A should consider the date of the last interim report, 30 June 2005, as the ‘end of the previous reporting period’ for the purpose of deriving the cost bases for non-monetary items at 31 December

2005.

T will use the restated amounts in its 31 December 2004 financial statements to derive cost bases of non-monetary items at 31

December 2005.

Restatement procedures for non-monetary balance sheet items

All non-monetary components in the balance sheet, excluding retained earnings, are restated by applying a general price index from the dates on which the items arose at the first application of

IAS 29. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Restated retained earnings, excluding current-year earnings, are the balancing figure derived from all the other amounts in the opening restated balance sheet.

Non-monetary items at fair value or net realisable value

Some non-monetary assets may be carried at fair value at the balance sheet date – such as property, plant and equipment revalued by an independent appraiser as allowed under IAS 16; marketable equity securities fair valued under IAS 39; and investment properties carried at fair value under the IAS 40 fair value model.

The historical cost amounts should be restated to obtain the appropriate monetary gain or loss. The restated carrying amount should then be compared to the ‘current’ values and the difference, if any, charged or credited to the income statement or shareholders’ equity in accordance with the appropriate standard.

The net realisable value of an asset may be less than its restated amount.

Application of the normal impairment requirement would therefore result in a write-down of the carrying amount in the restated financial statements, even if no impairment of the asset was required in the historical cost financial statements .

Prepaid expenses



Obtain the ageing of prepaid expenses.

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

Restate prepaid expenses from the date of the payments to the balance sheet date.

Marketable equity securities –

Should equity securities that are carried at fair value be restated?

(see IAS 32/39+ IFRS 9 workbooks)

Equity securities classified as either available-for-sale assets or designated as at fair value through profit or loss (including held-fortrading assets) are carried at fair value on the balance sheet under

IAS 39.

Fair value gains and losses on assets designated as at fair value through profit or loss are recorded immediately in the income statement.

Fair value gains and losses on available-for-sale assets are recorded directly in equity. Fair value gains and losses deferred in equity are recycled to the income statement on disposal or impairment.

The historical cost of the equity securities should be restated .

The difference between the fair value of the equity securities and the restated historical cost of the equity securities is the fair value gain or loss. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Advances paid on purchases



Obtain a breakdown of advances paid, ensuring that, where appropriate, the relevant specific advances have already been netted off against accounts payable.



For advances paid in respect of purchases of future inventories, property, plant and equipment (PPE) or intangibles, obtain the ageing of advances, including the amounts and payment dates.



Restate advances according to the ageing schedule from the payment dates to the balance sheet date.



When the inventory, PPE or an intangible asset is received, add the restated carrying value of the advance to the restated cost base of the asset.

Inventories (see IAS 2 workbook)

Raw materials



Obtain the historical cost prices and acquisition dates of raw materials. The average ageing of items could (subject to materiality considerations) be estimated using inventory turnover if a detailed ageing of inventory cannot be obtained.



If the FIFO or weighted average method is used, restate raw materials inventories based on the ageing of the related items using the increase in the general price index for the period from the purchase dates to the balance sheet date.

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

If an annual average is used, restate raw materials using the annual average increase in the general price index.

Semi-finished and finished goods



Obtain the ageing of semi-finished and finished goods.



Deduct any historical depreciation expense of property, plant and equipment that is included in the cost of semi-finished goods, as this will be replaced with the restated depreciation expense.



If the FIFO or weighted average method is used, restate the balance of semi-finished goods, based on the ageing of the composition of cost elements included in inventories. If annual average costing is used, restate using the annual average increase in the general price index.



After completion of the restatement, add back to inventory the attributable depreciation calculated by reference to the restated property, plant and equipment balances.



After the inventory has been restated, review the restated balances to determine the need for any net realisable value provisioning.

Inventory

Will the costing method of inventory (for example FIFO or weighted average) have an impact on the IAS 29 restatement?

The costing method should have no impact on the final restated http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IAS 29 Financial Reporting in Hyperinflationary Economies value of the inventory if there are no price changes in real terms.

Restatement would result in the same inventory value if there had been no change in the price in real terms.

In practice, however, there are likely to be different results, as the changes in the cost of inventory may not be equal to the change in the general price index (for example, there may be a real change in the inventory cost).

How are inventory and the related provision for net realisable value treated when the inventory is subsequently sold or disposed of?

Inventory is a non-monetary item. The carrying value of the inventory and any related provision for net realisable value should be inflated up to the date of the sale or disposal.

Investments in associates



Obtain the historical cost prices and acquisition dates of investments according to the purchase date and cost of purchase.



Restate the balance of investments using the increase in the general price index from the purchase date to the balance sheet date.



Compare the restated investment balance with the market value, and adjust the investment balance, if an impairment is identified.

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Subsidiaries and associates

What exchange rates should be used when consolidating a foreign subsidiary of a group that presents its consolidated financial statements in a hyperinflationary currency?

A foreign subsidiary that operates in an economy that is not experiencing hyperinflation and whose functional currency is therefore not hyperinflationary should translate the income statement into a hyperinflationary presentation currency using the exchange rates at the date of the transactions (in practice, monthly or weekly average exchange rates may be used as an approximation).

The income statement items should then be restated in accordance with IAS 29 from the date of the transaction, which would be the same date used to translate the stable foreign currency into the hyperinflationary presentation currency. This will facilitate the elimination of any inter-company transactions, as the transactions will be on the same basis of accounting and therefore comparable.

The balance sheet should be translated into the hyperinflationary currency using the closing rate method. The investor’s share of net assets in the subsidiary at the start of the year (as calculated by the equity method of accounting) should be adjusted for current-year inflation.

The difference between the parent’s share of the closing net assets and the opening balance and earnings for the period, both adjusted for inflation as described above, should be charged to equity as a translation adjustment. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


What exchange rates should be used when accounting for a foreign associate of an undertaking presenting its financial

statements in a hyperinflationary currency?

The investor’s share of the results of operations of an associate with a stable functional currency should be translated into the group’s hyperinflationary presentation currency at the dates on which the earnings accrued. The earnings should then be restated to year-end purchasing power in the consolidated financial statements from the date of translation.

The opening investment balance accounted for using the equity method at opening exchange rates should be adjusted for inflation to year-end purchasing power.

To calculate the net investment in the associate, the investee’s balance sheet should be translated into the group’s presentation currency at year-end rates, which forms the basis for carrying value of the investment.

The difference between the carrying value and the opening balance plus earnings for the period, both adjusted for inflation, should be recorded in equity as a translation adjustment.

Property, plant and equipment and accumulated depreciation

(see IAS 16, IAS 2, IAS 11, IAS 36 and IAS 23 workbooks)



Obtain the original historical cost prices and acquisition dates of property, plant and equipment. The restatement should be based on the original purchase date of the asset, not the date of reclassification from the construction-in-progress account.

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

Eliminate from the IFRS historical financial statements any revaluation of construction in progress, property, plant and equipment and the associated accumulated depreciation that does not comply with IAS 16, if any.



Restate the original purchase cost of property, plant and equipment from the date of the purchase of each item to the balance sheet date using the general price index.



Calculate the depreciation charge for the period on the basis of the restated property, plant and equipment. Opening accumulated depreciation is also calculated on the basis of restated property, plant and equipment.



For disposals, determine the original date of purchase and the historical cost. Calculate and then deduct the restated property, plant and equipment balance that has been disposed of and its accumulated depreciation.



Replace historical depreciation charges included in general administrative expenses, idle-time expenses, cost of goods sold and inventory balances, with the depreciation expense calculated on the basis of the restated property, plant and equipment balances.



Obtain the historical cost prices and acquisition dates of the

‘construction in progress’ balance and restate the balances by applying indices according to transaction date. When the construction in progress is subsequently transferred to items of property, plant and equipment, the related inflation adjustment should be transferred and applied to the asset. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng




If the undertaking capitalises interest in accordance with IAS 23, recognise the part of the capitalised borrowing cost that compensates for the inflation during the same period as an expense in the period in which those costs were incurred.



For the first year of adopting the IAS 16 alternative treatment for measurement, restate the historical cost of the asset in accordance with IAS 29 to obtain the correct monetary gain or loss in the income statement. Then replace the carrying value with the appraised value, and treat the difference in accordance with IAS 16.



Assess for impairment in accordance with IAS 36.

Property, plant and equipment

What indices are used to restate construction in progress

(CIP)? How does the restatement of CIP affect the future value of items of PPE?

CIP should be restated from the date on which the payment was made. An asset or project within CIP should be restated within CIP.

When transferred to assets in use, the related inflation adjustment should also be transferred and added to the cost base of the item of property, plant or equipment.

Management should consider the inflation effect on assets that were previously held in CIP when initially adopting IAS 29 where the economy of the reporting undertaking has been experiencing hyperinflation in previous years..

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How are assets that have been remeasured by an independent appraiser in accordance with IAS 16 treated when restating them in accordance with IAS 29?

If assets are revalued during a year of restatement, the historical cost should be restated to arrive at the correct monetary gain or loss. The restated cost should then be compared to the appraised amount, and the difference treated as required by IAS 16.

In subsequent years, the appraised carrying amount and the revaluation reserve (unless it is the first year of IAS 29 application when eliminated) should be restated.

Intangible assets (see IAS 38 workbook)



Intangible assets, including goodwill, are inflated in the same manner as property, plant and equipment.

Advances received



Obtain a breakdown of advances received, ensuring that, where appropriate, the relevant specific advances have been netted off against the relevant accounts receivable.



Obtain the ageing of advances received.



Restate advances according to the ageing, by the increase in the general price level from the date of receipt to the balance sheet date.



The restated advances received should be transferred to revenue when the sale is recognised. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Deferred income



Obtain the ageing of deferred income according to the date of receipt.



Restate the original amount of deferred income received from the transaction date to the balance sheet date.



Calculate accumulated amortisation and current-period amortisation on the basis of the restated deferred income balance.



Replace historical amortisation credited to the income statement with the amortisation calculated on the basis of the restated deferred income.

Are provisions for liabilities and charges monetary or nonmonetary items?

Provisions for liabilities and charges could be monetary, monetary but inflation linked or non-monetary. Their classification depends on the nature of the liability.

For example, if warranty obligations are limited to a defined original amount, the warranty provision is monetary. However, if the undertaking’s liability is specified as a repair or exchange of the item under warranty, the provision is non-monetary.

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Restatement of shareholders’ equity



At the start of the first period of application of IAS 29, the components of shareholders’ equity in the opening balance sheet, excluding retained earnings, should be restated by applying a general price index from the dates on which the items arose. Any revaluation surplus that arose in previous periods should be eliminated. Restated retained earnings is the balancing figure derived from all the other restated amounts in the restated opening balance sheet.



At the end of the first period and in subsequent periods, all components of shareholders’ equity are restated by applying a general price index from the start of the period, or the dates on which the items arose, if later. This restatement forms part of the monetary gain or loss calculation.



Any statutory revaluation surplus (that is not in accordance with

IAS 16) arising in subsequent periods is eliminated against the related revalued assets.



Current-year restated net income is added to the balance of the restated opening retained earnings.

 For the purpose of the statement of changes in shareholders’ equity, dividends paid during a period should be restated by applying a general price index from the date at which the shareholders’ right to receive payment is established to the balance sheet date. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

Equity

What are the components of shareholders' equity that need to be restated? Which dates should be used for the restatement?

All components of shareholders' equity should be restated, with certain exceptions for revaluation reserves. Legal and special reserves are generally a part of retained earnings in IFRS financial statements. These reserves are not considered for restatement purposes. It may be beneficial to disclose the historical statutory reserves in the footnotes to the financial statements.

Capital increases should be restated from the date on which the consideration was received. If consideration was received in the form of a non-monetary contribution (such as contributed PPE), the fair value of the asset should be used as the historical cost.

Can management present share capital at historical cost and the IAS 29 adjustment separately on the balance sheet?

No. Share capital presented on the balance sheet should be expressed in year-end purchasing power.

However, an undertaking may present the historical cost share capital and the related IAS 29 adjustment separately in the notes with an appropriate description.

How is the revaluation reserve in equity treated?

Statutory regulations for countries operating in a hyperinflationary economy often allow companies to increase the carrying value of

PPE based on prescribed rules, with a corresponding increase in the equity

– usually the revaluation reserve. These statutory

18

revaluation adjustments are not in accordance with IAS 16 and should be eliminated from the IFRS financial statements.

If a revaluation has been performed at year-end in accordance with

IAS 16, the revaluation reserve would be the difference between the historical values restated in accordance with IAS 29 and the revalued amounts according to IAS 16.

There would be no need to inflate the revaluation reserve, as it would be current at year-end. The revaluation reserve would be inflated in subsequent years.

How should a share capital increase by way of a transfer from the statutory revaluation surplus be treated?

The statutory revaluation surplus is eliminated from the IFRS restated financial statements, as noted above. A share capital increase by way of a transfer from the statutory revaluation surplus is not therefore considered in calculating the restated paid-in capital.

The increase of the share capital is represented by a transfer from retained earnings to reflect the legal transaction.

The amount of the transfer is the restated amount of statutory increase inflated from the date of the authorisation of the share capital increase.

How are dividends payable treated?

A dividend payable is a monetary liability that will result in a http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IAS 29 Financial Reporting in Hyperinflationary Economies monetary gain for the undertaking. The dividend amount should therefore be excluded from retained earnings at the date on which the dividend becomes payable.

Should unpaid capital that the shareholders have committed to pay be inflated?

The treatment of the unpaid share capital depends on whether the shareholder is legally bound to pay the capital or not.

If the shareholder has no legal obligation to pay this capital, there would be no receivable recorded by the undertaking. The unpaid capital and commitment would be disclosed in the notes at the historical amount, which is the consideration expected to be received by the undertaking.

There is no effect on monetary gain or loss, as the undertaking does not have an enforceable receivable.

However, if the capital increase is legally binding and approved by the general assembly, the undertaking would show a receivable from shareholders with a corresponding increase in share capital

(the fact that the share capital has not been paid would be disclosed in the notes).

The share capital would be restated to account for any subsequent changes in inflation that creates a monetary loss in the income statement from holding the receivable.

19


Transition to IFRS (see IFRS 1 workbook)

IFRS 1 requires retrospective application of the wording of IAS 29 effective at the reporting date of the undertaking's first IFRS financial statements - that is, as if the current wording of IAS 29 had always been applied.

An undertaking should restate its non-monetary assets and liabilities that were acquired (or originated) during a past period of hyperinflation for the effects of changes in purchasing power from transaction date until the end of the period of hyperinflation. Equity components, such as share capital, have to be restated.

These exemptions should not be applied to other items by analogy.

IFRS 1 provides some exemptions from retrospective application of

IFRSs to some equity items, such as an exemption from a requirement to determine cumulative translation reserve at the date of transition. However, it also states that these exemptions should not be applied to other items by analogy.

Restatement on transition to IFRS

A country moved out of hyperinflation eight years ago. Is it possible to avoid restatement in accordance with IAS 29 on transition to IFRS by electing to use the IFRS 1 ‘fair value as deemed cost’ exemption?

The IFRS 1 'fair value as deemed cost' exemption only covers property, plant and equipment, investment property under the cost model, and intangible assets carried at fair value. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

A company may have non-monetary liabilities in the balance sheet requiring restatement, such as deferred income. Intangible assets carried at cost less amortisation, for example when there is no active market, will also require IAS 29 restatement if acquired during the period of hyperinflation.

Components of equity, such as share capital, also have to be restated for inflation effects from the transaction date to the end of the period of hyperinflation.

Restatement of the income statement

All items in the income statement should be restated by applying the change in the general price index from the dates when the items of income and expense were originally recorded.

Most undertakings will restate activity on a monthly average basis

– provided inflation is occurring at a relatively stable rate

– with all transactions presumed to occur evenly throughout the relevant period.

Revenue



Obtain a monthly break-down of revenue.



Restate each period using the appropriate indices to year-end.

Selection of the index

What is the correct index to be used to restate the income statement?

The items within the income statement should be restated from the

20

date of the transaction. However, it is generally not practical to restate the items from the date of the transaction



average indices may be used as approximations.

The average indices to use would depend on the frequency of the transactions (sales earned evenly throughout the period) and whether inflation was relatively constant throughout the period.

If the income statement transactions occurred evenly throughout the year without seasonal fluctuations and inflation was relatively constant during the year, the annual average index may be used for the restatement.

In periods of unstable inflation or where there have been seasonal fluctuations influencing the income statement, quarterly or monthly indices would be more appropriate.

Cost of goods sold



Obtain the monthly breakdown of the items included in production costs.



Restate all components of production costs, except depreciation and raw materials, from the month when the costs were incurred to the year-end.



Calculate raw material used in the production process through the reconciliation of restated opening raw materials and closing raw materials balances. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng




Calculate depreciation related to production costs on the basis of the restated property, plant and equipment, as explained in the balance sheet section, and replace the historical depreciation with the restated depreciation.



Restate opening and closing historical finished and semifinished goods, as explained in the balance sheet section.

 The ‘restated cost of goods sold’ figure is obtained by: adding to purchases and other production costs restated from the date when the costs were incurred; the restated opening finished and semi-finished goods; and deducting the restated closing finished and semi-finished goods. The restated opening finished goods and semi-finished goods are derived by:

– restating amounts to the prior balance sheet date purchasing power, and

•

– inflating the restated cost of opening amounts as calculated above by the conversion factor for the entire year.

Depreciation, amortisation of intangible assets and realisation of prepaid expenses and deferred income (grant)

This is calculated on the basis of the restated asset or liability balance.

Other items included in the income statement

 Obtain a monthly breakdown of all items.

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 Restate all items for each month using the increase in the general price index from the related month or quarter until the year-end.

 Certain non-monetary items included in the opening balance sheet could subsequently be realised through the income statement

– for example, inventory and disposed property, plant and equipment. In that case, the restatement should consider the restatement surplus accumulated while the item was recognised in the balance sheet.

Foreign exchange

Should interest income or expense and foreign exchange gains or losses be restated?

All items in the income statement should be restated. There are no exceptions to this requirement.

Impairment loss on trade and other receivables

If the impairment loss on trade and other receivables is inflated, the movement schedule of the provision does not reconcile. How are the opening and closing balances reconciled?

Management should provide against a bad debt at the time at which the impairment is identified. The provision is a monetary item, as the underlying asset it relates to is monetary.

A monetary gain will therefore result from carrying this provision

(which offsets the monetary loss being incurred as a result of http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng holding the receivable). The impairment loss on trade and other receivables is inflated from the date on which the provision was initially recorded.

All items must be expressed in terms of the measuring unit current at the balance sheet date to ensure the reconciliation of the provisions. The difference between the restated opening balance, restated current period expense (net of any restated provision reversals) and the closing balance is a monetary gain.

Adjustments or reclassifications made to statutory financial statements to arrive at IFRS historical financial statements

 If the adjustment or reclassification made in accordance with

IFRS relates to a specific period or specific date, the adjustment or reclassification calculated in historical terms should be restated for the related time period, using the increase in the general price index from the specific date to the balance sheet date.

Income taxes (see IAS 12 workbook)

Current taxes

 Obtain details of monthly or quarterly taxation calculated on the basis of the undert aking’s monthly or quarterly taxable income. Restate monthly or quarterly tax expenses for each month or quarter in terms of balance sheet date purchasing power, using the increase in the general price index from the related month or quarter until the reporting date.

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Deferred taxes

 Calculate deferred tax expense or income and deferred tax liability or asset with reference to historical adjustments made (if any) in moving from the tax accounts to the IFRS historical financial statements.

 Calculate deferred tax in relation to temporary differences arising from the restatement of non-monetary assets and liabilities. Deferred tax is calculated in full on the temporary differences arising from the restatement of non-monetary assets and liabilities.

 As the closing deferred tax position is calculated based on the applicable temporary differences between the tax base and the IAS 29-adjusted IFRS balance sheet (ie, expressed in the measuring unit current at the balance sheet date), there is no need to adjust the closing deferred tax asset or liability for inflation.

A practical approach to deferred taxes is to charge or credit to the tax line in the income statement the difference between the opening deferred tax asset or liability, adjusted to year-end purchasing power and the closing deferred tax asset or liability.

 Opening deferred tax is calculated as if IAS 29 had always been applied. It is calculated for temporary differences between tax bases of assets and liabilities and their carrying amounts expressed in the purchasing power at the opening balance sheet date. The calculated tax is then inflated to the purchasing power at the closing balance sheet date. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


 The movement in the deferred tax balance for the reporting period includes a monetary gain or loss on tax bases of assets and liabilities. For example, if the opening tax base of

PPE is 100, inflation for the year is 50% and income tax rate is 30%, the loss on the tax base of the PPE in accordance with IFRIC 7 (see Appendix 1), is 15, being 30% x (100 x

1.5

– 100).

Monetary gain or loss in the income statement

 The gain or loss on the net monetary position arises from holding monetary assets and liabilities and is reported as a separate item in the restated income statement (see below).

The monetary gain or loss is derived from restating the closing balance sheet (less the inflation adjustments to the opening balance sheet in prior year-end purchasing power) and the items in the income statement.

 IFRIC 7 (see Appendix 1) also identifies inflation gains or losses on the tax bases of assets and liabilities as a separate component of the monetary gain or loss. This is in addition to the gain or loss on the net monetary position

 from the carrying amounts of monetary assets and liabilities.

The derived monetary gain or loss may need additional netting off with the indexation differences that were recognised in the income statement on those monetary items that are linked to inflation index. These are subject to inflationary risks or holding benefits, such as monetary gains or losses.

23

Monetary gain or loss

Calculation and proof of the monetary gain or loss that arises on the carrying amounts of monetary assets and liabilities is an important element of applying IAS 29.

Restatement in accordance with IAS 29 requires the application of certain procedures and judgement. It is therefore necessary to verify that the results are reasonable; the proof may well reveal restatement errors.

The monetary gain or loss may be estimated by applying the change in a general price index to the weighted average difference between monetary assets and monetary liabilities.

The weighted average of the opening monetary position and the monetary position at year-end may be used for the purpose of this calculation.

It is possible, however, for a large difference to arise between the monetary gain or loss in the income statement and the estimate as calculated by the proof if the monetary position has not been relatively constant throughout the year.

If the monetary position is changing significantly, a more accurate proof of the monetary gain or loss would be obtained by using the quarterly or monthly weighted average monetary position.

Proof



average monetary position method

A simple example with a constant monetary position is set out below. It would be appropriate to use the weighted average of the opening and closing monetary position in this example. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Proof – statement of sources and application of net monetary assets and liabilities method

A statement of source and application of net monetary assets or liabilities is often prepared as alternative proof of the net monetary gain or loss (see below). The items that cause changes in the monetary assets or liabilities are analysed, and the net balance of the monetary assets or liabilities is initially determined as if there were no changes, and is then adjusted for current-year movements.

Restatements are performed, and the comparison with the actual net balance and movements of monetary assets or liabilities enables the monetary gain or loss to be approximated.

24

Conversion factor 1.649 for the year

Balance sheet:

– cash

– share capital

– retained earnings

Income statement:

– monetary loss

Monetary loss proof:

Average monetary position for the year

(10,000+10,000)/2

Change in inflation factor (1.649-1.000)

Monetary loss estimated for the year

Monetary loss per income statement http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Opening position currency units

10,000

10,000

–

Inflation adjustment

–

6,490

(6,490)

(6,490)

Closing position currency units at the balance sheet date

10,000

16,490

(6,490)

(6,490)

10,000

0.649

6,490

(6,490)

25


Procedures for the preparation of a statement of source and application of net monetary assets and liabilities are as follows:

Historical column

1. Calculate the net monetary position at the start of the period under restatement.

2. Identify all items that caused changes in the monetary position during the period. These should be the actual or uninflated changes in the monetary position. These items can be obtained from the historical cost income statement or cash flow statement.

3. Arrive at the monetary position at the end of the period by adding or subtracting the changes as identified. Check that the monetary position as calculated is equal to the actual monetary position at the end of the period.

Restated column

4. Calculate the net monetary position at the start of the period as in Step 1 above, but restate it for inflation for the entire period. The inflation adjustment restates the opening monetary position as if there were no monetary gain or loss – ie, by adjusting the opening monetary position as if the opening monetary assets and liabilities were not eroded as a result of inflation.

5. Inflate the changes in the monetary position (Step 2 above) but restate as if there were no monetary gain or loss; adjusting the changes in monetary position for inflation restates the monetary changes as if the monetary assets and liabilities obtained or disposed of during the period were not eroded as a result of inflation. These items may be obtained from the inflation adjusted income statement and/or cash flow statement.

6. Determine the net monetary position restated at period end as if inflation had not affected the monetary assets and liabilities. Note that the real monetary position does not change as a result of the inflation adjustment.

Proof http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 26


7. Compare the actual net monetary position at the end of the period included in the ‘historical’ column with the restated net monetary position at the end of the period in the ‘restated’ column. The difference between the actual position and the restated monetary position is the estimate of the monetary gain or loss. This estimate should be compared to the actual gain or loss in the income statement.

An example is set out on the next page. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 27

In this example, the inflation factor was

1.650, and there were two types of transactions that occurred evenly throughout the period.

Balance sheet

(SFP):



cash



trade receivables

Opening position

100

-

Closing position

100

200



trade payables



share capital



current profit

Profit and loss



credit sales



cost of sales



monetary loss *



profit

100

-

100

-

100

300

100

100

100

300

200

(100)

-

100

* Monetary loss is calculated as follows:

Inflation adjustments

-

-

-

65

(65)

60

(30)

(95)

(65) http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

Closing position at period end purchasing power

100

200

100

165

35

260

(130)

(95)

35


28


Monetary loss from sales

Monetary gain from cost of sales

Restatement of share capital

60

(30)

65

95

Monetary loss proof



statement of sources and application of net monetary assets and liabilities:

Historical Restated

Net monetary asset at the start of the 100 165 period

Add movement in receivables

Deduct movement in payables

200

(100)

(A)

20

0 (B)

260

(130)

295

Monetary loss is ((A)-(B)) 95

The proof of the monetary gain or loss may be more challenging if indexation differences on those monetary items that are linked to the inflation index were offset with the monetary gain or loss in the income statement, as required by IAS 29. Such components of the monetary gain or loss, as well as the IFRIC 7 inflation gains or losses on the tax bases of assets and liabilities, should be analysed separately. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 29


Cash flow statement (see IAS 7 workbook)

The preparation of a cash flow statement under IAS 29 presents some challenges. All activity should be presented in current purchasing power, but readers of the financial statements must also be able to follow cash flows between the restated balance sheets and income statements. Most undertakings use the indirect method, although both methods are presented in the detailed example in Section 7.

There are two unique elements in the hyperinflationary cash flow statement:



Net income before tax is adjusted for the monetary gain or loss for the period; and



The monetary loss on cash and cash equivalents is presented separately.

The example below shows how the monetary gain element impacts financing activity.

EXAMPLE

Below are the historical and price level adjusted movements in borrowing. Inflation in the year is 100%; average inflation for the year is

41%; assume movements occur rateably over the year. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 30

Historical movements

Conversion factor

Balance 20X7

1,000

2.0

Draw-down

500

1.41


Repaid

(700)

1.41

Monetary gain

-

Balance 20X8

800

1.0

Price level adjusted 2,000 705 (987) (918) 800

The cash flow from financing activities should include a drawdown of 705 and a repayment of 987. The monetary gain of 918 is recorded in the income statement and is eliminated from the cash flow statement as a non-cash item. It is useful to disclose the amount of the monetary gain in the notes to enable readers to understand movements in borrowings in the balance sheet. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 31

SUMMARY

The restatement of financial statements

Prices change over time as the result of various specific or general political, economic and social forces. Specific forces such as changes in supply and demand and technological changes may cause individual prices to increase or decrease significantly and independently of each other. In addition, general forces may result in changes in the general level of prices and therefore in the general purchasing power of money.

In most countries, financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued. Some undertakings, however, present financial statements that are based on a current cost approach that reflects the effects of changes in the specific prices of assets held.

In a hyperinflationary economy, financial statements, whether they are based on a historical cost approach or a current cost approach, are useful only if they are expressed in terms of the measuring unit current at the balance sheet date.

As a result, IAS 29 applies to the financial statements of undertakings reporting in the currency of a hyperinflationary economy. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Presentation of the information required by IAS 29 as a supplement to unrestated financial statements is not permitted.

Also, separate presentation of the financial statements before restatement is discouraged.

The financial statements of an undertaking whose functional currency is hyperinflationary, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the balance sheet date.

The corresponding figures for the previous period and any information in respect of earlier periods shall also be stated in terms of the measuring unit current at the later balance sheet date.

For the purpose of presenting comparative amounts in a different presentation currency, IAS 21 The Effects of Changes in Foreign

Exchange Rates applies.

The gain or loss on the net monetary position shall be included in profit or loss and separately disclosed.

The restatement of financial statements in accordance with IAS 29 requires the application of certain procedures as well as judgement.

32

Historical cost financial statements

Balance sheet

Balance sheet amounts not already expressed in terms of the measuring unit current at the balance sheet date are restated by applying a general price index.

Monetary items are not restated because they are already expressed in terms of the monetary unit current at the balance sheet date. Monetary items are money held and items to be received or paid in money.

Assets and liabilities linked by agreement to changes in prices, such as index linked bonds and loans, are adjusted in accordance with the agreement in order to ascertain the amount outstanding at the balance sheet date. These items are carried at this adjusted amount in the restated balance sheet.

All other assets and liabilities are non-monetary. Some nonmonetary items are carried at amounts current at the balance sheet date, such as net realisable value and market value, so they are not restated. All other non-monetary assets and liabilities are restated.

Most non-monetary items are carried at cost or cost less depreciation; hence they are expressed at amounts current at their date of acquisition.

The restated cost, or cost less depreciation, of each item is determined by applying to its historical cost and accumulated depreciation the change in a general price index from the date of acquisition to the balance sheet date. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Hence, property, plant and equipment, investments, inventories of raw materials and merchandise, goodwill, patents, trademarks and similar assets are restated from the dates of their purchase.

Inventories of partly-finished and finished goods are restated from the dates on which the costs of purchase and of conversion were incurred.

Detailed records of the acquisition dates of items of property, plant and equipment may not be available or capable of estimation. It may be necessary, in the first period of application of IAS 29, to use an independent professional assessment of the value of the items as the basis for their restatement.

A general price index may not be available for the periods for which the restatement of property, plant and equipment is required by IAS

29. In these circumstances, it may be necessary to use an estimate based, for example, on the movements in the exchange rate between the functional currency and a relatively stable foreign currency.

Some non-monetary items are carried at amounts current at dates other than that of acquisition or that of the balance sheet, for example property, plant and equipment that has been revalued at some earlier date. In these cases, the carrying amounts are restated from the date of the revaluation.

The restated amount of a non-monetary item is reduced, in accordance with appropriate Standards, when it exceeds the amount recoverable from the item’s future use (including value-inuse, sale or other disposal). Hence, in such cases:

33

- restated amounts of property, plant and equipment, goodwill, patents and trademarks are reduced to recoverable amount,

- restated amounts of inventories are reduced to net realisable value and

- restated amounts of current investments are reduced to market value.

An investee that is accounted for under the equity method may report in the currency of a hyperinflationary economy. The balance sheet and income statement of such an investee are restated under

IAS 29 in order to calculate the investor’s share of its net assets and results of operations.

Where the restated financial statements of the investee are expressed in a foreign currency, they are translated at closing rates.

The impact of inflation is usually recognised in borrowing costs. It is not appropriate both to restate the capital expenditure financed by borrowing and to capitalise that part of the borrowing costs that compensates for the inflation during the same period. This part of the borrowing costs is recognised as an expense in the period in which the costs are incurred.

An undertaking may acquire assets under an arrangement that permits it to defer payment without incurring an explicit interest charge. Where it is impracticable to impute the amount of interest, such assets are restated from the payment date and not the date of purchase. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


At the start of the first period of application of IAS 29, the components of owners’ equity, except retained earnings and any revaluation surplus, are restated by applying a general price index from the dates the components were contributed or otherwise arose.

Any revaluation surplus that arose in previous periods is eliminated. Restated retained earnings are derived from all the other amounts in the restated balance sheet.

At the end of the first period and in subsequent periods, all components of owners’ equity are restated by applying a general price index from the start of the period or the date of contribution, if later.

The movements for the period in owners’ equity are disclosed in accordance with IAS 1.


IAS 29 requires that all items in the income statement are expressed in terms of the measuring unit current at the balance sheet date . 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.

Gain or loss on net monetary position

In a period of inflation:

34


- an undertaking holding an excess of monetary assets over monetary liabilities loses purchasing power and

- an undertaking with an excess of monetary liabilities over monetary assets gains purchasing power to the extent the assets and liabilities are not linked to a price level.

This gain or loss on the net monetary position is the difference resulting from the restatement of nonmonetary assets, owners’ equity and income statement items and the adjustment of index linked assets and liabilities.

The gain or loss may 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.

The gain or loss on the net monetary position is included in net income. The adjustment to those assets and liabilities linked by agreement to changes in prices is offset against the gain or loss on net monetary position.

Other income statement items, such as interest income and expense, and foreign exchange differences related to invested or borrowed funds, are also associated with the net monetary position.

Although such items are separately disclosed, it may be helpful if they are presented together with the gain or loss on net monetary position in the income statement.

Current cost financial statements

Balance sheet (SFP) http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

Items stated at current cost are not restated because they are already expressed in terms of the measuring unit current at the balance sheet date. Other items in the balance sheet are restated as detailed above.


The current cost income statement, before restatement, generally reports costs current at the time at which the underlying transactions or events occurred. Cost of sales and depreciation are recorded at current costs at the time of consumption; sales and other expenses are recorded at their money amounts when they occurred. Therefore all amounts need to be restated into the measuring unit current at the balance sheet date by applying a general price index.

Gain or loss on net monetary position

The gain or loss on the net monetary position is accounted for in accordance as above.

Taxes

The restatement of financial statements in accordance with IAS 29 may give rise to differences between the carrying amount of individual assets and liabilities in the balance sheet and their tax bases. These differences are accounted for in accordance with IAS

12 Income Taxes (see Appendix 1).

35

Cash flow statement

IAS 29 requires that all items in the cash flow statement are expressed in terms of the measuring unit current at the balance sheet date.

Corresponding figures

Corresponding figures for the previous reporting period, whether they were based on a historical cost approach or a current cost approach, are restated by applying a general price index so that the comparative financial statements are presented in terms of the measuring unit current at the end of the latest reporting period.

Information that is disclosed in respect of earlier periods is also expressed in terms of the measuring unit current at the end of latest the reporting period.

For the purpose of presenting comparative amounts in a different presentation currency, IAS 21 applies.

Consolidated financial statements

A parent that reports in the currency of a hyperinflationary economy may have subsidiaries that also report in the currencies of hyperinflationary economies.

The financial statements of any such subsidiary need to 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. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Where such a subsidiary is a foreign subsidiary, its restated financial statements are translated at closing rates. The financial statements of subsidiaries that do not report in the currencies of hyperinflationary economies are dealt with in accordance with IAS

21.

If financial statements with different reporting dates are consolidated, all items, whether non-monetary or monetary, need to be restated into the measuring unit current at the date of the consolidated financial statements.

Selection and use of the general price index

The restatement of financial statements in accordance with IAS 29 requires the use of a general price index that reflects changes in general purchasing power. It is preferable that all undertakings that report in the currency of the same economy use the same index.

Economies ceasing to be hyperinflationary

When an economy ceases to be hyperinflationary and an undertaking discontinues the preparation and presentation of financial statements prepared in accordance with IAS 29, it shall 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.

Disclosures

The following disclosures shall be made:

36

1. the fact that the financial statements and the corresponding figures for previous periods have been restated for the changes in the general purchasing power of the functional currency and, as a result, are stated in terms of the measuring unit current at the balance sheet date;

2. whether the financial statements are based on a historical cost approach or a current cost approach; and

3. the identity and level of the price index at the balance sheet date and the movement in the index during the current and the previous reporting period.

The disclosures required by IAS 29 are needed to make clear the basis of dealing with the effects of inflation in the financial statements. They are also intended to provide other information necessary to understand that basis and the resulting amounts.

Multiple choice questions

1. The Russian Rouble is currently hyperinflationary and IAS 29 applies:

1.Yes.

2.No.

2. IAS 29 shall be applied to financial statements, including the consolidated financial statements:

1.Yes.

2.No.

3. As prices rise, the value of money (the general purchasing power): http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


1. Rises.

2. Falls.

4. Financial statements unadjusted for inflation do not properly reflect the company’s position at the balance sheet date, the results of its operations or cash flows.

1.True.

2. False.

5. The currency is hyperinflationary if the cumulative inflation rate over three years is approaching, or exceeds, 100%.

1. Yes.

2. No.

3. Maybe.

6. The IAS 29 approach is to restate all balances recorded in the financial statements (including comparative numbers) to the yearend

1. replacement cost index of the undertaking.

2. general purchasing power of the functional currency.

7. First-time adoptors do not have to apply IAS 29 retrospectively.

1.True.

2. False.

37

8. The most reliable indicator of changes in general price levels is the:

1. Wholesale price index.

2. Index of wages and salaries.

3. Consumer price index.

9. An index is needed to restate

1. historical cost amounts to current purchasing power;

2. current purchasing power to historical cost amounts;

3. historical cost amounts to fair value.

10. Monetary items need to be restated

1.True.

2. False.

11. The provision for doubtful receivables is considered monetary

1.True.

2. False.

12. The provision for inventory obsolescence is considered monetary

1.True.

2. False.

13. Assets

Prepaid expenses

Advances paid on purchases http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Inventories

Marketable equity securities

Investments in associates

Property, plant and equipment

Intangible assets

Liabilities

Advances received on sales

Deferred income (for example, government grants)

Shareholders’ equity

1. These are monetary.

2. These are non-monetary.

14. Assets

Cash and amounts due from banks

Marketable debt securities

Trade receivables

Notes receivable

Other receivables

Liabilities

Trade payables

Accrued expenses and other payables

Current income taxes and withholding taxes payable

Borrowings

Notes payable

1. These are monetary.

2. These are non-monetary.

38

15. The monetary position is equal to the non-monetary position.

1.True.

2. False.

16. The prior-year comparatives are:

1. Not adjusted by an index.

2. Adjusted by an index to the levels prevailing at the closing date of each period.

3. Adjusted by an index to the levels at the end of the latest reporting period.

17. The net realisable value of an asset may be less than its restated amount, but higher than its historic-cost carrying value. It is recorded at its

1. Historic cost.

2. Restated amount.

3. Net realisable value.

18. Foreign exchange

Should interest income or expense and foreign exchange gains or losses be restated?

1. Yes.

2. No.

19. The monetary gain or loss is derived from restating the

1. opening balance sheet and the items in the income statement. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


2. closing balance sheet (less the inflation adjustments to the opening balance sheet in prior year-end purchasing power) and the items in the income statement.

20. There are two unique elements in the hyperinflationary cash flow statement:



Net income before tax is adjusted for the monetary gain or loss for the period; and



The monetary loss on cash and cash equivalents is presented separately.

1. True.

2. False.

Answers to multiple choice questions

Question Answer

1. 2

2.

3.

4.

5.

1

2

1

3

6.

7.

8.

9.

10.

11.

12.

13.

2

2

3

1

2

1

2

2

39

14.

15.

16.

17.

18.

19.

20.

1

2

1

1

1

3

3

APPENDIX 1 - IFRIC Interpretation 7

Applying the Restatement Approach under

IAS 29

Background

IFRIC 7 provides guidance on how to apply IAS 29 in a reporting period in which an undertaking identifies the existence of hyperinflation in the economy of its functional currency, when that economy was not hyperinflationary in the prior period, and the undertaking therefore restates its financial statements in accordance with IAS 29.

Issues

The questions addressed in IFRIC 7 are:

(1) how should the requirement '...stated in terms of the measuring unit current at the balance sheet date' in IAS 29 be interpreted when an undertaking applies IAS 29?

(2) how should an undertaking account for opening deferred tax items in its restated financial statements? http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng


Consensus

In the reporting period in which an undertaking identifies the existence of hyperinflation in the economy of its functional currency, not having been hyperinflationary in the prior period, the undertaking shall apply the requirements of IAS 29 as if the economy had always been hyperinflationary.

For non-monetary items measured at historical cost, the undertaking’s opening balance sheet at the start of the earliest period presented in the financial statements shall be restated to reflect the effect of inflation from the date the assets were acquired and the liabilities were incurred or assumed until the closing balance sheet date of the reporting period.

For non-monetary items carried in the opening balance sheet at amounts current at dates other than those of acquisition or incurrence, that restatement shall reflect the effect of inflation from the dates those carrying amounts were determined until the closing balance sheet date of the reporting period.

At the closing balance sheet date, deferred tax items are recorded and measured under IAS 12. However, the deferred tax figures in the opening balance sheet for the reporting period shall be determined as follows:

(1) the undertaking remeasures the deferred tax items under

IAS 12 after it has restated the nominal carrying amounts of its non-monetary items at the date of the opening balance sheet of the reporting period by applying the measuring unit at that date.

40

(2) the deferred tax items remeasured in accordance with (1) are restated for the change in the measuring unit from the date of the opening balance sheet of the reporting period to the closing balance sheet date of that period.

This is repeated for the deferred tax items in the opening balance sheet of any comparative periods presented.

After an undertaking has restated its financial statements, all corresponding figures in the financial statements for a subsequent reporting period, including deferred tax items, are restated by applying the change in the measuring unit for that subsequent reporting period only to the restated financial statements for the previous reporting period.

The restatement approach

The purpose of restating financial statements in hyperinflationary economies in accordance with IAS 29 is to reflect the effect on an undertaking of changes in general purchasing power.

Consequently, the opening balance sheet should be restated to reflect the change in a general price index for the reporting period only and not for changes in a general price index before the start of the reporting period, even though some balance sheet items may have been acquired or assumed before that date.

An undertaking applies the requirements of IAS 29 to its financial statements from the start of the reporting period to the balance http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IAS 29 Financial Reporting in Hyperinflationary Economies sheet date and not only from the date when it identifies the existence of hyperinflation.

Hence, IAS 29 does not exclude from the restatement of an undertaking’s opening balance sheet changes in the general price level before the start of the reporting period in which the undertaking identifies the existence of hyperinflation.

The restatement of the financial statements for the reporting period in which an undertaking identifies the existence of hyperinflation should be consistent with the restatement approach applied in subsequent reporting periods.

It may be necessary, in the first period of application of IAS 29, to use an independent professional assessment of the value of the items as the basis for their restatement.

When a general price index may not be available, it may be necessary to use an estimate based, for example, on the movements in the exchange rate between the functional currency and a relatively stable foreign currency.

Restatements are required, because hyperinflation can make unadjusted financial statements meaningless or misleading.

However, first-time adopters of IFRSs could use, for example, the fair value at transition date as deemed cost for property, plant and equipment, and, in some instances, also for investment property and intangible assets.

Hence, if a first-time adopter that would otherwise have to apply

IAS 29 at its transition to IFRSs applies the fair value measurement exemption of IFRS 1, it would apply IAS 29 to periods only after the

41

date for which the fair value was determined. Such remeasurements would therefore reduce the need for a first-time adopter to restate its financial statements.

In relation to a change in functional currency, the IFRIC observed that the existence of hyperinflation may (but not necessarily should) initiate such a change. The IFRIC noted that a change in functional currency is a change in the currency that is normally used to determine the pricing of an undertaking’s transactions.

The purpose of restatement for the effects of hyperinflation is to reflect the effect of changes in purchasing power in the economy of an undertaking’s functional currency. Therefore, the IFRIC did not believe that the application of accounting for hyperinflation should be based on the accounting for the change in an undertaking’s functional currency.

The IFRIC concluded that the opening balance sheet for the reporting period in which an undertaking identifies the existence of hyperinflation ought to be restated as if the undertaking had always applied the restatement approach under IAS 29. The IFRIC reconfirmed its view that this treatment is similar to the retrospective application of a change in accounting policy described in IAS 8.

Deferred tax items

The IFRIC was asked for guidance on the accounting for deferred tax items when an undertaking restates its financial statements according to IAS 29. In particular, it was asked for guidance on measuring deferred tax items in the opening balance sheet for the http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IAS 29 Financial Reporting in Hyperinflationary Economies reporting period in which an undertaking identifies the existence of hyperinflation.

IAS 29 states:

The restatement of financial statements may give rise to differences between the carrying amount of individual assets and liabilities in the balance sheet and their tax bases. These differences are accounted for under IAS 12.

Therefore, at the closing balance sheet date of the reporting period an undertaking remeasures its deferred tax items on the basis of the restated financial statements, rather than by applying the general restatement provisions for monetary items or non-monetary items.

However, the IFRIC noted that it was not clear how an undertaking should account for its comparative deferred tax items.

The IFRIC confirmed that its conclusion above should also apply to deferred tax items. In other words, the deferred tax items in the opening balance sheet for the reporting period in which an undertaking identifies the existence of hyperinflation should be calculated as if the environment had always been hyperinflationary.

IAS 12 explains:

Non-monetary assets are restated in terms of the measuring unit current at the balance sheet date (see IAS 29) and no equivalent adjustment is made for tax purposes.

(notes: (1) the deferred tax is charged in the income statement; and

(2) if, in addition to the restatement, the non-monetary assets are also revalued, the deferred tax relating to the revaluation is charged

42

to equity and the deferred tax relating to the restatement is charged in the income statement.)

Consequently, the IFRIC confirmed its conclusion that restatement of comparative deferred tax items would require an undertaking, first, to remeasure its deferred tax items on the basis of the financial statements of the previous reporting period, which have been restated by applying a general price index reflecting the price level at the end of that period. secondly, the undertaking should restate those calculated deferred tax items by the change in the general price level for the reporting period.

IAS 29 Financial Reporting in Hyperinflationary Economies http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 43

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