IAS 29: Financial reporting in hyperinflationary economies
Spotting hyperinflation, restating non-monetary items with a general price index, and the gain or loss on the net monetary position.
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What it is: When prices rise extremely fast, old costs in the accounts become meaningless. IAS 29 makes companies in such economies restate their accounts in today’s money.
The key idea: restate non-monetary items (like land and inventory at cost) using a general price index. Monetary items (cash, receivables, payables) are already in today’s money, so they stay as they are. Holding cash in hyperinflation loses value: that loss goes to profit or loss.
Example. Land cost 500,000 when the price index was 100. The index is now 340. Restated land = 500,000 × 340/100 = 1,700,000.
Key words
- Hyperinflation
- Very high inflation, judged from a list of indicators, including cumulative inflation over three years approaching or exceeding 100%.Example: Prices tripling in three years.
- Monetary items
- Money held and items to be received or paid in a fixed or determinable number of units of currency.Example: Cash, receivables, payables, loans.
- Non-monetary items
- Items not fixed in units of currency.Example: Land, buildings, inventory, equity.
- General price index
- An index that reflects changes in general purchasing power.Example: A national consumer price index.
- Gain or loss on net monetary position
- The gain or loss from holding monetary assets or liabilities during inflation. Recognised in profit or loss.Example: Holding cash during the year causes a loss.
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Indicators of hyperinflation
- People prefer to keep wealth in non-monetary assets or a relatively stable foreign currency.
- Prices are quoted in a relatively stable foreign currency.
- Credit prices include compensation for the expected loss of purchasing power.
- Interest rates, wages and prices are linked to a price index.
- Cumulative inflation over three years approaches or exceeds 100%.
It is a matter of judgement, and all entities using that currency should apply IAS 29 from the same date.
Restating the statements
| Item | Treatment |
|---|---|
| Monetary items | Not restated (already in current money). |
| Non-monetary items at historical cost (PPE, inventory) | Restate: cost × index at year end ÷ index at acquisition. Depreciation is based on the restated amounts. |
| Non-monetary items already at current value (fair value, NRV) | Not restated. |
| Income and expenses | Restate from the date recorded to the year end. |
| Comparatives | Restated to the current measuring unit at the end of the reporting period. |
| Net monetary position | Gain or loss in profit or loss. |
Restated non-monetary assets are still reduced if they exceed their recoverable amount (IAS 36). If a hyperinflationary subsidiary is consolidated, its accounts are restated under IAS 29 before being translated under IAS 21.
Worked example
A company in a hyperinflationary economy. The general price index was 100 when it bought land, 250 at the start of this year and 340 at the year end.
| Item | Historical amount | Restatement | Restated |
|---|---|---|---|
| Land (bought at index 100) | 500,000 | × 340/100 | 1,700,000 |
| Inventory (bought at index 320) | 160,000 | × 340/320 | 170,000 |
| Cash | 200,000 | not restated | 200,000 |
| Trade payables | 90,000 | not restated | 90,000 |
The company held net monetary assets all year, so it also recognises a loss on net monetary position in profit or loss: its cash buys less at the end of the year than at the start.
Practice questions
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