Ch 24 - Reporting In Hyperinflationary Economy

CHAPTER 24 – REPORTING IN HYPERINFLATIONARY ECONOMY HYPERINFLATION • Financial reporting in a hyperinflationary economy does not establish an absolute rate at which hyperinflation is deemed to arise. • Hyperinflation is a matter of judgment. • Indicated by characteristics of economic environment of a country which include but are not limited to the following: o General population prefers to keep its wealth in nonmonetary assets or in relatively stable foreign currency. o General population regards monetary amount not in terms of local currency but in terms of a relatively stable foreign currency. o 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. o Interest rates, wages and prices are linked to a price index. o Cumulative rate over 3 years is approaching or exceeds 100% o Cumulatively, current financial year to date o Comparative, comparable financial year to date of the preceding year FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMY • Financial statements of an entity that reports in the currency of a hyperinflationary economy, whether they are based on historical cost approach or a current cost approach shall be stated in terms of the measuring unit current at the end of reporting period. • The restatement of financial statements of an entity that reports in the currency of a hyperinflationary economy is accomplished by means of constant peso accounting. • Constant peso accounting o Restatement of conventional or historical financial statements in terms of the current purchasing power of the peso through the use of index number. o Also known as purchasing power or price level accounting • Monetary items o Money held and assets and liabilities to be received or paid in fixed or determinable amount of money. o Essential feature is a right to receive or an obligation to deliver a fixed or determinable amount of money. • Nonmonetary items o Items not classified as monetary (residual definition) o Their peso amounts reported in the financial statements differ from the amounts that are ultimately realizable or payable • What items are restated o Only nonmonetary items are restated when preparing constant peso financial statements o Monetary items are not restated anymore because they are automatically stated in terms of current purchasing power of the peso o Objective of constant peso accounting is to report elements of the financial statements in terms of pesos that have the same purchasing power. • Formula for restatement Index number at the end of reporting period x Historical cost Index number on acquisition date

•

•

General price index o Index number used for restatement o Designed to show how much the overall level of prices in the economy has changed over time. o An increase means that the purchasing power of money has decreased, inflation o Decrease means that the purchasing power of money has increased, deflation Gain or loss on purchasing power o Purchasing power means the goods and services that money can buy o Inflation or rising prices – purchasing power loss is incurred on monetary assets and purchasing power gain is realized on monetary liabilities o Deflation or falling prices – purchasing power gain is realized on monetary assets and a purchasing power loss is incurred on monetary liabilities

PROCEDURES FOR RESTATEMENT • Items in financial statements are classified into monetary and nonmonetary. • Monetary items are not restated. • Nonmonetary items are restated by applying the general price index from the date of acquisition to the end of reporting period. • Some nonmonetary items are carried at amount current at date other than acquisition date, in such case, carrying amounts are restated from the date of revaluation. • All items in the income statement are restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded. For practical purposes, average index may be used. • General purchasing power gain or loss is computed on monetary items and is included in profit or loss. • Restated amount of PPE, goodwill, and other tangible asset is reduced when it exceeds recoverable amount. • Any revaluation surplus recognized previously is eliminated. • Retained earnings would be the balancing figure. • When comparative statements are prepared, the monetary items of the preceding year are expressed in terms of the index number at the end of the current year.

SUMMARY OF RESTATEMENT PROCEDURES HISTORICAL TO CONSTANT PESO 1. Identify monetary and non-monetary items because only nonmonetary items not already stated at the measuring unit current as of end of reporting period are restated. 2. Non-monetary items stated at net realizable value or fair value as at the end of reporting period need not be restated. Financial instruments and other items measured at fair value and inventories measured at net realizable value are not restated. 3. Non-monetary items that are measured at revalued amounts where revaluation was made at some earlier date shall be restated from the date of the revaluation. If revaluation is made as at the end of reporting period, no restatement is necessary. 4. If it is the entity’s first time to apply PAS 29, any revaluation surplus in equity is eliminated. The revalued non-monetary items shall be restated from their acquisition dates to the end of reporting period.

5. Determine the current price index as of end of reporting period by reference to a general price index, most commonly the “CPIU.” This will be the numerator in all fractions used in the restatement procedures. 6. Determine the historical price indices for items to be restated. These will be the denominators in the fractions used in the restatement procedures. If it is impracticable to determine the historical price indices, the average price index may be used. 7. The gain or loss on net monetary position (general purchasing power gain or loss) is determined from the monetary items. The gain or loss on net monetary position is recognized in profit or loss. 8. The restated amount of a non-monetary item is reduced when it exceeds its recoverable amount, e.g., inventories are reduced to their NRV in accordance with PAS 2 and PPE and intangible assets are reduced to their recoverable amounts in accordance with PAS 36. 9. When comparative statements are prepared, both monetary and non-monetary items of the preceding period are expressed in terms of the index number at the end of the current year. 10. Retained earnings will be the balancing figure in the restated statement of financial position. 11. To check the accuracy of the derived restated amounts, a restated statement of changes 'in equity is prepared. The balances of equity accounts in the restated statement of changes in equity should tally with the balances in the restated statement of financial position. 12. All items in the statement of cash flows shall be restated to the measuring unit current as of the end of reporting period.