International Financial Reporting Standards_guide.pdf

CHAPTER 39
Financial Reporting in
Hyperinflationary Economies
(IAS 29)
39.1 OBJECTIVE
In a hyperinflationary economy, reporting of operating results and financial position without
restatement is not useful. Money loses purchasing power at such a rapid rate that comparison
of amounts from transactions and other events that have occurred, even within the same
accounting period, is misleading. This standard prescribes the accounting in the financial
statements of an entity whose functional currency is in a hyperinflationary economy.
39.2 SCOPE OF THE STANDARD
IAS 29 should be applied by entities that report in the currency of a hyperinflationary economy.
This standard does not prescribe an absolute rate at which hyperinflation is deemed to
arise. It is a matter of judgment when restatement of financial statements in accordance with
this standard becomes necessary. Characteristics of a hyperinflationary economy include the
following:
■ The general population prefers to keep its wealth in nonmonetary assets or in a relatively
stable foreign currency.
■ Prices are normally quoted in a stable foreign currency.
■ Credit transactions take place at prices that compensate for the expected loss of purchasing
power.
■ Interest, wages, and prices are linked to price indexes.
■ The cumulative inflation rate over three years is approaching or exceeds 100 percent
(that is, an average of more than 26 percent per year).
IAS 29 requires that the financial statements of an entity operating in a hyperinflationary
economy be restated in the measuring unit current at the reporting date.
IAS 21 requires that if the functional currency of a subsidiary is the currency of a hyperinflationary
economy, transactions and events of the subsidiary should first be measured in the
subsidiary’s functional currency; the subsidiary’s financial statements are then restated for
price changes in accordance with IAS 29. Thereafter, the subsidiary’s financial statements are
translated, if necessary, into the presentation currency using closing rates. IAS 21 does not
permit such an entity to use another currency, for example a stable currency, as its functional
currency.
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