Objective of IFRS 29 Financial Reporting in Hyperinflationary Economies– determination of the procedure for recalculating financial statements in hyperinflationary conditions.
The standard is applied to the preparation of primary financial statements in the currency of a country with a hyperinflationary economy.
Criteria, allowing to call the economy hyperinflationary:
The effect of inflation is expressed in the fall in the purchasing power of money and cash equivalents, which leads to a profit or loss on the net cash position.
Net cash position is the positive or negative difference between a company's monetary assets and liabilities.
The financial statements of an enterprise that reports in the currency of a country with hyperinflation must be recalculated in units of measure in effect at the reporting date. The restated financial statements replace the regular financial statements.
Ways to account for the impact of inflation:
Inflation has a different impact on reporting items. Profit (loss) on net monetary items should be included in net income and disclosed separately. If the economy ceases to be hyperinflationary, the entity does not apply this standard for reporting. When presenting financial statements, amounts expressed in units of measure valid at the end of the previous reporting period are used as the basis for carrying amounts in subsequent financial statements.
Information disclosed in the reporting:
IAS 29 used by organizations that prepare financial statements in a currency in respect of which hyperinflationary processes are observed in the economy. Consider the features of the application of this standard.
Hyperinflation is a process that leads to a rapid depreciation of funds and, due to this, gives an unreliable picture of the real financial and economic situation when comparing data at the beginning and end of the same reporting period. Therefore, in order to obtain financial statements that reflect the state of affairs in relation to the purchasing power of money at the end of the reporting period, its data at the beginning of this period and for previous periods, reflected in the statements for comparison, are recalculated taking into account the current purchasing power of money.
The rules set forth in IAS 29, from 02/09/2016 applied in the version of the text attached to the order of the Ministry of Finance of Russia dated 12/28/2015 No. 217n. The previously valid text of this standard was introduced in the Russian Federation by order of the Ministry of Finance of the Russian Federation of November 25, 2011 No. 160n.
Addition to IAS 29 is the clarification of IFRIC 7, also put into effect by order of the Ministry of Finance of Russia dated December 28, 2015 No. 217n, in which the main idea embodied in the standard is set out as the need to recalculate reporting prepared in hyperinflationary conditions, as if the economy had always been hyperinflationary.
International standards do not establish quantitative criteria for assessing the emergence, presence or disappearance of hyperinflation. This question is always decided by a value judgment. However, if there is a decision about the presence of hyperinflation, then for any of its stages there should be a recalculation of the initial indicators of the reporting and data of previous periods in order to bring them to figures expressed in the purchasing power of money at the end of the reporting period.
As signs of hyperinflation IAS 29 calls:
Speaking about the need to adjust financial statements prepared in conditions of hyperinflation, IFRS-29 not only explains the need for such work, but also directly prohibits the submission of unrestated financial statements or adjustments in the form of separate additions to unrestated financial statements (clause 7). Thus, all financial statements prepared for delivery should be subject to change, and this is done before they are submitted to the interested authorities.
When adjusting, the following principles are observed:
The items of assets and liabilities reflected in the financial statements are measured using the following approaches:
When compiling consolidated reporting recalculation of the reports of the organizations that form it is done before inclusion in general reporting. If necessary, the data of individual reports are converted into another currency at the exchange rate on the corresponding date, and if the reporting dates do not match, the recalculation is carried out on the date required for merging.
The most common way to change the value is to recalculate indicators using an index that reflects price changes. Less common are mechanisms such as:
Financial statements prepared in a currency subject to hyperinflation must be restated to bring the data of previous periods and indicators reflected in it at the beginning of the reporting period to figures expressed in prices of the current reporting date. This is done subject to certain rules in the recalculation procedure.
IFRS. Crib Schroeder Natalia G.
IFRS No. 29 FINANCIAL REPORTING IN HYPERINFLATION
Objective of IFRS 29 Financial Reporting in Hyperinflationary Economies– determination of the procedure for recalculating financial statements in hyperinflationary conditions.
The standard is applied to the preparation of primary financial statements in the currency of a country with a hyperinflationary economy.
Criteria, allowing to call the economy hyperinflationary:
1) the majority of the population prefers to keep their savings in non-monetary form, or relatively stable currency;
2) prices are most often indicated in foreign currency;
3) sales and purchases on credit are carried out at prices that compensate for the expected loss of purchasing power of money during the term of the loan, even if it is short;
4) prices, wage, discount rates are determined based on the price index;
5) the cumulative rise in inflation over the past few years is approaching 100% or more.
The effect of inflation is expressed in the fall in the purchasing power of money and cash equivalents, which leads to a profit or loss on the net cash position.
Net cash position is the positive or negative difference between a company's monetary assets and liabilities.
The financial statements of an entity that reports in the currency of a hyperinflationary country must be restated in the units of measure in effect at the reporting date. The restated financial statements replace the regular financial statements.
Ways to account for the impact of inflation:
1) direct (determines the effect of inflation in the recalculation of financial statements based on the actual acquisition cost);
2) indirect (financial statements are recalculated on the basis of replacement cost).
Inflation has a different impact on reporting items. Profit (loss) on net monetary items should be included in net income and disclosed separately. If the economy ceases to be hyperinflationary, the entity does not apply this standard for reporting. When presenting financial statements, the amounts expressed in units of measure valid at the end of the previous reporting period are used as the basis for the carrying amounts in subsequent financial statements.
Information disclosed in the reporting:
1) the fact that the financial statements for the previous period have been restated to take into account changes in the general purchasing power of the reporting currency and are presented in units of measurement valid at the reporting date;
2) the level of the price index as of the reporting date;
3) changes in the price index for the current and previous reporting periods;
4) method of preparation of financial statements.
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The standard should be applied to the primary financial statements (including consolidated financial statements) of an entity that reports in the currency of a hyperinflationary economy.
Under conditions of hyperinflation, money loses purchasing power at such a rate that comparison of the amounts received from transactions and events that took place at different times, even within the same reporting period, will be misleading and, therefore, becomes impossible without adjusting them for inflation .
The standard does not set an absolute value for the rate of inflation when it appears to be hyperinflationary. The need to revise the financial statements in accordance with the standard refers to the category of subjective decisions and is within the competence of the company's management. The presence of hyperinflation can be indicated by typical characteristics of the state of the economic environment for such a process:
Prices change over time as a result of specific or general political, economic or social conditions. Specific factors such as changes in supply and demand, technology can cause significant and independent price increases or decreases for individual products. In addition, general conditions may lead to changes in general price levels and thus to changes in the general purchasing power of money.
In most countries, primary financial statements are prepared on a cost basis without taking into account changes in the general price level or increases in certain prices of assets held, except for those fixed assets and investments that may be revalued. However, some companies present initial financial statements based on replacement cost that reflect the effects of changes in specific prices of assets held.
The financial statements of an entity reporting in the currency of a hyperinflationary economy, whether based on actual cost or replacement cost, must be presented in units of measure in effect at the reporting date.
Revision of financial statements in accordance with IFRS 29 requires the application of certain procedures.
The procedure for recalculating indicators of reporting forms in conditions of hyperinflation. To ensure comparability of financial statements prepared in hyperinflationary conditions, IFRS 29 regulates the recalculation of financial statements for previous periods in monetary units in force at the reporting date. To translate financial statements, a price index should be used that best reflects changes in the overall purchasing power of the reporting currency. In most countries, it is customary to use an index for this purpose. consumer prices, which is published monthly, and in conditions of hyperinflation - weekly.
The rules for recalculating financial statements in hyperinflationary conditions, regulated by IFRS 29, differ for: monetary and non-monetary items; items recorded at actual or replacement cost.
Monetary items are money or assets and liabilities held to be received or paid in money. Cash assets include cash on hand and in bank accounts, accounts receivable, meeting the definition of monetary items, marketable debt securities, etc. Monetary liabilities include borrowed funds, taxes payable, bills payable, other accounts payable corresponding to the definition of monetary items.
To non-monetary items include fixed assets intangible assets, inventories, equity securities, share capital, reserves, deferred tax liabilities and claims, etc.
Rules for restating items in financial statements under IFRS29 are as follows:
In accordance with IAS 29:
If fixed assets and intangible assets are accounted for in the balance sheet at residual value, equal to the original cost minus depreciation, the residual value of these assets is subject to recalculation. The adjusted residual value is determined by adjusting their original cost and accumulated depreciation by the amount of the change in the price index that occurred from the date the assets were acquired to the reporting date.
Elements of equity are adjusted by the change in the price index from the beginning of the period or the date of the founders' contributions (if later) to the date of the financial statements.
Income and expenses are recognized in the income statement in the units of measure in effect at the reporting date, therefore they are recalculated by the change in the price index that occurred during the period from the date of initial recognition of income or expense in financial accounting to the reporting date.
If assets and liabilities are associated with changes in prices under a contract, such as index bonds, loans and borrowings, then in the financial statements they are accounted for in the valuation adjusted in accordance with this contract. The portion of borrowing costs that offsets inflation is recognized as an expense in the period in which they are incurred.
Under IAS 29, gains or losses arising from the translation of assets, liabilities, equity, income and expenses during periods of inflation are included in net profit or loss of the reporting period.
These adjustments to the elements of the financial statements may result in differences between taxable and accounting profit, the accounting of which is regulated by IFRS 12 Income Taxes.
The financial statements should disclose the following information:
The disclosures required by the standard are necessary to show how the effects of inflation are reflected in the financial statements.
The rules for recalculating financial statements in hyperinflationary conditions differ for: monetary and non-monetary items; items recorded at actual or replacement cost.
IFRS 29 Financial Reporting in Hyperinflationary Economies
Double and sometimes even triple growth in prices for goods and services, the absence of one of the types of property (or assets) in the free sale - foreign currency and complete uncertainty with the price of its acquisition (absence of a market price) - all this cannot but affect the foundations of life as business entities of Belarus, and the population, even if the latter is not going to go on vacation to Egypt at all. almost similar economic situation found its description in one of the IFRS standards: “(a) the population as a whole prefers to keep their savings in non-monetary form or in a relatively stable foreign currency. Available amounts in local currency are immediately invested to maintain purchasing power; (b) the general public does not value money in local currency, but in terms of a relatively stable foreign currency. Prices may be quoted in this foreign currency; (c) sales and purchases on credit are made at prices that compensate for the expected loss of purchasing power during the term of the credit, even if this period is short; (d) interest rates, wages and prices are linked to a price index; (e) the three-year cumulative inflation rate approaches or exceeds 100%.
Isn't it almost complete coincidence with the situation in Belarus in the spring of 2011 (with the exception, perhaps, only of the cumulative inflation for three recent years, and even then, according to official statistics. But who believes in the official one, except perhaps the payers themselves, before going to the nearest store). When asked in what currency the Belarusians keep their funds, if any, the answer is given by exchange offices - according to the official point of view, it was the population who bought up all foreign currency, and the exchangers are therefore empty. However, it should be added that for the majority of our population this issue is simply irrelevant, since many are not able to make at least some savings at all.
The duality of prices in the market is so deeply imprinted in our minds that the notorious US dollars and euros of the European Union became in the spring of 2011 the main tool for calculating prices by sellers in Belarus.
The IFRS standard from which we have quoted is IAS 29 “Financial Reporting in Hyperinflationary Conditions”, which contains the above-described signs of hyperinflation in the country. There is no doubt that hyperinflation predetermines many features of the economic activity of business entities, which are reflected in accounting. For Belarusian organizations reporting in accordance with IFRS IAS, there will definitely be a problem in connection with the application of the above-mentioned “hyperinflationary standard”.
There is no doubt that financial statements prepared in a hyperinflationary currency do not make sense: they are unreliable. Therefore, an approach is needed that can allow organizations that operate in a hyperinflationary economy to create reliable financial statements. There are 2 approaches to accounting for the level of hyperinflation:
transfer of credentials from one currency to another. Financial accounting data denominated in a hyperinflationary currency, under this approach, are recalculated using a price index and expressed in some unit of measure (the inflationary currency) on the balance sheet date;
Relevant data as of the previous date, in accordance with IFRS 1 “Presentation of Financial Statements”, and any other information compared to earlier periods must also be presented in accounting units (US dollar or euro) at the date of compilation balance sheet;
· Profit (income) or expenses on non-monetary property (assets) should be included in net income and disclosed in a separate line. IAS 29 requires that a balance sheet total not already expressed in accounting units at the balance sheet date is also expressed in accounting units at the balance sheet date by applying a general price index.
Suppose that the Andrew Carpuning enterprise operates in a hyperinflationary economy, then according to IFRS IAS 29 it is necessary to transfer all non-monetary property (assets) in the balance sheet into accounting monetary units using a general price index (in this case, the author emphasizes that any coincidence of the general price index at the end of the year in this example with general index Belarus prices for 2011 is random):
Property and liabilities | Before transfer | Previous index prices | Price index at the end of the year | After translation |
Long term property | (450 / 150) x 45 = 135 |
|||
(450 / 250) x 50 = 90 |
||||
Cash | ||||
Total property | ||||
long term duties | ||||
Short-term liabilities | ||||
Total liabilities and equity |
Thus, the following questions arise:
In other words, when an entity applies IAS 29 and translates the financial statements into a non-hyperinflationary currency, the comparative information must be remeasured in accordance with IAS 29 rather than IAS 21 (i.e., comparative information must be consistent with prior period information). When a country's economy is no longer hyperinflationary and revaluation in accordance with IAS 29 is no longer required, an entity shall use the amount of balance sheet items revalued to the price level at the end of hyperinflation to translate the items financial report into the national currency.
INFORMATION DISCLOSURE
IAS 29 requires entities that apply the requirements of the standard to disclose the following information:
· Confirmation that the financial statements and corresponding figures for previous periods have been revalued to reflect changes in purchasing power, and therefore, as a result, are expressed in accounting units at the balance sheet date;
· what approach was used in the preparation of the financial report - the method of change in value or the present value method;
the level of the price index on the date of the balance sheet and its change in reporting period compared to the previous one.
It should be noted that disclosure of financial information that has been indexed to IAS 29 as an addition to non-indexed data is prohibited. This is done to prevent the provision of financial information based on a price change approach instead of financial data indexed in accordance with IAS 29. The requirements of the standard do not encourage the provision of unrevalued financial information, although they do not strictly prohibit it. The provision of such data is contrary to the requirements of IFRS.
ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
International Financial Reporting Standard First-Time Adoption requires the application of IAS 29 to any periods during which the functional currency has been hyperinflationary.
