Since 1977

FAR OCAMPO/CABARLES/SOLIMAN/OCAMPO
FAR.2849-Financial Reporting and Changing Prices MAY 2020

DISCUSSION PROBLEMS
1. What is hyperinflation? b. In a period of inflation, an entity with an excess of
a. General increase in prices and fall in the monetary liabilities over monetary assets gains
purchasing power of money. purchasing power to the extent the assets and
b. Inflation occurring at a very high rate. liabilities are not linked to a price level.
c. Inflation rate exceeding 100%. c. The gain or loss may be estimated by applying the
d. Inflation rate exceeding the 1,000% change in a general price index to the weighted
average for the period of the difference between
2. Which of the following would indicate that monetary assets and monetary liabilities.
hyperinflation exists? d. None of these.
I. The general population prefers to keep its wealth in
non-monetary assets or in a relatively stable 6. The following information pertains to Inflation
foreign currency. Company for the current year:
II. The general population regards monetary amounts
Monetary assets:
not in terms of the local currency but in terms of a
January 1 P250,000
relatively stable foreign currency.
December 31 700,000
III. Sales and purchases on credit take place at prices
Monetary liabilities:
that compensate for the expected loss of
January 1 100,000
purchasing power during the credit period, even if
December 31 300,000
the period is short.
Increase in net monetary items as
IV. Interest rates, wages and prices are linked to a
restated to constant peso 2,000,000
price index.
Decrease in net monetary items as
V. The cumulative inflation rate over three years is
restated to constant peso 1,500,000
approaching, or exceeds, 100%.
General price index:
a. I, II, III, IV and V January 1 125
b. I, II, III and IV only December 31 150
c. I, II and II only
The loss on purchasing power for the current year is
d. I and II only
a. P280,000 c. P250,000
b. P300,000 d. P100,000
3. Which statement is incorrect regarding reporting in a
hyperinflationary economy?
SOLUTION GUIDE:
a. The financial statements of an entity whose
functional currency is the currency of a
Computation of gain or loss on net monetary position:
hyperinflationary economy, whether they are
Net M.I., end of CY – constant peso xx
based on a historical cost approach or a current
Net M.I., end of CY – nominal peso (xx)
cost approach, shall be stated in terms of the
xx
measuring unit current at the end of the reporting
LOSS: Net monetary asset (MA > ML)
period.
GAIN: Net monetary liability (MA < ML)
b. Reporting of operating results and financial
position in the local currency without restatement
7. The following information pertains to Galileo Company
is not useful.
for the current year:
c. Money loses purchasing power at such a rate that
comparison of amounts from transactions and Sales (all on account) made evenly P249,000
other events that have occurred at different times, Equipment purchased for cash on May 1 50,000
even within the same accounting period, is Purchases (all on account) made evenly 80,000
misleading. Cash received evenly from customers 190,000
d. The gain or loss on the net monetary position shall Cash dividends declared on September 1,
be included in other comprehensive income and and paid on October 1 20,000
separately disclosed. Land acquired for cash on June 1 30,000
Depreciation expense 10,000
4. Monetary items are money held and items to be Shares issued for cash on March 1 60,000
received or paid in money. Monetary items do not Operating expenses paid evenly 40,000
include Income tax expense paid evenly 25,000
a. Pensions and other employee benefits to be paid in Purchase of treasury shares for cash on
cash Nov. 1 17,000
b. Provisions that are to be settled in cash Sale of investment in ordinary shares on
c. Cash dividends that are recognized as a liability August 1 for cash (cost = P5,000) 8,000
d. Property, plant and equipment Cash paid evenly on account payable 60,000
Monetary assets
5. Which statement is incorrect regarding gain or loss on January 1 50,000
the net monetary position? December 31 100,000
a. In a period of inflation, an entity holding an excess Monetary liabilities
of monetary assets over monetary liabilities loses January 1 35,000
purchasing power. December 31 30,000

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EXCEL PROFESSIONAL SERVICES, INC.

The following values of the GPI for the year are c. Revaluation reserve P200,000, Retained earnings
available: P800,000
1/1 100 8/1 114 d. Revaluation reserve P700,000, Retained earnings
2/1 102 9/1 116 P300,000
3/1 104 10/1 118
4/1 106 11/1 120 10. Statement of financial position amounts not already
5/1 108 12/1 122 expressed in terms of the measuring unit current at
6/1 110 12/31 124 the end of the reporting period are restated by
7/1 112 Average for year 112 applying a general price index. Which of the following
should be restated?
The purchasing power loss for the current year in end- a. Monetary assets.
of-year pesos is b. Monetary liabilities.
a. P 6,009 c. P14,174 c. Non-monetary items carried at amounts current at
b. P13,812 d. P25,037 the end of the reporting period, such as net
realizable value and fair value.
d. None of these.
SOLUTION:
11. In applying PAS 29, which of the following should be
Nominal Conv. Constant
restated?
peso factor peso
a. Notes receivable
Net monetary items, 1/1 P15,000 124/100 P18,600 b. Bonds payable
Sales 249,000 124/112 275,679 c. Inventory carried at net realizable value
Equipment purchase, d. Land carried at revalued amount, last revaluation
5/1 (50,000) 124/108 (57,407) made in a prior year
Purchases (80,000) 124/112 (88,571)
Cash dividends 12. Entity Q operates in hyperinflationary economy. Its
declared, 9/1 (20,000) 124/116 (21,379) balance sheet on December 31, 2020, follows:
Land purchase, 6/1 (30,000) 124/110 (33,818)
Cash P 3,500,000
Shares issued, 3/1 60,000 124/104 71,538 Inventory 27,000,000
Operating expenses (40,000) 124/112 (44,286) Property, plant and equipment 9,000,000
Income tax expense (25,000) 124/112 (27,679) Current liabilities 7,000,000
Purchase of treasury Noncurrent liabilities 5,000,000
shares, 11/1 (17,000) 124/120 (17,567) Share capital 4,000,000
Sale of investment, 8/1 8,000 124/114 8,702 Retained earnings 23,500,000
Net monetary items, The general price index at December 31 had moved in
12/31 P70,000 P83,812 this way: 2016 – 100; 2017 – 130; 2018 – 150; 2019
– 240; 2020 – 300.

Use the following information for the next two questions. The property, plant and equipment was purchased on
December 31, 2018, and there is six months’ inventory
The following “equity” relates to an entity operating in a held. The noncurrent liabilities were a loan raised on
hyperinflationary economy: March 31, 2020.
Before After What is the retained earnings balance on December
PAS 29 restatement 31, 2020 after adjusting for hyperinflation?
Share capital P1,000,000 P1,700,000 a. P35,500,000 c. P31,250,000
Revaluation reserve 200,000 ? b. P27,500,000 d. P23,500,000
Retained earnings 300,000 ?
P1,500,000 P2,700,000 13. In the statement of comprehensive income, which of
the following should be restated by applying the
8. Which statement is incorrect regarding restatement of change in the general price index from the date when
equity components in accordance with PAS 29? the items were initially recorded?
a. At the beginning of the first period of application of a. Sales
PAS 29, the components of owners’ equity, except b. Cost of goods sold
retained earnings and any revaluation surplus, are c. Other expenses
restated by applying a general price index from the d. All of the above.
dates the components were contributed or
otherwise arose. 14. Information about the company's inventory during the
b. Any revaluation surplus that arose in previous current year appears below:
periods is eliminated.
c. Restated retained earnings are derived from all the Units Unit Cost
other amounts in the restated balance sheet. Inventory, January 1 300 P10
d. None of the above. Purchases made evenly 900 12
Sales made evenly 800
9. What would be the balances on the revaluation reserve Inventory, December 31 400 12
and retained earnings after the restatement for PAS The general price index during the year was as follows:
29? January 1 – 90; Average – 120; December 31 – 135.
a. Revaluation reserve P0, Retained earnings
P1,000,000 The cost of goods sold restated in year-end constant
b. Revaluation reserve P1,000,000, Retained earnings pesos is
P0 a. P 9,000 c. P11,250
b. P13,500 d. P10,125

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15. The Richmond Corporation presented the following 16. The net income for 2018, 2019 and 2020, respectively
balances from the historical peso income statement for under historical cost/nominal peso basis are
the year ended December 31, 2020: a. P 1,000; P 3,000; P 6,000
Sales P350,000 b. P 0; P 0; P 10,000
Cost of goods sold 218,000 c. P 1,000; P 2,000; P 7,000
Depreciation - building 34,000 d. P (1,000); P (3,000); P(6,000)
Depreciation - equipment 23,000
All other expenses 48,000 17. The net income for 2018, 2019 and 2020, respectively
under the current cost/nominal peso basis are
Other information include: a. P 1,000; P 2,000; P 7,000
• Merchandise available for sale came from 2019 b. P 0; P 0; P 10,000
inventory of P28,750 and 2020 purchases of c. P 1,000; P 3,000; P 6,000
P220,000. d. P (1,000); P (3,000); P (6,000)
• Building costing P850,000 was acquired at the end
of 2017.
• Equipment totaled P115,000, of which P85,000 18. The following information pertains to each unit of
was bought at the end of 2017 and P30,000 was merchandise purchased for resale by Vend Co.:
bought at the end of 2019.
March 1
• The company uses the FIFO method of inventory
Purchase price P 8
valuation; average indexes for the year are used in
Selling price P12
restating inventories.
Price level index 110
• General price indexes at year end are as follows:
2017 – 100 2019 – 106
December 31
2018 – 102 2020 – 112
Replacement cost P10
(Assume that all changes in the general price-level
Selling price P15
index took place more or less evenly during the
Price level index 121
year.)
Under current cost accounting, what is the amount of
What should Richmond Corporation report as net
Vend's holding gain on each unit of this merchandise?
income for the year ended December 31, 2020
a. P0 c. P1.20
restated for general price-level changes?
b. P0.80 d. P2.00
a. P16,512 c. P22,016
b. P22,852 d. P21,431
19. On January 1, Smile Now Company acquired inventory
for P20,000. The inventory consisted of 10,000
SOLUTION:
identical units. The current cost of the inventory was
Sales (P350,000 x 112/109) P359,633 P30,000 on July 1; on that date Smile Now Company
Less cost of sales: sold three-fourths of the inventory for P28,000. On
Beginning inventory December 31, the current cost of the inventory on
(P28,750 x 112/104) P 30,962 hand was P8,500. The general price index on various
Purchases dates is as follows:
(P220,000 x 112/109) 226,055
January 1 110.0
Goods available 257,017
July 1 121.0
Ending inventory
December 31 133.1
(P30,750 x 112/109) ( 31,596) 225,421
Gross profit 134,212 Assuming that cost of goods sold is Smile Now
Depreciation – Building ( 38,080) Company's only expense and that no purchasing power
(P34,000 x 112/100) gain or loss exist, the net income for the year under
Depreciation – Equip. (P85T) current cost/constant peso basis would be
(P23,000 x 85/115 x 112/100) ( 19,040) a. P15,100 c. P17,050
Depreciation – Equip. (P30T) b. P16,500 d. P23,650
(P23,000 x 30/115 x 112/106) ( 6,340)
Other expenses
(P34,000 x 112/109) ( 49,321) 20. In a hyperinflationary economy, financial statements
Constant peso profit P 21,431 are useful only if they are expressed in terms of the
measuring unit current at the end of the reporting
period. As a result, PAS 29 applies to the financial
Use the following information for the next two questions. statements of entities reporting in the currency of a
hyperinflationary economy. Which of the following
Tatler Company purchased inventory costing P5,000 on does PAS 29 permit?
January 1, 2018. The company sold the inventory for a. Presentation of the information required by PAS 29
P15,000 on December 31, 2020. By examining the prices as a supplement to unrestated financial
quoted in suppliers catalogs, Tatler Company determined statements.
that the current cost of the inventory was P6,000 on b. Separate presentation of the financial statements
December 31, 2018, P8,000 on December 31, 2019, and before restatement.
P11,000 on December 31, 2020. Assume that cost of c. Both a and b.
goods sold is Tatler Company’s only expense. d. Neither a nor b.

- now do the DIY drill -

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EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

1. Which statement is correct regarding financial b. Sales of P300,000 and purchases of P120,000 were
reporting in a hyperinflationary economy in accordance made evenly throughout the year
with PAS 29? c. Operating expenses of P90,000 and income tax
a. PAS 29 established an absolute rate at which expense of P60,000 were incurred evenly
hyperinflation is deemed to arise. throughout the year
b. Presentation of the information required by PAS 29 d. Cash dividends of P20,000 were declared on
as a supplement to unrestated financial statements December 31. Selected values of the CPI-U during
is permitted. the year appear below:
c. Separate presentation of the financial statements
Jan. 1 110.0
before restatement is encouraged.
Average for year 121.0
d. It is a matter of judgment when restatement of
Dec. 31 133.1
financial statements in accordance with PAS 29
becomes necessary. The purchasing power gain or (loss) for the current
year expressed in constant year-end pesos is
2. An entity has several subsidiaries that operate in a a. P19,800 c. P(19,800)
hyperinflationary economy which uses the zloty as its b. P18,000 d. P(18,000)
local currency. Management wishes to show the
financial statements in U.S. dollars. Many of the
operations of the entity are within countries that are 6. Puppy Company acquired land on April 30, 2010, for
not hyperinflationary, and these subsidiaries use the P4,000,000. The CPI-U was 110 on April 30, 2010 and
euro as their functional currency. What currency 176 on December 31, 2020. The land would be
should the entity use to present its consolidated reported in a December 31, 2020 balance sheet
financial statements? prepared in constant end-of-year pesos at
a. U.S dollars a. P7,040,000 c. P4,000,000
b. the zloty b. P4,400,000 d. P6,400,000
c. the euro
d. the entity may use any currency
7. Property was purchased on December 31, 2018, for
3. An entity has a subsidiary that operates in a P20 million. The general price index in the country
hyperinflationary economy. The subsidiary's financial was 60.1 on that date. On December 31, 2020 the
statements are measured in terms of the local general price index had risen to 240.4. If the entity
currency, which is the zloty. The subsidiary's financial operates in a hyperinflationary economy, what would
statements have been restated in accordance with PAS be the carrying amount in the financial statements of
29. The parent is located in the United States and the property after restatement?
prepares the consolidated financial statements in U.S. a. P20 million c. P1,200.2 million
dollars. Which of the following accounting procedures b. P80 million d. P4,808 million
in correct in terms of the consolidation of the
subsidiary's financial statements?
a. The subsidiary's financial statements should be Use the following information for the next four questions.
prepared using the zloty and then retranslated into
U.S dollars Holland Company acquired a machine on January 1, 2020,
b. The subsidiary' financial statements should be for P50,000. Depreciation will be computed using the
prepared using zloty, then restated according to straight-line method, assuming a five-year useful life and
PAS 29, and then retranslated into U.S. dollars at no salvage value. A specific price index applicable to the
closing rates machine was 150 on January 1, 2020, and 225 on
c. The subsidiary's financial statements should be December 31, 2020. The CPI-U was 100 on January 1,
remeasured in U.S. dollars, then restated 2020, and 121 on December 31, 2020. The average CPI-U
according to PAS 29 and consolidated for 2020 was 110.
d. The subsidiary's financial statements should be
deconsolidated and not included in the 8. The depreciation expense for 2020 under historical
consolidated financial statements cost/ nominal peso basis is
a. P10,000 c. P13,750
4. During a period of inflation in which a liability account b. P12,100 d. P 2,500
balance remains constant, which of the following
occurs? 9. The depreciation expense for 2020 under historical
a. A purchasing power gain, if the item is a cost/constant peso basis is
nonmonetary liability. a. P10,000 c. P12,500
b. A purchasing power gain, if the item is a monetary b. P12,100 d. P13,750
liability.
c. A purchasing power loss, if the item is a 10. The depreciation expense for 2020 under current
nonmonetary liability. cost/nominal peso basis is
d. A purchasing power loss, if the item is a monetary a. P10,000 c. P12,500
liability. b. P12,100 d. P13,750

5. The following information pertains to Yellow Company 11. The depreciation expense for 2020 under current
for the current year: cost/constant peso basis is
a. The company had net monetary items of P80,000 a. P10,000 c. P12,500
on January 1. b. P12,100 d. P13,750

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EXCEL PROFESSIONAL SERVICES, INC.
LECTURE NOTES
1. Hyperinflation
PAS 29 Financial Reporting in Hyperinflationary
Economies does not establish an absolute rate at which
hyperinflation is deemed to arise. It is a matter of
judgment when restatement of financial statements in
accordance with PAS 29 becomes necessary.
Hyperinflation is indicated by characteristics of the
economic environment of a country which include, but
are not limited to, the following:
(a) the general population prefers to keep its wealth in
non-monetary assets or in a relatively stable foreign
currency. Amounts of local currency held are
immediately invested to maintain purchasing power;
(b) 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;
(c) 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;
(d) interest rates, wages and prices are linked to a price
index; and
(e) the cumulative inflation rate over three years is
approaching, or exceeds, 100%.
2. Monetary and non-monetary items
2.1 Monetary items are units of currency held and
assets and liabilities to be received or paid in a fixed or
determinable number of units of currency. The essential
feature of a monetary item is a right to receive (or an
obligation to deliver) a fixed or determinable number of
units of currency. Examples include:
• pensions and other employee benefits to be paid
in cash;
• provisions that are to be settled in cash;
• cash dividends that are recognized as a liability;
and
• a contract to receive (or deliver) a variable
number of the entity’s own equity instruments or
a variable amount of assets in which the fair
value to be received (or delivered) equals a fixed
or determinable number of units of currency
2.1 All other assets and liabilities are non-monetary.
The essential feature of a non-monetary item is the
absence of a right to receive (or an obligation to deliver)
a fixed or determinable number of units of currency.
Examples include:
• amounts prepaid for goods and services (eg
prepaid rent);
• goodwill;
• intangible assets;
• inventories;
• property, plant and equipment; and
• provisions that are to be settled by the delivery
of a nonmonetary asset
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3. Restatement of financial statements
3.1 The financial statements of an entity whose
functional currency (the currency of the primary
economic environment in which the entity operates ) is
the currency of a hyperinflationary economy, 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 required
by PAS 1 Presentation of Financial Statements and any
information in respect of earlier periods shall also be
stated in terms of the measuring unit current at the
balance sheet date. For the purpose of presenting
comparative amounts in a different presentation
currency, paragraphs 42(b) and 43 of PAS 21 The
Effects of Changes in Foreign Exchange Rates apply.
3.2 The gain or loss on the net monetary position shall
be included in profit or loss and separately disclosed.
3.3 Balance sheet – Historical cost
3.3.1 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.
3.3.2 Monetary items are not restated because they
are already expressed in terms of the monetary unit
current at the balance sheet date.
3.3.3 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.
3.3.4 Some non-monetary items are carried at
amounts current at the balance sheet date, such as net
realizable value and market value, so they are not
restated. All other non-monetary assets and liabilities
are restated.
3.3.5 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. 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.
3.3.6 Detailed records of the acquisition dates of items
of property, plant and equipment may not be available
or capable of estimation. In these rare circumstances, it
may be necessary, in the first period of application of
PAS 29, to use an independent professional assessment
of the value of the items as the basis for their
restatement.
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EXCEL PROFESSIONAL SERVICES, INC.
3.3.7 A general price index may not be available for
the periods for which the restatement of property, plant
and equipment is required by PAS 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.
3.3.8 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.
3.3.9 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 sale or other disposal). Hence, in
such cases, restated amounts of property, plant and
equipment, goodwill, patents and trademarks are
reduced to recoverable amount, restated amounts of
inventories are reduced to net realizable value and
restated amounts of current investments are reduced to
market value.
3.3.10 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 in
accordance with PAS 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.
3.3.11 The impact of inflation is usually recognized in
borrowing costs. It is not appropriate both to restate
the capital expenditure financed by borrowing and to
capitalize that part of the borrowing costs that
compensates for the inflation during the same period.
This part of the borrowing costs is recognized as an
expense in the period in which the costs are incurred.
3.3.12 An entity 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.
3.3.13 At the beginning of the first period of
application of PAS 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.
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3.3.14 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 beginning of
the period or the date of contribution, if later. The
movements for the period in owners’ equity are
disclosed in accordance with PAS 1 Presentation of
Financial Statements.
3.4 Balance sheet – Current cost
3.4.1 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 in the same way
as in historical balance sheet.
3.5 Income statement – Historical cost
3.5.1 PAS 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.
3.6 Income statement – Current cost
3.6.1 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.
4. Economies ceasing to be hyperinflationary
4.1 When an economy ceases to be hyperinflationary
and an entity discontinues the preparation and
presentation of financial statements prepared in
accordance with PAS 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.
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FAR.2849