Hyperinflation

Definition

• PAS 29 on financial reporting in a hyperinflationary

economy does not establish an absolute rate at which
hyperinflation is deemed to arise.
• This is a matter of judgment
 Indicators of Hyperinflation
• Hyperinflation is indicated by characteristics of the economic
environment of a country which include but are not limited to the
following:
• The general population prefers to keep its wealth in nonmonetary
assets or in relatively stable foreign currency
• The general population regards monetary amounts not in terms of
local currency but in terms of a relatively stable foreign currency
 Indicators of Hyperinflation
• 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
• Interest rates, wages and prices are linked to a price index
• The cumulative rate over 3 years is approaching or
exceeds 100%
Financial Reporting in a Hyperinflationary
Economy
• PAS 29, paragraph 8, provides that the 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 the reporting period
• Presentation of the information required under PAS 29 as a supplement to
unrestated financial statements is not permitted
• 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 and current cost accounting
 Monetary Items
• PAS 21 defines “monetary items as money held and assets and
liabilities to be received or paid in fixed or determinable amount of
money.”
• The essential feature of a monetary item is a right to receive or an
obligation to deliver a fixed or determinable amount of money
• In simple language, monetary items refer to cash and assets that
represent a fixed amount of pesos to be received, or obligations
that represent a fixed amount of pesos to be paid
 Monetary Items
• Monetary items are assets and liabilities whose amounts are fixed in the sense
that the amounts ultimately realizable or the amounts ultimately payable are
the same amounts that appear on the historical statements
• Stated differently, assets and liabilities are classified as monetary because by
their very nature, they are already expressed in terms of current pesos and
therefore realizable or payable at no more or no less than their face or stated
amounts
• Monetary assets and liabilities remain the same regardless of the change in the
general price level
 Nonmonetary Items
• Nonmonetary items, by the process of exclusion, may be defined
as those items that cannot be classified as monetary
• These items are so called nonmonetary because their peso
amounts reported in the financial statements differ from the
amounts that are ultimately realizable or payable
• The essential feature of a nonmonetary item is the absence of a
right to receive or an obligation to deliver a fixed or determinable
amount of money
 Gain or Loss on Purchasing Power
• Purchasing power means the goods and services that money can
buy
• In a period of inflation or rising prices, a purchasing power loss is
incurred on monetary assets and purchasing power gain is realized
on monetary liabilities
• In a period of deflation or falling prices, a purchasing power gain is
realized on monetary assets and a purchasing power loss is
incurred on monetary liabilities
 Treatment if economy is no longer
hyperinflationary
• Judgment shall be exercised whether an economy is no longer
hyperinflationary. The criterion is whether the cumulative inflation rate drops
below 100% in a three-year period
• When an economy ceases to be hyperinflationary, an entity shall discontinue
the preparation and presentation of financial statements under a condition of
hyperinflationary economy
• The amounts expressed in the measuring unit current at the end of the
previous reporting period shall be the carrying amounts in subsequent financial
statements
When parent is not in a hyperinflationary
economy and a subsidiary is in one

• The parent entity would prepare its financial statements in

accordance with PFRS and the financial statements of the
subsidiary would be adjusted for hyperinflation
• In other words, the financial statements of the subsidiary are
prepared using its local currency, then restated for hyperinflation
in accordance with PAS 29, and then retranslated in terms of the
functional currency of parent at closing rate
 When parent is in a hyperinflationary
economy and a subsidiary is not in one

• The financial statements of the parent entity are adjusted

for hyperinflation in accordance with PAS 29 but the
financial statements of the subsidiary need not be
restated but should comply with PAS 21 on accounting for
the effects of changes in foreign exchange rates