International Financial Reporting Standards

Financial Reporting in Hyperinflationary Economies – Understanding IAS 29

May 2006
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International Financial Reporting Standards Financial Reporting in Hyperinflationary Economies – Understanding IAS 29

Preface

Preface
International Financial Reporting Standards (IFRS) are popular with entities that raise international capital through debt or equity and that operate in emerging markets or fast-developing economies. These economies may be hyperinflationary environments. IAS 29, Financial Reporting in Hyperinflationary Economies, is an integral part of IFRS. It requires the IFRS financial statements of any entity operating in a hyperinflationary economy to take full account of the effects of inflation using a ‘current purchasing power’ approach. The IAS 29 requirements also need to be considered by any entity located outside the hyperinflationary environment preparing IFRS consolidated financial statements that include a foreign entity (such as a subsidiary, associate or joint venture) that operates in a hyperinflationary economy. The preparation of financial statements using a current purchasing power approach requires an understanding of the underlying economic concepts and a complex series of procedures and reconciliations to ensure accurate results. This guide is intended as a practical aid for entities applying IAS 29. It has been updated as of December 2005 to reflect the changes that arise as a result of the release of IFRIC 7 and other changes to IFRS. PricewaterhouseCoopers has helped many entities to apply this difficult standard. We hope that our experience and proven methodology will make applying IAS 29 less burdensome.

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International Financial Reporting Standards Financial Reporting in Hyperinflationary Economies – Understanding IAS 29

Contents

Contents
Section 1 Introduction Why is this guide needed? Inflation or changes in the general purchasing power of money Characteristics of hyperinflation Benefits of purchasing power adjusted financial statements Objectives of IAS 29 Who must apply IAS 29 Presenting financial statements in a stable currency Intra-group reporting Transition to IFRS Applying the standard Selection of the price index Segregation of monetary and non-monetary items Restatement of non-monetary items Income statement Calculation of monetary gain or loss Cash flow statement Restatement of comparatives Disclosures Economies that cease to be hyperinflationary Restatement procedures for non-monetary balance sheet items Non-monetary items at fair value or net realisable value Prepaid expenses Advances paid on purchases Inventories Investments in associates Property, plant and equipment and accumulated depreciation Intangible assets Advances received Deferred income Restatement of shareholders’ equity Transition to IFRS Restatement of the income statement Revenue Cost of goods sold Depreciation and amortisation of intangible assets and realisation of prepaid expenses and deferred income (grant) Other items included in the income statement Adjustments or reclassifications made to statutory financial statements to arrive at historical financial statements Income taxes Monetary gain or loss Monetary gain or loss Proof – average monetary position method Proof – statement of sources and application of net monetary assets and liabilities method Cash flow statement Illustrative example of IAS 29 3 3 3 3 4 4 5 5 5 5 6 6 7 8 9 9 10 10 10 10 12 12 12 13 13 14 15 16 16 17 17 19 20 20 20 21 21 22 22 23 24 24 24 28 29

Section 2

Section 3

Section 4

Section 5

Section 6 Section 7

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Introduction

Introduction
Why is this guide needed?
IAS 29 is based on current purchasing power principles and requires financial statements prepared in the currency of a hyperinflationary economy to be stated in terms of the value of money at the reporting balance sheet date. This requirement needs an understanding of complex economic concepts, a knowledge of the entity’s financial and operating patterns and a detailed series of procedures. It represents a challenge for reporting entities and auditors. This guide provides an overview of the concepts in the standard, descriptions of the necessary procedures and a detailed illustrative example.

Inflation or changes in the general purchasing power of money
The purchasing power of money declines as the level of prices of goods and services rises. The purchasing power of money in an inflationary environment and the price level are interdependent. Financial statements unadjusted for inflation in most countries are prepared on the basis of historical cost without regard to changes in the general level of prices. The individual assets, liabilities, shareholders’ equity, revenue, expenses and gains and losses are therefore stated at cost at the time at which these items were originated. The impact of inflation is ignored. This produces a meaningful result provided that there are no dramatic changes in the purchasing power of money. Significant changes in the purchasing power of money mean that financial statements unadjusted for inflation are likely to be misleading. Amounts are not comparable between periods, and the gain or loss in general purchasing power that arises in the reporting period is not recorded. Financial statements unadjusted for inflation do not properly reflect the company’s position at the balance sheet date, the results of its operations or cash flows. Inflation-adjusted financial statements are an extension to, not a departure from, historical cost accounting. IAS 29 aims to overcome the limitations of historical cost financial reporting in hyperinflationary environments.

Characteristics of hyperinflation
There is no absolute definition of hyperinflation. The characteristics identified in IAS 29 are as follows: • People accumulate wealth in non-monetary assets or in a stable foreign currency; • Monetary amounts are expressed in terms of a relatively stable foreign currency. Prices (for example, rent, wages and capital goods) may be quoted in that foreign currency; • Prices for credit sales and purchases are calculated to compensate for the expected loss of purchasing power during the credit period, even for short-term credit; • Interest rates, wages and prices are linked to a price index; and • The cumulative inflation rate over three years is approaching, or exceeds, 100%. A cumulative three-year inflation rate exceeding 100% is a strong indicator of hyperinflation, but the qualitative factors should also be considered. The factors have to be carefully weighed because it is not desirable to move in and out of hyperinflationary reporting within a short time period. Reporting entities in the same country should start applying IAS 29 at the same time in order to achieve comparability.

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International Financial Reporting Standards Financial Reporting in Hyperinflationary Economies – Understanding IAS 29

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Introduction

Other characteristics that are not mentioned in the standard but that can be useful in determining the presence of hyperinflation include: • severe exchange controls to protect the local currency; and • frequent Central Bank intervention in the currency.

Frequently asked questions
Economies ceasing to be hyperinflationary
If the cumulative inflation in an economy deemed to be hyperinflationary drops below 100% in a three-year period, has hyperinflation ceased? The economy has probably ceased to be hyperinflationary. However, this quantitative measure should be evaluated in the context of overall economic developments and trends. Although judgement is involved in determining when an economy is no longer hyperinflationary, all entities should cease to apply IAS 29 from the same date to ensure financial statements are comparable from entity to entity.

Benefits of purchasing power adjusted financial statements
Financial statements that are expressed under IAS 29 in a measuring unit that is current at the balance sheet date provide several benefits: • They provide management, shareholders and other users with comparable information from period to period, relating to the underlying results of operations, capital maintenance and trends in performance; • They enable management to make more reliable decisions on capital expenditure plans, as the financial statements are more relevant; and • They become more useful to international investors and other users of financial statements in that they are comparable with other companies in the same industry.

Objectives of IAS 29
The IAS 29 approach is to restate all balances recorded in the financial statements (including comparative numbers) to the year-end general purchasing power of the functional currency. The effects of the IAS 29 restatement on the financial statements will depend on the magnitude of inflation and the composition of the entity’s assets and liabilities. The remeasurement process requires the application of judgement as well as certain required procedures. The standard states: ‘The consistent application of these procedures and judgements from one period to another is more important than the precise accuracy of the resulting amounts included in the restated financial statements.’

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Introduction

Who must apply IAS 29
Compliance with IAS 29 is mandatory for any entity if the primary economic environment in which it operates is hyperinflationary and it therefore has to measure items in its IFRS financial statements in the currency of a hyperinflationary economy. The standard applies to an entity’s financial statements from the beginning of the reporting period in which it identifies the existence of hyperinflation in the country of its functional currency.

Presenting financial statements in a stable currency
The restatement process outlined in IAS 29 specifically applies to those situations in which an entity measures items in its IFRS financial statements in the currency of a hyperinflationary economy. When an entity presents financial statements in a stable currency, it should ensure that the financial statements have dealt with the impact of hyperinflation before being translated into a stable currency for presentation purposes. The IFRS financial statements presented in local currency at historical cost should be restated in accordance with IAS 29. Entities may then apply translation procedures in IAS 21 to present them in a stable currency. The yearend exchange rate is used to translate the financial statements into the stable currency for all periods presented unless the entity also presented financial statements in a stable currency in the previous year. Where this is the case, the comparative amounts should be those that were presented as current-year amounts in the relevant prior-year financial statements. The amounts presented in a stable currency are not subsequently adjusted for changes in the price level or exchange rates.

Intra-group reporting
A foreign subsidiary operating in a hyperinflationary economy may be required for group purposes to report to its overseas parent in a stable currency, usually the group’s presentation currency. IAS 21 requires the foreign subsidiary to restate its local currency IFRS financial statements in accordance with IAS 29 before translation into the group’s presentation currency.

Transition to IFRS
IFRS 1 requires retrospective application of the wording of IFRS standards effective at the reporting date of the entity's first IFRS financial statements – that is, as if the current wording of each of the effective standard had always been applied – unless IFRSs provide an exemption. This includes retrospective application of the current wording of IAS 29.

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Applying the standard

Applying the standard
IAS 29 requires management to restate the financial statements, including the cash flow statements, into the current purchasing power at the balance sheet date. This should be done in a number of steps, and judgement should be applied. The consistent application of procedures is more important than the precise accuracy of the results. The restatement procedures are summarised as: • the selection of a general price index, • the segregation of monetary and non-monetary items, • the restatement of non-monetary items, • the restatement of the income statement, • the calculation and proof of the monetary gain or loss, • the preparation of the cash flow statement with recognition of inflationary effects, and • the restatement of corresponding figures.

Selection of the price index
IAS 29 requires the use of a general price index to reflect changes in purchasing power. Most governments issue periodic price indices that vary in their scope, but all entities that report in the currency of the same economy should use the same index. The most reliable indicator of changes in general price levels is the consumer price index. The consumer price index is normally closest to the concept of the general price index required by IAS 29 because it is at the end of the supply chain and reflects the impact of prices on the general population’s consumption basket.

The most important attributes for a reliable general price index are: • a wide range of reference, such as inclusion of most of the goods and services produced in the economy, in order to reflect varying price fluctuations; • an accurate reflection of price changes; • the availability of prior-year indices, as well as those of the current year; • regular, preferably monthly, updating; and • consistency, uniformity and continuity.

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Applying the standard

Conversion factors need to be calculated based on the increase in the general price index in order to restate historical cost amounts to current purchasing power.

Example
An item of property, plant or equipment was purchased in December 20X0 at a price of 200 million currency units. The restated asset cost at 31 December 20X2, determined using the conversion factors below, is 200 x 4.114 = 822.8 million currency units, current at 31 December 20X2. General price index 31 December 20X0: 31 December 20X2: 54.224 223.100 Conversion factor 4.114 (223.100/ 54.224) 1.000 (223.100/223.100)

Segregation of monetary and non-monetary items
Management should restate all balance sheet amounts that are not expressed in terms of the measuring unit current at the balance sheet date. Monetary items do not need to be restated, as they represent money held, to be received or to be paid. Monetary items are therefore already expressed in current purchasing power. All balance sheet items must be segregated into monetary and non-monetary items. Most balance sheet items are obviously monetary or non-monetary. In less straightforward cases, the determination as to whether a component is monetary depends on its underlying characteristics. For example, the provision for doubtful receivables is considered monetary because receivables are monetary. The provision for inventory obsolescence is non-monetary because inventory is non-monetary. Examples of monetary assets and liabilities are:

Assets Cash and amounts due from banks Marketable debt securities Trade receivables Notes receivable Other receivables

Liabilities Trade payables Accrued expenses and other payables Current income taxes and withholding taxes payable Borrowings Notes payable

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Applying the standard

Assets and liabilities other than monetary items are called non-monetary items. All elements of shareholders’ equity are non-monetary once paid in or accumulated. Examples of non-monetary items are:

Assets Prepaid expenses Advances paid on purchases* Inventories Marketable equity securities Investments in associates Property, plant and equipment Intangible assets

Liabilities Advances received on sales* Deferred income (for example, government grants) Shareholders’ equity
* Advances paid or received are considered non-monetary if they are linked to specific purchases or sales; otherwise they should be considered monetary.

IFRIC 7 addresses accounting for deferred taxes when IAS 29 is applicable. An entity should calculate deferred taxes in accordance with IAS 12 after it has restated all non-monetary balances in accordance with IAS 29. Classification of deferred taxes as either monetary or non-monetary is not therefore relevant. For comparative balance sheets, the deferred tax calculation is done in two steps: 1. The deferred tax is calculated based on the carrying amounts expressed in the purchasing power current at the comparative balance sheet date. 2. The whole comparative balance sheet, including the calculated deferred tax, is restated to the purchasing power at the reporting date to take account of inflation for the reporting period. IFRIC 7 explains that IAS 29 restatement should be applied as if the economy had always been hyperinflationary. It also extends this principle to the calculation of deferred taxes in the opening balance sheet prepared in accordance with IAS 29 when the entity’s functional currency initially becomes hyperinflationary.

Restatement of non-monetary items
Non-monetary assets and liabilities are restated in terms of the measuring unit current at the balance sheet date, using the increase in the general price index from the transaction date when they arose to the balance sheet date. Specific issues arise when restatement increases the carrying amount of assets beyond the net realisable value or if non-monetary assets are carried at fair value. Detailed guidance on these issues and on the restatement of non-monetary items included in the balance sheet is in Section 3.

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Applying the standard

Income statement
The historical cost income statement generally reports revenues and costs that were current when the underlying transaction or event occurred. All items in the income statement should be expressed in terms of the measuring unit current at the balance sheet date. All amounts should therefore be restated by applying the change in the general price index from the dates when the items of income and expenses originated. Income statements are normally restated on a monthly basis. Income statement items, such as interest income and expense, and foreign exchange differences related to invested or borrowed funds are also associated with the net monetary position. These items are adjusted for inflation and, along with the monetary gain or loss, presented as separate line items in the income statement. These items are normally presented below an operating profit subtotal. Section 4 provides detailed guidance on restatement of the income statement.

Calculation of monetary gain or loss
One of the two main objectives of IAS 29 is to account for the financial gain or loss that arises from holding monetary assets or liabilities during a reporting period (the monetary gain or loss). The monetary gain or loss is calculated based on the entity’s monetary position. The monetary position can be derived from the equation below:

Assets • monetary • non-monetary

=

Liabilities • monetary • non-monetary

+

Shareholders’ equity

Therefore:

Monetary assets

+ liabilities

Monetary

=

Non-monetary liabilities

+

Non-monetary assets

+

Shareholders’ equity

Monetary position

Non-monetary position

All monetary assets and liabilities (net monetary position) held during the year are represented in the financial statements either by non-monetary assets and liabilities recorded on the balance sheet, or by transactions recorded in the profit and loss account or directly in equity. The monetary gain or loss may be calculated by restating nonmonetary items (including the profit and loss account and transactions recorded directly in equity) to year-end purchasing power and comparing the restated values to the historical cost amounts or, where balances existed at the beginning of the year, to the historical amounts restated to the beginning of the year purchasing power.

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It is also possible to calculate the gain or loss on the entity’s daily net monetary position. The costs of such a calculation, however, would be onerous. An approximation of the monetary gain or loss can be calculated using average monetary positions during the period as a test of the reasonableness of the monetary gain or loss derived by restating the non-monetary assets and liabilities. In addition to the gain or loss on the net carrying amount of monetary assets and liabilities (net monetary position), IFRIC 7 identifies inflation gains or losses on the tax bases of assets and liabilities as a separate component of the monetary gain or loss. Additional detail on calculation of the monetary gain or loss and proof of the amount is provided in Section 5.

Cash flow statement
All items in the cash flow statement should be expressed in a measuring unit current at the balance sheet date. All items in the cash flow statement are therefore restated by applying the relevant conversion factors from the date on which the transaction originated. There is no detailed guidance for this complex area. However, it is possible to arrive at an appropriate presentation by considering the objectives of IAS 29 and IAS 7. This includes separate disclosure of the effects of inflation on cash and cash equivalents. Guidance on preparation of the cash flow statement is included in Section 6.

Restatement of comparatives
The prior-year comparatives are restated in terms of the measuring unit current at the end of the latest reporting period. If prior-year financial statements have already been prepared to conform with IAS 29, the current-year conversion factor is applied to the prior-year financial statements.

Disclosures
Management should describe in the accounting policy note the methodology used in applying IAS 29. The following information should be disclosed: • The fact that the financial statements and the comparatives have been restated for the changes in the general purchasing power of the functional currency and, as a result, that they are stated in terms of the measuring unit current at the balance sheet date; • The identity and level of the price index at the balance sheet date and the movement in the index during the current and previous reporting period; and • The three-year cumulative inflation at the balance sheet date for each period presented in the financial statements (although this is not required by the standard, it is useful to disclose).

Economies that cease to be hyperinflationary
Judgement should be applied to determine when an economy ceases to be hyperinflationary. A number of qualitative and quantitative indicators should be considered – for example, stabilisation of the price level and increased preference to keep wealth in the local rather than stable foreign currency or non-monetary assets. Although much of the weight is given to a decrease in the cumulative three-year inflation below 100%, other qualitative factors may indicate that the price stabilisation is only temporary and the country is therefore not out of hyperinflation. It is not beneficial for an entity’s financial reporting to go in and out of hyperinflation within short period of time. An entity should cease applying IAS 29 at the end of the reporting period that is previous to

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the date on which the country moves out of hyperinflation. The amounts in the financial statements as at that date should be considered as the carrying amounts for the subsequent financial statements – that is, those restated amounts should be the cost bases of the non-monetary items in subsequent balance sheets. If, for example, a country moves out of hyperinflation at 31 October 2005, an entity’s last financial statements for the year ended 31 December 2004 would be used to derive cost bases for non-monetary items at any balance sheet date on or after 1 November 2005. This IAS 29 requirement results in ignoring inflation for a period of 10 months, from 1 January 2005 to 31 October 2005. The inflation in the last period before moving out of hyperinflation should be insignificant because the decrease in inflation reflects one of the reasons for an economy ceasing to be hyperinflationary. An entity may have presented interim reports before the country moves out of hyperinflation. These interim reports should not be subsequently amended to exclude hyperinflationary restatement. An entity should consider the closing date of the last interim report as the ‘end of the previous reporting period’ for the purpose of deriving the cost bases for non-monetary items at subsequent balance sheet dates in post-hyperinflationary periods. Entities preparing IFRS financial statements for the first time in economies that have ceased to be hyperinflationary will need to make a cumulative adjustment to the non-monetary items in the balance sheet. All adjustments to non-monetary items will be charged or credited to retained earnings.

Frequently asked questions
Economies that cease to be hyperinflationary
An economy ceased to be hyperinflationary at 31 October 2005. Company A’s last interim financial statements are for six months to 30 June 2005, and its last year-end financial statements are for the year to 31 December 2004. Company B prepares only annual financial statements, and its last reporting date was 31 December 2004. How should these companies apply IAS 29 in their financial statements for 2005? Company A should consider the date of the last interim report, 30 June 2005, as the ‘end of the previous reporting period’ for the purpose of deriving the cost bases for non-monetary items at 31 December 2005. Company B will use the restated amounts in its 31 December 2004 financial statements to derive cost bases of non-monetary items at 31 December 2005.

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Restatement procedures for non-monetary balance sheet items

Restatement procedures for non-monetary balance sheet items
All non-monetary components in the balance sheet, excluding retained earnings, are restated by applying a general price index from the dates on which the items arose at the first application of IAS 29. Restated retained earnings, excluding current-year earnings, are the balancing figure derived from all the other amounts in the opening restated balance sheet.

Non-monetary items at fair value or net realisable value
Some non-monetary assets may be carried at fair value at the balance sheet date – such as property, plant and equipment revalued by an independent appraiser as allowed under IAS 16; marketable equity securities fair valued under IAS 39; and investment properties carried at fair value under the IAS 40 fair value model. The historical cost amounts should be restated to obtain the appropriate monetary gain or loss. The restated carrying amount should then be compared to the ‘current’ values and the difference, if any, charged or credited to the income statement or shareholders’ equity in accordance with the appropriate standard. The net realisable value of an asset may be less than its restated amount. Application of the normal impairment requirement would therefore result in a write-down of the carrying amount in the restated financial statements, even if no impairment of the asset was required in the historical cost financial statements.

Prepaid expenses
• Obtain the ageing of prepaid expenses. • Restate prepaid expenses from the date of the payments to the balance sheet date.

Frequently asked questions
Marketable equity securities
Should equity securities that are carried at fair value be restated? Equity securities classified as either available-for-sale assets or designated as at fair value through profit or loss (including held-for-trading assets) are carried at fair value on the balance sheet under IAS 39. Fair value gains and losses on assets designated as at fair value through profit or loss are recognised immediately in the income statement. Fair value gains and losses on available-for-sale assets are recognised directly in equity. Fair value gains and losses deferred in equity are recycled to the income statement on disposal or impairment. The historical cost of the equity securities should be restated. The difference between the fair value of the equity securities and the restated historical cost of the equity securities is the fair value gain or loss.

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Restatement procedures for non-monetary balance sheet items

Advances paid on purchases
• Obtain a breakdown of advances paid, ensuring that, where appropriate, the relevant specific advances have already been netted off against accounts payable. • For advances paid in respect of purchases of future inventories, property, plant and equipment (PPE) or intangibles, obtain the ageing of advances, including the amounts and payment dates. • Restate advances according to the ageing schedule from the payment dates to the balance sheet date. • When the inventory, an item of PPE or an intangible asset is received, add the restated carrying value of the advance to the restated cost base of the asset.

Inventories
Raw materials • Obtain the historical cost prices and acquisition dates of raw materials. The average ageing of items could (subject to materiality considerations) be estimated using inventory turnover if a detailed ageing of inventory cannot be obtained. • If the FIFO or weighted average method is used, restate raw materials inventories based on the ageing of the related items using the increase in the general price index for the period from the purchase dates to the balance sheet date. • If an annual average is used, restate raw materials using the annual average increase in the general price index. Semi-finished and finished goods • Obtain the ageing of semi-finished and finished goods. • Deduct the historical depreciation expense of property, plant and equipment that is included in the cost of semi-finished goods, as this will be replaced with the restated depreciation expense. • If the FIFO or weighted average method is used, restate the balance of semi-finished goods, based on the ageing of the composition of cost elements included in inventories. If annual average costing is used, restate using the annual average increase in the general price index. • After completion of the restatement, add back to inventory the attributable depreciation calculated by reference to the restated property, plant and equipment balances. • After the inventory has been restated, review the restated balances to determine the need for any net realisable value provisioning.

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Restatement procedures for non-monetary balance sheet items

Frequently asked questions
Inventory
Will the costing method of inventory (for example FIFO or weighted average) have an impact on the IAS 29 restatement? The costing method should have no impact on the final restated value of the inventory if there are no price changes in real terms. Restatement would result in the same inventory value if there had been no change in the price in real terms. In practice, however, there are likely to be different results, as the changes in the cost of inventory may not be equal to the change in the general price index (for example, there may be a real change in the inventory cost). How are inventory and the related provision for net realisable value treated when the inventory is subsequently sold or disposed of? Inventory is a non-monetary item. The carrying value of the inventory and any related provision for net realisable value should be inflated up to the date of the sale or disposal.

Investments in associates
• Obtain the historical cost prices and acquisition dates of investments according to the purchase date and cost of purchase. • Restate the balance of investments using the increase in the general price index from the purchase date to the balance sheet date. • Compare the restated investment balance with the market value, and adjust the investment balance, if an impairment is identified.

Frequently asked questions
Subsidiaries and associates
What exchange rates should be used when consolidating a foreign subsidiary of a group that presents its consolidated financial statements in a hyperinflationary currency? A foreign subsidiary that operates in an economy that is not experiencing hyperinflation and whose functional currency is therefore not hyperinflationary should translate the income statement into a hyperinflationary presentation currency using the exchange rates at the date of the transactions (in practice, monthly or weekly average exchange rates may be used as an approximation). The income statement items should then be restated in accordance with IAS 29 from the date of the transaction, which would be the same date used to translate the stable foreign currency into the hyperinflationary presentation currency. This will facilitate the elimination of any inter-company transactions, as the transactions will be on the same basis of accounting and therefore comparable.
continued

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Restatement procedures for non-monetary balance sheet items

continued from p14

The balance sheet should be translated into the hyperinflationary currency using the closing rate method. The investor’s share of net assets in the subsidiary at the beginning of the year (as calculated by the equity method of accounting) should be adjusted for current-year inflation. The difference between the parent’s share of the closing net assets and the opening balance and earnings for the period, both adjusted for inflation as described above, should be charged to equity as a translation adjustment. What exchange rates should be used when accounting for a foreign associate of an entity presenting its financial statements in a hyperinflationary currency? The investor’s share of the results of operations of an associate with a stable functional currency should be translated into the group’s hyperinflationary presentation currency at the dates on which the earnings accrued. The earnings should then be restated to year-end purchasing power in the consolidated financial statements from the date of translation. The opening investment balance accounted for using the equity method at opening exchange rates should be adjusted for inflation to year-end purchasing power. To calculate the net investment in the associate, the investee’s balance sheet should be translated into the group’s presentation currency at year-end rates, which forms the basis for carrying value of the investment. The difference between the carrying value and the opening balance plus earnings for the period, both adjusted for inflation, should be recorded in equity as a translation adjustment.

Property, plant and equipment and accumulated depreciation
• Obtain the original historical cost prices and acquisition dates of property, plant and equipment. The restatement should be based on the original purchase date of the asset, not the date of reclassification from the construction-in-progress account. • Eliminate from the IFRS historical financial statements any revaluation of construction in progress, property, plant and equipment and the associated accumulated depreciation that does not comply with IAS 16, if any. • Restate the original purchase cost of property, plant and equipment from the date of the purchase of each item to the balance sheet date using the general price index. • Calculate the depreciation charge for the period on the basis of the restated property, plant and equipment. Opening accumulated depreciation is also calculated on the basis of restated property, plant and equipment. • For disposals, determine the original date of purchase and the historical cost. Calculate and then deduct the restated property, plant and equipment balance that has been disposed of and its accumulated depreciation. • Replace historical depreciation charges included in general administrative expenses, idle-time expenses, cost of goods sold and inventory balances, with the depreciation expense calculated on the basis of the restated property, plant and equipment balances. • Obtain the historical cost prices and acquisition dates of the ‘construction in progress’ balance and restate the balances by applying indices according to transaction date. When the construction in progress is subsequently transferred to items of property, plant and equipment, the related inflation adjustment should be transferred and applied to the asset.

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Restatement procedures for non-monetary balance sheet items

• If the entity capitalises interest in accordance with IAS 23, recognise the part of the capitalised borrowing cost that compensates for the inflation during the same period as an expense in the period in which those costs were incurred. • For the first year of adopting the IAS 16 alternative treatment for measurement, restate the historical cost of the asset in accordance with IAS 29 to obtain the correct monetary gain or loss in the income statement. Then replace the carrying value with the appraised value, and treat the difference in accordance with IAS 16.39-42. • Assess for impairment in accordance with IAS 36.

Frequently asked questions
Property, plant and equipment
What indices are used to restate construction in progress (CIP)? How does the restatement of CIP affect the future value of items of PPE? CIP should be restated from the date on which the payment was made. An asset or project within CIP should be restated within CIP. When transferred to assets in use, the related inflation adjustment should also be transferred and added to the cost base of the item of property, plant or equipment. Management should consider the inflation effect on assets that were previously held in CIP when initially adopting IAS 29 where the economy of the reporting entity has been experiencing hyperinflation in previous years. How are assets that have been remeasured by an independent appraiser in accordance with IAS 16 treated when restating them in accordance with IAS 29? If assets are revalued during a year of restatement, the historical cost should be restated to arrive at the correct monetary gain or loss. The restated cost should then be compared to the appraised amount, and the difference treated as required by IAS 16. In subsequent years, the appraised carrying amount and the revaluation reserve (unless it is the first year of IAS 29 application when eliminated) should be restated.

Intangible assets
• Intangible assets, including goodwill, are inflated in the same manner as property, plant and equipment.

Advances received
• Obtain a breakdown of advances received, ensuring that, where appropriate, the relevant specific advances have been netted off against the relevant accounts receivable. • Obtain the ageing of advances received. • Restate advances according to the ageing, by the increase in the general price level from the date of receipt to the balance sheet date. • The restated advances received should be transferred to revenue when the sale is recognised.

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Restatement procedures for non-monetary balance sheet items

Deferred income
• Obtain the ageing of deferred income according to the date of receipt. • Restate the original amount of deferred income received from the transaction date to the balance sheet date. • Calculate accumulated amortisation and current-period amortisation on the basis of the restated deferred income balance. • Replace historical amortisation credited to the income statement with the amortisation calculated on the basis of the restated deferred income.

Frequently asked questions
Provisions for liabilities and charges
Are provisions for liabilities and charges monetary or non-monetary items? Provisions for liabilities and charges could be monetary, monetary but inflation linked or non-monetary. Their classification depends on the nature of the liability. For example, if warranty obligations are limited to a defined original amount, the warranty provision is monetary. However, if the entity’s liability is specified as a repair or exchange of the item under warranty, the provision is non-monetary.

Restatement of shareholders’ equity
• At the beginning of the first period of application of IAS 29, the components of shareholders’ equity in the opening balance sheet, excluding retained earnings, should be restated by applying a general price index from the dates on which the items arose. Any revaluation surplus that arose in previous periods should be eliminated. Restated retained earnings is the balancing figure derived from all the other restated amounts in the restated opening balance sheet. • At the end of the first period and in subsequent periods, all components of shareholders’ equity are restated by applying a general price index from the beginning of the period, or the dates on which the items arose, if later. This restatement forms part of the monetary gain or loss calculation. • Any statutory revaluation surplus (that is not in accordance with IAS 16) arising in subsequent periods is eliminated against the related revalued assets. • Current-year restated net income is added to the balance of the restated opening retained earnings. • For the purpose of the statement of changes in shareholders’ equity, dividends paid during a period should be restated by applying a general price index from the date at which the shareholders’ right to receive payment is established to the balance sheet date.

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Restatement procedures for non-monetary balance sheet items

Frequently asked questions
Equity
What are the components of shareholders’ equity that need to be restated? Which dates should be used for the restatement? All components of shareholders’ equity should be restated, with certain exceptions for revaluation reserves. Legal and extraordinary reserves are generally a part of retained earnings in IFRS financial statements. These reserves are not considered for restatement purposes. It may be beneficial to disclose the historical statutory reserves in the footnotes to the financial statements. Capital increases should be restated from the date on which the consideration was received. If consideration was received in the form of a non-monetary contribution (such as contributed PPE), the fair value of the asset should be used as the historical cost. Can management present share capital at historical cost and the IAS 29 adjustment separately on the balance sheet? No. Share capital presented on the balance sheet should be expressed in year-end purchasing power. However, an entity may present the historical cost share capital and the related IAS 29 adjustment separately in the notes with an appropriate description. How is the revaluation reserve in equity treated? Statutory regulations for countries operating in a hyperinflationary economy often allow companies to increase the carrying value of PPE based on prescribed rules, with a corresponding increase in equity – usually the revaluation reserve. These statutory revaluation adjustments are not in accordance with IAS 16 and should be eliminated from the IFRS financial statements. If a revaluation has been performed at year-end in accordance with IAS 16, the revaluation reserve would be the difference between the historical values restated in accordance with IAS 29 and the revalued amounts according to IAS 16. There would be no need to inflate the revaluation reserve, as it would be current at year-end. The revaluation reserve would be inflated in subsequent years. How should a share capital increase by way of a transfer from the statutory revaluation surplus be treated? The statutory revaluation surplus is eliminated from the IFRS restated financial statements, as noted above. A share capital increase by way of a transfer from the statutory revaluation surplus is not therefore considered in calculating the restated paid-in capital. The increase of the share capital is represented by a transfer from retained earnings to reflect the legal transaction. The amount of the transfer is the restated amount of statutory increase inflated from the date of authorisation of the share capital increase. How are dividends payable treated? A dividend payable is a monetary liability that will result in a monetary gain for the entity. The dividend amount should therefore be excluded from retained earnings at the date on which the dividend becomes payable.
continued

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continued from p18

Should unpaid capital that the shareholders have committed to pay be inflated? The treatment of the unpaid share capital depends on whether the shareholder is legally bound to pay the capital or whether the commitment is nothing more than an unbinding promise to pay. If the shareholder has no legal obligation to pay this capital, there would be no receivable recorded by the entity. The unpaid capital and commitment would be disclosed in the notes at the historical amount, which is the consideration expected to be received by the entity. There is no effect on monetary gain or loss, as the entity does not have an enforceable receivable. However, if the capital increase is legally binding and approved by the general assembly, the entity would show a receivable from shareholders with a corresponding increase in share capital (the fact that the share capital has not been paid would be disclosed in the notes). The share capital would be restated to account for any subsequent changes in inflation that creates a monetary loss in the income statement from holding the receivable.

Transition to IFRS
IFRS 1 requires retrospective application of the wording of IAS 29 effective at the reporting date of the entity’s first IFRS financial statements – that is, as if the current wording of IAS 29 had always been applied. An entity should restate its non-monetary assets and liabilities that were acquired or originated during a past period of hyperinflation for the effects of changes in purchasing power from transaction date until the end of the period of hyperinflation. Equity components, such as share capital, have to be restated. These exemptions should not be applied to other items by analogy. IFRS 1 provides some exemptions from retrospective application of IFRSs to some equity items, such as an exemption from a requirement to determine cumulative translation reserve at the date of transition. However, it also states that these exemptions should not be applied to other items by analogy.

Frequently asked questions
Restatement on transition to IFRS
A country moved out of hyperinflation eight years ago. Is it possible to avoid restatement in accordance with IAS 29 on transition to IFRS by electing to use the IFRS 1 ‘fair value as deemed cost’ exemption? The IFRS 1 'fair value as deemed cost' exemption only covers property, plant and equipment, investment property under the cost model, and intangible assets carried at fair value. A company may have non-monetary liabilities in the balance sheet requiring restatement, such as deferred income. Intangible assets carried at cost less amortisation, for example when there is no active market, will also require IAS 29 restatement if acquired during the period of hyperinflation. Components of equity, such as share capital, also have to be restated for inflation effects from the transaction date to the end of the period of hyperinflation.

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Restatement of the income statement

Restatement of the income statement
All items in the income statement should be restated by applying the change in the general price index from the dates when the items of income and expense were originally recorded. Most entities will restate activity on a monthly average basis – provided inflation is occurring at a relatively stable rate – with all transactions presumed to occur evenly throughout the relevant period.

Revenue
• Obtain a monthly break-down of revenue. • Restate each period using the appropriate indices to year-end.

Frequently asked questions
Selection of the index
What is the correct index to be used to restate the income statement? The items within the income statement should be restated from the date of the transaction. However, it is generally not practical to restate the items from the date of the transaction – average indices may be used as approximations. The average indices to use would depend on the frequency of the transactions (ie, sales earned evenly throughout the period) and whether inflation was relatively constant throughout the period. If the income statement transactions occurred evenly throughout the year without seasonal fluctuations and inflation was relatively constant during the year, the annual average index may be used for the restatement. In periods of unstable inflation or where there have been seasonal fluctuations influencing the income statement, quarterly or monthly indices would be more appropriate.

Cost of goods sold
• Obtain the monthly breakdown of the items included in production costs. • Restate all components of production costs, except depreciation and raw materials, from the month when the costs were incurred to the year-end. • Calculate raw material used in the production process through the reconciliation of restated opening raw materials and closing raw materials balances. • Calculate depreciation related to production costs on the basis of the restated property, plant and equipment, as explained in the balance sheet section, and replace the historical depreciation with the restated depreciation. • Restate opening and closing historical finished and semi-finished goods, as explained in the balance sheet section.

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Restatement of the income statement

• The ‘restated cost of goods sold’ figure is obtained by: adding to purchases and other production costs restated from the date when the costs were incurred; the restated opening finished and semi-finished goods; and deducting the restated closing finished and semi-finished goods. The restated opening finished goods and semi-finished goods are derived by: – restating amounts to the prior balance sheet date purchasing power, and – inflating the restated cost of opening amounts as calculated above by the conversion factor for the entire year.

Depreciation and amortisation of intangible assets, and realisation of prepaid expenses and deferred income (grant)
This is calculated on the basis of the restated asset or liability balance.

Other items included in the income statement
• Obtain a monthly breakdown of all items. • Restate all items for each month using the increase in the general price index from the related month or quarter until the year-end. • Certain non-monetary items included in the opening balance sheet could subsequently be realised through the income statement – for example, inventory and disposed property, plant and equipment. In that case, the restatement should consider the restatement surplus accumulated while the item was recognised in the balance sheet.

Frequently asked questions
Foreign exchange
Should interest income or expense and foreign exchange gains or losses be restated? All items in the income statement should be restated. There are no exceptions to this requirement.

Impairment loss on trade and other receivables
If the impairment loss on trade and other receivables is inflated, the movement schedule of the provision does not reconcile. How are the opening and closing balances reconciled? Management should provide against an impairment loss on trade and other receivables at the time at which the impairment is identified. The provision is a monetary item, as the underlying asset it relates to is monetary. A monetary gain will therefore result from carrying this provision (which offsets the monetary loss being incurred as a result of holding the receivable). The impairment loss on trade and other receivables is inflated from the date on which the provision was initially recorded. All items must be expressed in terms of the measuring unit current at the balance sheet date to ensure the reconciliation of the provisions. The difference between the restated opening balance, restated current period expense (net of any restated provision reversals) and the closing balance is a monetary gain.

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Restatement of the income statement

Adjustments and or reclassifications made to statutory financial statements to arrive at IFRS historical financial statements
• If the adjustment or reclassification made in accordance with IFRS relates to a specific period or specific date, the adjustment or reclassification calculated in historical terms should be restated for the related time period, using the increase in the general price index from the specific date to the balance sheet date.

Income taxes
Current taxes • Obtain details of monthly or quarterly taxation calculated on the basis of the entity’s monthly or quarterly taxable income. Restate monthly or quarterly tax expenses for each month or quarter in terms of balance sheet date purchasing power, using the increase in the general price index from the related month or quarter until the reporting date. Deferred taxes • Calculate deferred tax expense or income and deferred tax liability or asset with reference to historical adjustments made (if any) in moving from the tax accounts to the IFRS historical financial statements. • Calculate deferred tax in relation to temporary differences arising from the restatement of non-monetary assets and liabilities. Deferred tax is calculated in full on the temporary differences arising from the restatement of nonmonetary assets and liabilities. • As the closing deferred tax position is calculated based on the applicable temporary differences between the tax base and the IAS 29-adjusted IFRS balance sheet (ie, expressed in the measuring unit current at the balance sheet date), there is no need to adjust the closing deferred tax asset or liability for inflation. A practical approach to deferred taxes is to charge or credit to the tax line in the income statement the difference between the opening deferred tax asset or liability, adjusted to year-end purchasing power and the closing deferred tax asset or liability. • Opening deferred tax is calculated as if IAS 29 had always been applied. It is calculated for temporary differences between tax bases of assets and liabilities and their carrying amounts expressed in the purchasing power at the opening balance sheet date. The calculated tax is then inflated to the purchasing power at the closing balance sheet date. • The movement in the deferred tax balance for the reporting period includes a monetary gain or loss on tax bases of assets and liabilities. For example, if the opening tax base of PPE is 100, inflation for the year is 50% and income tax rate is 30%, the loss on the tax base of the PPE, in accordance with IFRIC 7, is 15, being 30% x (100 x 1.5 – 100).

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Restatement of the income statement

Monetary gain or loss
• The gain or loss on the net monetary position arises from holding monetary assets and liabilities and is reported as a separate item in the restated income statement (see Section 5 for details of the monetary gain or loss). The monetary gain or loss is derived from restating the closing balance sheet (less the inflation adjustments to the opening balance sheet in prior year-end purchasing power) and the items in the income statement. • IFRIC 7 also identifies inflation gains or losses on the tax bases of assets and liabilities as a separate component of the monetary gain or loss. This is in addition to the gain or loss on the net monetary position from the carrying amounts of monetary assets and liabilities. • The derived monetary gain or loss may need additional netting off with the indexation differences that were recognised in the income statement on those monetary items that are linked to inflation index. These are subject to inflationary risks or holding benefits, such as monetary gains or losses.

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5

Monetary gain or loss

Monetary gain or loss
Calculation and proof of the monetary gain or loss that arises on the carrying amounts of monetary assets and liabilities is an important element of applying IAS 29. Restatement in accordance with IAS 29 requires the application of certain procedures and judgement. It is therefore necessary to verify that the results are reasonable; the proof may well reveal restatement errors. The monetary gain or loss may be estimated by applying the change in a general price index to the weighted average difference between monetary assets and monetary liabilities. The weighted average of the opening monetary position and the monetary position at yearend may be used for the purpose of this calculation. It is possible, however, for a large difference to arise between the monetary gain or loss in the income statement and the estimate as calculated by the proof if the monetary position has not been relatively constant throughout the year. If the monetary position is changing significantly, a more accurate proof of the monetary gain or loss would be obtained by using the quarterly or monthly weighted average monetary position.

Proof – average monetary position method
A simple example with a constant monetary position is set out below. It would be appropriate to use the weighted average of the opening and closing monetary position in this example.

Proof – statement of sources and application of net monetary assets and liabilities method
A statement of source and application of net monetary assets or liabilities is often prepared as alternative proof of the net monetary gain or loss (see below). The items that cause changes in the monetary assets or liabilities are analysed, and the net balance of the monetary assets or liabilities is initially determined as if there were no changes, and is then adjusted for current-year movements. Restatements are performed, and the comparison with the actual net balance and movements of monetary assets or liabilities enables the monetary gain or loss to be approximated.

Conversion factor 1.649 for the year Opening position currency units Balance sheet: – cash – share capital – retained earnings Income statement: – monetary loss Monetary loss proof: Average monetary position for the year (10,000+10,000)/2 Change in inflation factor (1.649-1.000) Monetary loss estimated for the year Monetary loss per income statement 10,000 10,000 – Closing position currency units at the balance sheet date 10,000 16,490 (6,490) (6,490)

Inflation adjustment – 6,490 (6,490) (6,490)

10,000 0.649 6,490 (6,490)

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Monetary gain or loss

Procedures for the preparation of a statement of source and application of net monetary assets and liabilities are as follows: Historical column 1. Calculate the net monetary position at the beginning of the period under restatement. 2. Identify all items that caused changes in the monetary position during the period. These should be the actual or uninflated changes in the monetary position. These items can be obtained from the historical cost income statement or cash flow statement. 3. Arrive at the monetary position at the end of the period by adding or subtracting the changes as identified. Check that the monetary position as calculated is equal to the actual monetary position at the end of the period. Restated column 4. Calculate the net monetary position at the beginning of the period as in Step 1 above, but restate it for inflation for the entire period. The inflation adjustment restates the opening monetary position as if there were no monetary gain or loss – ie, by adjusting the opening monetary position as if the opening monetary assets and liabilities were not eroded as a result of inflation. 5. Inflate the changes in the monetary position (Step 2 above) but restate as if there were no monetary gain or loss; adjusting the changes in monetary position for inflation restates the monetary changes as if the monetary assets and liabilities obtained or disposed of during the period were not eroded as a result of inflation. These items may be obtained from the inflation adjusted income statement and/or cash flow statement. 6. Determine the net monetary position restated at period end as if inflation had not affected the monetary assets and liabilities. Note that the real monetary position does not change as a result of the inflation adjustment. Proof 7. Compare the actual net monetary position at the end of the period included in the ‘historical’ column with the restated net monetary position at the end of the period in the ‘restated’ column. The difference between the actual position and the restated monetary position is the estimate of the monetary gain or loss. This estimate should be compared to the actual gain or loss in the income statement. A simple example is set out on the next page. In this example, the inflation factor was 1.650, and there were two types of transactions that occurred evenly throughout the period.

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Monetary gain or loss

Opening position Balance sheet: – cash – trade receivables

Closing position

Inflation adjustments

Closing position at period end purchasing power

100 – 100 – 100 – 100

100 200 300 100 100 100 300

– –

100 200

– trade payables – share capital – current profit

– 65 (65)

100 165 35

Profit and loss: – credit sales – cost of sales – monetary loss * – profit *Monetary loss is calculated as follows: Monetary loss from sales Monetary gain from cost of sales Restatement of share capital

200 (100) – 100

60 (30) (95) (65)

260 (130) (95) 35

60 (30) 65 95

Monetary loss proof – statement of sources and application of net monetary assets and liabilities: Historical 100 200 (100) 200 (A) Restated 165 260 (130) (B) 295 95

Net monetary asset at the beginning of the period Add movement in receivables Deduct movement in payables

Monetary loss is ((A)-(B))

The proof of the monetary gain or loss may be more challenging if indexation differences on those monetary items that are linked to the inflation index were offset with the monetary gain or loss in the income statement, as required by IAS 29. Such components of the monetary gain or loss, as well as the IFRIC 7 inflation gains or losses on the tax bases of assets and liabilities, should be analysed separately.

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Monetary gain or loss

Frequently asked questions
Monetary gain or loss on the tax base
What is the monetary gain or loss on the tax base and how should it be calculated. A loss on the tax base is a monetary loss. Assume a company acquired equipment for 1,000 at 1 January 20X6, and the equipment is depreciated in a straight line over 10 years for IFRS and tax purposes. Inflation for the year was 80%, and the tax rate is 30%. The IFRS carrying amount of the equipment is 1,620 (1,000 x 1.8 less 10% depreciation) at 31 December 20X6. The tax base of the equipment is 900 at 31 December 20X6. The company should therefore recognise a deferred tax liability of 216, being 30% x (1,620 – 900). This deferred tax liability arose as a result of the following: Monetary loss on the tax base of the asset: (1,000 x 80%) multiplied by the tax rate 30% Difference between tax depreciation of 100 and IFRS depreciation of 180 (10% of the restated cost of 1,800) multiplied by the tax rate 30% Deferred tax liability 240

(24) 216

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Cash flow statement

Cash flow statement
The preparation of a cash flow statement under IAS 29 presents some challenges. All activity should be presented in current purchasing power, but readers of the financial statements must also be able to follow cash flows between the restated balance sheets and income statements. Most entities use the indirect method, although both methods are presented in the detailed example in Section 7. There are two unique elements in the hyperinflationary cash flow statement: • Net income before tax is adjusted for the monetary gain or loss for the period; and • The monetary loss on cash and cash equivalents is presented separately. The example below shows how the monetary gain element impacts financing activity.

Example
Below are the historical and price level adjusted movements in borrowings. Inflation in the year is 100%; average inflation for the year is 41%; assume movements occur rateably over the year. Balance 20X7 Historical movements Conversion factor Price level adjusted 1,000 2.0 2,000 Drawdown 500 1.41 705 Monetary gain – Balance 20X8 800 1.0 (918) 800

Repaid (700) 1.41 (987)

The cash flow from financing activities should include a drawdown of 705 and a repayment of 987. The monetary gain of 918 is recorded in the income statement and is eliminated from the cash flow statement as a non-cash item. It is useful to disclose the amount of the monetary gain in the notes to enable readers to understand movements in borrowings in the balance sheet.

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Illustrative example of IAS 29

Illustrative example of IAS 29
Contents
This section provides a detailed illustrative example of the application of IAS 29. The term ‘restated’ is used to describe financial statements after the application of IAS 29. The term ‘historical’ is used to describe financial statements before restatement to current purchasing power. This example is prepared for illustrative purposes only; income statement, statement of changes in shareholders’ equity and statement of cash flows are presented for one year. Comparatives are required to be disclosed by the reporting entity under IAS 1. This example does not cover all possible circumstances, nor does it take into account any specific legal framework. Further specific information may be required in order to ensure fair presentation under IFRS. Page A Historical financial statements (without notes) Historical balance sheets as at 31 December 2004 and 2005 A.I A.II Historical income statement for the year ended 31 December 2005 A.III Historical statement of cash flows for the year ended 31 December 2005 A.IV Historical statement of changes in equity for the year ended 31 December 2005 B Additional historical information required for IAS 29 restatement Property, plant and equipment B.I B.II Investments B.II.1 Investment in an associate B.II.2 Other long-term investments B.II.3 Trading investments B.III Inventories and production expenditures incurred B.III.1 Inventory movements for the year B.III.2 Analysis of production costs incurred within the period B.III.3 Holding period of inventory B.IV Equity B.IV.1 Share capital B.IV.2 Dividends B.V Long-term liabilities B.V.1 Deferred income – government grant B.V.2 Borrowings B.VI Revenue and expenses B.VI.1 Monthly revenue and expenses B.VI.2 Quarterly non-taxable income and non-deductible expenses B.VII Monetary items and cash flows B.VII.1 Other receivables B.VII.2 Other payables B.VII.3 Revenue – cash receipts B.VII.4 Operating cash disbursements B.VII.5 Rent prepayments B.VII.6 Trade accounts receivable B.VIII Net monetary position per quarter 33 33 34 35 37 38 38 39 39 39 39 40 40 40 40 41 41 41 41 41 41 42 42 42 43 43 43 43 43 44 44 44

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Illustrative example of IAS 29

C Inflation indices and conversion factors Monthly inflation indices C.I C.II Conversion factors to 31 December 2004 purchasing power C.III Conversion factors to 31 December 2005 purchasing power C.IV Mid-month and average conversion factors for 2005 C.V Other average conversion factors used D Background information for the illustrative example E Restatement procedures E.I Support schedule – monetary vs non-monetary balance sheet components E.II Restatement of property, plant and equipment and depreciation E.II.1 Restatement of cost to 31 December 2004 purchasing power E.II.2 Restatement of cost to 31 December 2005 purchasing power E.II.3 Calculation of accumulated depreciation at 31 December 2004 E.II.4 Calculation of depreciation charge for 2005 E.II.5 Calculation of disposal at 31 December 2005 purchasing power E.II.6 Accumulated depreciation reconciliation (31 December 2005 purchasing power) E.II.7 Inflation adjustment journal entries E.II.8 Restated property, plant and equipment E.III Restatement of investment in associate E.IV Restatement of long-term investment accounted for at cost E.V Restatement of trading investments E.VI Restatement of inventories and cost of sales E.VI.1 Process of the restatement of inventories E.VI.2 Restatement of raw materials E.VI.3 Restatement of sundry supplies E.VI.4 Restatement of work in progress E.VI.5 Restatement of finished goods and cost of sales E.VI.6 Restated inventories – summary E.VI.7 Inventory restatement overall adjustment E.VII Restatement of deferred income – government grant E.VIII Restatement of revenue and expenses E.IX Restatement of equity components and movements E.IX.1 Restatement of paid-in share capital E.IX.2 Restatement of dividends (declared and paid) E.IX.3 Reversal of statutory revaluation of property, plant and equipment E.X Deferred tax calculations E.XI Current-year inflation adjustment to opening retained earnings E.XII Summary schedule of inflation adjustment journal entries E.XIII Monetary loss on the tax base of assets and liabilities E.XIV Tax reconciliation: non-deductible expenses and non-taxable income

Page 45 45 45 46 46 47 48 49 49 50 50 50 51 51 52 52 53 53 54 54 55 56 56 57 57 58 59 60 60 61 62 63 63 63 64 65 67 68 70 71

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Illustrative example of IAS 29

F Monetary proof Monetary proof based on average quarterly net monetary position F.I G Support for restatement of statement of cash flows Revenue collected G.I G.II Operating outflows G.II.1 Raw materials G.II.2 Wages, utilities and overheads G.II.3 Rent payments G.II.4 Income tax paid G.III Trade receivables and impairment loss on trade and other receivables G.IV Inflation effect on: G.IV.1 Cash G.IV.2 Bank overdrafts G.IV.3 Borrowings G.IV.4 Non-operating activities and income tax G.V Other accounts receivable and payable H Restated financial statements Restated balance sheets at 31 December 2004 and 2005 H.I H.II Restated income statement for year ended 31 December 2005 H.III Restated statement of cash flows for year ended 31 December 2005 H.IV Restated statement of changes in equity for year ended 31 December 2005 H.V Income tax reconciliation H.VI Non-temporary element of monetary loss

Page 72 72 73 73 73 73 73 73 73 74 74 74 74 75 75 76 77 77 78 79 81 82 82

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Illustrative example of IAS 29

A. Historical financial statements
A.I Historical balance sheet
(all amounts expressed in HCU)

Additional historical information ASSETS Non-current assets Property, plant and equipment Associates Other long-term investments Current assets Inventories Trade receivables Other receivables Trading investments Cash Total assets EQUITY AND LIABILITIES Equity Share capital Revaluation reserve Translation reserve Retained earnings Non-current liabilities Deferred income – government grant Borrowings Current liabilities Bank overdrafts Trade payables Current tax liabilities Other payables Total equity and liabilities
HCU – Historical currency units CCU – Current currency units

31 December 2005

31 December 2004

B.I B.II.1 B.II.2

54,163 35,630 11,000 100,793 19,410 28,170 1,500 15,000 9,742 73,822 174,615

43,337 16,320 10,000 69,657 15,170 19,400 1,000 5,000 5,750 46,320 115,977

B.III B.VII.6 B.VII.1 B.II.3

B.IV.1

22,000 47,157 13,010 22,328 104,495 2,800 29,000 31,800 8,060 24,760 353 5,147 38,320 174,615

17,000 38,130 – 20,697 75,827 3,200 15,000 18,200 5,200 10,750 153 5,847 21,950 115,977

B.V.1 B.V.2

B.VII.2

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Illustrative example of IAS 29

A.II Historical income statement
(all amounts expressed in HCU)

Additional historical information Sales Cost of sales Gross profit General and administrative expenses: Wages and salaries Depreciation expense Rent expense Impairment loss on trade and other receivables Other administrative expenses Amortisation of government grant Gain on sale of property, plant and equipment B.VI.1

Year-ended 31 December 2005 104,250 (69,750) 34,500

B.VI.1 B.VI.1 B.VI.1 B.V.1 B.I

(7,000) (3,447) (3,000) (2,450) (8,000) 400 386 (23,111) 11,389

Operating profit Finance income and costs: Gain on trading investments Interest income Interest expense Net foreign exchange losses Share of result of associate Profit before tax Income tax expense Profit for the year B.VI.1

B.II.3

B.VI.1 B.II.1

4,000 762 (2,000) (12,620) (9,858) 6,300 7,831 (1,200) 6,631

HCU – Historical currency units

CCU – Current currency units

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A.III Historical statement of cash flows
DIRECT METHOD CASH FLOW
(all amounts expressed in HCU)

Additional historical information Cash flows from operating activities Cash receipts from customers Cash paid for production materials and other supplies Cash paid to employees and for utilities and overheads Rent paid Income tax paid Net cash flow from operating activities Cash flows from investing activities Purchase of trading investments, net Purchase of other investments Purchase of property, plant and equipment Interest received Proceeds from sale of property, plant and equipment Net cash flow used in investing activities Cash flows from financing activities Proceeds from paid-in share capital Proceeds from bank overdrafts, net Interest paid Dividends paid Net cash from financing activities Net increase in cash Cash at the beginning of the period Cash at the end of the period
HCU – Historical currency units CCU – Current currency units

Year-ended 31 December 2005

B.VII.3 B.VII.4 B.VII.4 B.VII.5

94,410 (18,484) (53,386) (3,200) (1,000) 18,340

B.II.3 B.II.2 B.I B.I

(6,000) (1,000) (10,000) 162 1,500 (15,338)

B.IV.1

B.IV.2

5,000 2,860 (1,870) (5,000) 990 3,992 5,750 9,742

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Illustrative example of IAS 29

A.III Historical statement of cash flows (continued)
INDIRECT METHOD CASH FLOW
(all amounts expressed in HCU)

Additional historical information Cash flows from operating activities Profit before tax Adjustments for: Depreciation charge Impairment loss on trade and other receivables Amortisation of government grant Gain on sale of property, plant and equipment Share of result of associate Increase in fair value of trading investments Interest income Interest expense Foreign exchange loss on financing and investing activities Profit before changes in working capital Changes in working capital: Increase in trade receivables Increase in inventory Decrease in other receivables Increase in trade payables Decrease in other payables

Year-ended 31 December 2005

7,831

B.V.1

7,087 2,450 (400) (386) (6,300) (4,000) (762) 2,000 14,000 21,520

B.VII.6 B.VII.1 B.VII.2

(11,220) (4,240) 100 14,010 (830) (2,180) 19,340 (1,000) 18,340

Cash generated from operations: Income tax paid Net cash flow from operating activities (same as for direct method)
HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

A.IV Historical statement of changes in equity
(all amounts expressed in HCU)

Additional historical information Balance at 1 January 2005 Revaluation of property, plant and equipment Currency translation differences Net income recognised directly in equity Profit for the year Total recognised income Share capital paid in Dividends declared in 2005 B.IV.1

Share capital 17,000

Revaluation reserve 38,130

Translation reserve –

Retained earnings 20,697

Total 75,827

B.I B.II.1

– – – – –

9,027 – 9,027 – 9,027 – – – 47,157

– 13,010 13,010 – 13,010 – – – 13,010

– – – 6,631 6,631 – (5,000) (5,000)

9,027 13,010 22,037 6,631 28,668 5,000 (5,000) –

B.IV.1 B.IV.2

5,000 – 5,000 22,000

Balance at 31 December 2005
HCU – Historical currency units CCU – Current currency units

22,328 104,495

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Illustrative example of IAS 29

B. Additional historical information required for IAS 29 restatement
B.I Property, plant and equipment
(all amounts expressed in HCU)

Property, plant and equipment Gross book value (GBV) Accumulated depreciation Net book value (NBV) Gross book value Date of GBV (as acquisition revalued) 23 January 2002 12,800 12 January 2003 30,000 January 2002 8,000 January 2002 7,800 58,600 June 2005 27 December 2005 10,000 (2,600) 13,200 79,200 Historical expenditures 1,600 9,000 1,200 1,500 13,300 10,000 (500) – 22,800
Details of acquisition/disposal The workshop was received as a contribution to share capital and was originally recorded at fair value. The production line was constructed within a year. The table below contains data on expenditures incurred. The office building is rented under an operating lease agreement for 6 years. It was completely renovated at inception of the lease.

2004 58,600 (15,263) 43,337

2005 79,200 (25,037) 54,163

Note GBV is the historical cost as revalued for statutory reporting purposes.

Workshop building Production line Leasehold improvements Office equipment Total at 31 December 2004 Acquired during 2005 Disposed during 2005 2005 statutory revaluation Total at 31 December 2005

New office equipment was acquired. 1/3 of office equipment was disposed of for a cash consideration of HCU 1,500. The index prescribed by the statute was 1.2 for all assets recorded at 31 December 2005.

Production line: equipment and installation works Cost of production line which was put into operations on 12 January 2003 were incurred as follows: Cost incurred 27 February 2002 within April 2002 29 July 2002 within October 2002 first week of December 2002 HCU 3,700 1,300 1,670 1,300 1,030 9,000

Equipment bought Installation cost – phase II Environmental block Installation cost – phase II Final testing Total expenditures incurred

Accumulated depreciation Estimated useful life (years) 20 Workshop building Production line 10 Leasehold improvements 6 Office equipment 7 Acquired in 2005 5 Disposed of in 2005 2005 statutory revaluation Total accumulated depreciation

2004 HCU 1,920 6,000 4,000 3,343 x x x 15,263

2005 HCU 2,560 9,000 5,333 4,457 1,000 (1,486) 4,173 25,037

Note: Current-year depreciation charge of HCU 7,087 is comprised of HCU 3,640, included in conversion costs for production, and HCU 3,447, included in administrative and general expenses. HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

B.II Investments B.II.1 Investment in an associate
A 25% share in company A, a company incorporated in Cyprus, was acquired on 30 December 2004. Fair value of net assets acquired Cash paid Goodwill Share of net assets at 31 December 2004 Share of result for 2005 Foreign exchange differences Share of net assets at 31 December 2005
Note: The associate’s financial statements comply with IFRS.

HCU 16,000 (16,000) – 16,320 6,300 13,010 35,630

B.II.2 Other long-term investments
Other long-term investments represent a 6% interest in Company B. Company B is a domestic company and is not listed. It is carried at cost. Date of acquisition 31 March 2003 27 March 2005 % acquired 5% 1% HCU 10,000 10,000 1,000 11,000

Initial purchase Balance at 31 December 2004 Additional purchase in 2005 Balance at 31 December 2005

The fair value of the investment at 31 December 2005 was HCU 41,000 (2004: HCU 23,500).

B.II.3 Trading investments
Trading investments represent equity investments in ‘blue chips’, which are carried at market value. Excess cash is invested in the blue chip market in order to realise short-term trading gains. Movements of trading investments are summarised as follows:
(all amounts expressed in HCU)

Additions (at cost) 9,900 8,750 5,300 6,000 29,950

Disposals (at proceeds) (6,950) (5,700) (5,160) (6,140) (23,950)

Balance at 31 December 2004 Quarter I Quarter II Quarter III Quarter VI Gain on trading investments (income statement) Balance at 31 December 2005
HCU – Historical currency units CCU – Current currency units

Balance (at market value) 5,000

6,000 4,000 15,000

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Illustrative example of IAS 29

B.III Inventories and production expenditures incurred B.III.1 Inventory movements for the year
(all amounts expressed in HCU)

Raw materials Sundry supplies Work in progress Finished goods

2004 3,520 340 1,850 9,460 15,170

Receipts 34,870 2,376 71,800 70,340 179,386

Utilised/sold 33,070 1,986 70,340 69,750 175,146

2005 5,320 730 3,310 10,050 19,410

Note: The inventory is valued using average cost approach. Net realisable value as at 31 December 2005 is HCU 30,000 (2004: HCU 24,000).

B.III.2 Analysis of production costs incurred within the period
2005 HCU Direct: Direct raw materials Labour* Depreciation Utilities and other* Overhead materials Other overheads* 33,070 20,362 3,640 5,321 1,986 7,421 71,800 % 46.1% 28.3% 5.1% 7.4% 2.8% 10.3% 100.0% 2004 HCU 23,340 17,690 3,640 3,829 1,711 6,510 56,720 % 41.1% 31.2% 6.4% 6.8% 3.0% 11.5% 100.0%

Note: Work in progress average stage of completion is 50% with all direct materials being input at the beginning of the production cycle.

*Quarterly labour, utilities and overhead expenses are as follows: Quarter II Quarter II Quarter III Quarter IV Total for the year HCU 8,172 7,902 9,232 7,798 33,104

B.III.3 Holding period of inventory
(in months)

Raw materials Sundry supplies Work in progress (WIP) Finished goods

Holding period 1.6 3.2 0.4 1.7

Within work in progress 2.0 3.6 x x

Within finished goods 3.7 5.3 2.1 x

Note: The actual age of the inventories, including WIP, should be determined based on the date of purchase or costs incurred. This example uses an average age of WIP and finished goods turnover for simplicity. Average age of inventory may not be appropriate for use in the IAS 29 calculation in some circumstances. HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

B.IV Equity B.IV.1 Share capital
An analysis of share capital contributions is as follows: Date of contribution HCU Comments Half of the shares were paid in cash and half in consideration of workshop (see B.I) at par value. Paid in cash at par value. Second issue registered at 3 May 2004 was HCU 12,000.

Initial contributions Initial contributions Paid in first installment of second issue Balance at 31 December 2004 Paid in remainder of second issue Balance at 31 December 2005

23 Jan 2002 30 Jun 2002 5 Dec 2004

6,400 3,600 7,000 17,000 5,000 22,000

24 Sep 2005

The shares were paid in cash at par value.

B.IV.2 Dividends
Dividends of HCU 5,000 were declared in June 2005 and paid in cash at the end of November 2005.

B.V Long-term liabilities B.V.1 Deferred income – government grant
On 30 June 2002, the Company received a grant of HCU 4,000 for capital expenditures and accounted for this as deferred income. The grant was conditional based on installment of an environmental block in the production line (see B.I). The grant is amortised to income on a straight-line basis over the depreciation period of the related assets starting January 2003.

B.V.2 Borrowings
Borrowed funds represent a US$ loan. The loan is to be repaid in 2007. There were no movements during the year in US$ terms, unrealised foreign exchange loss was as follows: US$ 5,000 5,000 Exchange rate 3.00 5.80 HCU 15,000 29,000 14,000

Balance at 31 December 2004 Balance at 31 December 2005 Foreign exchange loss charged to the income statement
HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

B.VI Revenue and expenses B.VI.1 Monthly revenue and expenses
(all amounts expressed in HCU)

January February March Quarter I April May June Quarter II July August September Quarter III October November December Quarter IV

Revenue 5,750 6,245 7,940 19,935 7,475 9,250 9,370 26,095 11,150 10,115 9,455 30,720 9,970 8,850 8,680 27,500 104,250

General and admin expenses Rent Wages Other 233 233 234 700 1,477 1,558 233 233 234 700 1,506 1,921 233 233 234 700 1,901 2,263 300 300 300 900 2,116 2,258 3,000 7,000 8,000

Foreign exchange Current Gain Loss* tax** (124) 1,094 (49) 194 (104) 1,412 (277) 2,700 254 (207) 1,842 (164) 1,584 (121) 1,495 (492) 4,921 572 (109) 1,319 (113) 1,036 (26) 1,557 (248) 3,912 21 (85) 479 (101) 871 (177) 1,117 (363) 2,467 353 (1,380) 14,000 1,200

* The foreign exchange loss results from borrowings. The foreign exchange gain results from a number of small receivables. **The Company calculates and accrues income tax only at the end of each quarter based on quarterly tax returns. A monetary gain related to the current tax liability will result from the time there is a legal liability to the government.

B.VI.2 Quarterly non-taxable income and non-deductible expenses
(all amounts expressed in HCU)

Quarter I Quarter II Quarter III Quarter IV

Non-taxable revenue – – 801 593 1,394

Non-deductible expenses 728 2,148 555 432 3,863

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Illustrative example of IAS 29

B.VII Monetary items and cash flows B.VII.1 Other receivables
At 31 December 2005, other receivables included HCU 600 (2004: HCU nil) of dividends from trading investments declared but not paid and HCU 900 (2004: HCU 700) of quarterly rent paid in advance in accordance with a lease agreement. The rest of the other receivables are sundry pre-payments of an operating nature.

B.VII.2 Other payables
As at 31 December 2005, other payables included HCU 190 (2004: HCU 60) of December interest on borrowings payable within five days after each month-end. The rest of other payables are sundry payables of operating nature.

B.VII.3 Revenue – cash receipts
(all amounts expressed in HCU)

Quarter I January 7,340 February 8,740 March 8,160 Quarter 24,240 Total for the year

Quarter II April May June

7,420 8,030 7,330 22,780

Quarter III July August September

6,720 7,720 8,240 22,680

Quarter IV October November December

7,730 8,220 8,760 24,710 94,410

B.VII.4 Operating cash disbursements
(all amounts expressed in HCU)

Raw materials Quarter I Quarter II Quarter III Quarter IV 4,477 3,923 4,651 5,433 18,484

Wages, utilities and overheads 10,810 12,373 14,692 15,511 53,386

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Illustrative example of IAS 29

B.VII.5 Rent prepayments
Rent is payable quarterly in advance. The following payments were made: Date of cash outflow 27 March 29 June 17 September 25 December HCU 700 700 900 900 3,200

B.VII.6 Trade accounts receivable
(all amounts expressed in HCU)

Trade receivables, gross Impairment loss on trade and other receivables Trade receivables, net

2004 22,650 (3,250) 19,400

2005 33,870 (5,700) 28,170

Note: The Company reassesses its impairment loss provision for trade and other receivables once a year at the year-end.

B.VIII Net monetary position per quarter
(all amounts expressed in HCU)

31 December 2004 22,650 (3,250) 1,000 5,750 26,150

31 March 2005 18,945 (3,250) 1,125 5,745 22,565

30 June 30 September 31 December 2005 2005 2005 22,760 (3,250) 1,250 7,746 28,506 31,400 (3,250) 1,500 8,741 38,391 33,870 (5,700) 1,500 9,742 39,412

ASSETS Trade receivables Impairment loss provision for trade and other receivables Other receivables Cash Total assets LIABILITIES Borrowings Bank overdrafts Trade payables Dividends payable Current income tax liability Other payables Total liabilities Net monetary position
HCU – Historical currency units

(15,000) (5,200) (10,750) – (153) (5,847) (36,950) (10,800)
CCU – Current currency units

(17,700) (5,922) (15,037) – (254) (4,847) (43,760) (21,195)

(22,621) (6,630) (19,878) (5,000) (572) (4,847) (59,548) (31,042)

(26,533) (3,340) (23,991) (5,000) (21) (4,847) (63,732) (25,341)

(29,000) (8,060) (24,760) – (353) (5,147) (67,320) (27,908)

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Illustrative example of IAS 29

C. Inflation indices and conversion factors
C.I Monthly inflation indices
Monthly inflation indices represent monthly general growth in prices; that is, the ratio of a month’s end prices to the prior month-end prices. Generally, such indices are publicly available. Inflation for a month/monthly inflation index 2002 2003 2004 2005 January 9.0%/1.090 5.6%/1.056 6.5%/1.065 3.6%/1.036 5.8%/1.058 6.2%/1.062 4.5%/1.045 3.4%/1.034 February March 7.0%/1.070 6.0%/1.060 4.0%/1.040 4.0%/1.040 April 8.1%/1.081 5.5%/1.055 4.2%/1.042 5.3%/1.053 May 4.1%/1.041 5.2%/1.052 3.2%/1.032 3.2%/1.032 June 2.7%/1.027 3.4%/1.034 1.6%/1.016 1.8%/1.018 July 2.4%/1.024 5.3%/1.053 2.5%/1.025 4.0%/1.040 August 3.8%/1.038 5.3%/1.053 2.4%/1.024 3.3%/1.033 September 5.1%/1.051 6.3%/1.063 5.3%/1.053 5.9%/1.059 October 5.5%/1.055 6.6%/1.066 4.2%/1.042 3.7%/1.037 November 5.1%/1.051 5.6%/1.056 3.4%/1.034 3.9%/1.039 December 3.9%/1.039 5.4%/1.054 2.5%/1.025 3.9%/1.039 Accumulated for the year 83.5%/1.835 90.8%/1.908 54.3%/1.543 56.9%/1.569

C.II Conversion factors to 31 December 2004 purchasing power
From the end of: January February March April May June July August September October November December 2002 4.965 4.691 4.383 4.055 3.894 3.791 3.703 3.568 3.395 3.219 3.062 2.946 2003 2.789 2.626 2.477 2.347 2.231 2.157 2.049 1.946 1.831 1.717 1.626 1.543 2004 1.448 1.385 1.332 1.280 1.240 1.221 1.191 1.163 1.104 1.060 1.025 1.000

Conversion factor for the end of December 2004 is 1.000; for the end of any other month, it is calculated by multiplying monthly inflation indices for all subsequent months up to December 2004. For example: end of September 2004 factor is 104.2/100 x 103.4/100 x 102.5/100 (see monthly inflation indices above) = 1.104
HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

C.III Conversion factors to 31 December 2005 purchasing power
From the end of: January February March April May June July August September October November December 2002 7.790 7.360 6.877 6.363 6.110 5.948 5.810 5.599 5.327 5.050 4.805 4.623 2003 4.376 4.120 3.886 3.682 3.500 3.385 3.215 3.053 2.873 2.693 2.551 2.421 2004 2.273 2.173 2.089 2.009 1.945 1.916 1.868 1.824 1.732 1.663 1.608 1.569 2005 1.515 1.466 1.410 1.339 1.297 1.274 1.225 1.186 1.120 1.079 1.039 1.000

Conversion factor for the end of December 2005 is 1.000; for the end of any other month, it is calculated by multiplying monthly inflation indices for all subsequent months up to December 2005. For example: end of September 2005 factor is 103.7/100 x 103.9/100 x 103.9/100 (see monthly inflation indices above) = 1.120

C.IV Mid-month and average conversion factors for 2005
• The nearest conversion factor is used to restate a specific transaction. The average conversion factor for the period is generally used to restate a significant volume of transactions of similar type (eg, sales). • As inflation is constant within each month, the mid-month conversion factors have been used as a monthly average. Mid-month conversion factor is the geometrical average, as illustrated in the following example: For October, the conversion factor is 1.099 = square root ([103.7/100]x[103.9/100]x[103.9/100]). • Quarterly averages and average for the year were calculated as arithmetic average of the mid-month indices. Conversion factors Quarterly average

January February March April May June July August September October November December
HCU – Historical currency units

Monthly indices (C.I+100%) 103.6% 103.4% 104.0% 105.3% 103.2% 101.8% 104.0% 103.3% 105.9% 103.7% 103.9% 103.9%
CCU – Current currency units

Mid-month (and monthly average) 1.542 1.491 1.438 1.374 1.318 1.285 1.249 1.205 1.153 1.099 1.059 1.019

Average for the year

1.490

1.326

1.202

1.059

1.269

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Illustrative example of IAS 29

C.V Other average conversion factors used
The following conversion factors required for restatement were calculated, based on the same principles as described at C.IV. Conversion factor up to Conversion factor up to 31 December 2004 31 December 2005 purchasing power purchasing power 4.216 6.615 Average for April 2002 Average for October 2002 3.306 5.187 Mid-July 2004 1.206 1.892 Mid-September 2004 1.088 1.707 Mid-November 2004 1.042 1.635 Mid-December 2004 1.012 1.588
HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

D. Background information for the illustrative example
D.I Background information for the illustrative example
1. The historical financial statements comply with IFRS, except for the following: 1.1. Property, plant and equipment is revalued using pre-defined statutory indices. These indices are accepted for tax purposes. 1.2. Investment in unlisted company targeted for acquisition is accounted at cost. 1.3. Hyperinflationary restatement was not applied. 1.4. Deferred tax was not calculated and accrued. 2. The following measurement units are used in the illustrative example: • HCU – historical currency units – the nominal currency of the hyperinflationary economy; • CCU – current currency units – the units of year end purchasing power (2004 or 2005 depending on the underlying item). If the relevant year-end purchasing power is not evident, the following abbreviations are used: • 2004 CCU – current currency units in 31 December 2004 purchasing power; • 2005 CCU – current currency units in 31 December 2005 purchasing power. 3. The relevant line items in the statements of income and of cash flow may be restated on a monthly, quarterly, or annual average basis, or on the basis of actual expenditure or cash flows, depending on the level of fluctuation of the underlying transactions, rate of inflation, and materiality of the respective amounts. Although there is an element of judgement inherent in the determination of the basis of restatement for these items, the assumptions used and judgements made should be consistent between the items and statements. In order to illustrate the effects of the application of a range of indices, various conditions have been assumed, and these have resulted in varying bases for the restatement. 4. All investing and financing activities’ cash flows including property, plant and equipment purchases and installation works are close to the date of the underlying acquisition or disposal transaction unless otherwise indicated. 5. The company is not subject to VAT or any other taxes besides income tax. 6. Income tax is calculated based on the historical income statement except for certain non-tax deductible expenses and non-taxable income. There are no temporary differences between the historical carrying values and their tax bases except for the associate. Income from associate is not taxed if not repatriated through dividends or sale of business. Profit repatriation tax is 30% on cash received. The Company pays its current income tax liabilities one month after each quarter-end without delay. Enacted income tax rate of 30% applies to the current and all future periods.
HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

E. Restatement procedures
E.I Support schedule – monetary vs non-monetary balance sheet components
Monetary (accumulate monetary gains/losses, to be used for monetary proof) ASSETS Non-current assets Property, plant and equipment Investment in associates Other long-term investments (6% investment in Company B) Current assets Inventories Trade receivables Impairment loss provision for trade and other receivables Other receivables Trading investments (equity securities) Cash LIABILITIES AND EQUITY Capital and reserves Share capital Revaluation reserve Translation reserve Retained earnings Non-current liabilities Deferred income – government grant Borrowings Current liabilities Bank overdrafts Trade payables Current income tax liability Other payables Non-monetary (restate and include in adjustment schedule) 

  

     

n/a   

 

  

Classification of deferred taxes as either monetary or non-monetary has no impact on the calculated amount of deferred tax assets or liabilities recognised in the balance sheet in accordance with IAS 12 and IAS 29.
HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

E.II Restatement of property, plant and equipment, and depreciation E.II.1 Restatement of cost to 31 December 2004 purchasing power
Acquired/incurred Equipment bought 27 February 2002 Installation cost – phase II within April 2002 Environmental block 29 July 2002 Installation cost – phase II within October 2002 Final testing first week of December 2002 Total production line Workshop building 23 January 2002 Leasehold improvements January 2002 Office equipment January 2002 HCU Conversion (B.I) factor (C.II) 3,700 4.691 1,300 4.216 1,670 3.703 1,300 3.306 1,030 3.062 9,000 1,600 4.965 1,200 4.965 1,500 4.965 13,300 2004 CCU 17,357 5,481 6,184 4,298 3,154 36,474 7,944 5,958 7,448 57,824 2004 CCU-HCU

44,524 a

E.II.2 Restatement of cost to 31 December 2005 purchasing power
Acquired/incurred Equipment bought 27 February 2002 Installation cost – phase II within April 2002 Environmental block 29 July 2002 Installation cost – phase II within October 2002 Final testing first week of December 2002 Total production line Workshop building 23 January 2002 Leasehold improvements January 2002 Office equipment January 2002 Total cost at 31 December 2004 Addition June 2005 Disposal January 2002 Total cost at 31 December 2005 HCU Conversion (B.I) factor (C.III) 3,700 7.360 1,300 6.615 1,670 5.810 1,300 5.187 1,030 4.804 9,000 1,600 7.790 1,200 7.790 1,500 7.790 13,300 10,000 1.274 (500) 7.790 22,800 2005 CCU 27,232 8,600 9,703 6,743 4,948 57,226 12,464 9,348 11,685 90,723 12,740 (3,895) 99,568 2005 CCU-HCU

77,423 2,740 (3,395) c 76,768 b

Note: The statutory revaluation surplus has been reversed against revaluation reserve in order to calculate actual historical costs (see E.IX.3) HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

E.II.3 Calculation of accumulated depreciation at 31 December 2004
The restated cost calculated above is the basis for determining the restated depreciation. The historical depreciation was reversed (see ADJ 2 on E.XII) and has been replaced by CCU amounts calculated below: Useful economic life UEL 10 20 6 7 In use as at 31 December 2004 Y 2 3 3 3 Accumulated depreciation at 31 December 2004 2005 CCU2004 CCU 2005 CCU 2004 CCU Y*E.II.1/UEL Y*E.II.2/UEL 7,295 11,445 1,192 1,870 2,979 4,674 3,192 5,008 22,997 8,339 14,658

Production line Workshop building Leasehold improvements Office equipment

d

E.II.4 Calculation of depreciation charge for 2005
Useful economic life 10 20 6 7 5 Used in the year 1 1 1 1 1/2 Depreciation charge 2005 CCU 5,723 623 1,558 1,669 1,274 10,847

Production line Workshop building Leasehold improvements Office equipment Office equipment – addition

}

Production expenses General & admin

6,346

e

}

4,501H.II,f H.III

HCU – Historical currency units

CCU – Current currency units

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Illustrative example of IAS 29

E.II.5 Calculation of disposal at 31 December 2005 purchasing power
HCU (B.I) Date 1,500 27 December 2005 HCU (B.I) 2,600 (1,486) (1,500) (386) CCU 3,895 (2,226) (1,500) 169 Conversion factor (C.III) 1.000 CCU 1,500 CCU-HCU 1,295 (740) – 555

Proceeds

Gross book value Accumulated depreciation (1/3 of total depreciation on office equipment) Proceeds (Gain)/loss on disposal

E.II.6 Accumulated depreciation reconciliation at 31 December 2005 purchasing power
Accumulated depreciation at 31 December 2004 Depreciation charge for 2005 Disposed Accumulated depreciation at 31 December 2005
HCU – Historical currency units CCU – Current currency units

Source E.II.3 E.II.4 E.II.5

CCU 22,997 10,847 (2,226) h 31,618 g

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Illustrative example of IAS 29

E.II.7 Inflation adjustment journal entries
i) Reversal of statutory depreciation (recorded in E.XII as ADJ 2) Property, plant and equipment Dr 20,864 Gain on disposal of property, plant and equipment Dr 1,486 Retained earnings – opening balance Cr (8,093) Cr (7,170) Revaluation reserve General and administrative expenses, depreciation Cr (3,447) Temporary holding account (current period expenses)* Cr (3,640) 22,350 (22,350)
Historical accumulated depreciation at 31 December 2005 Historical accumulated depreciation for disposed assets Historical accumulated depreciation at 31 December 2004 Prior-year revaluation of accumulated depreciation 2005 historical depreciation charged to general expenses 2005 historical depreciation included in costs of conversion

ii) Restatement of property, plant and equipment cost (recorded in E.XII as ADJ 3) Property, plant and equipment Dr 76,768 b Gain on disposal of property, plant c and equipment Dr 3,395 Retained earnings – opening balance Cr (44,524) a 80,163 (44,524) Net monetary loss Cr (35,639) b+c–a 80,163 (80,163) iii) Accumulated depreciation in 2005 purchasing power (recorded in E.XII as ADJ 4) Retained earnings – opening balance Dr 14,658 d (opening accumulated depreciation in 2004 CCU) General and administrative expenses, e depreciation Dr 4,501 Temporary holding account (current f period expenses)* Dr 6,346 Property, plant and equipment Cr (31,618) g Gain on disposal of property, plant and Cr (2,226) h equipment 25,505 (33,844) 8,339 Net monetary loss Dr d (2005 inflation surplus on opening accumulated depreciation) 33,844 (33,844) The depreciation forms part of period costs allocated among WIP, finished goods and cost of goods sold. However, for simplicity, no allocation of the current period depreciation is done at this stage. A temporary holding account was used to accumulate the depreciation on the historical cost of the assets, which is being eliminated. The amounts included in this holding account are appropriately allocated to inventories or cost of goods sold during the restatement of inventory. See section E.VI.

E.II.8 Restated property, plant and equipment
(all amounts expressed in 2005 CCU)

Gross book value Accumulated depreciation Net book value
HCU – Historical currency units

Source E.II.2 E.II.6

2004 90,723 (22,997) 67,726

2005 99,568 (31,618) 67,950

CCU – Current currency units

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Illustrative example of IAS 29

E.III Restatement of investment in an associate
As the foreign associate is accounted for at exchange rates current at the balance sheet date, no restatement of this balance sheet component is required at 31 December 2005. However, the restatement is necessary to calculate the appropriate translation reserve charge and monetary gain or loss for the period. Share of result of the associate was restated by the average conversion factor for 2005. Conversion CCU CCU-HCU HCU (B.II.1) factor (C.III) Share of net assets at 31 December 2004 16,320 1.569 25,606 9,286 c Share of result of associate 6,300 1.269 7,995 1,695 b Foreign exchange difference 13,010 Balancing 2,029 (10,981) a Share of net assets at 31 December 2005 35,630 1.000 35,630 – IAS 29 adjustment entry (recorded in E.XII as ADJ 6) Translation reserve Dr 10,981 Share of result of associate Cr Net monetary loss Cr 10,981

a (1,695) b (9,286) c=a+b (10,981)

E.IV Restatement of long-term investments accounted for at cost
The investment in Company B should be restated from the date of acquisition. Such investments fall in availablefor-sale investments group and should be fair valued in accordance with IAS 39. At cost Conversion Fair Fair Conversion (B.II.2), factor Cost CCUvalue valuefactor date HCU (C.II, C.III) CCU HCU (B.II.2) CCU Initial acquisition 31 March 2003 10,000 Balance at 31 December 2004 2.477 24,770 14,770 23,500 (1,270) b in 2004 purchasing power 2005 inflation of 56.9% (from conversion factor 1.569) 14,094 13,372 c Balance at 31 December 2004 in 2005 purchasing power 3.886 38,864 28,864 36,872 (1,992) Additions 27 March 2005 Cost at 31 December 2005 Fair value adjustment (equity) (calculated) Carrying value at 31 December 2005 (B.II.2) 1,000 11,000 1.410 1,410 40,274 410 29,274 1,410 2,718 41,000 d a 726 e

IAS 29 and IAS 39 adjustment entry (recorded in E.XII as ADJ 7) 30,000 Dr Other long-term investments Fair value reserve Cr (726) (14,770) Cr Retained earnings – opening balance Net monetary loss Cr (14,504) 30,000 (30,000)
HCU – Historical currency units CCU – Current currency units

a+e e b (CCU – HCU) c (for cost)+d

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Illustrative example of IAS 29

E.V Restatement of trading investments
As trading investments are carried at market value (ie, a unit current at the balance sheet date), no restatement of this balance sheet component is required at 31 December 2005. However, the restatement is necessary to calculate the appropriate income statement effect of the change in market value of the trading investments and monetary effect for the period. Conversion Conversion factor date HCU (B.II.3) factor (C.III) Balance at 31 December 2004 (market value) Additions, at cost Additions, at cost Additions, at cost Additions, at cost Disposal, at proceeds Disposal, at proceeds Disposal, at proceeds Disposal, at proceeds Net additions for 2005 Balance at 31 December 2005 (market value) Income statement, gain/(loss) on trading investments 31 Dec 2004 Q1 average Q2 average Q3 average Q4 average Q1 average Q2 average Q3 average Q4 average 5,000 9,900 8,750 5,300 6,000 (6,950) (5,700) (5,160) (6,140) 6,000 11,000 15,000 4,000 1.569 1.490 1.326 1.202 1.059 1.490 1.326 1.202 1.059 1.410

CCU 7,845 14,751 11,602 6,371 6,354 (10,356) (7,558) (6,202) (6,502) 8,460 16,305 15,000 (1,305)

CCU-HCU 2,845

2,460 5,305 – (5,305)

31 Dec 2005

1.000

IAS 29 adjustment entry (recorded in E.XII as ADJ 8): Gain on trading investments Net monetary loss
HCU – Historical currency units

Dr Cr

5,305 (5,305)

CCU – Current currency units

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Illustrative example of IAS 29

E.VI Restatement of inventories and cost of sales E.VI.1 Process of the restatement of inventories
The order of restating inventory should follow the production process. The order is necessary in order to consider the cumulative effect of holding materials and expenditures throughout the production process. The restatement may be broken down into four stages: 1) Restatement of opening inventories The restatement is based on the period of holding the inventory or costs incurred (for work in progress (WIP) and goods produced). a) The opening balances should be restated to the prior year-end purchasing power. That is, all raw materials and component costs of finished goods and WIP should be restated from the date of acquisition or expenditure to the opening balance sheet date. The difference (inflation effect) relates to the prior year(s) and is included in the opening retained earnings.

b) The opening inventories presented in prior-year purchasing power should be restated to current year-end purchasing power. The resulting difference would be credited to monetary loss for the current period. 2) Restatement of period additions The restatement of additions to inventory may require the historical information to be restated on a monthly or quarterly basis, depending on the rate of inflation during the year and timing of expenditures. However, yearly average inflation (ie, conversion factor of 1.269) has been used in this illustrative example. WIP additions throughout the year should be inflated from the date of acquisition or expenditure. 3) Restatement of closing inventories Restatement of closing inventory should be performed in the same manner as the restatement of opening inventories. 4) Calculation of the inventory used in the production process Inventory disposals in terms of current year-end purchasing power could be calculated as follows (all amounts should be expressed in 2005 CCU): Opening inventory balance Plus additions on account for 2005 Less closing inventory balance Raw materials shipped for conversion, WIP completed or cost of sales (depends on type of inventory) in 2005 CCU
HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

E.VI.2 Restatement of raw materials
The following restatement of inventories was performed following the described algorithm: HCU (B.III.1) Opening balance (1.6 months holding period) 2005 inflation of 56.9% (from conversion factor 1.569) Opening balance in 2005 CCU Receipts Less: closing balance (1.6 months holding period) Raw materials usage 3,520 Conversion factor* 1.042 1.569 1.635 1.269 1.059 2004 CCU 3,668 2,087 5,755 44,250 (5,634) 44,371 2,235 9,380 (314) 11,301 b 2005 CCU CCUHCU 148 a

34,870 (5,320) 33,070

*Conversion factor for the inventory balances is calculated based on inventory holding period (see B.III.3). That is, for a 1.6 month holding period, the conversion factor used is from middle of November of the respective year (see section C).

E.VI.3 Restatement of sundry supplies
HCU (B.III.1) Opening balance (3.2 months holding period) 2005 inflation of 56.9% (from conversion factor 1.569) Opening balance in 2005 CCU Receipts Less: closing balance (3.2 months holding period) Usage of sundry supplies
HCU – Historical currency units CCU – Current currency units

Conversion factor (section C) 1.104 1.569 1.732 1.269 1.120

2004 CCU 375

2005 CCU

CCUHCU 35 d

340

213 588 3,015 (818) 2,785 248 639 (88) 799 e

2,376 (730) 1,986

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Illustrative example of IAS 29

E.VI.4 Restatement of work in progress
Holding Opening WIP* period Labour, utilities and services 0.4 Raw materials 2.0 (0.4+1.6) Depreciation** Overhead materials Opening WIP (B.III.1) – total 3.6 (0.4+3.2) Mid September 2004 Conversion factor date Mid December 2004 End of October 2004 Conversion factor (section C) 1.012 1.060 left as not material 1.088 CCUHCU 8 65 – 3 76 h

HCU 649 1,078 84 39 1,850

CCU 657 1,143 84 42 1,926 1,926 1,096 3,022

Opening WIP at 31 December 2004 CCU 2005 inflation of 56.9% (from conversion factor 1.569) Opening balance in 2005 CCU Receipts (B.III.2): Labour, utilities and services: Quarter I Quarter II Quarter III Quarter IV Raw materials Depreciation Overhead materials Total expenditures incurred

1,172

x x x x x x x

Q1 average 8,172 Q2 average 7,902 Q3 average 9,232 Q4 average 7,798 x 33,070 x 3,640 x 1,986 71,800

1.490 1.326 1.202 1.059 see E.VI.2 see E.II.4 see E.VI.3

12,176 4,004 10,478 2,576 11,097 1,865 8,258 460 44,371 11,301 6,346 2,706 2,785 799 95,511 23,711

f

Less: closing balance* Labour, utilities and services (46%x50%=23.0%) 0.4 Raw materials (46.1%) 2.0(0.4+1.6) Depreciation (5.1%x50%=2.5%)**

Mid December 2004 End of October 2004

1,042 2,089 116

1.019 1.079 left as not material 1.153

1,062 2,254 116

20 165 –

Overhead materials (2.8%x50%=1.4%) 3.6(0.4+3.2) Mid September 2004 63 3,310 Closing balance (B.III.1) total (73.0%) Goods produced 70,340

73 10 3,505 195 g 95,028 24,688 j

*The split between components of WIP were approximated based on the structure of expenditures incurred (see B.III.2) and the average stage of WIP completion (50% - see D). The approximation of the opening WIP has been shown below for illustrative purposes:

Component

Expenditures (B.III.2) (a)

Percent of completion (b)

Weight in WIP (a)x(b)

Total WIP (B.III.1) (c)=((a)x(b))/70.6% (d)

WIP components (c)x(d)

Labour, utilities and services Raw materials Depreciation Overhead materials

49.5% 41.1% 6.4% 3.0% 100.0%

50% 100% 50% 50%

24.8% 41.1% 3.2% 1.5% 70.6%

35.1% 58.3% 4.5% 2.1% 100.0%

1,850

649 1,078 84 39 1,850

**Depreciation included in WIP inventory was not adjusted for inflation as the amount is not significant. However, in different circumstances it could be necessary to apply the approach used for finished goods (see E.VI.5). HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

E.VI.5 Restatement of finished goods and cost of sales
Holding Conversion factor period date Opening finished goods inventory* Labour, utilities and services (49.5%) 2.1 (1.7+0.4) 3.7 (1.7+0.4+1.6) Raw materials (41.1%) Depreciation (6.4%)** Overhead materials (3.0%) 5.3 (1.7+0.4+3.2) Opening balance of finished goods (B.III.1) – total (100%) Holding period Opening balance in 2004 CCU 2005 inflation of 56.9% (from conversion factor 1.569) Opening balance in 2005 CCU Total period production Less: closing balance* Labour, utilities and services (46,0%) 2.1 (1.7+0.4) Raw materials (46.1%) 3.7 (1.7+0.4+1.6) Depreciation (5.1%)** Overhead materials (2.8%) 5.3 (1.7+0.4+3.2) Closing balance of finished goods (B.III.1) – total (100%) Cost of sales Conversion factor HCU (section C) 2004 CCU CCUHCU

End Oct 2004 4,683 Mid Sept 2004 3,888 605 Mid July 2004 284 9,460 Conversion factor date

1.060 1.088 1.111 1.206

4,964 4,230 672 343 10,209 2005 CCU 10,209

281 342 67 59 749 k CCUHCU

Conversion factor HCU (section C)

70,340

see E.VI.4

5,809 16,018 6,558 95,028 24,688

End Oct 2005 4,623 Mid Sept 2005 4,633 513 Mid July 2005 281 10,050 69,750

1.079 1.153 1.743 1.249

4,988 5,342 894 351

365 709 381 70

11,575 1,525 l 99,471 29,721 m

* The structure of expenditures incurred (presented in B.III.2) was used to approximate the weights of components of finished goods balance. Some accounting systems do not provide sufficient breakdown of WIP and finished goods.They therefore need to be approximated (see E.VI.4 for WIP approximation). **Depreciation included in finished goods balance was approximated based on the percentage increase in the CCU depreciation charge and the HCU depreciation charge. The percentage increase over the HCU depreciation charge was calculated as follows:

(a) Restated depreciation charge (b) Historical depreciation charge Conversion factor (a)/(b)
HCU – Historical currency units

2004 4,045 3,640 1.111

2005 6,346 3,640 1.743

CCU – Current currency units

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Illustrative example of IAS 29

E.VI.6 Restated inventories – summary (E.VI.2 – E.VI.5)
(all amounts expressed in CCU)

Raw materials Sundry supplies Work in progress Finished goods

31 December 2004 5,755 588 3,022 16,018 25,383

Receipts 44,250 3,015 95,511 95,028 237,804

Utilised/sold 44,371 2,785 95,028 99,471 241,655

31 December 2005 5,634 818 3,505 11,575 H.II 21,532 H.I

E.VI.7 Inventory restatement overall adjustment
The adjustment is recorded in E.XII as ADJ 5 Inventories Cost of goods sold Temporary holding account (current period expenses)* Retained earnings – opening balance Net monetary loss Dr Dr Cr Cr 31,843 Cr 31,843 2,122 29,721 b+e+g+l m (2,706) f (1,008) a+d+h+k (3,714) (28,129) (31,843)

* A temporary holding account was used to hold the historical depreciation of the current period when it was eliminated at a previous stage in this example (see section E.II). This holding account also ensures that the restated depreciation is allocated properly between inventories and cost of sales. HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

E.VII Restatement of deferred income – government grant
HCU (B.V.1) 3,200 Conversion factor (C.II,C.III) 3.791 5.948 (400) 2,800 5.948 CCU CCUHCU 8,931 a 15,834 b (1,979) c 13,855 d=b+c

Balance at 31 December 2004 – at 31 December 2004 purchasing power* – at 31 December 2005 purchasing power* Current period amortisation (in 2005 CCU) Balance at 31 December 2005

12,131 19,034 (2,379) 16,655

IAS 29 adjustment entry (recorded in E.XII as ADJ 9): Retained earnings – opening balance Dr Net monetary loss Dr Amortisation of government grant Cr Deferred income – government grant Cr
*Conversion factor from end of June 2002 HCU – Historical currency units CCU – Current currency units

8,931 6,903

15,834

a b-a (1,979) c (13,855) d (15,834)

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Illustrative example of IAS 29

E.VIII Restatement of revenue and expenses
Restated amounts are calculated by multiplying the historical monthly or quarterly HCU (see B.VI.1) by the average conversion factors for that month or quarter (see C.IV) except for current tax, which is restated using the conversion factors from the month-end (based on conditions summarised in section B.VI.1). For example, January revenue: 5,750 x 1.542 = 8,867; Quarter IV tax: 374 x 1.000 = 374. Restated income statement items (all amounts expressed in CCU) General and admin expenses Foreign exchange Revenue Wages Rent Other Gain Loss Current tax (8,867) 359 (191) 1,687 (9,311) 347 (73) 289 (11,418) 336 (150) 2,030 (29,596) 2,201 1,042 2,321 (414) 4,006 378 (10,271) 320 (284) 2,531 (12,192) 307 (216) 2,088 (12,040) 301 (155) 1,921 (34,503) 1,997 928 2,547 (655) 6,540 758 (13,926) 291 (136) 1,647 (12,189) 281 (136) 1,248 (10,902) 270 (30) 1,795 (37,017) 2,285 842 2,720 (302) 4,690 25 (10,957) 330 (93) 526 (9,372) 318 (107) 922 (180) 1,138 306 (8,845) (29,174) 2,241 954 2,391 (380) 2,586 374 (130,290) 8,724 3,766 9,979 (1,751) 17,822 1,535 H.II CCU-HCU (26,040) 1,724 766 1,979 (371) 3,822 335 ADJ 14; H.V Adjusting entries (recorded in E.XII as ADJ 14): Revenue Wages and salaries Rent expense Other administrative expenses Net foreign exchange losses Interest income Interest expense Income tax expense Net monetary loss Cr Dr Dr Dr Dr Cr Dr Dr Dr 538 335 17,452 26,245 1,724 766 1,979 3,451 (205) (26,040) Average conversion factor January 1.542 February 1.491 1.438 March Quarter I 1.490 April 1.374 May 1.318 June 1.285 Quarter II 1.326 July 1.249 August 1.205 September 1.153 Quarter III 1.202 October 1.099 November 1.059 1.019 December Quarter IV 1.059

(26,245)

Note: Interest income and expense were restated using the yearly average because interest expense arises evenly over that period, and interest income is not material. HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

E.IX Restatement of equity components and movements E.IX.1 Restatement of paid-in share capital
1) Restatement of the opening balance to 31 December 2004 purchasing power Conversion factor Date of contribution/conversion factor used HCU (from C.II) CCU 23 January 2002/end January 2002 6,400 4.965 31,776 30 June 2002/end June 2002 3,600 3.791 13,648 5 December 2004/end November 2004 7,000 1.025 7,175 Balance at 31 December 2004 17,000 52,599 2) Restatement of the opening balance to 31 December 2005 purchasing power Conversion factor Date of contribution/conversion factor used HCU (from C.III) 23 January 2002/end January 2002 6,400 7.790 30 June 2002/end June 2002 3,600 5.948 5 December 2004/end November 2004 7,000 1.608 Balance at 31 December 2004 17,000 24 September 2005/end September 2005 Balance at 31 December 2005 5,000 22,000 1.120 CCUHCU

35,599 a

CCU 49,856 21,413 11,256 82,525 5,600 88,125

CCUHCU

65,525 600 H.V 66,125 b

3) IAS 29 adjustment entry (recorded in E.XII as ADJ 10) Retained earnings – opening balance Net monetary loss Share capital Dr Dr Cr a b-a (66,125) b 66,125 (66,125) 35,599 30,526

E.IX.2 Restatement of dividends (declared and paid)
Date of contribution/conversion factor used Accrued (ie, retained earnings movement): June 2005 Paid (ie, cash flow): November 2005 Monetary gain on delay in dividends payment IAS 29 adjustment entry (recorded in E.XII as ADJ 11): Dividends accrued Net monetary loss
HCU – Historical currency units CCU – Current currency units

Conversion factor (from C.III) HCU 5,000 (5,000) 1.274 1.039

CCU 6,370 (5,195) 1,175

CCUHCU 1,370 a (195) H.III 1,175

Dr Cr

1,370

a (1,370) a

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Illustrative example of IAS 29

E.IX.3 Reversal of statutory revaluation of property, plant and equipment
1) Reversal of 2005 year-end statutory revaluation (recorded in E.XII as ADJ 1a) Revaluation reserve Dr Property, plant and equipment Cr 9,027 (9,027) H.V

2) Reversal of prior-years statutory revaluation for PPE cost (recorded in E.XII as ADJ 1b) Revaluation reserve Property, plant and equipment Gain on disposal of property, plant and equipment Dr Cr Cr Note (A) (43,200) (B) (2,100) (C) 45,300 (45,300) 45,300

Note: (A) Opening balance of revaluation reserve. (B) Surplus on gross book value of property, plant and equipment at 31 December 2005. (C) Surplus on gross book value of the disposal. 3) Reconciliation of revaluation reserve adjustments Revaluation reserve at 31 December 2005 Less: Revaluation reserve debit related to revaluation of accumulated depreciation to be reversed within statutory depreciation reversal (See E.II)
HCU – Historical currency units CCU – Current currency units

ADJ 1a ADJ 1b

(47,157) 9,027 45,300 7,170

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Illustrative example of IAS 29

E.X Deferred tax calculations
IFRS carrying value A At 31 December 2004 Property, plant and equipment Investment in associate Other long-term investments Inventories Trading investments Deferred income (government grant) 43,166 16,320 23,500 16,178 5,000 (12,131) Tax base B 43,337 16,000 10,000 15,170 5,000 (3,200) Temporary difference B-A 171 (320) (13,500) (1,008) – 8,931 Deferred tax asset/(liability) (B-A)*30% 51 (96) (4,050) (302) – 2,679 (1,718) a; E.XIII (978) c; H.V (2,696) E.XIII 54,163 16,000 11,000 19,410 15,000 (2,800) (13,787) (19,630) (30,000) (2,122) – 13,855 (4,136) (5,889) (9,000) (637) – 4,157 (15,505) b (12,809) b-(a+c)

Opening deferred tax (net) in 31 December 2004 purchasing power 2005 inflation of 56.9% (from conversion factor 1.569) Opening deferred tax (net) in 31 December 2005 purchasing power At 31 December 2005 Property, plant and equipment 67,950 Investment in associate 35,630 Other long-term investments 41,000 Inventories 21,532 Trading investments 15,000 (16,655) Deferred income (government grant) Deferred tax (net) at 31 December 2005 Movement in deferred tax for the current period

Within deferred tax amount, the following is charged through fair value reserve: IFRS carrying Temporary value IFRS cost difference A B B-A At 31 December 2004 Other long-term investments 23,500 24,770 1,270 Opening deferred tax charge to fair value reserve in 31 December 2004 purchasing power 2005 inflation of 56.9% (from conversion factor 1.569) Opening deferred tax charge to fair value reserve in 31 December 2005 purchasing power At 31 December 2005 Other long-term investments Deferred tax charge to fair value reserve at 31 December 2005 Deferred tax charge to fair value reserve for the current period
HCU – Historical currency units CCU – Current currency units

Deferred tax asset/(liability) (B-A)*30% 381 f 381 g 217 598

41,000

40,274

(726)

(218) d (218) (816) e

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E.X Deferred tax calculations (continued)
Within deferred tax amount, the following is charged through translation reserve: Translation reserve value A Temporary Deferred tax difference asset/(liability) B-A (B-A)*30% – – – – (609) (609) (609) h j

Tax base B

At 31 December 2004 Investment in associate – – – Opening deferred tax charge to translation reserve in 31 December 2004 purchasing power 2005 inflation of 56.9% (from conversion factor 1.569) Opening deferred tax charge to translation reserve in 31 December 2005 purchasing power At 31 December 2005 Investment in associate 2,029 – (2,029)

Deferred tax charge to translation reserve at 31 December 2005 Deferred tax charge to translation reserve for the current period

Deferred tax accrual entry (recorded in E.XII as ADJ 12): Retained earning – opening balance Dr Translation reserve Dr Fair value reserve Dr Net monetary loss Dr Income tax expense Dr Deferred tax liability Cr

2,099 609 218 1,195 11,384 (15,505) 15,505 15,505)

a-f h d c+j b-(a+c)-e-j b

HCU – Historical currency units

CCU – Current currency units

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Illustrative example of IAS 29

E.XI Current-year inflation adjustment to opening retained earnings
Retained earnings opening balance will be accumulated in the adjustment schedule as follows: Description Opening historical retained earnings HCU Add: Sum of all prior-year adjustments to opening retained earnings from adjustment schedule Opening retained earnings in 2004 CCU 2005 inflation of 56.9% (from conversion factor 1.569) Opening retained earnings in 2005 CCU Opening retained earnings adjusting entry (recorded in E.XII as ADJ 15): Net monetary loss Retained earnings – opening balance
HCU – Historical currency units CCU – Current currency units

Source A.I E.XII (ADJ 1-ADJ 14) E.XII (subtotal) C.I

Currency units 20,697 7,108 27,805 15,821 a 43,626

Dr Cr

15,821

a (15,821) a

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Illustrative example of IAS 29

E.XII Summary schedule of inflation adjustment journal entries
BALANCE SHEET (inc. retained earnings reconciliation) ADJ 1a Reversal 31 Dec 2005 of 2005 revaluation HISTORICAL ADJ 1b Reversal of p/y cost revaluation ADJ 2 ADJ 3 Reversal of statutory PPE depreciation restatement ADJ 5 ADJ 6 ADJ 7 ADJ 8 Inventories Associate Long-term Trading Depreciation and CoS restatement investment investments in 2005 PP restatement IAS29&IAS39 (P&L effect) ADJ 4

ASSETS Non-current assets Property, plant and equipment Associates Other long-term investments Current assets Inventories Trade receivables Other receivables Trading investments Cash Total assets LIABILITIES AND EQUITY Equity Share capital Revaluation reserve Translation reserve Retained earnings – opening Income statement 2005 Dividends declared 2005 Retained earnings – closing Non-current liabilities Deferred income – grant Borrowings Deferred tax liabilities Current liabilities Bank overdrafts Trade payables Current income taxes Other payables Total liabilities and equity Check (Dr –Cr) to be nil INCOME STATEMENT Sales Cost of sales (Temporary holding account) Gross profit General and administrative: Wages Depreciation expense Rent expense Impairment loss on receivables Other administrative expenses Amortisation of grant Gain on sale of PPE Operating profit Share of result of associate Financial income and costs: Gain on trading investments Interest income Interest expense Foreign exchange loss Net monetary loss Profit before tax Income tax expense/(credit) Profit for the year Working papers reference

54,163 35,630 11,000 100,793 19,410 28,170 1,500 15,000 9,742 73,822 174,615

(9,027) – – (9,027) – – – – – – (9,027)

(43,200) – – (43,200) – – – – – – (43,200)

20,864 – – 20,864 – – – – – – 20,864

76,768 – – 76,768 – – – – – – 76,768

(31,618) – – (31,618) – – – – – – (31,618)

– – – – 2,122 – – – – 2,122 2,122

– – – – – – – – – – –

– – 30,000 30,000 – – – – – – 30,000

– – – – – – – – – – –

(22,000) (47,157) – (13,010) (20,697) (6,631) 5,000 (22,328) (104,495) (2,800) (29,000) n/a (31,800) (8,060) (24,760) (353) (5,147) (38,320) (174,615) –

– 9,027 – – – – – – 9,027 – – – – – – – – – 9,027 –

– 45,300 – – – (2,100) – (2,100) 43,200 – – – – – – – – – 43,200 –

– (7,170) – – (8,093) (5,601) – (13,694) (20,864) – – – – – – – – – (20,864) –

– – – – (44,524) (32,244) – (76,768) (76,768) – – – – – – – – – (76,768) –

– – – – 14,658 16,960 – 31,618 31,618 – – – – – – – – – 31,618 –

– – – – (1,008) (1,114) – (2,122) (2,122) – – – – – – – – – (2,122) –

– – – 10,981 – (10,981) – (10,981) – – – – – – – – – – – –

– – (726) – (14,770) (14,504) – (29,274) (30,000) – – – – – – – – – (30,000) –

– – – – – – – – – – – – – – – – – – – –

(104,250) 69,750 – (34,500) 7,000 3,447 3,000 2,450 8,000 (400) (386) (11,389) (6,300) (4,000) (762) 2,000 12,620 – (7,831) 1,200 (6,631) A.I, A.II, A.IV

– – – – – – – – – – – – – – – – – – – – E.IX.3.1

– – – – – – – – – – (2,100) (2,100) – – – – – – (2,100) (2,100) E.IX.3.2

– – (3,640) (3,640) – (3,447) – – – – 1,486 (5,601) – – – – – – (5,601) (5,601) E.II.7i

– – – – – – – – – – 3,395 3,395 – – – – – (35,639) (32,244) (32,244) E.II.7ii

– – 6,346 6,346 – 4,501 – – – – (2,226) 8,621 – – – – – 8,339 16,960 16,960 E.II.7iii

– 29,721 (2,706) 27,015 – – – – – – – 27,015 – – – – – (28,129) (1,114) (1,114) E.VI.7

– – – – – – – – – – – – (1,695) – – – – (9,286) (10,981) – (10,981) E.III

– – – – – – – – – – – – – – – – – (14,504) (14,504) – (14,504) E.IV

– – – – – – – – – – – – – 5,305 – – – (5,305) – – – E.V

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E.XII Summary schedule of inflation adjustments journal entries (continued)
ADJ 10 ADJ 9 Share Deferred capital income restatement restatement ADJ 11 ADJ 12 ADJ 13 ADJ 14 Dividends Deferred Impairment Other declared income tax loss on P&L items restatement receivables restatement Subtotal Opening retained earnings in 2004 CCU ADJ 15 Retained earnings b/f RESTATED 31 Dec 2005 BALANCE SHEET (inc. retained earnings reconciliation)

– – – – – – – – – – –

– – – – – – – – – – –

– – – – – – – – – – –

– – – – – – – – – – –

– – – – – – – – – – –

– – – – – – – – – – –

67,950 35,630 41,000 144,580 21,532 28,170 1,500 15,000 9,742 75,944 220,524

– – – – – – – – – – –

67,950 35,630 41,000 144,580 21,532 28,170 1,500 15,000 9,742 75,944 220,524

ASSETS Non-current assets Property, plant and equipment Associates Available-for-sale investments Current assets Inventories Trade receivables Other receivables Trading investments Cash Total assets LIABILITIES AND EQUITY Equity Share capital Fair value reserve Translation reserve Retained earnings – opening Income statement 2005 Dividends declared 2005 Retained earnings – closing Non-current liabilities Deferred income – grant Borrowings Deferred tax liabilities Current liabilities Bank overdrafts Trade payables Current income taxes Other payables Total liabilities and equity Check (Dr – Cr) to be nil INCOME STATEMENT

– – – – 8,931 4,924 – 13,855 13,855 (13,855) – – (13,855) – – – – – – –

(66,125) – – – 35,599 30,526 – 66,125 – – – – – – – – – – – –

– – – – – (1,370) 1,370 – –

– – 218 609 2,099 12,579 – 14,678 15,505

– – – – – – – – – – – – – – – – – – – –

– – – – – – – – – – – – – – – – – – – –

(88,125) – (508) (1,420) (27,805) (9,556) 6,370 (30,991) (121,044) (16,655) (29,000) (15,505) (61,160) (8,060) (24,760) (353) (5,147) (38,320) (220,524) –

– – – – (15,821) 15,821 – – – – – – – – – – – – – –

(88,125) – (508) (1,420) (43,626) 6,265 6,370 (30,991) (121,044) (16,655) (29,000) (15,505) (61,160) (8,060) (24,760) (353) (5,147) (38,320) (220,524) –

– – – – – (15,505) – (15,505) – – – – – – – – – – – – – –

– – – – – – – – – (1,979) – (1,979) – – – – – 6,903 4,924 – 4,924 E.VII

– – – – – – – – – – – – – – – – – 30,526 30,526 – 30,526 E.IX.1

– – – – – – – – – – – – – – – – – (1,370) (1,370) – (1,370) E.IX.2

– – – – – – – – – – – – – – – – – 1,195 1,195 11,384 12,579 E.X

– – – – – – – – – – – – – – – – – 19,033 19,033 19,033 – E.XIII

(26,040) – – (26,040) 1,724 – 766 – 1,979 – – (21,571) – – (205) 538 3,451 17,452 (335) 335 – E.VIII

(130,290) 99,471 – (30,819) 8,724 4,501 3,766 2,450 9,979 (2,379) 169 (3,609) (7,995) 1,305 (967) 2,538 16,071 10,785 3,442 (6,114) (9,556)

– – – – – – – – – – – – – – – – – 15,821 15,821 – 15,821 E.XI

(130,290) 99,471 – (30,819) 8,724 4,501 3,766 2,450 9,979 (2,379) 169 (3,609) (7,995) 1,305 (967) 2,538 16,071 5,036 12,379 (6,114) 6,265 H.I, H.II, H.IV

Sales Cost of sales Gross profit General and administrative: Wages Depreciation expense Rent expense Impairment loss on receivables Other administrative expenses Amortisation of grant Gain on sale of PPE Operating profit Share of result of associate Financial income and costs: Loss on trading investments Interest income Interest expense Foreign exchange loss Net monetary loss Profit before tax Income tax expense/(credit) Profit for the year Working papers reference

Should be always nil

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Illustrative example of IAS 29

E.XIII Monetary loss on the tax base of assets and liabilities
IFRIC 7 paragraph IE6 states that a loss on the tax bases of assets and liabilities due to inflation is a monetary loss. In this example, tax bases of both the monetary and the non-monetary items lose value due to inflation. The tax base of the company’s net assets may be expressed as the company’s HCU net assets plus relevant temporary differences (as defined in IAS 12). Monetary loss on the tax bases is then the monetary loss on the HCU equity and an inflation increase in the relevant temporary differences. As stated in D.I, there are no temporary differences between the historical carrying values and their tax bases except for the associate. Monetary loss on equity, including current year income statement Share capital E.IX.1 Dividends E.IX.2 Retained earnings E.XI ADJ 14 income statement items E.XII, ADJ 14 ADJ 12 loss on deferred tax E.XII, ADJ 12 Monetary loss on HCU net assets Effect of temporary differences Monetary loss on the associate Monetary loss on the tax base of the associate (16,000 x 56.9%) Monetary loss on the temporary differences Monetary loss on the tax base of net assets Note: Monetary loss on equity can be proved as follows: Gain on carrying amounts of net monetary assets (net monetary position) Less loss on non-monetary position: Property, plant and equipment E.II.7 Associate E.III Other long-term investments E.IV Inventory E.VI.7 E.V Trading investments Deferred income (government grant) E.VII Monetary loss on HCU equity 13,997 (27,300) (9,286) (14,504) (28,129) (5,305) 6,903 (63,624)

30,526 (1,370) 15,821 17,452 1,195 63,624

E.III E.X, D.I

(9,286) 9,104 (182) 63,442 x30%=

19,033

ADJ 13

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Illustrative example of IAS 29

E.XIV Tax reconciliation: non-deductible expenses and non-taxable income
Non-deductible expenses HCU Inflation factor Non-deductible expenses CCU Tax effect at 30% Non-taxable income HCU Inflation factor Non-taxable income CCU Tax effect at 30% Quarter I 728 1.490 1,085 326 – 1.490 – – Quarter II Quarter III 2,148 555 1.326 1.202 2,848 667 854 – 1.326 – – 200 801 1.202 963 289 Quarter IV 432 1.059 457 137 593 1.059 628 188 Total 3,863 5,057 1,517 H.V 1,394 1,591 477 H.V

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Illustrative example of IAS 29

F. Monetary proof
F.I Monetary proof based on average quarterly net monetary position
The difference between the theoretical monetary gain and the monetary gain that resulted from the restatement procedures (other than the monetary loss on the tax bases) is not significant (2.7%). This is proof that the monetary gain is reasonable. 31 December 31 March 2005 2004 Conversion factors from each date to 31 December 2005 Inflation for the year (1.569-1.000) a Inflation for the year split per quarter* Net monetary position, HCU (B.VIII) b Quarter average monetary position Theoretical monetary gain for each quarter (a x b) Theoretical monetary gain for the year (sum of monetary gain per quarter) Monetary gain as a result of the restatement procedures of carrying amounts Percentage of variation 1.569 1.410 0.159 (10,800) (21,195) (15,998) 2,544 30 June 2005 1.274 0.136 (31,042) (26,119) 3,552 30 September 2005 1.120 0.154 (25,341) (28,192) 4,342 31 December 2005 1.000 0.569 0.120 (27,908) (26,625) 3,195 13,633 13,997 2.7% 13,997 (19,033) (5,036)

Monetary gain as a result of restatement procedures of carrying amounts Monetary loss on the tax bases of assets and liabilities Total monetary gain/(loss) recognised in income statement

* Inflation for quarter is calculated as the difference between the conversion factors at the end of the quarter and the beginning of the quarter. HCU – Historical currency units CCU – Current currency units

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G. Support for restatement of statement of cash flows
G.I Restatement of revenues collected
Month January February March April May June July August September October November December HCU (B.VII.3) 7,340 8,740 8,160 7,420 8,030 7,330 6,720 7,720 8,240 7,730 8,220 8,760 94,410 Conversion factor (C.IV) 1.542 1.491 1.438 1.374 1.318 1.285 1.249 1.205 1.153 1.099 1.059 1.019 CCU 11,318 13,031 11,734 10,195 10,584 9,419 8,393 9,303 9,501 8,495 8,705 8,926 119,604 H.III

G.II Restatement of operating cash outflows
HCU (B.VII.4) G.II.1 Raw materials Quarter I Quarter II Quarter III Quarter IV G.II.2 Wages, utilities and overheads Quarter I Quarter II Quarter III Quarter IV 4,477 3,923 4,651 5,433 18,484 10,810 12,373 14,692 15,511 53,386 Conversion factor (C.IV) 1.490 1.326 1.202 1.059 CCU 6,671 5,202 5,591 5,754 23,218 16,107 16,407 17,660 16,426 66,600 H.III

1.490 1.326 1.202 1.059

G.II.3 Rent payments 27 March 29 June 17 September 25 December HCU (B.VII.5) 700 700 900 900 3,200 Conversion factor (C.III, C.IV) 1.410 1.274 1.153 1.000 CCU 987 892 1,038 900 3,817 H.III

G.II.4 Income tax paid Performed based on the quarterly tax accruals and dates due: HCU (B.VI.1) Conversion factor (C.III) End of January 153 1.515 End of March 254 1.339 End of July 572 1.225 End of October 21 1.079 1,000
HCU – Historical currency units CCU – Current currency units

CCU 232 340 701 23 1,296 H.III

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Illustrative example of IAS 29

G.III Trade receivables and impairment loss on trade and other receivables
As provision for impaired receivables is a monetary item, it results in monetary gain (which is offset by the monetary loss created by holding the related receivables). The inflation effect on the opening provision is a reconciling item in the indirect cash flow statement, as this is a non-cash item not shown as a change in working capital. HCU (3,250) (2,450) 5,700 – CCU (5,099) (2,450) 5,700 (1,849) H.III

Opening provision for impaired receivables Impairment loss for the year Less: closing impairment loss provision Difference – inflation effect on related impairment loss provision

Note: Impairment loss for the year was considered to be in 31 December 2005 purchasing power, as the Company only reassesses its impairment loss provision once a year at the reporting date, which is the year-end.

G.IV Inflation effect on cash and non-operating cash flows G.IV.1 Calculation of inflationary effect on cash
HCU 5,750 (5) 2,001 995 1,001 Source C.IV CCU 9,022 (7) 2,653 1,196 1,060 Inflation effect 3,272 (2) 652 201 59 4,182 H.III

Opening cash Net movement in cash per quarter: Quarter I Quarter II Quarter III Quarter IV Total inflation effect on cash

1.490 1.326 1.202 1.059

G.IV.2 Restatement of bank overdrafts
HCU 5,200 (8,060) 2,860 722 708 (3,290) 4,720 Source C.IV CCU 8,159 (8,060) (99) 1,076 939 (3,955) 4,998 3,058 (2,860) Inflation effect 2,959

Opening bank overdrafts Less: closing cash Net increase/(decrease) in bank overdrafts Including: Quarter I Quarter II Quarter III Quarter IV Net increase, restated at average inflation Less: increase in HCU Inflation effect on net increase in overdrafts Monetary gain on bank overdrafts

1.490 1.326 1.202 1.059

H.III 198 3,157 G.IV.4

HCU – Historical currency units

CCU – Current currency units

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Illustrative example of IAS 29

G.IV.3 Calculation of inflationary effect on borrowings
Opening borrowings Increase due to foreign exchange loss (B.VI.1) Less: closing cash Reductions of borrowings (due to inflation) HCU 15,000 14,000 (29,000) – CCU 23,535 E.VIII 17,822 (29,000) 12,357 H.III

G.IV.4 Inflationary effect on non-operating activities and tax
Inflation effect on financing activities is calculated as the difference between the restated opening and closing balances of bank overdrafts and borrowings. Inflation effect on non-operating activities includes the inflation effect on dividends, interest, inflation effect on investing activities and cash. Inflation effect Monetary gain on bank overdrafts G.IV.2 3,157 Reductions of borrowings (due to inflation) G.IV.3 12,357 Inflation effect on dividends – gain E.IX.2 1,175 Inflation effect on interest payable – gain G.V 112 Inflation effect on interest receivable – loss G.V (161) Inflation effect on cash – loss G.IV.1 (4,182) Inflation effect on non-operating activities 12,458 Inflation effect on income tax – gain G.V 126 Monetary loss on tax bases E.XIII (19,033) Inflation effect on non-operating activities and income tax (6,449) H.III
Note: Inflation effect on investing activities is not material due to this example’s conditions. HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

G.V Other accounts receivable and payable
(all amounts expressed in HCU)

Total Other receivables Closing balance Opening balance Increase/(decrease) in other receivables Other payables Closing balance Opening balance (Increase)/decrease in other payables
(all amounts expressed in HCU)

Interest income 600 – 600

Interest expense – – –

Income tax – – –

Other operating 900 1,000 (100)

1,500 1,000 500

(5,147) (5,847) 700

– – –

(190) (60) (130)

– – –

(4,957) (5,787) 830

Total Other receivables Closing balance Opening balance in 2005 CCU* Increase/(decrease) in other receivables Other payables Closing balance Opening balance in 2005 CCU* (Increase)/decrease in other payables Current tax liability Closing balance Opening balance in 2005 CCU* (Increase)/decrease in current tax liability Amount accrued Amount paid Monetary gain/(loss)

Interest income 600 – 600

Interest expense – – –

Income tax – – –

Other operating 900 1,569 (669) H.III

1,500 1,569 (69)

(5,147) (9,174) 4,027

– – –

(190) (94) (96)

– – –

(4,957) (9,080) 4,123 H.III

(353) (240) (113)

– – – (967) 206 (161)

– – – 2,538 (2,330) 112

(353) (240) (113) 1,535 (1,296) 126

– – –

G.IV.4

* Opening balance was restated by using the 1 January 2005 conversion factor 1.569. **Interest expense paid within five days after each month-end was restated using the average of month-end conversion factors for 2005. HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

H. Restated financial statements
H.I Restated balance sheets
(Historical information is presented here for convenience of the example and should not be included into the restated financial statements)

Restatement procedures ASSETS Non-current assets Property, plant and equipment Associates Available-for-sale investments Current assets Inventories Trade receivables Other receivables Trading investments Cash Total assets EQUITY AND LIABILITIES Capital and reserves Share capital Revaluation reserve Translation reserve Fair value reserve Retained earnings Non-current liabilities Deferred income – government grant Borrowings Deferred tax liabilities Current liabilities Bank overdrafts Trade payables Current tax liability Other payables Total equity and liabilities

Restated 2005 CCU 31 December 2005 2004

Historical HCU 31 December 2005 2004

E.II.7 E.III E.IV

67,950 35,630 41,000 144,580 21,532 28,170 1,500 15,000 9,742 75,944 220,524

67,726 25,606 36,872 130,204 25,383 30,439 1,569 7,845 9,022 74,258 204,462

54,163 35,630 11,000 100,793 19,410 28,170 1,500 15,000 9,742 73,822 174,615

43,337 16,320 10,000 69,657 15,170 19,400 1,000 5,000 5,750 46,320 115,977

E.VI.6 mon mon E.V mon

E.IX.1 E.XII, E.III E.IV E.XI, E.XII

88,125 – 1,420 508 30,991 121,044 16,655 29,000 15,505 61,160 8,060 24,760 353 5,147 38,320 220,524

82,525 – – (1,394) 43,626 124,757 19,034 23,535 2,696 45,265 8,159 16,867 240 9,174 34,440 204,462

22,000 47,157 13,010 – 22,328 104,495 2,800 29,000 – 31,800 8,060 24,760 353 5,147 38,320 174,615

17,000 38,130 – – 20,697 75,827 3,200 15,000 – 18,200 5,200 10,750 153 5,847 21,950 115,977

E.VII mon E.X

mon mon mon mon

Note: mon defines monetary balance sheet items that are already expressed in year-end purchasing power and require no restatement. Monetary items of prior-year are adjusted by 1.569 to current year-end purchasing power for comparative purposes, as required by IAS 29. HCU – Historical currency units CCU – Current currency units

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Illustrative example of IAS 29

H.II Restated income statement for year ended 31 December 2005
(Historical information is presented here for convenience of the example and should not be included into the restated financial statements)

Restatement procedures Sales Cost of sales Gross profit General and administrative expenses: Wages and salaries Depreciation expense Rent expense Impairment loss on trade and other receivables Other administrative expenses Amortisation of government grant Profit on sale of property, plant and equipment E.VIII E.VI.5

Restated 2005 CCU 130,290 (99,471) 30,819

Historical HCU 104,250 (69,750) 34,500

E.VIII E.II.4 E.VIII G.III E.VIII E.VII E.II.5

(8,724) (4,501) (3,766) (2,450) (9,979) 2,379 (169) (27,210) 3,609

(7,000) (3,447) (3,000) (2,450) (8,000) 400 386 (23,111) 11,389

Operating profit Finance income and costs: (Loss)/gain on trading investments Interest income Interest expense Net foreign exchange losses Net monetary losses

E.V E.VIII E.VIII E.VIII E.XI

(1,305) 967 (2,538) (16,071) (5,036) (23,983) 7,995 (12,379)

4,000 762 (2,000) (12,620) – (9,858) 6,300 7,831 (1,200) 6,631

Share of result of associate Profit before tax Income tax expense Profit for the year
HCU – Historical currency units CCU – Current currency units

E.III

E.XII

(6,114) (6,265)

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Illustrative example of IAS 29

H.III Restated statement of cash flows for year ended 31 December 2005
(Historical information is presented here for convenience of the example and should not be included into the restated financial statements)

Restatement procedures DIRECT METHOD (see indirect method on following page) Cash flows from operating activities Cash receipts from customers Cash paid for production materials and other supplies Cash paid to employees and for utilities and overheads Rent paid Income tax paid Net cash flow from operating activities Cash flows from investing activities Purchase of trading investments – net Purchase of available-for-sale investments Purchase of property, plant and equipment Interest received Proceeds from sale of property, plant and equipment Net cash flow from investing activities Cash flows from financing activities Proceeds from paid in share capital Increase in bank overdrafts – net Interest paid Dividends paid Net cash flow from financing activities Inflation effect on cash Net increase in cash Cash at beginning of period Cash at end of period
HCU – Historical currency units CCU – Current currency units

Restated 2005 CCU

Historical HCU

G.I G.II.1 G.II.2 G.II.3 G.II.4

119,604 (23,218) (66,600) (3,817) (1,296) 24,673

94,410 (18,484) (53,386) (3,200) (1,000) 18,340

E.V E.IV E.II.2 average E.II.5

(8,460) (1,410) (12,740) 206 1,500 (20,904)

(6,000) (1,000) (10,000) 162 1,500 (15,338)

E.IX.1 G.IV.2 G.V E.IX.2

5,600 3,058 (2,330) (5,195) 1,133 (4,182) 720 9,022 9,742

5,000 2,860 (1,870) (5,000) 990 – 3,992 5,750 9,742

G.IV.1

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Illustrative example of IAS 29

H.III Restated statement of cash flows for year ended 31 December 2005 (continued)
(Historical information is presented here for convenience of the example and should not be included into the restated financial statements)

Restatement procedures (source) INDIRECT METHOD Cash flows from operating activities Profit before tax Adjustments for: Depreciation charge Impairment loss on trade and other receivables Change in impairment loss provision due to inflation Amortisation of government grant Loss/(gain) on sale of fixed assets Share of result of associate Decrease/(increase) in market value of trading investments Interest income Interest expense Foreign exchange loss on financing and investing activities Monetary effect on non-operating activities and income tax Profit before changes in working capital: Changes in working capital: Decrease/(increase) in trade accounts receivable, gross Decrease/(increase) in inventory Decrease in other receivables Increase in trade payables Decrease in other payables Cash generated from operations Income tax paid Net cash flow from operating activities (same as for direct method)
HCU – Historical currency units CCU – Current currency units

Restated 2005 CCU

Historical HCU

H.II

(12,379)

7,831

E.II.4 H.II G.III H.II H.II H.II H.II H.II H.II E.VIII G.IV.4

10,847 2,450 (1,849) (2,379) 169 (7,995) 1,305 (967) 2,538 17,822 6,499 16,011

7,087 2,450 – (400) (386) (6,300) (4,000) (762) 2,000 14,000 – 21,520

H.I G.V H.I G.V

1,668 3,851 669 7,893 (4,123) 9,958 25,969 (1,296) 24,673

(11,220) (4,240) 100 14,010 (830) (2,180) 19,340 (1,000) 18,340

G.II.4

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Illustrative example of IAS 29

H.IV Restated statement of changes in equity for year ended 31 December 2005
(all amounts expressed in CCU)

Restatement procedures Balance at 1 January 2005 Currency translation differences Fair value gain on investments Deferred tax on fair value reserve Net income recognised directly in equity Profit for the year Total recognised income Share capital paid in Dividends declared in 2005 E.IX.1 E.III E.IV E.X

Share capital 82,525 _ _ _ _

Translation reserve _ 2,029 _ (609) 1,420 _ 1,420 _ _ _ 1,420

Fair value reserve (1,394) _ 2,718 (816) 1,902 _ 1,902 _ _ _ 508

Retained earnings 43,626 _ _ _ _ (6,265) (6,265) _ (6,370) (6,370) 30,991

Total 124,757 2,029 2,718 (1,425) 3,322 (6,265) (2,943) 5,600 (6,370) (770) 121,044

H.II

_ _ 5,600 _ 5,600 88,125

E.IX.1 E.IX.2

Balance at 31 December 2005
HCU – Historical currency units

E.IX.1

CCU – Current currency units

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International Financial Reporting Standards Financial Reporting in Hyperinflationary Economies – Understanding IAS 29

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Illustrative example of IAS 29

H.V Income tax reconciliation
Restated profit before tax Expected income tax at applicable tax rate of 30% Tax effects from: Statutory revaluation of property, plant and equipment (9,027x30%) Non-deductible expenses Non-taxable income Difference in tax and IFRS depreciation of property, plant and equipment Restatement of current taxes Non-temporary element of monetary loss Actual tax expense (12,379) 3,714

E.IX.3 E.XI E.XI E.II.4, A.III E.VIII H.VI

2,708 (1,517) 477 1,128 (335) (61) 6,114

Recognition of monetary gain or loss on tax bases of assets and liabilities in accordance with IFRIC 7 eliminates many reconciling items between the theoretical tax at the statutory tax rate and the actual tax expense. The nontemporary element of monetary loss arose due to approximations made in this example.
HCU – Historical currency units CCU – Current currency units

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International Financial Reporting Standards Financial Reporting in Hyperinflationary Economies – Understanding IAS 29

7

Illustrative example of IAS 29

H.VI Non-temporary element of monetary loss
Certain approximations were made in this example. Non-temporary element of monetary gains and losses can be analysed as follows: Effect of monetary loss on tax bases (19,033 x [1-30%]) Less effect of restatement of: - opening tax bases of non-monetary items [(43,337+16,000+10,000+15,170+5,000-3,200) x 56.9% x 30%] - receipts of inventories during the year (237,804 - 179,386) x 30% - inventories sold during the year (241,655 -175,146) x 30% - allocation of depreciation to admin costs (3,447-4,501) x 30% - long-term investments purchased during the year (410 x 30%) - realised gain on trading investments (2,460 x 30%) - property, plant and equipment purchased during the year (2,740 x 30%) - non-deductible expenses/non-taxable income 1,394 x 30% - 477 - (3,863 x 30% - 1,517) - income and expense items (17,452 x 30%) - cost of sales (29,721 x 30%) - current income tax (335 x 30%) Add loss on net monetary position (13,997 x 30%) Non-temporary element of monetary loss
HCU – Historical currency units CCU – Current currency units

E.XIII

13,323

E.X E.VI.6, B.III.1 E.VI.6, B.III.1 ADJ 2, 4 E.IV E.V E.II.2 E.XI ADJ 14 ADJ 5 ADJ 14 F.I

(14,732) (17,525) 19,953 (316) (123) (738) (822) 299 5,236 (8,916) 101 4,199 (61)

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Notes

84

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