Unit III –Financial Reporting

in Hyperinflationary Economies
Hyperinflation
 Is a matter of judgment
 It is indicated by characteristics of the economic environment of a country which includes but are not
limited to the following:
a. The general population prefers to keep its wealth in nonmonetary assets or in a relatively stable
foreign currency.
b. The general population regards monetary monetary amounts not in the terms of local currency
but in terms of relatively stable foreign currency.
c. Sales and purchases on credit take place at prices that compensate for the expected loss of
purchasing power during the credit period even if the period is short.
d. Interest rate, wages and prices are linked to a price index.
e. The cumulative rate over 3 years is approaching or exceeds 100%.

General Price change

 Increase or decrease in the overall level of prices of goods or services throughout the economy.
 Inflation – an increase in general price level means decrease in the purchasing power of money.
 Deflation – a decrease in general price level means increase in the purchasing power of meny.

Specific price change

 Increase or decrease in the price of a specific good or service.

Financial Reporting in Hyperinflationary Economy

 PAS 29, par. 8, provides that the financial statements of the entity that reports in the currency of a
hyperinflationary economy, whether they are based on historical cost approach or current cost
approach, shall be stated in terms of the measuring unit current at the end of the reporting period.

 The restatement of financial statements of an entity is accomplished by means of current cost

accounting or constant peso accounting.

Constant peso accounting

 The restatement of historical financial statements in terms of the current purchasing power of the
peso through the use of index number.
 Also known as price level accounting.

Current Cost Accounting

 Method of measuring assets, liabilities, income and expenses at current cost at the end of reporting
period.
 Restatement of historical cost in terms of current replacement cost.
 Current replacement cost – is the estimated cost to acquire a similar asset at current purchase
price.
 Holding gain – if current replacement cost is higher than the historical cost.
 Holding loss - if current replacement cost is lower than historical cost.
 Unrealized holding gain or holding loss – if asset is still unsold or unused.
 Realized holding gain or holding loss – if assets is already sold or used during the year.

Monetary items
 Refers to cash and assets that represents fixed amount of pesos to be received or obligations that
represent a fixed amount of pesos to be paid.
 Remains the same regardless of the change in the general price level.

Nonmonetary items
 Items that cannot be classified as monetary items because their peso amounts reported in the
financial statements differ from the amounts that are ultimately realizable or payable.
Examples of Monetary and Nonmonetary items

Monetary Nonmonetary
Cash 
Financial assets held for trading 
Financial assets held FVOCI 
Financial assets at amortized cost 
Accounts receivable and notes receivable 
Allowance for doubtful accounts and notes 
Inventories 
Advances to employees 
Prepaid insurance, taxes, advertising, rents, etc. 
Prepaid interest 
Receivable under finance lease 
Long-term receivables 
Special deposits which are recoverable 
Pension, sinking and other fund:
Consisting of financial assets at fair value 
Consisting of bonds at amortized cost 
Property, plant and equipment 
Accumulated depreciation 
Cash surrender value 
Advances to suppliers 
Discount on bonds payable 
Intangible assets 
Goodwill 
Accounts and notes payable 
Accrued expenses 
Cash dividend payable 
Liability for refundable deposits 
Advances from customers 
Accrued losses on firm purchase commitments 
Bonds payable 
Obligations under finance lease 
Pension benefits to be paid in cash 
Provisions that are to be settled in casg 
Deferred revenue 
Non-controlling interest 
Preference share capital 
Ordinary share capital 
Share Premium 
Retained earnings – residual and not classified as either
monetary or nonmonetary

 Only nonmonetary items are restated when preparing the constant peso financial statements.

Formula for restatement:

Index number at end of reporting period x Historical cost

Index number on acquisition date

Gain or loss on purchasing power

 Inflation – purchasing power loss is incurred on monetary assets and purchasing power gain is
realized on monetary liabilities.

 Deflation - purchasing power gain is realized on monetary assets and purchasing power loss is
incurred on monetary liabilities.
 UNIT III - Financial Reporting in Hyperinflationary Economies
Activity 1 : (adapted)

Problem 1:
Excellent Company provided the following financial statements based on historical cost:

Excellent Company
Statement of Financial Position
December 31, 2023

Assets 2023 2022

Cash 450,000 400,000
Accounts receivable 600,000 450,000
Allowance for doubtful accounts (20,000) (30,000)
Inventories 300,000 350,000
Land 200,000 200,000
Building 600,000 600,000
Accumulated depreciation (240,000) (200,000)
Equipment 800,000 800,000
Accumulated depreciation (320,000) (240,000)
Total Assets 2,370,000 2,330,000

Liabilities and Stockholders’ Equity

Accounts payable 250,000 300,000
Bonds Payable 500,000 500,000
Share capital 1,000,000 1,000,000
Retained earnings 620,000 530,000
Total liabilities and stockholders’ equity 2,370,000 2,330,000

Excellent Company
Statement of Income and Retained Earnings
Year ended December 31, 2023
Sales 3,000,000
Less: Cost of goods sold :
Inventory, January 1 350,000
Purchases 1,900,000
Goods available for sale 2,250,000
Inventory, December 31 300,000 1,950,000
Gross Profit 1,050,000
Less: Expenses:
Distribution and administrative expenses 600,000
Depreciation expense – building 40,000
Depreciation expense – equipment 80,000
Interest expense 30,000 750,000
Income before income tax 300,000
Less: Income tax 75,000
Net income 225,000
Retained earnings, January 1 530,000
Total 755,000
Less: Dividends paid, July 1 135,000
Retained earnings, December 31 620,000

Additional information:
 1. The price index numbers prevailing at the date various assets and equities arose are as follows:

Date Index Index number

January 1, 2017 Share capital 100
January 1, 2017 Land 100
January 1, 2017 Building 100
January 1 2019 Equipment 110
July 1, 2023 Dividends 150
December 31, 2023 Interest 160

2. Prices rose evenly and index numbers expressing the general price level changes were:

January 1, 2022 130

December 31, 2022 140
December 31, 2023 160
Average for 2022 135
Average for 2023 150

3. Sales and purchases were made and expenses other than depreciation were incurred evenly.

4. Inventories were reported at cost using FIFO and average index numbers for the year are applicable
in restating inventories.

REQUIRED: 1. Prepare a comparative statement of financial position on December 31, 2023 restated to
December 31, 2023 level.
2. Prepare an income statement for 2023 restated to December 31, 2023 price level.
3. compute the gain or loss on purchasing power for 2023.

Problem 2:
Sunflower Company reported the following liabilities in the statement of financial position at year end:

Accounts payable 1,000,000

Accrued expenses 500,000
Bonds payable 3,000,000
Finance leas liability 4,000,000
Unearned revenue 300,000
Advances from customers 1,200,000
Estimated warranty liability 200,000
Deferred tax liability 400,000

REQUIRED: Compute the total monetary liabilities.

Problem 3:
Gardenia Company reported the following assets bin the statement of financial position at year-end:

Cash in bank 2,000,000

Accounts receivable 4,000,000
Inventory 1,500,000
Available for sale securities 500,000
Patent 1,000,000
Advances to suppliers 400,000
Advances to employees 200,000
Prepaid expenses 100,000

REQUIRED: Compute the total monetary assets.

Problem 4 (current cost accounting) adapted
Sample Company was formed on January 1, 2020. The entity presented the following financial statements
pertaining to the first year operations.
Sample Company
Statement of Financial Position
December 31, 2023

Assets
Cash 900,000
Accounts receivable 1,340,000
Inventory 1,800,000
Land 1,400,000
Equipment ( 10 year life) 2,400,000
Accumulated depreciation (240,000)
Total assets 7,600,000

Liabilities and Stockholders’ Equity

Accounts Payable 800,000

Income tax payable 700,000
Notes payable 1,000,000
Share capital 4,200,000
Retained earnings:
Net income 1,300,000
Dividends ( 400,000) 900,00
Total liabilities and stockholders’ equity 7,600,000

Sample Company
Statement of Financial Position
December 31, 2023

Sales 8,000,000
Less: Cost of sales:
Inventory, January 1 2,000,000
Add: Purchases 4,200,000
Goods available for sale 6,200,000
Less: Inventory, December 31 1,800,000 4,400,000
Gross income 3,600,000
Less: Operating expenses:
Expenses 1,360,000
Depreciation 240,000 1,600,000
Income before income tax 2,000,000
Less: Income tax 700,000
Net income 1,300,000

Additional information:
The current cost information on December 31, 2023:
Cost of goods sold at average current cost 5,200,000
Inventory 2,040,000
Land, 3,200,000
Equipment, 2,800,000

REQUIRED: Prepare an income statement and a statement of financial position in accordance with current
cost accounting.

Problem 5:
Simple Company reported the following information in relation to Land:

 The entity purchased land on January 1, 2020 for P 500,000 cash. On December 31, 2020, the land
has a current replacement cost of P 600,000.
 On December 31, 2021, the land has a current replacement cost of P 750,000.
 The entity sold the land for P 1,000,000 cash on December 31, 2022. On this date, the current
replacement cost of the land is P 800,000.

Q1: What is the unrealized holding gain to be reported in 2020?

Q2: What is the unrealized holding gain to be reported in 2021?

Q3: What is the unrealized holding gain to be reported in 2022?

Q4: What is the gain on sale of land to be reported in 2022?

Problem 6:

Kerr Company purchased a machine for P 1,150,000 on January 1, 2023, the first of operation. At the end of
the year, the current cost of the machine was P 1,250,000.

The machine has no residual value, has a five-year life and is depreciated by the straight-line method.

Q1: What amount of depreciation should be reported in the historical cost income statement for 2023?

Q2: What amount of depreciation expense should be reported in the current cost income statement for
2023?

Q3: What is the realized holding gain on the machine for 2023?

Q4: what is the unrealized holding gain on the machine for 2023?

Problem 7:

Easy Company acquired an equipment on January 1, 2023 for P 5,000,000. Depreciation is computed using
the straight line method. The estimated useful life of the equipment is five years with no residual value.

A specific price index applicable to the equipment was 150 on January 1, 2023 and 225 on December 31,
2023.

Q1: What amount of depreciation should be reported in the historical cost income statement for 2023?

Q2: What amount of depreciation expense should be reported in the current cost income statement for
2023?

Q3: What is the realized holding gain on the equipment for 2023?

Q4: what is the unrealized holding gain on the equipment for 2023?

End