Chapter 29

REPORTING IN
HYPERINFLATIONARY
ECONOMY (PAS 29)
HYPERINFLATION

PAS 29 on financial reporting in hyperinflanatory economy does not establesg an

absolutr rate at which hyperinflation is deemed to arise.

Hyperinflation is a matter of judgement.

Hyperinflation is indicated by characteristics of the economic environment of a

country which include but are not limited to the following:

A) The general population prefers to keep its wealth in nonmonetary assets or in

relatively stable foreign currency.

Accordingly, amounts held in local currency are immediately invested in

nonmonetary assets or stable foreign currency to maintain purchasing power.
B) The general population regards monetary amounts not in terms of local currency
but in terms of a relatively stable foreign currency.

C) Sales and purchases on credit take place at prices that compensate for the expected
l9ss of purchasing power during the credit period even if the period is short.

D) The cummulative over 3 years is approaching or exceeds 100%.

Although PAS 29 sets out the characteristics that may indicate hyperinflationary
economy, it also states that judgement may be used in determining wether restatement
of financial statements is required.

Although PAS 29 sets out the characteristics that may indicate hyperinflationary
economy, it also states that judgement may be used in determining wether restatement
of financial statements is required.
FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMY

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

Presentation of the information under PAS 29 as a supplement to unrestated financial

statement is not permitted.

The restatemnt of financial statements of an entity that reports in the currency of

hyperinflationary economy is accomplished by means of constant peso accounting.
MONETARY ITEMS

PAS 21 defines monetary items as money held and assets and liabilities to be received or
oaid in fuxed or determinable amount of money.

The essential feature of monetary item is a right to receive or an obligation to deliver a

fixed or determinable amount of money.

In simple language, monetary items refer to cash and assets that represent a fixed amount
of pesos to be received or o livations that represent a fixed amount peso to be paid.
NONMONETARY ITEMS

Nonmonetary items, by the process of exclusion, mat be defined as those items that cannot
be classified as monetary.

These items are called nonmonertary because their pesi amounts reported in the financial
statements differ from the amounts that are ultimately realizable or payable.

The essential feature of a nonmonetary item is the absence of a right to receive or an

obligation ti deliver a fixed or determinable amount of money.
WHAT ITEMS ARE RESTATED?

Only nonmonetary items are restated when preparing constant peso

financial statements.

Monetary items are not restated anymore because they are automatically
stated in terms of current purchasing power of peso.

The objective of constant peso accounting is report elements of financial

statements in terms os pesos that have the same purchasing power.
FORMULA FOR RESTATEMENT
GENERAL PRICE INDEX

The price index number used for restatement is known as a general price
index constructed by government like the bangko sentral ng phillipines.
Such as an index is design to show how much the overall level of prices in
the economy has change over time. As increase in the genreral price index
means that the purchasing power of money has decreased. This is
popularly known as ‘inflation’.
 GAIN OR LOSS OR PURCHASING POWER
Purchasing power that means the goods and services that money can buy.

In a period of inflamation or rising prices a purchasing power loss is incurved on monetary assets and purchasing power gain is realized on money liabilities.

In a period of deflation or falling prices a purchasing power gain is realized on monetary assets and a purchasing power loss is incurveed on monetary liabilities
 ILLUSTRATION
*A person deposites P100.000 in a savings account at the beginning of the current year to earn 8% intersest.

*Five years later having withdrawn neither the principal nor the interest, the depositor own a passbook that shows a balance of P136.930 , which is the amount of P100.000 compounded anually at 8% for 5years.

*Obviously , there is a monetary income of P46.930 because the depositor now has more pesos than before.

But economically speaking, is there gain or loss?

*If during the five year period the price level approximately increased a 100% then to maintain the purchasing power of the P100.000 in the current year, the depositor should have P200.000 after 5 years.

*But the depositor has only P146.930. Thus there is an economic loss of P53.070. Clearly, when prices increase, the value of money decreases.
Another illustration

person borrow at the beginning of the current year P100,000 payable after 5 years at 7% interest compound annually.

The table of amounts shows that the value of the P100,000 after 5 years at 7% compound annually is P140,260. This is, therefore,the amount to be paid by the debtor.

If during the five year period the price level increased by approximtely 100% then the creitr should should receive a tleast P200,000 to maintain the purchasing power of the P100,000 im the current year. But he recieves only P140,260.

There is an economic loss on the part of the creditor, and an economic gain on the part of debtor, in the amount of P59,740.

Clearly, when prices increase, it is more advantageouse to incur fixed obligati ons rather than hold monetary assets.
Proced ures for retatement

1. The items in the financial statements are classified into monetary and nonmonetary

2. Mon etary items are not restated because these are already expressed in terms of monetary unit current at the end of reporting period

3. Nonmonetary Items are restated by applying the general price index from the date of acquisition to the end of reporting period. Some nonmometary items tht are carried at amounts current at end of reporting period, such as net realized value and fair value are no longer restated

4.Some nonmonetary items are carried at amount current at date other acquisition date, for example, property, plant and equipment are revalued. In such case, the carrying amounts are restated from date of revaluation..
5.All items in the icome statement are restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded.

However,for practical purpose, the average index may be used.

6.The general purchasing gain or loss is computed on monetary items. The gain or loss on purchasing power is included profit or loss.

7.The restated amount of property, plant and equipment goodwill and other intangible asset is reduced when it exceeds the recoverable amount.

8.Any revaluation surplus recognized previously is eliminated.

9.Retained earnings would be the balancing figure in the restated statement financial position
10. When comparative statements are prepared, the monetary items of the preceding year are expressed in terms of the index number at the end of the current year.