PAS 29 Financial Reporting in Hyperinflationary

Economies

Learning Objectives
• State the core principle under PAS 29.
• Describe the restatement procedures under PAS 29.

Conceptual Framework & Acctg. Standards (by: Zeus Vernon B. Millan) 1

The Stable Monetary Assumption

• Under the stable monetary assumption, the purchasing power

of money is assumed to be stable. Therefore, inflation is ignored.

• The exception to this concept is hyperinflation.

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Standards (by: Zeus Vernon B. Millan)
Price level changes

• General price level changes and the purchasing power of money

have an inverse relationship.
 If the general price level increases, this means that the
purchasing power of money has decreased – a condition known
as inflation.
 If the general price level decreases, this means that the
purchasing power of money has increased – a condition known
as deflation.

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Standards (by: Zeus Vernon B. Millan)
Hyperinflation

• Hyperinflation occurs when inflation is “very high.”

• PAS 29 does not establish an absolute rate at which hyperinflation

is deemed to arise. This is a matter of judgment.

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Standards (by: Zeus Vernon B. Millan)
Indicators of hyperinflation
1. The general population prefers to keep its wealth in non-monetary assets or in a
relatively stable foreign currency. Amounts of local currency held are
immediately invested to maintain purchasing power;
2. The general population regards monetary amounts not in terms of the local
currency but in terms of a relatively stable foreign currency. Prices may be quoted
in that currency;
3. 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;
4. Interest rates, wages and prices are linked to a price index; and
5. The cumulative inflation rate over three years is approaching, or exceeds,
100%.

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Standards (by: Zeus Vernon B. Millan)
Core principle
• The financial statements of an entity whose functional currency is the
currency of a hyperinflationary economy shall be stated in terms of the
measuring unit current at the end of the reporting period.
• The comparative information for the previous period shall also be
stated in terms of the measuring unit current at the end of the
reporting period.
• Presentation of information as a supplement to unrestated financial
statements is not permitted.
• Separate presentation of the financial statements before restatement
is discouraged.

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Standards (by: Zeus Vernon B. Millan)
Restatement of financial statements

Statement of financial position

• Only non-monetary items, statement of financial position amounts not
already expressed in terms of the measuring unit current at the end of the
reporting period, are restated when using the constant peso accounting.

• Monetary items are not restated because they are already expressed in
terms of the monetary unit current at the end of the reporting period.
 
• Monetary items are money held and items to be received or paid in fixed or
determinable amount of money without reference to future prices of specific
goods or services. Monetary items include monetary assets and monetary
liabilities.

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Standards (by: Zeus Vernon B. Millan)
Examples of Monetary assets

1. Cash and cash equivalents

2. Loans and receivables and their related allowances
3. Financial assets at amortized cost (debt instruments)
4. Finance lease receivables
5. Cash surrender value

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Standards (by: Zeus Vernon B. Millan)
Examples of Monetary liabilities

1. Financial liabilities at amortized cost (debt instruments), e.g., accounts,

notes, bonds, and finance lease payables.
2. Accrued expenses payable in fixed and determinable amounts of money.
3. Refundable deposits, e.g., security deposits on leases to be returned to
tenants at the end of the lease term and deposits for returnable
containers.
4. Dividends payable

• All other items that cannot be classified as monetary items are non-
monetary items, except of “retained earnings.” Retained earnings is
the a balancing figure after restatement.

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Standards (by: Zeus Vernon B. Millan)
Examples of Nonmonetary assets

1. Physical assets such as inventories, property, plant, and equipment,

and investment properties and their related accumulated
depreciation
2. Intangible assets
3. Financial assets measured at fair value
4. Advances and prepayments not collectible in cash such as
advances to suppliers, prepaid insurance, prepaid rent, and the
like.

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Standards (by: Zeus Vernon B. Millan)
Examples of Nonmonetary liabilities

1. Financial liabilities measured at fair value

2. Unearned items not payable in cash such as advances from
customers, unearned rent, deferred revenues, and the like.
3. Warranty obligations to be settled by future delivery of services (e.g.,
free repair service) or replacement with other non-monetary items
(e.g., free replacement of parts or replacement of the good purchased).

• Equity items such as share capital and share premium are also
nonmonetary items and thus restated.

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Standards (by: Zeus Vernon B. Millan)
Non-monetary items carried at other than cost

• As a general guide, only non-monetary measured at cost are restated. The

following non-monetary items need not be restated:
1. Non-monetary items measured at net realizable value (NRV) or Fair value
as at the end of reporting period*.
2. Non-monetary items measured at revalued amounts as at the end of
reporting period*.

• * If the NRV, fair value or revalued amount is determined at a date other

than the end of reporting period, the nonmonetary item is nevertheless
restated.

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Standards (by: Zeus Vernon B. Millan)
Restatement of financial statements

• All items in the statement of profit or loss and other

comprehensive income are restated.

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Standards (by: Zeus Vernon B. Millan)
Formula for restatement

*When it is impracticable to determine the historical price indices,

such as for transactions recurring very frequently, the average
general price index for the period may be used.

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Standards (by: Zeus Vernon B. Millan)
 Gain or loss on net monetary position

The gain or loss on the net monetary position (also called ‘purchasing
power gain or loss’) is recognized in profit or loss.

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Standards (by: Zeus Vernon B. Millan)
Financial Instruments

• Financial instrument – is “any contract that gives rise to a financial

asset of one entity and a financial liability or equity instrument of
another entity.” (PAS 32.11)

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Standards (by: Zeus Vernon B. Millan)
Financial assets

• Financial asset – is any asset that is:

a. Cash;
b. An equity instrument of another entity;
c. A contractual right to receive cash or another financial asset from
another entity;
d. A contractual right to exchange financial instruments with another
entity under conditions that are potentially favorable; or
e. A contract that will or may be settled in the entity’s own equity
instruments and is not classified as the entity’s own equity instrument.

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Standards (by: Zeus Vernon B. Millan)
Financial liabilities

• Financial liability – is any liability that is:

a. A contractual obligation to deliver cash or another financial asset to
another entity;
b. A contractual obligation to exchange financial assets or financial
liabilities with another entity under conditions that are potentially
unfavorable to the entity; or
c. A contract that will or may be settled in the entity’s own equity
instruments and is not classified as the entity’s own equity instrument.

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Standards (by: Zeus Vernon B. Millan)
Equity instrument

• Equity instrument – is “any contract that evidences a residual

interest in the assets of an entity after deducting all of its liabilities.”
(PAS 32.11)

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Examples of financial assets

a. Cash and cash equivalents (e.g., cash on hand, in banks, short-term

money placements, and cash funds)
b. Receivables such as accounts, notes, loans, and finance lease
receivables.
c. Investments in equity or debt instruments of other entities such as
held for trading securities, investments in subsidiaries, associates,
joint ventures, investments in bonds, and derivative assets
d. Sinking fund and other long-term funds composed of cash and other
financial assets.

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Standards (by: Zeus Vernon B. Millan)
• The following are not financial assets:
a. Physical assets, such as inventories, biological assets, PPE and
investment property
b. Intangible assets
c. Prepaid expenses and advances to suppliers
d. The entity’s own equity instrument (e.g., treasury shares)

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Standards (by: Zeus Vernon B. Millan)
Examples of financial liabilities

a. Payables such as accounts, notes, loans and bonds payable.

b. Lease liabilities
c. Held for trading liabilities and derivative liabilities
d. Redeemable preference shares issued.
e. Security deposits and other returnable deposits

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Standards (by: Zeus Vernon B. Millan)
• The following are not financial liabilities:
a. Unearned revenues and warranty obligations that are to be settled
by future delivery of goods or provision of services.
b. Taxes, SSS, Philhealth, and Pag-IBIG payables
c. Constructive obligations

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Standards (by: Zeus Vernon B. Millan)
Presentation

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Standards (by: Zeus Vernon B. Millan)
Contracts settled through equity instruments

Financial liability Equity instrument

 The contract requires the delivery of  The contract requires the delivery
(a) a variable number of the (receipt) of a fixed number of the
entity’s own equity instruments in entity’s own equity instruments in
exchange for a fixed amount of cash exchange for a fixed amount of
or another financial asset or (b) a cash or another financial asset.
fixed number of the entity’s own
equity instruments in exchange for a
variable amount of cash or
another financial asset.

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Standards (by: Zeus Vernon B. Millan)
Redeemable vs. Callable Preference shares

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Standards (by: Zeus Vernon B. Millan)
Compound financial instruments

• A compound financial instrument is a financial instrument that,

from the issuer’s perspective, contains both a liability and an
equity component. These components are classified and accounted
for separately, as follows:
a. The value assigned to the liability component is its fair value
without the equity feature.
b. The value assigned to the equity component is the residual
amount after deducting the value assigned to the liability
component from the total fair value of the compound instrument.

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Standards (by: Zeus Vernon B. Millan)
Treasury shares

• Treasury shares are an entity’s own shares that were previously

issued but were subsequently reacquired but not retired.
• Treasury shares are treated as deduction from equity.
• Treasury share transactions are recognized directly in equity.
Therefore, they do not result to gains or losses.

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Standards (by: Zeus Vernon B. Millan)
Interest, Dividends, Losses and Gains

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Standards (by: Zeus Vernon B. Millan)
Offsetting of financial assets & financial
liabilities
• A financial asset and a financial liability are offset and only the net
amount is presented in the statement of financial position when the
entity has both:
a. a legal right of setoff and
b. an intention to settle the amounts on a net basis or
simultaneously

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