International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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accordance with national legislation is sometimes described as ‘current cost’
information, it will seldom meet the definition of current cost in accordance with the
Conceptual Framework. [CF(2010) 4.55(b)]. Where this is the case, entities must first
determine the carrying value on the historical cost basis for these assets and liabilities
before applying the requirements of IAS 29.
4.1.4
Non-monetary items carried at historical cost
Non-monetary items carried at historical cost, or cost less depreciation, are stated at
amounts that were current at the date of their acquisition. The restated cost, or cost less
depreciation, of those items is calculated as follows:
general price index at
net book value
the end of the reporting period
restated for
= historical cost ×
hyperinflation
general price index at the date of acquisition
Application of this formula to property, plant and equipment, inventories of raw
materials and merchandise, goodwill, patents, trademarks and similar assets appears to
be straightforward, but does require detailed records of their acquisition dates and
accurate price indices at those dates. [IAS 29.15]. It should be noted though that IAS 29
permits certain approximations as long as the procedures and judgements are consistent
from period to period. [IAS 29.10]. Where sufficiently detailed records are not available
or capable of estimation, IAS 29 suggests that it may be necessary to obtain an
‘independent professional assessment’ of the value of the items as the basis for their
restatement in the first period of application of the standard, but also notes that this will
only be in rare circumstances. [IAS 29.16].
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Example 16.2: Restatement of property, plant and equipment
The table below illustrates how the restatement of a non-monetary item (for example, property, plant and
equipment) would be calculated in accordance with the requirements of IAS 29. When IAS 29 is first applied,
the item is restated from the date of acquisition. In subsequent periods it is restated from the previous
reporting period as shown below.
Net book value of
Historical
Conversion
Restated for
property, plant and equipment
restatements
factor
hyperinflation
Opening balance, 1 January
510
2.40
1,224
(a)
– Additions (May)
360
1.80
648
(b)
– Disposals (March)
(105)
2.40
(252)
(c)
– Depreciation
(200)
(448)
(d)
Closing balance, 31 December
565
1,172 (e)
(a) The opening balance is restated by adjusting the historical balance for the increase in the price index
between the beginning and the end of the reporting period.
(b) The additions are restated for the increase in the price index from May to December.
(c) The disposals are restated for the increase in the price index between the beginning and the end of the
reporting period, assuming all disposals were acquired in a previous reporting period.
(d) Depreciation has been recalculated using the cost balance restated for hyperinflation on an asset by asset
basis as a starting point. The alternative approach, to restate the depreciation charge by applying the
appropriate conversion factor, could be easier to apply but may not be accurate enough when there is a
significant level of additions and disposals during the reporting period.
(e) The closing balance is in practice determined by adding up items (a)-(d). Alternatively, the entity could
calculate the closing balance by restating the acquisition cost of the individual assets for the change in
the price index during the period of ownership.
The calculations described under (a)-(e) all require estimates regarding the general price index at given dates
and are sometimes based on averages or best estimates of the actual date of the transaction.
When an entity purchases an asset and payment is deferred beyond normal credit terms,
it would normally recognise the present value of the cash payment as its cost. [IAS 16.23].
When it is impracticable to determine the amount of interest, IAS 29 provides relief by
allowing such assets to be restated from the payment date rather than the date of
purchase. [IAS 29.22].
Once the calculation discussed above has been completed, additional adjustments may
need to be made. In order to arrive at the final restated cost of the non-monetary items,
the provisional restated cost needs to be adjusted for borrowing costs and impairment,
if applicable, as follows: [IAS 29.19, 21]
net book value
borrowing costs that
adjustment to
restated costs
=
restated for
–
compensate for inflation
–
recoverable
hyperinflation
capitalised under IAS 23
amount
IAS 29 only permits partial capitalisation of borrowing costs, unlike the full
capitalisation that is ordinarily required by IAS 23 – Borrowing Costs (see Chapter 21),
because of the risk of double counting as the entity would both restate the capital
expenditure financed by borrowing and capitalise that part of the borrowing costs that
compensates for the inflation during the same period. [IAS 29.21]. The difficulty when
borrowing costs are capitalised is that IAS 29 only permits capitalisation of borrowing
costs to the extent that those costs do not compensate for inflation. The standard does
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not provide any guidance on how an entity should go about determining the component
of borrowing costs that compensates for the effects of inflation. Therefore, entities will
need to develop an appropriate methodology.
It is possible that an IAS 29 inflation adjustment based on the general price index leads
to non-monetary assets being stated above their recoverable amount. Therefore, IAS 29
requires that the restated amount of a non-monetary item is reduced, in accordance
with the appropriate standard, when it exceeds its recoverable amount from the item’s
future use (including sale or other disposal). [IAS 29.19]. This requirement should be taken
to mean that any overstatement of non-monetary assets not within the scope of IFRS 9
should be calculated and accounted for in accordance with IAS 36 – Impairment of
Assets – or the measurement provisions of IAS 2 – Inventories (see 4.2 below). That is,
the asset is written down to its recoverable amount or net realisable value and the loss
is recognised in profit or loss.
The example below illustrates how, after it has restated the historical cost based
carrying amount of property, plant and equipment by applying the general price index,
an entity adjusts the net book value restated for hyperinflation for these considerations:
Example 16.3: Borrowing costs and net realisable value adjustments
After the entity has restated the
historical cost based carrying amount of property, plant and equipment by
applying the general price index, it needs to adjust the net book value restated for hyperinflation to take
account of borrowing costs capitalised since the acquisition of the asset as follows:
Net book value restated for hyperinflation (inclusive of borrowing costs)
1,725
Borrowing costs capitalised at historical cost under IAS 23
42
Borrowing costs that compensated for inflation
(30)
Borrowing costs permitted to be capitalised under IAS 29
12
Borrowing costs that compensated for inflation
(30)
Relevant conversion factor for the borrowing costs
2.10 ×
(63) (a)
Net book value restated for hyperinflation and after adjustment of
capitalised borrowing costs
1,662
Net book value restated for hyperinflation and after adjustment of
capitalised borrowing costs
1,662
Amount recoverable from the item’s future use
1,550
112
Adjustment to lower recoverable amount
(112) (b)
Carrying amount restated under IAS 29
1,550
(a) The borrowing costs capitalised in the original historical cost financial statements are reversed, as they
are not permitted under IAS 29.
(b) To the extent that the ‘net book value restated for hyperinflation and after adjustment of capitalised
borrowing costs’ exceeds the ‘amount recoverable from the item’s future use’, the restated amount
should be reduced to the lower ‘amount recoverable from the item’s future use’.
4.2 Inventories
Inventories of finished and partly finished goods should be restated from the dates on
which the costs of purchase and of conversion were incurred. [IAS 29.15]. This means
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that the individual components of finished goods should be restated from their
respective purchase dates. Similarly, if production takes place in several distinct
phases, the costs associated with each of those phases should be restated from the
date that the cost was incurred.
Given the large number of transactions affecting an entity’s inventory position, it may
be difficult to determine the date of acquisition of individual items of inventory.
Therefore, entities commonly approximate the ageing of inventories based on
inventory turnover. Similarly, the level of the general price index at the date of
acquisition is often determined at the average level for the month because an up-to-
date price index is not available for each day of the month. Determining the appropriate
level of the general price index can be difficult when the price index is updated
relatively infrequently and the entity’s business is highly seasonal.
IAS 29 requires restatement of inventory by applying a general price index, which could
result in an overvaluation when the price of inventory items increases at a different rate
from the general price index. At the end of each period it is therefore essential to ensure
that items of inventory are not valued in excess of their net realisable value. Any
overstated inventories should be written down to net realisable value under IAS 2.
[IAS 29.19].
4.3
Restatement of associates, joint ventures and subsidiaries
IAS 29 provides separate rules for the restatement of associates and joint ventures
that are accounted for under the equity method. If the investee itself operates in the
same hyperinflationary currency, the entity should restate the statement of financial
position, statement of profit and loss and other comprehensive income of the
investee in accordance with the requirements of IAS 29 in order to calculate its
share of the investee’s net assets and results of operations. [IAS 29.20]. The standard
does not permit the investment in the investee to be treated as a single indivisible
item for the purposes of the IAS 29 restatement. Restating the financial statements
of an associate before application of the equity method will often be difficult
because the investor may not have access to the detailed information required. The
fact that the investor can exercise significant influence or has joint control over an
investee often does not mean that the investor has unrestricted access to the
investee’s books and records at all times.
When the investor does not operate in the hyperinflationary currency, but the investee
does, the same processes described above are still required to be completed prior to
the equity accounting process. Once restated, the results of the investee are translated
into the investor’s presentation currency at the closing rate. [IAS 29.20]. IAS 21 contains a
similar provision that requires that all current year amounts related to an entity (i.e.
investee), whose functional currency is the currency of a hyperinflationary economy,
to be translated at the closing rate at the date of the most recent statement of financial
position (see Chapter 15 at 6.1). [IAS 21.42].
If a parent that reports in the currency of a hyperinflationary economy has a subsidiary
that also reports in the currency of a hyperinflationary economy, then the financial
statements of that subsidiary must first be restated by applying a general price index of
the country in whose currency it reports before they are included in the consolidated
1190 Chapter 16
financial statements issued by its parent. [IAS 29.35]. When an investor has a subsidiary
whose functional currency is the currency of a hyperinflationary economy, IAS 21
further clarifies that all current year amounts related to the subsidiary should be
translated at the closing rate at the date of the most recent statement of financial
position (see Chapter 15 at 6.1). [IAS 21.42].
If a parent that reports in the currency of a hyperinflationary economy has a subsidiary
that reports in a currency that is not hyperinflationary, the financial statements of that
subsidiary should be translated in accordance with paragraph 39 of IAS 21 (see
Chapter 15 at 6.1). [IAS 21.39].
In addition, IAS 29 requires that when financial statements with different reporting
dates are consolidated, all items, whether non-monetary or monetary are restated into
the measuring unit current at the date of the consolidated financial statements. [IAS 29.36].
4.4
Calculation of deferred taxation
Determining whether deferred tax assets and liabilities are monetary or non-monetary
is difficult because:
• deferred taxation could be seen as a valuation adjustment that is either monetary
or non-monetary depending on the asset or liability it relates to, or
• it could also be argued that any deferred taxation payable or receivable in the very
near future is almost identical to current tax payable and receivable. Therefore, at
least the short-term portion of deferred taxation, if payable or receivable, should
be treated as if it were monetary.
IFRIC 7 provides guidance to facilitate the first time application of IAS 29. Although the
interpretation notes that there continues to be a difference of opinion as to whether
deferred taxation is monetary o
r non-monetary, [IFRIC 7.BC21-BC22], the debate has been
settled for practical purposes because:
• IAS 12 – Income Taxes – requires deferred taxation in the closing statement of
financial position for the year to be calculated based on the difference between
the carrying amount and the tax base of assets and liabilities, without making a
distinction between monetary and non-monetary items; and
• IFRIC 7 requires an entity to remeasure the deferred tax items in any comparative
period in accordance with IAS 12 after it has restated the nominal carrying
amounts of its non-monetary items at the date of the opening statement of
financial position of the reporting period by applying the measuring unit at that
date. These remeasured deferred tax items are then restated for the change in the
measuring unit between the beginning and the end of reporting period. [IFRIC 7.4].
The following example, which is based on the illustrative example in IFRIC 7, shows
how an entity should restate its deferred taxation in the comparative period.
[IFRIC 7.IE1-IE6].
Example 16.4: Restatement of deferred taxation
Entity A owns a building that it acquired in December 2017. The carrying amount and tax base of the
building, and the deferred tax liability are as follows:
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Before IAS 29 restatement
2019
2018
Building (not restated)
300
400
Tax base
200
333
Tax rate
30%
30%
Deferred tax liability:
(300 – 200) × 30% =
30
(400 – 333) × 30% =
20
Entity A has identified the existence of hyperinflation in 2019 and therefore applies IAS 29 from the beginning of