2019. Entity A will use the following general price index and conversion factors to restate its financial statements:
General price index
December 2017
95
December 2018
135
December 2019
223
The table below shows the method required by IFRIC 7:
2019
2018
Building (not restated)
300
400
Building (restated in 2019 financial statements):
300 × (223 ÷ 95) =
704
400 × (223 ÷ 95) =
939
Building (restated in 2018 financial statements):
400 × (135 ÷ 95) =
568 (a)
Tax base
200
333 (b)
Deferred tax liability (restated in 2019 financial statements):
(704 – 200) × 30% =
151
(568 – 333) × 30% = 71; 71 × (223 ÷ 135) =
117
Entity A measures the temporary difference at the end of 2018 by comparing (a) the restated carrying amount
of the building in 2018 accounts to (b) its tax base at that date. The temporary difference calculated in that
manner is then multiplied by the applicable tax rate and the resulting amount is then adjusted for the
hyperinflation during 2019, resulting in a deferred tax liability of 117.
After entity A has restated its financial statements for a given year, all corresponding figures in the financial
statements for a subsequent reporting period, including deferred tax items, are restated by applying the
change in the measuring unit for that subsequent reporting period only to the restated financial statements for
the previous reporting period. [IFRIC 7.5].
IAS 29 refers to IAS 12 for guidance on the calculation of deferred taxation by entities
operating in hyperinflationary economies. [IAS 29.32]. IAS 12 recognises that IAS 29
restatements of assets and liabilities may give rise to temporary differences when equivalent
adjustments are not allowed for tax purposes. [IAS 12.IE.A18]. Where IAS 29 adjustments give
rise to temporary differences, IAS 12 requires the following accounting treatment:
(1) the deferred tax income or expense is recognised in profit or loss; and
(2) if, in addition to the restatement, non-monetary assets are also revalued, the
deferred tax movement relating to the revaluation is recognised in other
comprehensive income and the deferred tax relating to the restatement is
recognised in profit or loss. [IAS 12.IE.A18].
1192 Chapter 16
For example, deferred taxation arising on revaluation of property, plant and equipment
is recognised in other comprehensive income, just as it would be if the entity were not
operating in a hyperinflationary economy. On the other hand, restatement in
accordance with IAS 29 of property, plant and equipment that is measured at historical
cost is recognised in profit or loss. Thus the treatment of deferred taxation related to
non-monetary assets valued at historical cost and those that are revalued, is consistent
with the general requirements of IAS 12.
5
RESTATEMENT OF THE STATEMENT OF CHANGES IN
EQUITY
At the beginning of the first period when an entity applies IAS 29, it restates the
components of owners’ equity as follows:
• the components of owners’ equity, except retained earnings and any revaluation
surplus, are restated by applying a general price index from the dates the
components were contributed or otherwise arose;
• any revaluation surplus that arose in previous periods is eliminated; and
• restated retained earnings are derived from all the other amounts in the restated
statement of financial position. [IAS 29.24].
At the end of the first period and in subsequent periods, all components of owners’
equity are restated by applying a general price index from the beginning of the period
or the date of contribution, if later. [IAS 29.25]. Subsequent revaluations may give rise to
a revaluation surplus within equity.
IFRS does not define retained earnings and many jurisdictions require entities to
appropriate part of the balance into specific (often non-distributable) reserves. In such
cases, entities will need to apply judgement to determine whether these reserves are
essentially part of retained earnings (and so are not restated by applying the general
price index as described in paragraph 24 of IAS 29). If they are considered a separate
component of equity, then they are restated by applying the general price index as
explained above, both at the beginning of the first period when an entity applies IAS 29
and at the end of the first period and subsequent periods. Where entities have made
such judgements concerning the types of reserves held and these judgements have a
significant effect on the amounts recognised in the financial statements, IAS 1 requires
disclosure to users of the financial statements. [IAS 1.122].
Though IAS 29 provides guidance on the restatement of assets, liabilities and individual
components of shareholders’ equity, national laws and regulations with which the entity
needs to comply might not permit such revaluations. This can mean that IAS 29 may
require restatement of distributable reserves, but that from the legal point of view in
the jurisdiction concerned, those same reserves remain unchanged. That is, it is possible
that ‘restated retained earnings’ under IAS 29 will not all be legally distributable.
It may therefore be unclear to users of financial statements restated under IAS 29 to
what extent components of equity are distributable. Because of its global constituents,
the IASB’s standards cannot deal with specific national legal requirements relating to a
legal entity’s equity. Entities reporting under IAS 29 should therefore disclose the
Hyperinflation
1193
extent to which components of equity are distributable where this is not obvious from
the financial statements. In our view it is important for entities to give supplementary
information in the circumstances where the IAS 29 adjustments have produced large
apparently distributable reserves that are in fact not distributable.
Example 16.5: Restatement of equity
The table below shows the effect of a hypothetical IAS 29 restatement on individual components of equity.
Issued share capital and share premium increase by applying the general price index, the revaluation reserve
is eliminated as required, and retained earnings is the balancing figure derived from all other amounts in the
restated statement of financial position.
Amounts after
Components of
Amounts before
IAS 29
equity under
restatement
restatement
national law
Issued capital and share premium
1,500
3,150
1,500
Revaluation reserve
800
–
800
Retained earnings
350
1,600
350
Total equity
2,650
4,750
2,650
A user of the financial statements of the entity might get the impression, based on the information
restated in
accordance with IAS 29, that distributable reserves have increased from 350 to 1,600. However, if national
law does not permit revaluation of assets, liabilities and components of equity, then distributable reserves
remain unchanged.
6
RESTATEMENT OF THE STATEMENT OF PROFIT AND
LOSS AND OTHER COMPREHENSIVE INCOME
IAS 29 requires that all items in historical cost based statements of profit and loss and
other comprehensive income be expressed in terms of the measuring unit current at the
end of the reporting period. [IAS 29.26]. The standard contains a similar requirement for
current cost based statements of profit and loss and other comprehensive income,
because the underlying transactions or events are recorded at current cost at the time
they occurred rather than in the measuring unit current at the end of the reporting
period. [IAS 29.30]. Therefore, all amounts in the statement of profit and loss and other
comprehensive income need to be restated as follows:
general price index at the
restated
amount before
end of the reporting period
=
×
amount
restatement
general price index when the underlying
income or expenses were initially recorded
Actually performing the above calculation on a real set of financial statements is often
difficult because an entity would need to keep a very detailed record of when it entered
into transactions and when it incurred expenses. Instead of using the exact price index
for a transaction it may be more practical to use an average price index that
approximates the actual rate at the date of the transaction. For example, an average rate
for a week or a month might be used for all transactions occurring during that period.
However, it must be stressed that if price indices fluctuate significantly, the use of an
average for the period may be inappropriate.
1194 Chapter 16
There may be items in statements of profit and loss and other comprehensive income,
e.g. interest income and expense that comprise an element that is intended to
compensate for the effect of hyperinflation. However, even those items need to be
restated as IAS 29 specifically requires that ‘all amounts need to be restated’ (see 6.1
below). [IAS 29.26, 30].
Example 16.6 illustrates how an entity might, for example, restate its revenue to the
measuring unit current at the end of the reporting period. A similar calculation would
work well for other items in statements of profit and loss and other comprehensive
income, with the exception of:
(a) depreciation and amortisation charges which are often easier to restate by using
the cost balance restated for hyperinflation as a starting point;
(b) deferred taxation which should be based on the temporary differences between
the carrying amount and tax base of assets and liabilities, the restated opening
balance carrying amount of statement of financial position items, and the
underlying tax base of those items (see 4.4 above); and
(c) the net monetary gain or loss which results from the IAS 29 restatements
(see 6.2 below).
Example 16.6: Restatement of historical cost statement of profit and loss and
other comprehensive income
An entity would restate its revenue for the period ending 31 December 2019, when the general price index
was 2,880, as shown in the table below.
Revenue
General
before
Restated
price index
Conversion factor
restatement
revenue
31 January 2019
1,315
(2,880 ÷ 1,315) = 2.19
40
87.6
28 February 2019
1,345
(2,880 ÷ 1,345) = 2.14
35
74.9
31 March 2019
1,371
etc. = 2.10
45
94.5
30 April 2019
1,490
1.93
45
87.0
31 May 2019
1,600
1.80
65
117.0
30 June 2019
1,846
1.56
70
109.2
31 July 2019
1,923
1.50
70
104.8
31 August 2019
2,071
1.39
65
90.4
30 September 2019
2,163
1.33
75
99.9
31 October 2019
2,511
1.15
75
86.0
30 November 2019
2,599
1.11
80
88.6
31 December 2019
2,880
1.00
80
80.0
745
1,119.9
Inevitably, in practice there is some approximation in this process because of the
assumptions that the entity is required to make, for example the use of weighted
averages rather than more detailed calculations and assumptions as to the timing of the
underlying transactions (e.g. the calculation above assumes the revenues for the month
are earned on the final day of the month, which is not realistic).
Hyperinflation
1195
6.1
Restatement of interest and exchange differences
A common question is whether an entity should restate exchange differences under
IAS 29, because the standard considers that ‘foreign exchange differences related to
invested or borrowed funds, are also associated with the net monetary position’.
[IAS 29.28]. Nevertheless, the standard requires that all items in the statement of profit
and loss and other comprehensive income are expressed in terms of the measuring unit
current at the end of the reporting period. ‘Therefore all amounts need to be restated
by applying the change in the general price index from the dates when the items of
income and expenses were initially recorded in the financial statements’. [IAS 29.26].
Interest and exchange differences should therefore be restated for the effect of
inflation, as are all other items in the statement of profit and loss and other
comprehensive income, and be presented on a gross basis. However, it may be helpful
if they are presented together with the gain or loss on net monetary position in the
statement of profit and loss and other comprehensive income. [IAS 29.28].
6.2
Calculation of the gain or loss on the net monetary position
In theory, hyperinflation only affects the value of money and monetary items and does
not affect the value, as distinct from the price, of non-monetary items. Therefore, any
gain or loss because of hyperinflation will be the gain or loss on the net monetary
position of the entity. By arranging the items in an ordinary statement of financial
position, it can be shown that the monetary position minus the non-monetary position
is always equal to zero:
Non-
Monetary
monetary
Total
items
it
ems
Monetary assets
280
280
Non-monetary assets
170
170
Monetary liabilities
(200)
(200)
Non-monetary liabilities
(110)
(110)
Assets minus liabilities
140
Shareholders’ equity
(140)
(140)
Net position
0
80
(80)
Theoretically, the gain or loss on the net monetary position can be calculated by
applying the general price index to the entity’s monetary assets and liabilities. This
would require the entity to determine its net monetary position on a daily basis,
which would be entirely impracticable given the resources required to prepare daily
IFRS compliant accounts as well as the difficulties in making the monetary/non-
monetary distinction (see 4.1 above). The standard therefore allows the gain or loss
on the net monetary position to be estimated by applying the change in a general
price index to the weighted average for the period of the difference between
monetary assets and monetary liabilities. [IAS 29.27, 31]. Due care should be exercised
in estimating the gain or loss on the net monetary position, as a calculation based on
averages for the period (or monthly averages) can be unreliable if addressed without
1196 Chapter 16
accurate consideration of the pattern of hyperinflation and the volatility of the net
monetary position.
However, as shown in the above table, any restatement of the non-monetary items must
be met by an equal restatement of the monetary items. Therefore, in preparing financial
statements it is more practical to assume that the gain or loss on the net monetary
position is exactly the reverse of the restatement of the non-monetary items. A stand-
alone calculation of the net gain or loss can be used to verify the reasonableness of the
restatement of the non-monetary items.
The gain or loss on the net monetary position as calculated above, as well as any
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 236