adjustments on inflation linked instruments (see 4.1.2 above), should be included in
profit or loss and disclosed separately. It may be helpful to present it together with items
that are also associated with the net monetary position such as interest income and
expense, and foreign exchange differences related to invested or borrowed funds.
[IAS 29.28].
6.3
Measurement of reclassification adjustments within equity
IAS 29 does not provide guidance on the measurement basis of reclassifications from
other comprehensive income. For example, it is not clear when a debt instrument at
fair value through other comprehensive income is sold, whether the amount reclassified
into profit and loss is based on the amounts historically recorded in other
comprehensive income, or alternatively based on an inflation adjusted amount. Another
example is the case of cash flow hedges where gains or losses in an earlier reporting
period are recycled to profit and loss to offset against the gains or losses of the hedged
item at a later date.
The conflict arises due to the manner in which the statement of profit and loss and
other comprehensive income is constructed, including the need to classify items in
other comprehensive income as amounts to be recycled, or not. The need to classify
items in other comprehensive income into items that are recycled to profit or loss,
or not, would indicate that amounts initially recorded in other comprehensive
income should be recycled at amounts as originally recorded. While this may satisfy
the requirements for other comprehensive income, this leads to a loss of relevant
information in the statement of profit and loss and other comprehensive income.
Using the examples cited above, the gain or loss on disposal of a debt instrument at
fair value through other comprehensive income would no longer be presented in
terms of the index being used for purposes of restating amounts in profit or loss. In
the case of a cash flow hedge, the offset that would also be expected in profit or loss
is also lost. The alternative view would be to recycle amounts that have been
restated in terms of the current index that is being applied. This is illustrated in the
example below.
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Example 16.7: Measurement of reclassification adjustments
An entity acquired an item of PPE for FCU 3,000 on 31 December 2017. The exchange rate on the date of
acquisition was CU 10 to FCU 1, therefore the cost to the entity was CU 30,000. Before the acquisition was made,
the entity entered into a fully effective cash flow hedge that resulted in a gain of CU 6,000. The entity’s accounting
policy for cash flow hedges is to reclassify from equity to profit or loss as a reclassification adjustment in the same
period or periods during which the asset acquired affects profit or loss. The useful life of the asset is three years,
therefore in a non-hyperinflationary environment, for each of these three years, depreciation would amount to
CU 10,000, and CU 2,000 would be reclassified from other comprehensive income to profit or loss.
IAS 29 is not explicit on whether the reclassification from other comprehensive income should be adjusted for
the effects of hyperinflation. The following example illustrates the difference between adjusting and not
adjusting the reclassification of the cash flow hedge gains for the effect of hyperinflation. For the purpose of
this example, assume the general price index was 100 at 31 December 2018 and 150 at 31 December 2019.
2019 –
2019 –
2019 –
Hyperinflationary
Hyperinflationary
Non-hyperinflationary
Adjusted
Non-Adjusted
Depreciation
(a) –15,000
(a) –15,000
–10,000
Reclassification of cash
flow hedge gains
(b) 3,000
2,000
2,000
Net profit
Other comprehensive
income
Reclassification of cash
flow hedge gains
–3,000
–2,000
–2,000
(a) 30,000 × (150/100) / 3
(b) 6,000 × (150/100) / 3
If the entity had made the policy choice to include gains or losses in the initial cost or carrying amount of the asset
as a basis adjustment, the result would be consistent with the outcome of the adjusted reclassification approach.
While the approach of adjusting for hyperinflation would ensure relevant information
in the statement of profit and loss and other comprehensive income, it would lead to
different amounts being originally recorded and subsequently recycled in other
comprehensive income.
As no direct guidance is given in IAS 29, the development of an accounting policy in terms
of the IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors –
hierarchy would be required. In developing such an accounting policy an entity would
need to apply judgement and consider the objective of the standard that gives rise to the
amounts that are recycled to profit or loss. The basic accounting requirements before the
application of IAS 29 for the hedge accounting example cited above is currently
contained in IFRS 9 (or IAS 39 – Financial Instruments: Recognition and Measurement –
if IFRS 9 hedging has not yet been adopted). Understanding the objective of hedge
accounting and what risks have been hedged in the designated relationship would be
relevant inputs in developing an appropriate accounting policy. Once developed, the
general recommendation of IFRS to apply procedures and judgements consistently
should be followed for a particular class of equity reclassification. As there are numerous
different types of reclassifications within equity, an entity may need to determine a
relevant policy for each class of adjustment that could occur.
1198 Chapter 16
7
RESTATEMENT OF THE STATEMENT OF CASH FLOWS
The standard requires that all items in the statement of cash flows be expressed in terms
of the measuring unit current at the end of the reporting period. [IAS 29.33]. This is a
difficult requirement to fulfil in practice.
IAS 7 – Statement of Cash Flows – requires the following information to be presented:
(a) cash flows from operating activities, which are the principal revenue-producing
activities of the entity and other activities that are not investing or financing activities;
(b) cash flows from investing activities, which are the acquisition and disposal of long-
term assets and other investments not included in cash equivalents; and
(c) cash flows from financing activities, which are activities that result in changes in
the size and composition of the equity capital and borrowings of the entity.
[IAS 7.6, 10].
In effect IAS 29 requires restatement of most items in a statement of cash flows, therefore
implying that the actual cash flows at the time of the transactions will be different from
the numbers presented in the statement of cash flows itself. However, not all items are
restated using the same method and many of the restatements are based on estimates. For
example, items in the statement of profit and loss and other comprehensive income are
restated using an estimate of the general price index at the time that the revenues were
earned and the costs incurred. Unavoidably this will give rise to some inconsistencies.
Similarly, the restatement of statement of financial position items will give rise to
discrepancies because some items are not easily classified as either monetary or non-
monetary. This raises the question of how an entity should classify the monetary gain or
loss relating to a statement of financial position item in its statement of cash flows.
It is not clear from IAS 29 how a monetary gain or loss should be presented in the
statement of cash flows. In practice different approaches have been adopted, such as:
(a) presenting the effect of inflation on operating, investing and financing cash flows
separately for each of these activities and presenting the net monetary gain or loss
as a reconciling item in the cash and cash equivalents reconciliation;
(b) presenting the monetary gain or loss on cash and cash equivalents and the effect
of inflation on operating, investing and financing cash flows as one number; and
(c) attributing the effect of inflation on operating, investing and financing cash flows
to the underlying item and presenting the monetary gain or loss on cash and cash
equivalents separately.
Irrespective of the method chosen, users of statements of cash flows prepared in the
currency of a hyperinflationary economy should be mindful of the fact that figures
presented in the statement of cash flows may have been restated in accordance with
IAS 29 and may differ from the actual underlying cash flows. In our view it is important
for entities that have a significant proportion of their activities in hyperinflationary
economies to consider whether the entity should provide sufficient additional
disclosures to ensure that the financial statements are fully understood. Whether this is
limited to a general explanation of the mismatch between reported and actual amounts,
or specific information on major transactions is provided, would depend on the nature
and materiality of transactions affected.
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8
RESTATEMENT OF COMPARATIVE FIGURES
The standard requires that all financial information be presented in terms of the
measurement unit current at the end of the current reporting period, therefore:
• corresponding figures for the previous reporting period, whether they were based
on a historical cost approach or a current cost approach, are restated by applying
a general price index; and
• information that is disclosed in respect of earlier periods is also expressed in terms
of the measuring unit current at the end of the reporting period. [IAS 29.34].
Where IAS 29 was applied in the previous reporting period, this will be a
straightforward mathematical computation to apply the measuring unit current at the
end of the reporting period to the prior year comparative figures. An example of this
can be seen in the restatement of the opening balance of property, plant and equipment
in Example 16.2 above.
9 INTERIM
REPORTING
The illustrative examples to IAS 34 – Interim Financial Reporting – state that interim
financial reports in hyperinflationary economies are prepared using the same principles
as at financial year end. [IAS 34.B32]. This means that the financial statements must be
stated in terms of the measuring unit current at the end of the interim period and that
the gain or loss on the net monetary position is included in net income (profit or loss).
The comparative financial information reported for prior periods must also be restated
to the current measuring unit. [IAS 34.B33]. Hence, an entity that reports quarterly
information must restate the comparative statements of financial position, statement of
profit and loss and other comprehensive income, and other primary financial
statements each quarter.
In restating its financial information an entity may not ‘annualise’ the recognition of the
gain or loss on the net monetary position or use an estimated annual inflation rate in
preparing an interim financial report in a hyperinflationary economy. [IAS 34.B34].
Interim reporting of a group containing a subsidiary that reports in a hyperinflationary
currency results in particular issues in the year that the subsidiary’s functional currency
becomes hyperinflationary. These are discussed further at 10.1 below.
10 TRANSITION
10.1 Economies
becoming
hyperinflationary
When the functional currency of an entity becomes hyperinflationary it must start
applying IAS 29. The standard requires that the financial statements and any
information in respect of earlier periods should be stated in terms of the measuring unit
current at the end of the reporting period. [IAS 29.8]. IFRIC 7 clarifies that items should
be restated fully retrospectively. In the first year in which the entity identifies the
existence of hyperinflation, the requirements of IAS 29 should be applied as if the
economy had always been hyperinflationary. The opening statement of financial
1200 Chapter 16
position at the beginning of the earliest period presented in the financial statements
should be restated as follows:
• non-monetary items measured at historical cost should be restated to reflect the
effect of inflation from the date the assets were acquired and the liabilities were
incurred or assumed; and
• non-monetary items carried at amounts current at dates other than those of
acquisition or incurrence should be restated to reflect the effect of inflation from
the dates those carrying amounts were determined. [IFRIC 7.3].
What is less obvious is how an entity (a parent), which does not operate in a
hyperinflationary economy, should account for the restatement of an entity (a subsidiary)
that operates in an economy that became hyperinflationary in the current reporting
period when incorporating it within its consolidated financial statements. This issue has
been clarified by IAS 21 which specifically prohibits restatement of comparative figures
when the presentation currency is not hyperinflationary. [IAS 21.42(b)]. This means that
when the financial statements of a hyperinflationary subsidiary are translated into the
non-hyperinflationary presentation currency for consolidation into the financial
statements of the parent, the comparative amounts are not adjusted.
However, the impact on interim financial statements of such a parent may be more
difficult to resolve. For example, a non-hyperinflationary parent (with a December year-
end) may own a subsidiary whose functional currency is considered hyperinflationary
from, say, 1 July 2018 onwards. The subsidiary’s second quarter results would not have
been adjusted for the impact of hyperinflation, while its third quarter results would reflect
the effects of hyperinflation for the period from the beginning of the year to the reporting
date. This results in the parent needing to reflect a ‘catch up effect’ in its third quarter or
full year reporting. As the prior year comparative figures cannot be restated under IAS 21,
the full effect would be included in the current period. [IAS 21.42(b)]. However,
paragraph 4
of IAS 29 specifically states that the standard ‘...applies to the financial statements of any
entity from the beginning of the reporting period in which it identifies the existence of
hyperinflation in the country in whose currency it reports’.
If separate information is presented for each quarter, it is not clear how this effect
should be taken into consideration in preparing the parent’s third quarter results,
specifically whether the year-to-date results are adjusted as though the subsidiary was
hyperinflationary from the beginning of the year or only from the beginning of the third
quarter. Possible approaches would include:
• reporting the third quarter profits as the difference between the year-to-date profit
in which the subsidiary is restated under IAS 29, less the year-to-date second quarter
profits as they were actually reported (i.e. non-hyperinflation based results); or
• reporting the difference between the year-to-date profit for the third quarter and
the year-to-date profit for the second quarter in which the subsidiary is restated
under IAS 29 (i.e. with purchasing power adjustments to 30 June).
As there is no clear guidance on the appropriate method of quantification, entities
should adopt a consistent approach and disclose this judgement and the impact thereof
on the financials if it has a significant impact, as required by IAS 1.
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Additional questions arising in respect of the preparation of quarterly interim financial
statements in the scenario described above would include:
• Would the parent entity need to re-issue interim reports that had been issued
earlier in the current year?
• In the period that the subsidiary’s economy become hyperinflationary, would the
parent entity adjust the comparative interim information for hyperinflation (and
year to date interim information) for the same interim period in the prior year?
• In the first quarter of the following financial period (2019), would the parent entity
adjust the comparative information for hyperinflation (and year to date interim
information) for the same interim period in the prior year (2018)?
Although the subsidiary will apply the requirements of IAS 29 on a retrospective basis,
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 237