Hyperinflation is a severe economic condition characterized by extremely high and often accelerating inflation rates, which can drastically erode the purchasing power of money. In such environments, conventional financial reporting becomes challenging and potentially misleading. To address these challenges, International Accounting Standard 29: Financial Reporting in Hyperinflationary Economies (IAS 29) provides guidelines to ensure that financial statements remain relevant and reliable. This blog delves into the importance, scope, and practical application of IAS 29 in hyperinflationary economies.

International Accounting Standard 29: Financial Reporting in Hyperinflationary Economies (IAS 29) is essential because it ensures that financial statements in hyperinflationary economies provide accurate and reliable information. Without restatement, financial results and positions reported in the local currency would be misleading, as the rapidly decreasing purchasing power of money would distort the true financial performance and position of entities. The standard helps maintain transparency, comparability, and relevance in financial reporting, enabling stakeholders to make informed decisions.

Scope of IAS 29

International Accounting Standard 29: Financial Reporting in Hyperinflationary Economies (IAS 29) applies to entities whose functional currency is the currency of a hyperinflationary economy. The standard does not set a specific inflation rate to define hyperinflation but provides indicators to help identify it. These indicators include:

• The general population prefers to keep its wealth in non-monetary assets or a relatively stable foreign currency.
• Prices, interest rates, and wages are linked to a price index.
• The cumulative inflation rate over three years approaches or exceeds 100%.

What is Hyperinflationary Economy?

Hyperinflation refers to an extraordinarily high and often accelerating inflation rate, which rapidly erodes the real value of the local currency. This economic condition leads to a significant decrease in purchasing power, making the local currency nearly worthless. Hyperinflation is typically identified when the cumulative inflation rate over three years approaches or exceeds 100%.

Definition of Monetary and Non-Monetary Items

In the context of IAS 29, it’s essential to understand the distinction between monetary and non-monetary items:

Monetary Items: Monetary items are assets and liabilities that are to be received or paid in fixed or determinable amounts of money. These include:

• Cash: Money available for use.
• Receivables: Amounts due from customers or other parties. For example, trade receivables (invoices issued to customers but not yet paid).
• Payables: Amounts owed to suppliers or other parties. For example, trade payables (invoices received from suppliers but not yet paid).
• Loans Payable: Amounts borrowed and to be repaid in the future, such as bank loans.

Non-Monetary Items: Non-monetary items are assets and liabilities that do not represent a claim to receive (or an obligation to deliver) a fixed or determinable amount of money. These include:

• Property, Plant, and Equipment: Tangible assets used in production or supply of goods and services. For example, machinery and buildings.
• Inventory: Goods available for sale or use in production. For example, raw materials, work-in-progress, and finished goods.
• Intangible Assets: Non-physical assets such as patents, trademarks, and goodwill.
• Investment Properties: Properties held for rental income or capital appreciation, such as commercial real estate.

Restatement of Financial Statements

In hyperinflationary economies, financial statements must be restated to reflect changes in the general price index. This ensures that the financial information remains relevant and reliable. The restatement process involves adjusting the historical cost of assets, liabilities, income, and expenses to their current values.

Selecting a General Price Index

Entities must select an appropriate general price index to measure changes in the purchasing power of the currency. This index should be:

• Reliable: Consistently reflecting the changes in the economy.
• Representative: Covering all major sectors of the economy.

Net Monetary Position

The gain or loss on the net monetary position, resulting from the effects of inflation on monetary items, must be included in the profit or loss for the period and separately disclosed. This provides transparency and clarity on the financial impact of hyperinflation.

Presentation in Any Currency

Once restated, financial statements can be presented in any currency by translating the results and financial position in accordance with IAS 21. This allows for more consistent and comparable financial reporting across different economies.

Disclosure Requirements

Entities must provide clear disclosures when preparing financial statements under IAS 29. These include:

• Restatement Confirmation: Disclosure that the financial statements have been restated.
• Price Index Used: Information on the selected general price index.
• Basis of Preparation: Whether the statements are prepared on a historical cost or current cost basis.

Countries Experiencing Hyperinflation

As of December 2024, the following countries are experiencing hyperinflation:

• Zimbabwe: With an inflation rate of 667.36%.
• Venezuela: Known for its ongoing economic crisis and high inflation rates.
• Sudan: Facing severe economic challenges and high inflation.
• Argentina: Experiencing significant inflationary pressures.
• Suriname: Experiencing high inflation rates.
• Sierra Leone: Facing economic instability and high inflation.
• South Sudan: Facing severe economic challenges and high inflation.

Countries Under Watch for Hyperinflation

These countries are under watch due to rising inflation rates and economic challenges:

• Turkey: Under watch due to rising inflation rates.
• Haiti: Under economic stress with high inflation.
• Islamic Republic of Iran: Experiencing economic challenges and inflation.
• Ghana: Under watch due to rising inflation rates.
• Lao P.D.R.: Experiencing economic instability and high inflation.
• Malawi: Facing economic challenges and high inflation.
• Ethiopia: Under economic stress with high inflation.
• Pakistan: Experiencing significant inflationary pressures.
• Myanmar: Under economic stress with high inflation.
• Burundi: Facing economic instability and high inflation.
• Nigeria: Under watch due to rising inflation rates.
• Egypt: Experiencing economic challenges and inflation.
• São Tomé and Príncipe: Under watch due to rising inflation rates.

Conclusion

IAS 29 “Financial Reporting in Hyperinflationary Economies” provides essential guidelines for financial reporting in hyperinflationary economies, ensuring that financial information remains accurate and useful. By following these standards, entities can navigate the complexities of hyperinflation and maintain transparency and reliability in their financial statements. The role of IAS 29 is critical in promoting global financial stability, fostering investor confidence, and enabling stakeholders to make informed economic decisions even in the most volatile environments.