In 880 previous posts on this blog, I’ve never once mentioned IAS 29 Financial Reporting in Hyperinflationary Economies…

Let’s remedy that today! IAS 29 is built on the premise that “In a hyperinflationary economy, reporting of operating results and financial position in the local currency without restatement is not useful. Money loses purchasing power at such a rate that comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading.” It takes the view that in such an economy, financial statements are useful only if they are expressed in terms of a measuring unit current at the end of the reporting period. Amounts in the statement of financial position that aren’t already expressed in terms of the measuring unit current at the end of the reporting period are restated by applying a general price index; amounts in the income statement are 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.

Under current IFRS, the core principle of IAS 29 hasn’t always been achieved when the financial statements include the results and financial position of a foreign operation. The standards require that the results and financial position of an entity whose functional currency isn’t that of a hyperinflationary economy are translated into a different presentation currency by translating assets and liabilities for each statement of financial position presented (including comparatives) at the closing rate at the date of that statement of financial position, and income and expenses and other comprehensive income (again including comparatives) at exchange rates at the dates of the transactions; the resulting exchange differences are then recognized in other comprehensive income. This applies equally when the presentation currency is that of a hyperinflationary economy: the IASB notes in the basis for conclusions accompanying its recent amendments that this has resulted in “information that was not always useful for users of financial statements” and in “diversity in applying the requirements when an entity translated the results and financial position of a foreign operation whose functional currency was that of a non-hyperinflationary economy.” While one might intuitively have thought it’s not too important an issue, a 2023 staff paper noted that research and feedback “confirmed the submitted fact pattern and the related matter are common in hyperinflationary economies and the effect can be material.” There was also a suggestion that “the current trend is that more countries are becoming hyperinflationary.”

Accordingly, the amendments address the issue by introducing the following new requirement:

• When an entity’s functional currency is the currency of a non-hyperinflationary economy but its presentation currency is the currency of a hyperinflationary economy, the results and financial position of the entity shall be translated into the presentation currency by translating all amounts (ie assets, liabilities, equity items, income and expenses, including comparatives) at the closing rate at the date of the most recent statement of financial position.

They provide the following exception:

• When an entity’s functional currency and presentation currency are the currency of a hyperinflationary economy (or are the currencies of different hyperinflationary economies) and the entity translates the results and financial position of a foreign operation whose functional currency is that of a non-hyperinflationary economy, the entity shall (instead) restate the comparative amounts of that foreign operation included in the entity’s previously issued financial applying the general price index it applies to corresponding statements by figures for the previous reporting period.

This reflects concerns raised by commenters about the cost of retranslating comparative information at the closing rate when the statements contain the results and financial position of a foreign operation translated under IAS 29: “Such an entity would need to retranslate the comparative information of affected foreign operations and then reperform the procedures (for example, consolidation procedures) to prepare comparative information for its consolidated financial statements. Stakeholders also explained that if such entities would be required to translate comparative amounts using the closing rate, the comparative information and the composition of the resulting financial ratios could change from those reported previously—which could be difficult to explain to users of financial statements.”

The amendments also require an entity applying the above to provide summarized financial information about its foreign operations that enables users of financial statements to assess their effect on its results and financial position. The basis for conclusions observes that these foreign operations are likely to have different characteristics and a different risk profile from the entity’s other operations, such that summarized financial information helps users of financial statements better understand the foreign operations’ cash flows and provides useful information about the entity’s commitments and obligations, and its solvency and liquidity.

Well, I’m not sure that’s the most easily coherent post I ever wrote, but at least it ticks off IAS 29. A few hundred more posts and I might crack open IAS 26!

The opinions expressed are solely those of the author.