In July, the International Accounting Standards Board (IASB) issued an exposure draft to address accounting issues that affect companies that translate financial information from a non-hyperinflationary currency to a hyperinflationary currency. This exposure draft comes as a result of narrow-scope amendments previously discussed.
In the suite of IFRS Accounting Standards, IAS 29, Financial Reporting in Hyperinflationary Economies, lays out the accounting treatment for the financial statements of entities whose functional currency is the currency of a hyperinflationary economy. It doesn’t explicitly define what constitutes a hyperinflationary economy but gives a list of characteristics that could indicate hyperinflation. One of these factors is that the cumulative inflation rate over three years is approaching, or exceeds, 100%.
The IMF’s list includes large countries, which could impact on financial reporting
Affected countries
The International Monetary Fund’s World Economic Outlook in April 2024 identified 13 economies as being hyperinflationary. These are: Argentina, Ethiopia, Ghana, Haiti, Iran, Lebanon, Sierra Leone, South Sudan, Sudan, Suriname, Turkey, Venezuela and Zimbabwe. This list was the same as the one published in 2023, except for Yemen, which is no longer classified as hyperinflationary.
In addition to this, and more relevant to the exposure draft, a number of countries were identified as either being expected to become hyperinflationary in 2024 or needing to be kept under review in 2024 and 2025. This list includes large countries, which could impact on financial reporting. The report identified that Egypt, Laos and Malawi are expected to become hyperinflationary in 2024. The countries to be kept under review are Burundi, Nigeria, Pakistan and Sri Lanka.
Principles of IAS 29
If any of these are deemed to be hyperinflationary, then the principles of IAS 29 must be applied from the beginning of the reporting period when hyperinflation was in existence. The basic principle in IAS 29 is that the financial statements of an entity that reports in the currency of a hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet date. Comparative figures should be restated into the same current measuring unit.
There is a diversity in practice between entities who do restate these figures and some who don’t
This isn’t the focus of the exposure draft released by the IASB. Instead, it seeks to clarify accounting treatments covered under IAS 21, The Effects of Changes in Foreign Exchange Rates.
Issue addressed
The situation raised to the IFRS Interpretations Committee (IFRIC) related to an entity whose functional and presentational currency is the currency of a hyperinflationary economy but has a foreign operation whose functional currency is the currency of a non-hyperinflationary economy.
The scenario given was that currently the entity applies principles under paragraph 39 of IAS 21, which covers translating foreign operations in a non-hyperinflationary currency. Under these principles, the entity translates assets and liabilities in the statement of financial position at the closing exchange rate at the date of that statement of financial position; translates income and expenses using exchange rates at the dates of the transactions; and does not restate comparative amounts. The question arose as to the crossover with IAS 29 and whether principles under this standard apply, specifically the principles of translating statement of profit or loss figures and comparative figures at the closing rate.
Additional paragraphs will tell entities to translate all amounts at the closing rate
The IASB noted that in a hyperinflationary economy, financial information is useful only if it reflects a measure of current purchasing power of the currency. Applying IAS 21 today does not always result in that outcome and in some cases has led to diversity in accounting practice.
In response, it was noted that currently there is a diversity in practice between entities who do restate these figures and some who don’t. IFRIC noted that both treatments could presently be justified using the principles of IAS 21 and IAS 29.
ED impact
In order to close this discrepancy, the proposed solution from the IASB is to add paragraphs into IAS 21. These will tell entities to translate all amounts, including comparatives, at the closing rate. Other alternatives were discussed, such as using the general price index for the statement of profit or loss and comparatives, but it was felt that the use of the closing rate provided a simple, cost-effective solution.
The exposure draft is open for comment until 22 November 2024. The IASB is seeking feedback on the proposed amendments from interested or affected stakeholders before deciding whether to proceed with the amendments to IAS 21.
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