With inflation abating in the UK and US and accountants engaging in technical dead-end debates, use of CPI-adjusted numbers was abondoned. Self-evidently, inflation adjustments that apply accounting standard IAS 29 are essential in hyperinflationary environments, in which historic numbers are meaningless. Even then, the adjusted figures have little meaning, since by the time they see the light of day they are already out of touch with reality.
"In most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be re-valued. Some entities, however, present financial statements that are based on a current cost approach that reflects the effects of changes in the specific prices of assets held."
"Constant Purchasing Power Accounting (CPP) is a consistent method of indexing accounts by means of a general index which reflects changes in the purchasing power of money. It therefore attempts to deal with the inflation problem in the sense in which this is popularly understood, as a decline in the value of the currency. It attempts to deal with this problem by convertingall of the currency unit measurement in accounts into units at a common date by means of the index. The international accounting profession has been in agreement regarding the use of financial capital maintenance in units of CPP during low inflation, high inflation, hyperinflation and deflation since 1989. IAS 29 requires the restatement of Historical Cost or Current Cost period-end financial statements in terms of the period-end monthly published Consumer Price Index during hyperinflation. IAS 29 must be implemented in terms of daily valuation of all non-monetary items in units of CPP and in terms of Daily CPP which would maintain 100% of current period profits constant in real value.IAS 29 thus requires implementation of financial CMUCPP.
The relevant standard now is IAS 29, financialreporting in hyper inflationary economies, which is applicable in an environment wherecumulative inflation in three consecutive years to be approaching 100 per cent or exceeds it.In a hyperinflationary economy, money loses purchasing power at a high rate making thecomparison of amounts from transactions and other events that have occurred at differenttimes or even within the same accounting period misleading. IAS 29 has instituted amethodology of restatement of accounting information using suitable price indices to makethe financial statements of different periods comparable and the accounting indicators forthe same accounting period useful for users’ decision making.IAS 29 is applicable to the financial statements, including the consolidated financialstatements, of any entity whose functional currency is the currency of a hyperinflationaryeconomy. An entity shall apply this standard from the beginning of the reporting period inwhich it identifies the existence of hyperinflation in the country in whose currency itreports. IAS 29 requires presentation of financial statements restated in accordance with themeasuring unit current at the end of the reporting period. The restated financial statementsare not to be presented as a supplement to unrestated financial statements. Moreover,separate presentation of the financial statements before restatement is discouraged.
Hyperinflationary economy is an economy that is characterized by the following:
(i) The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediatelyinvested to maintain purchasing power;
(ii) The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;
(iii) Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
(iv) Interest rates, wages, and prices are linked to a price index; and
(v) The cumulative inflation rate over three years is approaching, or exceeds, 100%.
Monetary items that are either assets or liabilities expressed in terms of money held and items to be received or paid in money.
Restatement of Financial Statements:
All financial statement elements, whether they are based on a historical cost approach or a current cost approach, are stated in terms of the measuring unit current at the end of the reporting period.
The corresponding figures for theprevious period required by IAS 1, Presentation of Financial Statements, and anyinformation in respect of earlier periods, shall also be stated in terms of the measuring unitcurrent at the end of the reporting period.
For the purpose of presenting comparative amounts in a different presentation currency,paragraphs 42(b) and 43 of IAS 21, The Effects of Changes in Foreign Exchange Rates,are also applied. The measuring unit current at the end of the reporting period is determinedusing a general price index that reflects changes in general purchasing power. IAS 29 prefers that all entities belonging to the same hyperinflationary economy should use the same general index. Therefore, a hyperinflationary economy that follows IFRSs shouldnotify a general price index to be followed by the entities for the purpose of presentation offinancial statements. The measuring unit current at a particular measurement date isdetermined by applying a conversion factor: Index on the reporting dateIndex on the measurement dateThis means the conversion factor for all items measured using the currency ofhyperinflationary economy on the reporting date is 1. Items measured using the currency of a hyperinflationary economy at a date earlier than reporting date are converted applying a conversion factor that is greater than 1.
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