Chapter 19: Financial Reporting in Hyperinflationary Economies

29

PAS __

Price change

An increase or decrease in the price of a good or service in a given market, either in wholesale or retail

• General price-level changes

• Specific price changes

Two major types of price changes are

General price-level change

An increase or decrease in the overall level of prices of goods and services throughout the economy

Purchasing power

Its ability to buy goods and services

Inflation

An increase in the general price-level

Deflation

A decrease in the general price level

Specific price change

An increase or decrease in the price of a specific good or service

Hyperinflation

Rapid, excessive, and out of control general price increases in an economy

a. Keeping wealth in non-monetary assets or in a relatively stable foreign currency

b. Regards monetary amounts not in terms of local currency but in terms of a relatively stable foreign currency

c. Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power

d. Interest rates, wages, and prices are linked to a price index

e. Cumulative inflation rate over three years is approaching, or exceeds 100%

Indicators of a hyperinflationary economy:

1. Restatement approach

2. Stable foreign currency

Two (2) adjustments approaches or solutions to accounting for hyperinflation:

Restatement approach

This approach adjusts hyperinflationary currency by applying a general price index and expressed in the current measuring unit

Stable foreign currency

This approach translates assets and liabilities carried at current prices into the current rate of exchange (normally in dollars)

Restatement

PAS 29 Financial Reporting in Hyperinflationary Economies only permits the __ approach

1. Selection of a general price index

2. Analysis and restatement of assets and liabilities

3. Restatement of the statement of P/L and OCI

4. Calculation of the gain/loss on the net monetary position

5. Restatement of the cash flow

6. Restatement of the corresponding figures

*all on the basis of the selected index

6 steps followed in the restatement of FS in accordance with PAS 29:

Constant peso accounting

The restatement of conventional or historical FS in terms of the current purchasing power of the peso through the use of index number

Monetary item

Money held and assets and liabilities to be received or paid in fixed or determinable amount/s of money

Nonmonetary item

The absence of a right to receive or pay in fixed amount/s of money, items not money in nature (intangible assets, PPE, etc.)

Current cost accounting

A method of measuring assets, liabilities, income, and expenses at current cost at the end of the reporting period

Current cost

Estimated cost to acquire a similar asset at current purchase price

Holding gain

The excess of current cost over historical cost (Current Cost - Historical Cost)

Holding loss

The excess of historical cost over current cost. (Historical Cost - Current Cost)

Realized - Actualized cost; when an asset is sold or used

Unrealized - Theoretical cost; when an asset is unsold or unused

What is the difference between realized and unrealized?

d. The cumulative inflation rate over three years is approaching or less than 90%

Hyperinflation is indicated by characteristics of the economic environment of a country which include all of the following, except:

a. Interest rates, wages, and prices are linked to a price index

b. The general population prefers to keep wealth in nonmonetary assets or in relatively stable foreign currency

c. The cumulative inflation rate over three years is approaching or exceeds 100%

d. The cumulative inflation rate over three years is approaching or less than 90%

True

T or F: In a hyperinflationary economy, monetary items are not restated because they are already expressed in terms of the measuring unit current at the end of reporting period.

b. Marketing costs paid in cash

All of the following are monetary items, except:

a. Loan repayable at par value

b. Marketing costs paid in cash

c. Trade receivables

d. Trade payables

a. Measuring unit current at the end of the reporting period

The FS of an entity that reports in the currency of a hyperinflationary economy shall be presented at:

a. Measuring unit current at the end of the reporting period

b. Historical cost

c. Current cost

d. Fair value

d. P/L and separately disclosed

The FS of an entity that reports in the currency of a hyperinflationary economy shall be included in:

a. Comprehensive income

b. Retained earnings

c. Equity

d. P/L and separately disclosed

a. Allowance for Doubtful Accounts

When presenting information on a constant peso basis, which of the following is classified as monetary?

a. Allowance for Doubtful Accounts

b. Patent

c. Equipment

d. Goodwill

c. Cash

During a period of deflation, an entity would have the greatest gain in genera, purchasing power by holding:

a. Accounts payable

b. Mortgage payable

c. Cash

d. Property, plant, and equipment

Loss

During a period of deflation in which a liability account balance remains constant, a purchasing power ____ occurs if the item is a monetary liability.

Gain

During a period of inflation in which a liability account balance remains constant, a purchasing power ____ occurs if the item is a monetary liability.