IFRS Essentials

IAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES1

1 INTRODUCTION

IAS 29 comprises rules relating to financial reporting in hyperinflationary countries. In such countries 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 would be misleading (IAS 29.2). For most entities, the rules of IAS 29 are only relevant to their foreign operations (subsidiaries, associates or jointly controlled entities) whose functional currency is hyperinflationary. In such cases, the investee's financial statements should be adjusted before being translated and included in the investor's consolidated financial statements.

2 APPLICATION OF IAS 29 RELATING TO FOREIGN OPERATIONS: THE “7-STEP-APPROACH”

Step 1: Does hyperinflation exist?

The application of IAS 29 presupposes that there is hyperinflation. A cumulative inflation rate over three years that is approaching or exceeds 100% is the strongest indicator of hyperinflation (IAS 29.3e). An inflation rate of over 50% that is increasing massively can also be an indicator of hyperinflation.

Step 2: Determining the appropriate price index

A general price index is used with regard to the inflation adjustment. If there is more than one price index (e.g. a consumer price index (CPI) and a producer or wholesale price index (PPI or WPI)), determining the appropriate index is a matter of proper judgment (IAS 29.11 and 29.17). ...