Overview of IAS 29
Conventional financial reporting is distorted by inflation. This is especially the case with hyper-inflation, where the measuring unit (the currency unit) is not stable. Adjustments to stabilise the unit of measurement – to measure items in units of constant purchasing power – make the financial statements more relevant and reliable. IAS 29 requires financial statements prepared in the currency of a hyper-inflationary economy to be stated in terms of the value of money at the end of the reporting period. This requirement relies on an understanding of complex economic concepts, a knowledge of the entity’s financial and operating patterns, and a detailed series of procedures.
Prices change over time, as the result of political, economic and social factors. Two phenomena should be distinguished: (1) changes in supply and demand and technological changes might cause prices of individual items to increase or decrease independently of each other (‘specific price changes’); and (2) other factors in the economy might result in changes in the general level of prices, and therefore in the general purchasing power of money (‘general price changes’). The purchasing power of money declines as the level of prices of goods and services rises. The purchasing power of money in an inflationary environment and the price level are interdependent.
Financial statements, unadjusted for inflation in most countries, are prepared on the basis of historical cost, without regard either to changes in the general level of prices or to changes in specific prices of assets held. However, there are exceptions where the entity is required to, or chooses to, measure certain assets or liabilities at fair value. Examples are property, plant and equipment, which could be revalued to fair value under IAS 16, and biological assets, which are generally required to be measured at fair value by IAS 41. This produces a meaningful result, provided that there are no dramatic changes in the purchasing power of money. A small number of 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.
Significant changes in the purchasing power of money, particularly in a hyper-inflationary economy, mean that financial statements unadjusted for inflation are not useful and are likely to be misleading. Amounts are not comparable between periods, or even within a period, and the gain or loss in general purchasing power that arises in the reporting period is not recorded. Financial statements unadjusted for inflation do not properly reflect the company’s position at the end of the reporting period, the results of its operations or its cash flows. In a hyper-inflationary economy, financial statements, whether they are based on an historical cost approach or a current cost approach, are useful only if they are expressed in terms of the measuring unit current at the end of the reporting period.
Inflation-adjusted financial statements are an extension to, and not a departure from, historical cost accounting. IAS 29 aims to overcome the limitations of historical cost financial reporting in hyper-inflationary environments, but it does not reflect specific price changes in assets and liabilities.
Disclosure of IAS 29
- Gain or loss on monetary items [IAS 29.9]
- The fact that financial statements and other prior period data have been restated for changes in the general purchasing power of the reporting currency [IAS 29.39]
- Whether the financial statements are based on an historical cost or current cost approach [IAS 29.39]
- Identity and level of the price index at the balance sheet date and moves during the current and previous reporting period [IAS 29.39]