FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES (IAS 29)
This Standard deals with the measurement problems of entities that are reporting in the currency of a hyperinflationary economy. In this situation, financial information reported in historical terms would present a distorted picture of the entity’s performance and financial position. This Standard sets out procedures for adjusting the financial information for the effects of hyperinflation.
DEFINITION OF HYPERINFLATION
The Standard does not define hyperinflation but sets out the general characteristics of a hyperinflationary economy.
These characteristics would include the following five:
1. Where the preference is to keep wealth in nonmonetary assets or in a stable foreign currency. Any local currency would be immediately invested in order to attempt to maintain its purchasing power.
2. Where prices are quoted in a stable foreign currency and the population regards monetary amounts in that currency, as effectively a local currency.
3. Where transactions are priced at an amount that includes compensation for the future expected loss of the purchasing power of the local currency. This characteristic would be taken into account even if the credit period is quite short.
4. Where prices, wages, and interest rates are closely linked to a price index.
5. Where cumulative inflation rates over a period of three years approach or exceed 100%.
Although IAS 29 sets out the characteristics that may indicate a hyperinflationary ...