Listed companies and groups operating in countries with potentially hyperinflationary economies such as, Venezuela, Argentina, Turkey and Lebanon, face complex reporting challenges and will come under increased scrutiny from investors, audit committees and regulators.
Hyperinflationary jurisdictions have quadrupled in the past decade. Current global instability indicates this trend could continue. For finance teams understanding International Accounting Standard 29 (IAS 29) – Financial Reporting in Hyperinflationary Economies Hyperinflation, and how it alters financial reporting is essential to being able to comply with the financial reporting requirements and providing clarity to stakeholders.
What is a hyperinflationary economy?
IAS 29 has no single rate threshold for an economy becoming hyperinflationary meaning that management must apply judgement. However, IAS 29 does give a number of key indicators of which the most widely used is the cumulative inflation rate over three years approaching or in excess of 100%. Other indicators include:
- the general population prefer to hold wealth in non-monetary assets or stable foreign currencies;
- prices may be commonly quoted in a more stable foreign currency; and
- interest rates, wages and prices are linked to a price index.
For example:
|
Annual inflation |
Venezuela |
Argentina |
Turkey |
|
2023 |
228% |
134% |
54% |
|
2024 |
49% |
220% |
59% |
|
2025 |
270% |
41% |
35% |
|
Cumulative inflation |
2311% |
955% |
229% |
How IAS 29 affects financial reporting
IAS 29 sets out the framework for a company or group to show the comparative purchasing power of its financial statements at the end of each reporting period, enabling management, investors and other[TS4.1] stakeholders to understand performance on a consistent basis.
For example:
|
Primary statement |
Balances /transactions |
Restated? |
Method of restatement |
|---|---|---|---|
|
Statement of Financial Position
|
Non-monetary items |
Yes |
Using general price index from acquisition date to reporting date |
|
Non-monetary items – held at fair value |
No |
N/A – these are not restated as they are already at current prices | |
|
Monetary items |
No |
N/A – these are not restated as they are already at current prices | |
|
Equity – excluding retained earnings) |
Yes |
Using the general pricing index from the date they were contributed to reporting date | |
|
Retained earnings |
Yes |
Will be the balancing figure | |
|
Statement of Comprehensive Income |
All items |
Yes |
Using general price index of transaction to reporting date* |
The net impact of all restatements, referred to as the net monetary gain or loss, is then taken to the Statement of Comprehensive Income.
While non-monetary items and equity are indexed upward to reflect current purchasing power, monetary items such as cash and debt remain at their nominal face value.
This discrepancy represents the real wealth lost by holding cash and gained by holding debt during times of high inflation.
The comparative figures within both the Statement of Financial Position and the Statement of Comprehensive Income are restated using the closing rate as at the end of the current reporting date. Similarly, the net of all restatements will also be shown in the Statement of Comprehensive Income as a net monetary gain or loss.
Impact on the Statement of Cash Flows
All cashflows are required to be restated from the transaction date to the reporting date. Since this is often impractical, an average price index during the period is often used.
The closing cash balance is not restated but the opening cash balance is restated using the general price index movement in the reporting period. An existing index is often used such as the Consumer Price Index in the UK.
The gain or loss on net monetary position will be shown as a separate reconciling item.
What about subsidiaries?
Management must:
- Apply IAS 29 to the subsidiary’s current year figures
- Avoid restating comparatives at group level (unless the group’s presentation currency is also hyperinflationary)
- Translate the restated results into the group’s reporting currency at the closing rate
- Record translation differences in Other Comprehensive Income (OCI).
Disclosures required in capital markets reporting
To meet IAS 29 and regulatory expectations, management must disclose:
- Confirmation that IAS 29 has been applied
- The price indices used and their movement during the year
- The basis for determining that the economy is hyperinflationary
- The impact of hyperinflation on the entity’s results and financial position.
Listed companies should also consider European Securities and Markets Authority (ESMA) guidance when presenting non International Financial Reporting Standards (IFRS) measures such as Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) adjusted for net monetary gains/losses.
Investor reporting considerations
Because hyperinflationary accounting can obscure operational performance, management teams often use:
- Constant currency disclosures;
- Pro forma financial information in a stable currency (e.g. US Dollar); and
- Adjusted Key Performance Indicators (KPIs) excluding net monetary gains/losses, clearly labelled as non IFRS.
To help investors distinguish real economic performance from inflation driven adjustments.
Currency volatility and International Accounting Standard 21 (IAS 21)
The divergence between currency devaluation and inflation, commonly referred to as the “Purchasing Power Parity” gap, can create significant reporting distortions. Whether a currency is pegged or floating, market volatility often exceeds local price adjustments which causes “real” gains or losses that can mask an entity’s true economic performance. To counter this distortion, management can provide sensitivity analyses which demonstrates how net debt and profit would be affected by specific exchange rate swings. This helps investors better understand and quantify the gap.
In a hyperinflationary economy, significantly different exchange rates can exist as governments seek to exert control over a plummeting currency. This can give rise to an illegal black market to meet the demand that the government cannot or will not fulfil. When applying IAS 21 – The Effects of Changes in Foreign Exchange Rates, management will need to apply judgement in determining the rate legally available to settle transactions when translating foreign subsidiaries. The source of the rates used should also be disclosed.
Management typically use forward currency contracts to hedge such currency risk. Where this is applied, management will need to carefully consider whether hedge accounting should be applied, consulting the requirements outlined in IFRS 9.
How to prepare for an audit
Given the significant judgement involved, IAS 29 is typically a key audit focus. Management should prepare a detailed technical paper covering:
- Assessment supporting the hyperinflation conclusion
- The source and reliability of the general price index
- Exchange rates used for consolidation
- Full restatement workings and reconciliations
- Supporting disclosures.
This documentation is essential for a smooth audit process and for board/audit committee oversight.
How can we help
Hyperinflationary accounting introduces complexity that can materially affect results, disclosures and investor understanding. Our Financial Accounting Advisory Services team supports management in applying IAS 29, preparing robust technical papers, and ensuring compliance with IFRS and capital market expectations.
To discuss your specific circumstances or arrange a consultation, please contact Capital Markets Partner, Nick Joel or Director, Thomas Sheehan.
