ACCTG 303 AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIES

FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES

The Stable Monetary Assumption
• Under the stable monetary assumption, the purchasing power of money is assumed to be stable.
Therefore, inflation is ignored.
• The exception to this concept is hyperinflation.

Price level changes

• General price level changes and the purchasing power of money have an inverse relationship.
 If the general price level increases, this means that the purchasing power of money has
decreased – a condition known as inflation.
 If the general price level decreases, this means that the purchasing power of money has
increased – a condition known as deflation.

Hyperinflation
• Hyperinflation occurs when inflation is “very high.”
• PAS 29 does not establish an absolute rate at which hyperinflation is deemed to arise. This is a matter
of judgment.

Indicators of hyperinflation
1. The general population prefers to keep its wealth in non-monetary assets or in a relatively stable
foreign currency. Amounts of local currency held are immediately invested to maintain purchasing
power;
2. The general population regards monetary amounts not in terms of the local currency but in terms of a
relatively stable foreign currency. Prices may be quoted in that currency;
3. Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing
power during the credit period, even if the period is short;
4. Interest rates, wages and prices are linked to a price index; and
5. The cumulative inflation rate over three years is approaching, or exceeds, 100%.

Core principle
• The financial statements of an entity whose functional currency is the currency of a hyperinflationary
economy shall be stated in terms of the measuring unit current at the end of the reporting period.
• The comparative information for the previous period shall also be stated in terms of the measuring
unit current at the end of the reporting period.
• Presentation of information as a supplement to unrestated financial statements is not permitted.
• Separate presentation of the financial statements before restatement is discouraged.

Restatement of financial statements

Statement of financial position
• Only non-monetary items, statement of financial position amounts not already expressed in terms of
the measuring unit current at the end of the reporting period, are restated when using the constant
peso accounting.
• Monetary items are not restated because they are already expressed in terms of the monetary unit
current at the end of the reporting period.
• Monetary items are money held and items to be received or paid in fixed or determinable amount of
money without reference to future prices of specific goods or services. Monetary items include
monetary assets and monetary liabilities.

Examples of Monetary assets

1. Cash and cash equivalents
2. Loans and receivables and their related allowances
3. Financial assets at amortized cost (debt instruments)
4. Finance lease receivables
5. Cash surrender value

Examples of Monetary liabilities

 ACCTG 303 AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIES
FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES
1. Financial liabilities at amortized cost (debt instruments), e.g., accounts, notes, bonds, and finance lease
payables.
2. Accrued expenses payable in fixed and determinable amounts of money.
3. Refundable deposits, e.g., security deposits on leases to be returned to tenants at the end of the lease
term and deposits for returnable containers.
4. Dividends payable
• All other items that cannot be classified as monetary items are non-monetary items, except of
“retained earnings.” Retained earnings is the balancing figure after restatement.

Examples of Nonmonetary assets

1. Physical assets such as inventories, property, plant, and equipment, and investment properties and
their related accumulated depreciation
2. Intangible assets
3. Financial assets measured at fair value
4. Advances and prepayments not collectible in cash such as advances to suppliers, prepaid insurance,
prepaid rent, and the like.

Examples of Nonmonetary liabilities

1. Financial liabilities measured at fair value
2. Unearned items not payable in cash such as advances from customers, unearned rent, deferred
revenues, and the like.
3. Warranty obligations to be settled by future delivery of services (e.g., free repair service) or
replacement with other non-monetary items (e.g., free replacement of parts or replacement of the good
purchased).
• Equity items such as share capital and share premium are also nonmonetary items and thus restated.

Non-monetary items carried at other than cost

• As a general guide, only non-monetary measured at cost are restated. The following non-monetary
items need not be restated:
1. Non-monetary items measured at net realizable value (NRV) or Fair value as at the end of reporting
period*.
2. Non-monetary items measured at revalued amounts as at the end of reporting period*.
• * If the NRV, fair value or revalued amount is determined at a date other than the end of reporting
period, the nonmonetary item is nevertheless restated.

Restatement of financial statements

• All items in the statement of profit or loss and other comprehensive income are restated.

Formula for restatement

*When it is impracticable to determine the historical price indices, such as for transactions recurring very
frequently, the average general price index for the period may be used.

Gain or loss on net monetary position

The gain or loss on the net monetary position (also called ‘purchasing power gain or loss’) is recognized in
profit or loss.
 ACCTG 303 AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIES
FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES

PROBLEM 1
An entity has the following accounts and their balances:
Cash 1,000,000 Accounts payable 1,700,000
Accounts receivable 2,700,000 Income tax payable 800,000
Allowance for bad debts (250,000) Accrued liabilities 60,000
Inventories 600,000 Cash dividends payable 150,000
Trading securities 200,000 Bonds payable 3,000,000
Investment in bonds (Amortized cost) 2,000,000 Discount on bonds payable (200,000)
Advances to suppliers 50,000 Warranty liability 800,000
Prepaid supplies 80,000 Unearned revenue 360,000
Biological assets 300,000 Share capital 2,000,000
Investment property 200,000 Share premium 500,000
Investment in associate 180,000 Retained earnings 830,000
Property, plant and equipment 2,140,000
Cash surrender value 800,000
Total assets 10,000,000 Total liabilities and equity 10,000,000
Required: Compute for the net monetary items.

PROBLEM 2
Hilario Co.’s functional currency is that of a hyperinflationary economy. Its 2024 statements of financial position
and profit or loss prepared under the historical cost basis are shown below:
Hilario Company
Statement of financial position
As of December 31, 2024
Cash 1,210,000
Accounts receivable 500,000
Allowance for bad debts (70,000)
Inventory at cost 400,000
Equipment at cost 2,000,000
Accumulated depreciation (100,000)
Total assets 3,940,000

Accounts payable 600,000

Bond payable 1,000,000
Discount on bons payable (180,000)
Total liabilities 1,420,000
Share capital 2,000,000
Retained earnings 520,000
Total equity 2,520,000
Total liabilities and SHE 3,940,000

Hilario Company
Statement of financial position
For the year ended December 31, 2024
Sales 1,800,000
Cost of sales:
Inventory, 1/1 100,000
Purchases 600,000
Total good available for sale 700,000
Inventory, 12/31 (400,000 (300,000)
)
Gross profit 1,500,000
Distribution costs (300,000)
 ACCTG 303 AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIES
FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES
Depreciation expense (100,000)
Bad debt expense (70,000)
Finance cost (120,000)
Profit before tax 910,000
Income tax expense (270,000)
Profit for the year 640,000

Additional information:
 The share capital was issued on January 1, 2023.
 The equipment was acquired on December 31, 2023.
 Sales, purchases, and expenses were earned/incurred evenly year, during the year, except interest
expense.
 Interest expense was recognized and paid on December 31,2024.
 Dividends of P120,000 were declared and paid on December 31, 2024.
 The December 31, 2023 restated retained earnings (deficit) is P(218,182).
 The December 31, 20x0 restated net monetary liabilities is P109,092.
 Selected values of general price indices (CPI) are shown below:
January 1, 2023 100
December 31, 2023 110
Average for 2024 115
December 31, 2024 120
Required: Prepare the restated financial statements.