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Thursday, 13 May 2010

IASB: It is not possible to prepare financial statements in accordance with IFRSs during a period of chronic hyperinflation.

The following is a copy of the IASB´s latest update:

IAS 29 Financial Reporting in Hyperinflationary Economies — Reporting in accordance with IFRSs after a period of chronic hyperinflation

The Committee received a request for clarification on how an entity should resume presenting financial statements in accordance with IFRSs after a period when it did not comply with IAS 29. The request identifies an entity whose functional currency is the currency of a hyperinflationary economy. The entity is unable to comply with IAS 29 because the general price index relating to the entity’s functional currency is unavailable and the functional currency lacks exchangeability, that is, the entity’s functional currency is suffering from chronic hyperinflation. The entity’s functional currency then changes to a non-hyperinflationary currency.


The Committee noted that current IFRSs do not provide guidance relating to the issue and that it is not possible to prepare financial statements in accordance with IFRSs during a period of chronic hyperinflation.
The Committee reached a tentative conclusion that IAS 29 should be amended to provide guidance on how an entity shall prepare and present an opening statement of financial position at the date when the entity’s functional currency ceases to be a currency that is suffering from chronic hyperinflation. This guidance, which is different to the two approaches proposed in the request, would require the entity to:
- measure assets and liabilities on a fair value as deemed cost basis at that date.


- apply all applicable IFRSs prospectively from that date.


- be deemed a new accounting entity from that date. Consequently, there is no comparative information for the new accounting entity, for periods before that date.
The Committee requested the staff present the proposed draft wording for this amendment at the next meeting and an analysis of how the proposed draft wording addresses other potential issues identified by the Committee in relation to the request.

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It is interesting that the IASB finds that it is not possible to prepare financial statements in accordance with IFRS during a period of chronic hyperinflation.
1) The entity is unable to comply with IAS 29 because the general price index relating to the entity’s functional currency is unavailable.

I assume that the entity is a Zimbabwean entity. In Zimbabwe the general price index was not available but the parallel rate was available daily. The entity could use the parallel rate.

2) The functional currency lacks exchangeability, that is, the entity’s functional currency is suffering from chronic hyperinflation.

There is normally a parallel rate that should be used or the entity should designate the US Dollar as its functional currency in the hyperinflationary economy. American multinational do that.

The above problem can be solved by simply Dollarizing the entities daily operations and financial reporting.

Nicolaas Smith