Valuing monetary items during hyperinflation

Valuing monetary items during hyperinflation

Monetary items are valued at their nominal monetary HC values during the current accounting period under HCA during hyperinflation too. The real value of money and other monetary items is eroded at the rate of hyperinflation which can be anything from 100 per cent per over three years (i.e., 26 per cent per annum for three years in a row) to 89.7 Sextillion per cent (89,700,000,000,000,000,000,000 per cent) in the case of Zimbabwe in 2008. (Hanke 2010)

Net monetary losses and gains have to be calculated and accounted during hyperinflation as required by IAS 29 Financial Reporting in Hyperinflationary Economies under HCA. IAS 29 is an extension to and not a departure from HCA. This is in total contradiction to what is done during low inflation under HCA.

The net monetary loss or gain from holding net monetary item assets or net monetary item liabilities has to be calculated and accounted during hyperinflation under HCA in terms of IAS 29, but not during low inflation of up to, for example, 15 per cent per annum.

Hyperinflation is defined by the IASB as 100 per cent cumulative inflation over three years. That is 26 per cent annual inflation for three years in a row. At 26 per cent annual inflation for three years in a row companies have to calculate and account the cost of hyperinflation and write it off against profit, but, not at 15 per cent or 6 per cent inflation. At 22 per cent annual inflation for three years or 81.6 per cent cumulative inflation over three years an economy would not be in hyperinflation. However, 81.6 per cent of the real value of the monetary unit, all other monetary items as well as the real value of all constant items not maintained constant (treated as monetary items) of  listed and unlisted companies would be wiped out over the short period of three years. The economy would not be in hyperinflation and the HCA model would be implemented.

SA, for example, had been going along at 12 per cent average annual inflation or 40 per cent cumulative inflation over three years for at least the last 15 years before 2000, continuously implementing the HCA model.

Nicolaas Smith

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