How Inflation Accounting Is Applied in Hyperinflationary Economies under IAS 29 and ASC 830

Graziano Stefanelli
Nov 4
5 min read

When inflation becomes extreme, nominal figures in financial statements lose meaning. IFRS (IAS 29) and US GAAP (ASC 830) prescribe different frameworks for entities operating in hyperinflationary economies, ensuring that reported amounts reflect the effect of general price changes rather than outdated monetary units.

Under IAS 29, entities whose functional currency is hyperinflationary must restate their financial statements in terms of the measuring unit current at the end of the reporting period, applying a general price index to non-monetary items, income, expenses, and equity. US GAAP, on the other hand, requires foreign subsidiaries in hyperinflationary countries to use the reporting parent’s functional currency (usually USD) as their own functional currency and to remeasure, not restate, their accounts.

Both frameworks aim to restore comparability and preserve purchasing power by recognizing that a “currency unit” in such environments is no longer stable.

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How hyperinflation is identified

IAS 29.3 defines hyperinflation by characteristics rather than a single threshold, but practice follows indicators such as:

Cumulative inflation of around 100% or more over three years.
Preference for non-monetary assets or stable foreign currencies.
Prices linked to a price index rather than to currency amounts.
Significant changes in wage and price levels over short periods.

Under ASC 830-10-45-11, the same 100% cumulative three-year inflation guideline is used to determine whether a currency is considered hyperinflationary. Once identified, IFRS applies restatement, while US GAAP applies remeasurement into the parent’s currency.

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How IAS 29 restatement works

Under IAS 29, the entire financial statement—balance sheet, income statement, and cash flows—is expressed in terms of the current measuring unit at the reporting date using a general price index.

Monetary vs non-monetary distinction

Monetary items (cash, receivables, payables) are already expressed in current money and are not restated.
Non-monetary items (property, inventory, equity) are restated using the change in the general price index from acquisition date to reporting date.

Example:Machinery purchased for 2,000,000 when CPI = 100. At reporting date, CPI = 300.Restated cost = 2,000,000 × (300 / 100) = 6,000,000.

Entry:

Debit: Property, Plant & Equipment 4,000,000
Credit: Revaluation / Restatement Gain (Equity) 4,000,000

Income statement restatement

All income and expense items are expressed at the measuring unit current at the reporting date. In practice:

Revenues and expenses incurred evenly → restated using the average index.
Depreciation and cost of sales → restated from dates of original acquisition.

Net monetary gain or loss

The difference between the change in non-monetary items and the restated equity offset creates a monetary gain or loss, representing the effect of holding net monetary assets or liabilities during inflation.

If net monetary liabilities > assets → gainIf net monetary assets > liabilities → loss

Entry:

Debit: Monetary Loss on Inflation xx
Credit: Retained Earnings xx

or vice versa.

This line captures the erosion or benefit from exposure to a currency whose purchasing power is collapsing.

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How ASC 830 treats hyperinflationary economies

Under US GAAP, subsidiaries operating in hyperinflationary economies do not restate local financial statements for inflation. Instead, they adopt the reporting parent’s functional currency (typically USD). Their books are remeasured as if the USD were their functional currency:

Monetary assets and liabilities → remeasured using current exchange rates.
Non-monetary items (PPE, inventory) → remeasured at historical rates.
Income and expenses → translated at rates in effect when transactions occurred (average rates often used).

The remeasurement effect flows through P&L as a remeasurement gain or loss.

Example:A Venezuelan subsidiary’s local currency depreciates by 70% vs USD during the year. Monetary liabilities exceed monetary assets by 500,000 (USD equivalent). The subsidiary recognizes a remeasurement gain of 350,000 (70% × 500,000).

Entry:

Debit: Monetary Liability 350,000
Credit: Remeasurement Gain (P&L) 350,000

This approach captures inflation effects through the exchange rate rather than through an internal restatement mechanism.

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Comparative framework — IAS 29 vs ASC 830

Topic	IFRS (IAS 29)	US GAAP (ASC 830)
Functional currency	Remains local; financial statements restated in current measuring unit	Changes to parent’s currency; statements remeasured
Inflation threshold	≈100% cumulative in 3 years (guideline)	Same threshold (100% in 3 years)
Non-monetary items	Restated by CPI factor	Remeasured at historical rate
Monetary items	Not restated; generate monetary gain/loss	Remeasured at current rate
Income/expense restatement	Adjusted by average/period index	Remeasured at average or transaction rates
Impact recognition	Net monetary gain/loss in P&L	Remeasurement gain/loss in P&L
OCI treatment	Not used	Not used for hyperinflation remeasurement
Disclosures	Indexes used, monetary gain/loss, restatement basis	Remeasurement method, rates used, exposure effect

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Worked example — IFRS 29 restatement summary

Item	Historical Cost (CPI 100)	CPI at Year-End (300)	Restated Amount	Adjustment
Property, Plant & Equipment	2,000,000	300	6,000,000	+4,000,000
Inventory	1,000,000	300	3,000,000	+2,000,000
Equity (Share Capital)	1,500,000	300	4,500,000	+3,000,000

If monetary liabilities exceed monetary assets by 5,000,000, a monetary gain of 9,000,000 – 5,000,000 = 4,000,000 may offset restatement effects.

Simplified entries:

Debit: PPE 4,000,000
Debit: Inventory 2,000,000
Credit: Monetary Gain 4,000,000
Credit: Revaluation Surplus / Equity 2,000,000

The final balance sheet reflects current purchasing power, removing artificial profits or losses from nominal increases.

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Disclosure requirements

IFRS (IAS 29.39):Entities must disclose:

The fact that statements are restated under IAS 29.
The identity of the price index used and its level at the reporting date.
The amount of gain or loss on net monetary position.
Whether comparative information was restated.

US GAAP (ASC 830-30-50):Disclosures focus on:

Use of the parent’s functional currency.
Nature of remeasurement process.
Remeasurement gain or loss recognized.
Major inflation indexes considered in determining hyperinflationary status.

Example disclosure (IFRS):

During 2025, the entity operated in a hyperinflationary economy where the cumulative three-year inflation exceeded 110%. Financial statements were restated in accordance with IAS 29 using the national consumer price index (CPI 520 at year-end 2025, 340 at 2024). The gain on net monetary position recognized in profit or loss was €1.8 million.

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Journal entries summary

1) Restating non-monetary assets (IFRS):

Dr PPE / Inventory xx
Cr Equity (Revaluation Surplus) xx

2) Recognizing monetary gain/loss (IFRS):

Dr / Cr Monetary Gain or Loss (P&L) xx

3) Remeasurement (US GAAP):

Dr / Cr Monetary Item adjustments xx
Dr / Cr Remeasurement Gain or Loss (P&L) xx

4) Translation to parent’s currency (GAAP):

Dr / Cr Foreign Exchange Gain or Loss xx

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Impact on financial performance and ratios

Profit volatility: Both frameworks cause significant earnings swings; IFRS via monetary gain/loss, GAAP via remeasurement effects.
Equity levels: IFRS restatement inflates non-monetary assets and equity; GAAP often leaves equity lower since remeasurement gains are not capitalized.
Leverage ratios: IFRS restatement may improve debt-to-equity; GAAP remeasurement typically leaves leverage unchanged.
Comparability: IFRS statements are internally consistent in real terms; GAAP statements preserve parent currency comparability.

Investors should always analyze inflation-adjusted figures rather than nominal changes, as price-level distortions can obscure real profitability and solvency.

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Operational considerations

Continuously monitor cumulative inflation data to trigger IAS 29 or ASC 830 application.
Implement automated CPI restatement tools in ERP systems for non-monetary assets.
Train finance teams to identify monetary vs non-monetary exposures correctly.
Coordinate with tax teams, since tax authorities may still rely on historical nominal figures.
Clearly label restated amounts and indexes used in notes for transparency.

Proper application of IAS 29 and ASC 830 transforms financial statements from nominal records into meaningful, inflation-adjusted measures of performance and capital preservation in high-inflation environments.

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DATA STUDIOS

.....[datastudios.org]