Hyperinflationary Accounting
- Graziano Stefanelli
- Jul 21
- 2 min read
In economies experiencing hyperinflation, traditional historical cost accounting distorts financial statements, making reported figures less meaningful and impairing users’ ability to assess financial performance and position. Hyperinflationary accounting addresses these challenges by requiring entities to restate their financial statements to reflect current purchasing power. This process aims to present information that remains relevant and comparable during periods of extreme price instability.
Definition of Hyperinflation
An economy is generally considered hyperinflationary when the cumulative inflation rate over three years approaches or exceeds 100%. However, accounting standards (such as IAS 29 under IFRS) also consider qualitative indicators, including rapid and unpredictable price movements, widespread indexation of transactions, and the general population’s tendency to use a stable foreign currency as a reference.
Requirements for Financial Reporting
IFRS (IAS 29):
Entities whose functional currency is that of a hyperinflationary economy must restate their financial statements.
Restatement is required for all periods presented, using a general price index to convert historical costs to current purchasing power.
US GAAP:
There is no direct equivalent to IAS 29, but guidance requires the use of the US dollar as the functional currency for foreign operations in hyperinflationary economies, applying temporal method translation.
Restatement of Financial Statements
Non-monetary items: All non-monetary assets and liabilities (such as inventory, property, plant, and equipment) are restated at the balance sheet date using a general price index.
Equity items: Share capital and other components of equity are restated from the dates of contribution or transaction.
Income statement items: All revenues and expenses are restated at the average index applicable to the period in which they were recognized.
Monetary items (such as cash, receivables, and payables) are not restated, as they are already expressed in terms of current purchasing power.
Recognition of Gain or Loss on Net Monetary Position
As a result of restating for inflation, entities recognize a gain or loss on the net monetary position in profit or loss. This reflects the impact of holding monetary assets and liabilities during periods of hyperinflation.
Presentation and Disclosure
Entities must disclose:
The fact that financial statements have been restated for hyperinflation.
The index used and the level of price changes during the period.
The amount of gain or loss on the net monetary position.
Details of restatement methods and significant assumptions.
Practical Considerations
Selecting an appropriate general price index is critical for accurate restatement.
Adjusting for inflation may require significant system changes and judgment.
Restated figures must be consistently applied across periods for comparability.
Summary Table: Hyperinflationary Accounting
____________
FOLLOW US FOR MORE.
DATA STUDIOS
