2009

IFRS Foundation: Training Material for the IFRS® for SMEs

Module 31 –
Hyperinflation
 IFRS Foundation: Training Material
for the IFRS® for SMEs
including the full text of
Section 31 Hyperinflation
of the International Financial Reporting Standard (IFRS)
for Small and Medium-sized Entities (SMEs)
issued by the International Accounting Standards Board on 9 July 2009

with extensive explanations, self-assessment questions and case studies

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This training material has been prepared by IFRS Foundation education staff. It has not been approved by the
International Accounting Standards Board (IASB). The training material is designed to assist those training others to
implement and consistently apply the IFRS for SMEs. For more information about the IFRS education initiative visit
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IFRS Foundation: Training Material for the IFRS® for SMEs (version 2012-05)
Contents

INTRODUCTION __________________________________________________________ 1
Learning objectives ________________________________________________________ 1
IFRS for SMEs ____________________________________________________________ 1
Introduction to the requirements_______________________________________________ 1
REQUIREMENTS AND EXAMPLES ___________________________________________ 2
Scope of this Section _______________________________________________________ 2
Hyperinflationary economy ___________________________________________________ 4
Measuring unit in the financial statements _______________________________________ 6
Procedures for restating historical cost financial statements ________________________ 16
Disclosures ______________________________________________________________ 33
SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS _________________________ 34
COMPARISON WITH FULL IFRSs ___________________________________________ 35
TEST YOUR KNOWLEDGE ________________________________________________ 36
APPLY YOUR KNOWLEDGE _______________________________________________ 43
Case study 1 ____________________________________________________________ 43
Answer to case study 1 ____________________________________________________ 45
Case study 2 ____________________________________________________________ 48
Answer to case study 2 ____________________________________________________ 50

IFRS Foundation: Training Material for the IFRS® for SMEs (version 2012-05) iv
 Module 31 – Hyperinflation

This training material has been prepared by IFRS Foundation education staff and has not been
approved by the International Accounting Standards Board (IASB). The accounting
requirements applicable to small and medium-sized entities (SMEs) are set out in the
International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July
2009.

INTRODUCTION

In a hyperinflationary economy, financial statements (including consolidated financial

statements) are useful only if they are expressed in terms of the measuring unit that is current
at the end of the reporting period. Consequently, Section 31 Hyperinflation of the IFRS for SMEs
requires an entity whose functional currency is the currency of a hyperinflationary economy
to restate its non-monetary items in terms of the measuring unit that is current at the end of
the reporting period.

Module 31 introduces the learner to this subject, guides the learner through the official text,
develops the learner’s understanding of the requirements through the use of examples and
indicates the significant judgements and estimates that are required in accounting for
hyperinflation. Furthermore, the module includes questions designed to test the learner’s
knowledge of the requirements and case studies to develop the learner’s ability to account and
disclose for transactions and other events under hyperinflation in accordance with the IFRS for
SMEs.
| Learning objectives

Upon successful completion of this module you should know the financial reporting
requirements for accounting for an entity whose functional currency is the currency of a
hyperinflationary economy in accordance with the IFRS for SMEs. Furthermore, through the
completion of case studies, you should have enhanced your competence to account for
transactions and other events under hyperinflation in accordance with the IFRS for SMEs.
In particular you should, within the context of the IFRS for SMEs, be able to assess
hyperinflation indicators in order to determine whether Section 31 Hyperinflation is applicable
(ie assess whether a particular economy is hyperinflationary).

Furthermore, when Section 31 is relevant you should be able to:

 identify monetary and non-monetary items;

 demonstrate an understanding of the significant judgements and estimates that are

required when accounting for transactions and other events in a hyperinflationary
environment.
 measure and present gains or losses due to changes in the purchasing power of the
functional currency of an entity;
 restate financial statements to reflect the measuring unit that is applicable at the end of
the reporting period, to enhance the relevance of the financial information; and
 present and disclose information relevant to the financial statements of an entity whose
functional currency is that of a hyperinflationary economy.

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Module 31 – Hyperinflation

IFRS for SMEs

The IFRS for SMEs is intended to be applied to the general purpose financial statements of
entities that do not have public accountability (see Section 1 Small and Medium-sized Entities).
The IFRS for SMEs includes mandatory requirements and other material (non-mandatory) that is
published with it.
The material that is not mandatory includes:
 a preface, which provides a general introduction to the IFRS for SMEs and explains its
purpose, structure and authority.
 implementation guidance, which includes illustrative financial statements and a
disclosure checklist.
 the Basis for Conclusions, which summarises the IASB’s main considerations in reaching
its conclusions in the IFRS for SMEs.
 the dissenting opinion of an IASB member who did not agree with the publication of the
IFRS for SMEs.

In the IFRS for SMEs the Glossary is part of the mandatory requirements.

In the IFRS for SMEs there are appendices in Section 21 Provisions and Contingencies,
Section 22 Liabilities and Equity and Section 23 Revenue. Those appendices are non-mandatory
guidance.

Introduction to the requirements

The objective of general purpose financial statements of a small or medium-sized entity is to

provide information about the entity’s financial position, financial performance and cash
flows that is useful for economic decision-making by a broad range of users (eg existing and
potential investors, lenders and other creditors) who are not in a position to demand reports
tailored to meet their particular information needs. The objective of Section 31 is to prescribe
the accounting treatment and disclosure requirements for an entity whose functional
currency is that of a hyperinflationary economy.

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Module 31 – Hyperinflation

REQUIREMENTS AND EXAMPLES

The contents of Section 31 Hyperinflation of the IFRS for SMEs are set out below and shaded grey.
Terms defined in the Glossary of the IFRS for SMEs are also part of the requirements. They are
in bold type the first time they appear in the text of Section 31. The notes and examples
inserted by the IFRS Foundation education staff are not shaded. The insertions made by the
staff do not form part of the IFRS for SMEs and have not been approved by the IASB.

Scope of this section

31.1 This section applies to an entity whose functional currency is the currency of a
hyperinflationary economy. It requires such an entity to prepare financial statements
that have been adjusted for the effects of hyperinflation.

Notes

In accordance with Section 30 Foreign Currency Translation an entity is required to prepare

its financial statements using its functional currency. An entity’s functional currency is
the currency of the primary economic environment in which it operates. Management
is required to use judgement with the requirements and guidance of paragraphs 30.2–
30.5 (see Module 30 Foreign Currency Translation) to determine the applicable functional
currency.
Reporting the financial performance, financial position and cash flows of an entity
whose functional currency is the currency of a hyperinflationary economy without
restatement is not useful. Money loses purchasing power at such a rate that comparing
amounts from transactions and other events that have occurred at different times, even
within the same accounting period, is misleading (paragraph 2 of IAS 29 Financial
Reporting in Hyperinflationary Economies). A decrease in the purchasing power of a currency
is expressed by the increase of prices in an economy (ie the same nominal amount of
money can purchase fewer goods or services). The pervasive and recurring increase of
prices in an economy is often called inflation(1).
Significant, pervasive and recurring increases in an economy’s price levels are
commonly known as hyperinflation(1). The example below illustrates the erosive effect
of hyperinflation on the purchasing power of an entity with material monetary assets.

(1)
Concepts related to inflation (and hyperinflation) are usually associated with price levels in general rather than prices of
a few or particular goods. Another frequent attribute of the definition of inflation is recurrence (ie to be considered
inflation the rise of general price levels has to occur for at least a certain period of time (eg one year)). Hyperinflation in
particular is often characterised in literature as an ongoing (ie recurrent) and more significant increase in general price
levels. References: FISCHER, Stanley; SAHAY, Ratna; VÉGH, Carlos A. Modern Hyper and High Inflations. Journal of Economic
Literature. Vol XL, September 2002.

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Example—the effect of hyperinflation on the purchasing power of monetary

assets

Ex 1 On 31 December 20X1 SME A was formed when its owner contributed CU100,000 (2)
in cash to the entity. SME A held the cash throughout 20X2 and it did not enter
into any other transactions.
In 20X2 general price levels rose by 100 per cent (ie the relevant general price index
rose from 100 to 200 in 20X2) in the primary economic environment in which
SME A operates.
Because SME A’s only assets are monetary, in 20X2 when general price levels increased
by 100 per cent, SME A’s purchasing power declined by 100 per cent. In other words,
SME A’s CU100,000 would purchase half as many goods and services at the end of 20X2
as it could have purchased on 31 December 20X1.

Example—the effect of hyperinflation on the purchasing power of a

non-monetary asset

Ex 2 The facts are the same as in example 1. However, in this example, on 1 January
20X2 SME A used the cash contributed by the owner to purchase a plot of land for
CU100,000 (ie SME A held only land throughout 20X2 and it did not enter into any
other transactions). The entity intends to build a factory on the land in which it
intends to manufacture a product.
In 20X2 general price levels rose by 100 per cent in the primary economic
environment in which SME A operates.
Because SME A’s only assets are non-monetary, in 20X2 when general price levels
increased by 100 per cent, it is likely that SME A’s purchasing power remained constant
in 20X2. In other words, assuming that the value of the land measured in nominal
currency units increased by 100 per cent, if SME A had sold its land at the end of 20X2 it
could have used the proceeds from the sale of its land to purchase as many goods and
services on 31 December 20X2 as it could have originally purchased with the CU100,000
cash that it received from the owner on 31 December 20X1. This assumes that the
nominal selling price of the land increases at least at the rate of inflation.
Consequently, being invested in a non-monetary asset (land) prevented the erosion of
SME A’s purchasing power in 20X2.

Hyperinflationary economy
31.2 This section does not establish an absolute rate at which an economy is deemed
hyperinflationary. An entity shall make that judgment by considering all available
information including, but not limited to, the following possible indicators of hyperinflation:
(a) 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)
In this example, and in all other examples in this module, monetary amounts are denominated in ‘currency units (CU)’
and, unless otherwise specified, tax effects are ignored.

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Module 31 – Hyperinflation

(b) 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.
(c) 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.
(d) Interest rates, wages and prices are linked to a price index.
(e) The cumulative inflation rate over three years is approaching, or exceeds, 100 per
cent.

Notes

Determining whether an economy is hyperinflationary requires judgement and does not

depend solely on the level of cumulative inflation over a certain period of time. It is
preferable that all entities that report in the currency of the same hyperinflationary
economy should apply Section 31 from the same date. Nevertheless, Section 31 applies
to the financial statements of any entity from the beginning of the reporting period in
which it identifies the existence of hyperinflation in the economy of a country in whose
currency it reports (paragraph 4 of IAS 29)(3). The consistent application of judgement
from period to period is more important than the precise accuracy of the resulting
amounts included in the restated financial statements (see paragraph 10 of IAS 29).
The absolute level of inflation and the cumulative inflation rate over a certain period of
time can indicate hyperinflation. However, indicators are not conclusive on their own
and hyperinflation analysis usually requires the assessment of various indicators.

Examples

Ex 3 SME A is located in Country X, which is its primary economic environment.

General price levels in Country X, expressed in its local currency, have risen during
the last 15 years at an average annual rate of 3 per cent per year. Country X is
considered to be a safe country to invest in due to its stability. Both local and
foreign agents consider the local currency purchasing power to be stable. Local
agents prefer to have their savings in Country X’s local currency rather than in any
other currency.
Country X is not hyperinflationary. Accumulated inflation for three years is about 9 per
cent (ie far below the 100 per cent indicative rate). Economic agents in Country X do not
appear to avoid the local currency as a wealth reserve, because of its price stability
(ie there are only modest changes to currency purchasing power).

Ex 4 SME B’s primary economic environment is Country W. General price levels in

Country W, expressed in its local currency, have been rising during the last 5 years
at an average rate of 30 per cent per year. Market agents generally consider
Country W’s risk as high, mainly due to political instability that leads to uncertain
economic policy and loose monetary policy. Both local and foreign agents generally

(3)
In the absence of explicit guidance in the IFRS for SMEs an entity can (but is not required to), in accordance with
paragraph 10.6, consider the requirements and guidance in full IFRSs.

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avoid holding financial positions in the local currency. Financial assets

denominated in local currency are usually cash equivalents with high liquidity and
subject to interest rates that reflect future expected inflation. Household savings
are often used to buy properties (non-monetary assets) that are considered ‘safe
assets’ that generally prevent losses in purchasing power of the local currency.
Most indicators of hyperinflation relate to economic agents’ preferences and terms of
contracts in the economy (eg in a hyperinflationary economy agents avoid holding cash
for more than a short time because its purchasing power decreases quickly).
Consequently, in a hyperinflationary economy economic agents quickly convert cash
into non-monetary assets (eg property or inventories), financial assets that offer at least
inflation-adjusted restatement on the basis of price indexes, or into other more stable
currencies in order to preserve their purchasing power.
In hyperinflationary conditions, contracts that determine future cash flows between
parties often contain indexing clauses to ensure that amounts of future cash flows that
were agreed at current prices (ie at the contract date) preserve the purchasing power of
such cash flows when settled in terms of cash.
Country W is hyperinflationary—economic agents in Country W avoid the local currency
as a wealth reserve because there is a high risk of unexpected volatility in price levels
that could significantly deteriorate currency purchasing power. Furthermore,
accumulated inflation in 3 years is about 120 per cent (ie higher than the 100 per cent
indicative rate).

Measuring unit in the financial statements

31.3 All amounts in 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 required by paragraph 3.14, and any information presented in respect of earlier
periods, shall also be stated in terms of the measuring unit current at the reporting date.

Notes

The objective of financial statements of a small or medium-sized entity is to provide

information about the financial position, financial performance and cash flows of the
entity that is useful for economic decision-making by a broad range of users (eg existing
and potential investors, lenders and other creditors) who are not in a position to
demand reports tailored to meet their particular information needs.
The information provided in financial statements must be relevant to the economic
decision-making needs of users. To be relevant, information must be capable of
influencing the economic decisions of users by helping them evaluate past, present or
future events or confirming, or correcting, their past evaluations. In a hyperinflationary
economy, financial information is unlikely to be relevant to users in assessing future
cash flows unless nominal amounts are restated at price levels that are current at the
end of the reporting period.

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Module 31 – Hyperinflation

In addition, users must be able to compare the financial statements of an entity through
time and across entities to identify trends in its financial position and performance.
The measurement and presentation of the financial effects of similar transactions and
other events and conditions must therefore be carried out in a consistent way over time
for that entity. In hyperinflationary conditions, information must be restated to price
levels that are applicable at the end of the latest reporting period presented. If this is
not done, comparability in terms of purchasing power of amounts presented in the
financial statements would be weakened due to significantly different price levels at
each reporting period.

To achieve this, paragraphs 31.5–31.13 provide mandatory application guidance on how

to restate amounts by applying the measuring unit that is current at the end of the
reporting period. Paragraph 31.14 applies when hyperinflation ceases and paragraph
31.15 specifies the disclosures that should be provided.

Examples—restating amounts (and comparative amounts) in terms of the

measuring unit that is current at the end of the reporting period

Ex 5 The facts are the same as in example 1. SME A’s nominal (ie unrestated) trial
balance at 31 December 20X1 and 20X2 is as follows: (Note: ( ) indicates a credit)

31 December 20X2 31 December 20X1

Share capital (CU100,000) (CU100,000)
Cash and cash equivalents CU100,000 CU100,000
– –

Because the currency unit (ie CU) has lost 100 per cent of its purchasing power due to
hyperinflation the 31 December 20X2 trial balance is restated as follows:

Nominal Calculation Restated Reference:

(ie before CU paragraph
restatement) of the IFRS
CU for SMEs
Share capital (100,000) 200/100 index × (200,000) 31.10
CU100,000
Expense—loss on net Balancing 100,000 31.13
monetary position figure
Cash 100,000 200/200 index × 100,000 31.6
CU100,000
– –

Note: the CU100,000 cash on 31 December 20X2 has half the purchasing power than that
same nominal amount had on 31 December 20X1. Comparable amounts are calculated
by restating prior period balances in terms of the measuring unit that is current at the

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end of the reporting period. Accordingly, a CU100,000 loss arises from the restatement
of share capital at 31 December 20X2 and SME A’s statement of financial position at
31 December 20X2 (with comparative amounts for 20X1) is as follows:

31 December 20X2 31 December 20X1

CU CU
(a)
Share capital 200,000 200,000
Accumulated deficit (100,000) –
Total equity 100,000 200,000
(a)
Asset—cash 100,000 200,000

(a) To reflect the extent of the decline in the entity’s purchasing power in 20X2, SME A’s comparative amounts (ie at
31 December 20X1) for share capital and cash are increased by the hyperinflation factor (in this example 100 per
cent). Calculation for the cash comparative amount: CU100,000 cash held at 31 December 20X1 × 200/100
hyperinflation factor for 20X2 = CU200,000 adjusted amount at which cash is presented in SME A’s 20X2
financial statements as the comparative amount (ie at 31 December 20X1). Calculation for the share capital
comparative amount: CU100,000 share capital at 31 December 20X1 × 200/100 hyperinflation factor for 20X2 =
CU200,000 adjusted amount at which share capital is presented in SME A’s 20X2 financial statements as the
comparative amount (ie at 31 December 20X1).

SME A’s statement of comprehensive income for the year ended 31 December 20X2 is as
follows:

31 December 20X2

CU
Loss for the year—loss on net monetary position on restatement
to measuring unit current at 31 December 20X2 (100,000)

In summary, price levels increased 100 per cent and SME A has kept the resources
received from its owners in a monetary asset (ie cash) which is exposed to the purchasing
power loss under hyperinflation. Consequently, the statement of comprehensive income
reflects the loss of purchasing power of cash held during the year whereas the restated
equity balance in the entity’s financial position reflects ’real’ capital contributed by
owners and the reduction in constant purchasing power terms of owners’ interest due to
the loss of purchasing power of its cash.

Ex 6 The facts are the same as in example 2. SME A’s nominal (ie unrestated) trial
balance at 31 December 20X1 and 20X2 is as follows: (Note: ( ) indicates a credit)

31 December 20X2 31 December 20X1

Share capital (CU100,000) (CU100,000)
Property, plant and
equipment (land) CU100,000 CU100,000
– –

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In 20X2, the currency unit (ie CU) lost 100 per cent of its purchasing power due to
hyperinflation. The 31 December 20X2 SME A’s trial balance is restated as follows:

Nominal Calculation: Restated Reference:

(ie before CU paragraph
of the IFRS
restatement)
for SMEs
CU
Share capital (100,000) 200/100 index × (200,000) 31.10
CU100,000
Expense—loss on net
monetary position Balancing figure – 31.13
Land 100,000 200/100 index × 200,000 31.8(b)
CU100,000
– –

Note: the land at 31 December 20X2 represents the same purchasing power as the land
at 31 December 20X1. Comparable amounts are calculated by restating prior period
balances in the measuring unit that is current at the end of the reporting period.
SME A’s statement of financial position at 31 December 20X2 (with comparative
amounts for 20X1) is as follows:

31 December 20X2 31 December 20X1

CU CU
(a)
Equity—share capital 200,000 200,000
Asset—property, plant and equipment
(a)
(land) 200,000 200,000

(a) To reflect the stability in the entity’s purchasing power in 20X2, SME A’s comparative amounts (ie at
31 December 20X1) for share capital and land are increased by the hyperinflation factor (in this example 100 per
cent). Calculation for the land comparative amount: CU100,000 land held at 31 December 20X1 × 200/100
hyperinflation factor for 20X2 = CU200,000 adjusted amount at which property, plant and equipment is
presented in SME A’s 20X2 financial statements as the comparative amount (ie at 31 December 20X1).
Calculation for the share capital comparative amount: CU100,000 share capital at 31 December 20X1 × 200/100
hyperinflation factor for 20X2 = CU200,000 adjusted amount at which share capital is presented in SME A’s 20X2
financial statements as the comparative amount (ie at 31 December 20X1).

In summary, price levels increased 100 per cent and SME A invested the resources
received from its owners in a non–monetary asset (ie land) which is not exposed to loss
of purchasing power under hyperinflation. Consequently, the restated statement of
financial position reflects ’real’ capital contributed by owners and in the constant
purchasing power of owners’ interest due to the investment of funds in a non-monetary
asset which is ’protected’ from inflation.

Ex 7 The facts are the same as in example 6. However, in this example, SME A intends to
recover the carrying amount of the land through capital appreciation.
At 31 December 20X2 the fair value of SME A’s investment property is CU210,000.

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SME A’s nominal (ie unrestated) trial balance at 31 December 20X1 and 20X2 is as
follows: (Note: ( ) indicates a credit)

31 December 20X2 31 December 20X1

Share capital (CU100,000) (CU100,000)
Income—fair value increase (CU110,000) –
Investment property CU210,000 CU100,000
– –

In 20X2 the currency unit (ie CU) lost 100 per cent of its purchasing power due to
hyperinflation. The 31 December 20X2 trial balance is restated as follows:

Nominal (ie before Calculation: Restated Reference:

restatement) CU paragraph
CU of the
IFRS for
SMEs
Share capital (100,000) 200/100 index (200,000) 31.10
× CU100,000
Income—fair value increase (110,000) 200/200 index (110,000) 31.11
× CU100,000
Expense—loss on net monetary Balancing
position figure 100,000 31.13
Investment property (land) 210,000 200/200 index 210,000 31.8(a)
× CU210,000
– –

Note: because the investment property was remeasured to its fair value on 31 December
20X2, its nominal carrying amount is determined using the measuring unit that is
current at 31 December 20X2 (ie it is a non-monetary item that is not subject to
restatement since it is already carried at an amount that is current at 31 December
20X2).

SME A’s statement of comprehensive income for the year ended 31 December 20X2 is as
follows:

31 December 20X2

CU
Income—increase in the fair value of
investment property 110,000
Expense—loss on restatement for
hyperinflation (100,000)
Profit for the year 10,000

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SME A’s statement of financial position at 31 December 20X2 (with comparative

amounts for 20X1) is as follows:
31 December 20X2 31 December 20X1

CU CU
(a)
Share capital 200,000 200,000
Retained profit 10,000 –
Total equity 210,000 200,000
(a)
Asset—investment property (land) 210,000 200,000

(a) To reflect the inflation-adjusted growth in SME A’s purchasing power in 20X2, comparative amounts (ie at
31 December 20X1) for share capital and land are increased by the hyperinflation factor (in this example 100 per
cent). Calculation for the land comparative amount: CU100,000 land held at 31 December 20X1 × 200/100
hyperinflation factor for 20X2 = CU200,000 adjusted amount at which investment property is presented in
SME A’s 20X2 financial statements as the comparative amount (ie at 31 December 20X1). Calculation for the
share capital comparative amount: CU100,000 share capital at 31 December 20X1 × 200/100 hyperinflation factor
for 20X2 = CU200,000 adjusted amount at which share capital is presented in SME A’s 20X2 financial statements
as the comparative amount (ie at 31 December 20X1).

SME A’s inflation-adjusted net assets (and consequently its purchasing power) increased
by CU10,000 in 20X2 (ie CU110,000 fair value increase less CU100,000 attributable to
hyperinflation). In other words, the increased purchasing power results from the 110
per cent (or CU110,000) increase in the fair value of SME A’s investment property, which
exceeds the 100 per cent increase in general price inflation in 20X2 (as reflected in the
CU100,000 loss on restatement of share capital at 31 December 20X2). By restating the
amount in the financial statements, users of SME A’s financial statements (eg existing
and potential investors, lenders and other creditors) are provided with information
about SME A’s financial performance for the year ended 31 December 20X2 and its
financial position at 31 December 20X2. This information is relevant to making
decisions about providing resources to SME A.

Ex 8 The facts are the same as in example 1. In addition, in this example, during 20X3
when the index was on average 300, SME A earned CU30,000 revenue (and cash
receipts) respectively for services it provided in exchange for cash. The relevant
inflation index was 400 at 31 December 20X3.
The currency unit has, due to hyperinflation, lost 100 per cent of its purchasing power
for each of the past two years. The 31 December 20X3 trial balance is restated as follows:

Nominal Calculation: Restated Reference:

(ie before CU paragraph of
restatement) the IFRS
CU for SMEs
Share capital (100,000) 400/100 index × (400,000) 31.10
CU100,000
Retained earnings— 400/300 index ×
revenue: 20X3 (30,000) CU30,000 (40,000) 31.11
Retained earnings—loss on Balancing
net monetary position figure 310,000 31.13
Cash 130,000 400/400 index × 130,000 31.6
CU130,000
– –

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SME A’s statement of income and retained earnings for the year ended 31 December
20X3 (with comparative amounts for 20X2) is as follows:

20X3 20X2

CU CU
Revenue from providing services 40,000 –
Loss on the net monetary position on
(a) (b)
restating for hyperinflation (110,000) (200,000)
Loss for the year (70,000) (200,000)
–
Opening accumulated deficit (200,000)
Closing accumulated deficit (270,000) (200,000)

(a) CU310,000 cumulative loss on net monetary position recognised to 31 December 20X3 (see restated trial balance
above) less CU200,000(b) relating to 20X2 = CU110,000 loss recognised for the year ended 31 December 20X3.

(b) CU100,000 loss on net monetary position recognised in 20X2 (see example 5) × 400/200 restated for
hyperinflation to 31 December 20X4 = CU200,000

SME A’s statement of financial position at 31 December 20X3 (with comparative

amounts for 20X3) is as follows:

31 December 20X3 31 December 20X2

CU CU
(a)
Share capital 400,000 400,000
Accumulated deficit (270,000) (200,000)
Total equity 130,000 200,000
(a)
Asset—cash 130,000 200,000

(a) To reflect the inflation-adjusted growth in SME A’s purchasing power in 20X2, comparative amounts (ie at
31 December 20X2) for share capital and cash are increased by the hyperinflation factor. Calculation for the
cash comparative amount: CU100,000 cash held at 31 December 20X2 × 400/200 hyperinflation factor for 20X3 =
CU200,000 adjusted amount at which cash is presented in SME A’s 20X3 financial statements as the comparative
amount (ie at 31 December 20X2). Calculation for the share capital comparative amount: CU100,000 share
capital at 31 December 20X1 × 400/100 hyperinflation factor since 20X1 = CU400,000 adjusted amount at which
share capital is presented in SME A’s 20X3 financial statements as the comparative amount (ie at 31 December
20X3).

SME A’s inflation-adjusted net assets (and consequently its purchasing power) decreased
by CU70,000 in 20X3 when it generated CU30,000 nominal (unadjusted) profit.
The decreased purchasing power results from the increase in general price inflation
(as reflected in the CU110,000 loss on the net monetary position), which exceeds the
inflation-adjusted income (CU40,000) generated during 20X3. Users of SME A’s financial
statements (eg existing and potential investors, lenders and other creditors) are provided
with information about SME A’s financial performance for the year ended 31 December
20X3 and its financial position at 31 December 20X3. This information is relevant to
making decisions about providing resources to SME A.

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Ex 9 The facts are the same as in example 8. In addition, in this example, during 20X4,
when the index was on average 600, SME A earned CU60,000 revenue (and cash
receipts) for services it provided in exchange for cash. The relevant inflation index
was 800 at 31 December 20X4.
In hyperinflationary environments comparing figures in different measuring units is
misleading. In nominal terms SME A’s revenue in 20X4 (CU60,000) is 100 per cent higher
than 20X3 (CU30,000). However, after restating revenue in terms of the currency unit at
the end of the latest reporting period it is apparent that the trend in revenue is static
(ie CU80,000 for each of 20X3 and 20X4).

In 20X4, because the currency unit (ie CU) has, due to hyperinflation, lost 100 per cent of
its purchasing power for each of the past 3 years, the 31 December 20X4 trial balance is
restated as follows:

Nominal Calculation: Restated Reference:

(ie before CU paragraph
restatement) of the
CU IFRS for
SMEs
Share capital (100,000) 800/100 index × (800,000) 31.10
CU100,000
Retained earnings—revenue: 20X4 (60,000) 800/600 index × (80,000) 31.11
CU60,000
Retained earnings—revenue: 20X3 (30,000) 800/300 index × (80,000) 31.10
CU30,000
Retained earnings—cumulative
loss on net monetary position Balancing figure 770,000(a) 31.13
Cash 190,000 800/800 index × 190,000 31.6
CU190,000
– –

(a) Alternative calculation of the cumulative loss on restatement: CU700,000 share capital (ie CU800,000 restated
less CU100,000 nominal) + CU20,000 revenue in 20X4 (ie CU80,000 restated less CU60,000 nominal) + CU50,000
revenue for 20X3 (ie CU80,000 restated less CU30,000 nominal) = CU770,000 cumulative exchange loss on
restatement.

SME A’s statement of income and retained earnings for the year ended 31 December
20X4 (with comparative amounts for 20X3 and 20X2) is as follows:

20X4 20X3 20X2

CU CU CU
(a)
Revenue from providing services 80,000 80,000 –
Loss on the net monetary position on
(d) (c) (b)
restating for hyperinflation (150,000) (220,000) (400,000)
Loss for the year (70,000) (140,000) (400,000)
–
Opening accumulated deficit (540,000) (400,000)
Closing accumulated deficit (610,000) (540,000) (400,000)

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(a) Because SME A’s functional currency is that of a hyperinflationary economy, comparative amounts for its
financial performance must be restated in terms of the measuring unit that is current at 31 December 20X4.
The restatement provides relevant and comparable information for use by existing and potential investors,
lenders and other creditors in making decisions about providing resources to the entity. Calculation for the
revenue amount: CU30,000 revenue for the year ended 31 December 20X3 × 800/300 hyperinflation factor =
CU80,000 adjusted amount at which revenue is presented in SME A’s 20X4 financial statements as the
comparative amount (ie for the year ended 31 December 20X3).
(b)
CU100,000 loss on net monetary position recognised in 20X2 (see example 5) × 800/200 restated for
hyperinflation to 31 December 20X4 = CU400,000. Alternatively, CU200,000 restated loss on net monetary
position recognised in 20X3 as comparative figure (see example 8) × 800/400 restated for hyperinflation to 31
December 20X4 = CU400,000.
(c)
CU110,000 loss on net monetary position recognised in 20X3 (see example 8) × 800/400 restated for
hyperinflation to 31 December 20X4 = CU220,000.
(d)
CU770,000 cumulative loss on net monetary position recognised to 31 December 20X4 (see restated trial balance
(c) (b)
above) less CU220,000 relating to 20X3 less CU400,000 relating to 20X2 = CU150,000 loss recognised for the
year ended 31 December 20X4.

SME A’s statement of financial position at 31 December 20X4 (with comparative

amounts for 20X3 and 20X2) is as follows:

31 December 20X4 31 December 20X3 31

December
CU CU 20X2

CU
(a) (a) (a)
Share capital 800,000 800,000 800,000
Accumulated deficit (610,000) (540,000) (400,000)
Total equity 190,000 260,000 400,000
(a) (a)
Asset—cash 190,000 260,000 400,000
(a)
To reflect the inflation-adjusted growth in SME A’s purchasing power in 20X2, comparative amounts (ie at
31 December 20X3 and 20X2) for share capital and cash are increased by the hyperinflation factor, as follows:
 Calculation for the cash comparative amount (20X3): CU130,000 cash held at 31 December 20X3 × 800/400
hyperinflation factor for 20X4 = CU260,000 adjusted amount at which cash is presented in SME A’s 20X4
financial statements as the comparative amount (ie at 31 December 20X3).
 Calculation for the cash comparative amount (20X2): CU100,000 cash held at 31 December 20X2 × 800/200
hyperinflation factor for 20X4 = CU400,000 adjusted amount at which cash is presented in SME A’s 20X4
financial statements as the comparative amount (ie at 31 December 20X2).
 Calculation for the share capital comparative amounts: CU100,000 share capital at 31 December 20X1 ×
800/100 hyperinflation factor to 31 December 20X4 = CU800,000 adjusted amount at which share capital is
presented in SME A’s 20X4 financial statements as the comparative amounts (ie at 31 December 20X3 and
31 December 20X2).

SME A’s inflation-adjusted net assets (and consequently its purchasing power) decreased
by CU140,000 in 20X3 (CU400,000 adjusted cash at 31 December 20X2 less CU260,000
adjusted cash at 31 December 20X3) and by further CU70,000 in 20X4 (CU260,000
adjusted cash at 31 December 20X3 less CU190,000 adjusted cash at 31 December 20X4).
Users of SME A’s financial statements (eg existing and potential investors, lenders and
other creditors) are provided with relevant information about SME A’s financial position
at 31 December 20X4 and its financial performance for the year ended 31 December
20X4. This information is presented in a context (adjusted for changes in purchasing
power) that is relevant to making decisions about providing resources to SME A.
Contrary to economic reality, unadjusted financial information would misleadingly
reflect SME A’s financial performance and its financial position improving over time (ie
from 20X2 to 20X4).

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31.4 The restatement of financial statements in accordance with this section requires the use
of a general price index that reflects changes in general purchasing power. In most
economies there is a recognised general price index, normally produced by the
government, that entities will follow.

Notes

As illustrated in examples 1–9, financial statements of SMEs whose functional currency

is that of a hyperinflationary economy must be restated in accordance with Section 31
for the effects of changes in general purchasing power using a general price index
reflecting changes in general purchasing power. Such a general price index should be
reliable and reflect price changes of a wide variety of goods and services that are relevant
to the economy for which inflation is being measured.
It is preferable that all entities that report in the currency of the same economy use the
same index (paragraph 37 of IAS 29)(4). PricewaterhouseCoopers identifies the consumer
price index as the most reliable indicator of changes in general price levels because it is
at the end of the supply chain and reflects the impact of prices on the general
population’s consumption basket. They also identify the most important features of a
reliable general price index as:(5)
 a wide range of reference, such as inclusion of most goods and services produced in
the economy, in order to reflect varying price fluctuations;
 an accurate reflection of price changes;
 regular, preferably monthly, updating; and
 consistency, uniformity and continuity.
A general price index may not be available for the periods for which the restatement of
non-monetary items is required. In these circumstances, paragraph 17 of IAS 29 Financial
Reporting in Hyperinflationary Economies specifies that it may be necessary to use an
estimate based, for example, on the movements in the exchange rate between the
functional currency and a relatively stable foreign currency.(6)

(4)
In the absence of explicit guidance in the IFRS for SMEs an entity can (but is not required to), in accordance with paragraph
10.6, consider the requirements and guidance in full IFRSs.
(5)
PricewaterhouseCoopers Manual of Accounting IFRS 2011, CCH, London, paragraphs. 6.24–6.25.
(6)
In the absence of explicit guidance in the IFRS for SMEs an entity can (but is not required to), in accordance with paragraph
10.6, consider the requirements and guidance in full IFRSs.

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Procedures for restating historical cost financial statements

Statement of financial position

31.5 Statement of financial position amounts not expressed in terms of the measuring unit
current at the end of the reporting period are restated by applying a general price index.

31.6 Monetary items are not restated because they are expressed in terms of the measuring
unit current at the end of the reporting period. Monetary items are money held and items
to be received or paid in money.

31.7 Assets and liabilities linked by agreement to changes in prices, such as index-linked
bonds and loans, are adjusted in accordance with the agreement and presented at this
adjusted amount in the restated statement of financial position.

31.8 All other assets and liabilities are non-monetary:

(a) Some non-monetary items are carried at amounts current at the end of the reporting
period, such as net realisable value and fair value, so they are not restated. All other
non-monetary assets and liabilities are restated.
(b) Most non-monetary items are carried at cost or cost less depreciation; hence they are
expressed at amounts current at their date of acquisition. The restated cost, or cost
less depreciation, of each item is determined by applying to its historical cost and
accumulated depreciation the change in a general price index from the date of
acquisition to the end of the reporting period.
(c) The restated amount of a non-monetary item is reduced, in accordance with Section
27 Impairment of Assets, when it exceeds its recoverable amount.

Notes

Monetary items are cash held and items to be received or paid in currency. Monetary
assets include but are not restricted to cash, cash equivalents and financial assets.
Monetary liabilities include but are not restricted to loans payable (debt), trade and
other payables and provisions. Monetary items are directly exposed to the effects of
changes in currency purchasing power as these items are expected to be settled in cash
denominated in the affected currency. Consequently, monetary items are not restated
because their nominal contracted values express the actual estimate of cash flows
associated with those items, unless contractually subject to indexation, which does not
change their monetary substance.
Monetary items can be subject to indexation or denominated in a foreign currency and,
accordingly, their exposure to changes in purchasing power of an entity’s functional
currency depends on the variation of their respective price index or exchange-rate
variation. For such items, balances on the statement of financial position are restated in
accordance with the contracted index or exchange rate.

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Module 31 – Hyperinflation

All other items are non-monetary items. Non-monetary assets include but are not
restricted to inventories, property, plant and equipment and intangibles.
The purchasing power of non-monetary assets is frequently protected from general price
changes because increases in general price levels usually increase the nominal
(unadjusted) value of non-monetary assets. Consequently, non-monetary items usually
do not generate gains or losses due to changes in the purchasing power of a currency.
Consequently, in hyperinflationary conditions, the carrying amounts of non-monetary
items stated at historical cost are restated using a general price index in order to reflect
the constant purchasing power embodied in their respective expected future cash flows.
If the restated carrying amount of a non-monetary asset exceeds its recoverable amount,
its restated carrying amount must be reduced to its recoverable amount in accordance
with Section 27 Impairment of Assets.
Non-monetary items measured at net realisable value or fair value are not restated and
may generate gains or losses due to variations on their values above or below inflation
(see example 7).
Note: restatement of a non-monetary item under hyperinflation may give rise to a
temporary difference between the carrying amount of such an item in the financial
statements and the tax base that the entity expects will affect taxable profit when the
carrying amount of the item is recovered or settled. Temporary differences are
accounted for in accordance with Section 29 Income Tax. Throughout this module, there
are many examples of restatement of statement of financial position items. However,
for simplicity, deferred tax effects are ignored. Example 22 illustrates the deferred tax
effects of restating amounts in terms of the measuring unit that is current at the end of
the reporting period.

Examples

Ex 10 On 30 November 20X1 SME B acquired inventory in exchange for CU200,000 cash.

SME B had not sold any of the inventory by 31 December 20X1 (SME B’s reporting
date). On 31 December 20X1 the estimated selling price less costs to sell of the
inventory is CU230,000. The general price index increased by 100 per cent in 20X1
(including a 10 per cent increase in December).
In accordance with Section 31, the inventory (a non-monetary item) in hyperinflationary
conditions must be restated by applying a general price index. SME B acquired the
inventory for CU200,000 . As inflation during the period between acquisition and the
reporting date was 10 per cent, the restated amount for inventory is CU220,000
(ie CU200,000 cost × 1.1 inflation factor).

Note: in accordance with Section 27 Impairment of Assets the inventory must be tested for
impairment. The inventory is not impaired because its cost (restated under
hyperinflation) CU220,000 is lower than its estimated selling price less costs and sell
(CU230,000). Consequently, no impairment loss is recognised.

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Ex 11 The facts are the same as in Example 10. However, in this example, on 31 December
20X1 the estimated selling price less costs to sell of inventory is CU215,000.
In accordance with Section 31, the inventory is first restated from its original amount of
CU200,000 to CU220,000 (see Example 10). The inventory is tested for impairment by
comparing its estimated selling price less costs to sell of the inventory (CU215,000) to its
restated amount (CU220,000). In accordance with Section 27, an impairment loss
(expense) of CU5,000 (restated carrying amount less net selling price) must be recognised
in profit or loss and the carrying amount of inventory at 31 December 20X1 is
CU215,000.

Ex 12 On 1 January 20X2 SME C acquired land at the cost of CU250,000 upon which to
construct a warehouse in the future. The purchase was financed by a bank loan.
The loan agreement obliges SME C to pay CU250,000 (the principal amount) 10 years
after grant date and annual interest at a rate composed of the retail price index
variation plus a 5 per cent spread payable on 1 January each year for 10 years.
SME C operates in a hyperinflationary economy. Its reporting period ends on
31 December. In 20X2 the relevant general price index increased by 100 per cent
and the retail price index increased by 90 per cent.
On 31 December 20X2 the fair value less costs to sell of SME C’s land is CU550,000.
On 1 January 20X2, SME C recognises land (an asset classified as property, plant and
equipment) and a financial liability (bank loan) measured at CU250,000.
The loan is a monetary item linked by agreement to changes in prices and the interest at
5 per cent per annum applies after agreed restatement based on the retail price index.
Consequently, in accordance with paragraph 31.7, on 31 December 20X2 the bank loan
(financial liability) is CU498,750 (CU250,000 principal × (1 + 90% increase in the retail
price index) × (1 + 5% per loan contract)).
Land intended to be used in the future construction of SME C’s new warehouse is a
non-monetary item (asset) carried at cost in accordance with Section 17 Property, Plant and
Equipment. In accordance with paragraph 31.8(b), SME C must restate its carrying
amount using the general price index. Consequently, the carrying amount of the land at
31 December 20X2 is restated by the general inflation index from the acquisition date
(ie 1 January 20X2) to the reporting date (ie 31 December 20X2), resulting in a restated
carrying amount of CU500,000 (CU250,000 x (1 + inflation rate of 100%)). The restated
carrying amount of the land is then, in accordance with Section 27, compared to its fair
value less costs to sell. No impairment loss is recognised in 20X2 because the restated
carrying amount (CU500,000) is lower than the fair value less costs to sell of the land
(CU550,000). Consequently, the carrying amount of the land recognised in SME C’s
financial statements at 31 December 20X2 is CU500,000.

Ex 13 On 1 January 20X1 SME D acquires a building in exchange for CU100,000 cash.

The building is used by SME D’s administrative and sales staff. Management
estimated the useful life of the building to be 50 years with no residual value.
General price inflation for the years ended 31 December 20X1 and 20X2 is 100 per
cent in each year, respectively. There is no indication that the building might be
impaired.

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In accordance with Section 17 Property, Plant and Equipment, SME D recognised the
building at its cost of CU100,000 on 1 January 20X1. The building is then depreciated
before being tested for impairment. The depreciable amount of the building restated for
inflation is CU200,000 (ie CU100,000 cost × (1+ 100%)). Inflation-adjusted depreciation
for the year ended 31 December 20X1 is CU4,000 (ie CU200,000 restated depreciable
amount ÷ 50 years). Consequently the restated carrying amount of the building at
31 December 20X1 is CU196,000 (ie CU200,000 restated cost less CU4,000 restated
accumulated depreciation).

At 31 December 20X2 the depreciable amount of the building restated for inflation is
CU400,000 (ie CU200,000 restated cost at 31 December 20X1 × (1+ 100%)).
Inflation-adjusted depreciation for the year ended 31 December 20X2 is CU8,000
(ie CU400,000 restated depreciable amount ÷ 50 years). Consequently the restated
carrying amount of the building at 31 December 20X2 is CU384,000 (ie CU500,000
restated cost less CU16,000 restated accumulated depreciation).

Ex 14 The facts are the same as in Example 13. However, in this example, SME D holds the
building to earn lease rental. On 31 December 20X1 SME D measures the fair value
of the building at CU205,000.
Because SME D accounts for the property as an investment property using the fair value
model, at 31 December 20X1 SME D must use the fair value model to measure its
investment property. Consequently, it measures its investment property at CU205,000
(expressed in terms of the measuring unit that is current at 31 December 20X1).
Note: the carrying amount of the building is not restated (see paragraph 31.8).

31.9 At the beginning of the first period of application of this section, the components of
equity, except retained earnings, are restated by applying a general price index from the
dates the components were contributed or otherwise arose. Restated retained earnings
are derived from all the other amounts in the restated statement of financial position.

31.10 At the end of the first period and in subsequent periods, all components of owners’ equity
are restated by applying a general price index from the beginning of the period or the
date of contribution, if later. The changes for the period in owners’ equity are disclosed in
accordance with Section 6 Statement of Changes in Equity and Statement of Income and
Retained Earnings.

The components of equity represent the residual interest of owners in an entity.

In accordance with Section 31, owners’ interest (equity) is restated using a general price
index that reflects changes in general purchasing power. Restatement provides owners
with more relevant information with which to make decisions about providing
resources to the entity.
For cost-benefit reasons, retained earnings at the beginning of the first period of
hyperinflation is derived indirectly from all the other amounts in the restated statement
of financial position measured in accordance with Section 31. Thereafter, Section 31 is
applied to restate all equity items (including retained earnings) using a general price
index.

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Examples

Ex 15 On 1 January 20X1 SME A’s functional currency became hyperinflationary for the
first time. SME A’s statement of financial position at 31 December 20X1 comprised
CU100,000 cash and cash equivalents, CU50,000 trade receivables, CU10,000 trade
payables, CU100,000 contributed capital and CU40,000 retained earnings.
On 1 January 20X2 the general price index is 135. The capital was contributed on
1 January 20X1, when the general price index was 100.
SME A determines the restated amount of retained earnings at 1 January 20X2 in
accordance with paragraphs 31.9 and 31.10 as follows:
SME A’s assets and liabilities are monetary items. SME A has two equity items: capital
and retained earnings. Accordingly, only capital must be restated from its contribution
date (ie 1 January 20X1) to the beginning of the first period of application of Section 31
because the general price index has risen 35 per cent (35 points ÷ 100 points) from
1 January 20X1 to 1 January 20X2. Restated capital as of 1 January 20X2 is CU135,000
(CU100,000 x (1 + inflation rate of 35%)).
Finally, retained earnings are derived from all other items in the statement of financial
position at 31 December 20X1 as follows:

(+) Cash and cash equivalents CU100,000

(+) Trade receivables CU50,000
(-) Trade payables (CU10,000)
(-) Restated capital (CU135,000)
Restated retained earnings at 1 January 20X2 CU5,000

Ex 16 The facts are the same as in Example 15. Inflation for the year ended 31 December
20X2 was 100 per cent.
Assuming that monetary items—cash and cash equivalents, trade receivables and trade
payables—are unchanged at 31 December 20X2, capital and retained earnings must be
restated by applying the inflation rate for 20X2, as follows:
Capital:
Initial balance (31 December 20X2) × (270(a)/100 inflation factor January 20X1 to
December 20X2) = CU270,000.
Restatement effect for 20X2 = CU135,000 (CU270,000 restated balance less CU135,000
initial balance)
Retained Earnings (before profit or loss for current period)
Initial balance at 31 December 20X2 (CU5,000) × (270/135 inflation factor January 20X2 to
December 20X2) = CU10,000.

Journal entries:

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Dr Loss on net monetary position CU140,000

Cr Paid-in capital CU135,000
Cr Retained earnings CU5,000
To recognise the restatement of equity items.

The loss recognition on net monetary position will be discussed further in item 31.13
below. It is important to mention that hyperinflationary accounting leads to the
recognition of gains or losses due to net monetary item exposures, which is equivalent
to the restatement effect on non-monetary items and equity components.
In this example it is assumed that SME A had no transactions in 20X2. Nevertheless, its
monetary items were subject to the loss in purchasing power of the currency unit.
Consequently, SME A recognises a CU140,000 loss in 20X2. That loss becomes part of its
retained earnings. Consequently, retained losses at 31 December 20X2 is CU130,000
(ie CU10,000 restated opening retained earnings less CU140,000 loss on net monetary
position in 20X2).

SME A’s statement of financial position at 31 December 20X2 is as follows:

Cash and cash equivalents CU100,000

Trade receivables CU50,000
Total Assets CU150,000
Trade Payables CU10,000
Capital CU270,000
Retained losses (CU130,000)
Total Liabilities And Equity CU150,000

Changes in retained earnings for the year ended 31 December 20X2 are as follows:

Restated opening balance—01/01/X2 CU10,000

Net loss for 20X2 (CU140,000)
Closing balance—31/12/X2 (CU130,000)
(a)
Price index at 1 January 20X2 is 135 and inflation for the year ended 31 December 20X2 is 100 per
cent. Accordingly, price index at 31 December 20X2 is 270 (ie 135 × (1 + 100%))

Statement of comprehensive income and income statement

31.11 All items in the statement of comprehensive income (and in the income statement, if
presented) shall be expressed in terms of the measuring unit current at the end of the
reporting period. Therefore, all amounts need to be restated by applying the change in
the general price index from the dates when the items of income and expenses were
initially recognised in the financial statements. If general inflation is approximately even
throughout the period, and the items of income and expense arose approximately evenly
throughout the period, an average rate of inflation may be appropriate.

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Notes

In order to measure all items in the statement of comprehensive income in terms of the
measuring unit that is current at the end of the reporting period, all nominal amounts
of income and expenses are restated by applying the relevant general price index from
the date of recognition to the reporting date. Judgement is required to determine
whether using an average rate of inflation for the period (rather than an
effective-date-to-reporting-date inflation rate) is appropriate for such restatement.
When the inflation rate is increasing constantly and income and expenses are incurred
evenly throughout the year (ie comprehensive income is not subject to significant
volatility or seasonality in the year), for cost-benefit reasons restatement by applying an
average inflation rate is permitted.
Changes in non-monetary items recognised as income or expenses
When an entity’s non-monetary items are recognised as an income (eg some deferred
income) or expense (eg depreciation) the calculation is based on the restated underlying
item.

Example—restatement of income and expenses

Ex 17 SME B provides cleaning services under long-term contracts. SME B recognised

CU100,000 revenue in each month in 20X1. The relevant general price index rose
3 per cent each month in 20X1.
In nominal terms SME B’s revenue was earned evenly in 20X1 (ie CU100,000 per month).
Because SME B’s functional currency lost significant purchasing power during 20X1,
SME B restates all items of income and expense to express them in the measuring unit
that is current at the end of the reporting period as follows: (7)

Month Nominal Accumulated inflation Restated

Amount to year-end amount
December CU100,000 0.00% CU100,000
November CU100,000 3.00% CU103,000
October CU100,000 6.09% CU106,090
September CU100,000 9.27% CU109,273
August CU100,000 12.55% CU112,551
July CU100,000 15.93% CU115,927
June CU100,000 19.41% CU119,405
May CU100,000 22.99% CU122,987
April CU100,000 26.68% CU126,677
March CU100,000 30.48% CU130,477
February CU100,000 34.39% CU134,392
January CU100,000 38.42% CU138,423
Total CU1,200,000 CU1,419,202

(7)
In this example, for ease of calculation, it is assumed that revenue first qualified for recognition on the last day of the
month in which it was earned.

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Because the inflation rate and revenues are stable, an average annual inflation rate
could be used, as follows:

CU1,200,000 x {[(1 + 0.03) ^ 12] ^ 0.5} = CU1,432,863

Although restatement applying average rates usually does not generate exactly the same
figure compared to a transaction-by-transaction restatement, average conversion is
acceptable only if the difference is immaterial. In this example, in the absence of
evidence to the contrary the difference appears to be immaterial.

Ex 18 On 31 October 20X2 SME C receives CU200,000 cash (non-refundable) for services to

be provided on 30 November (50 per cent) and on 31 December 20X2 (50 per cent).
The relevant general price index is 200 on 31 October 20X2, 300 on 30 November
20X2 and 400 on 31 December 20X2 (SME C’s reporting date).
On 31 October 20X2 the CU200,000 consideration received in advance is recognised as a
service obligation (non-monetary item). As SME C provides the service, the service
obligation reduces with a corresponding amount recognised in income.

Date General price Liability Revenue at Restated revenue up to

index CU recognition date 31 December 20X2
CU CU

31 October 20X2 200 200,000 – –

adjustment 100,000
30 November 20X2 300 300,000(a)
30 November 20X2 (150,000) (a) 150,000 (a) 200,000 (c)
1 December 20X2 150,000
adjustment 50,000
31 December 20X2 200,000(b)
31 December 20X2 400 (200,000)(b) 200,000 (b) 200,000 (d)
31 December 20X2 –
Total restated revenue for the two month period ended
31 December 20X2 400,000
(a)
The non-monetary liability is restated from 31 October to 30 November by multiplying the original
amount of CU200,000 by 300/200 general price index. 50 per cent of the restated amount
(CU300,000) is then recognised as revenue on 30 November 20X2 = CU150,000.
(b)
The CU150,000 non-monetary liability at 1 December 20X2 is restated to 31 December 20X2 by
multiplying CU150,000 by 400/300 general price index = CU200,000. On 31 December 20X1 the
restated amount (CU200,000) is recognised as revenue when the service is provided.
(c)
The revenue recognised on 30 November 20X2 is restated to the reporting date (31 December 20X2)
by multiplying the CU150,000 originally recognised by 400/300 general price index.
(d)
No restatement because the revenue was recognised on the reporting date (31 December 20X2).

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Ex 19 On 31 December 20X0 SME D acquires a machine in exchange for CU100,000 cash.

SME D depreciates the machine on the straight-line method. Management
estimates the machine’s residual value to be zero and its useful life at 10 years.
The general price index was 10 on 1 January 20X1, 20 on 31 December 20X1 and 30
on 31 December 20X2.
Before calculating depreciation for 20X1, SME D applies the general price index to the
nominal amount of the machine to express the machine in the measuring unit that is
current at 31 December 20X1, as follows: CU100,000 × 20/10 = CU200,000. Depreciation
for the year ended 31 December 20X1 is then calculated : CU200,000 restated carrying
amount ÷ 10-year useful life = CU20,000 depreciation for the year ended 31 December
20X1.
Note: at 31 December 20X1 the restated carrying amount of the machine is CU180,000
(CU200,000 gross carrying amount less CU20,000 accumulated depreciation).
Before calculating depreciation for 20X2, SME D applies the general price index to the
nominal amount of the machine to express the machine in the measuring unit that is
current at 31 December 20X2, as follows: CU180,000 × 30/20 = CU270,000. Depreciation
for the year ended 31 December 20X2 is then calculated as follows: CU270,000 restated
carrying amount ÷ 9-year remaining useful life including 20X2 = CU30,000 depreciation
for the year ended 31 December 20X2.
Note: the comparative amount presented for depreciation for 20X1 is CU30,000,
calculated as follows: CU20,000 presented in 20X1 statement of financial position × 30/20
the increase in the general price index since 20X1. The comparative amount of gross
carrying amount for 20X1 is CU300,000, calculated as follows: CU200,000 presented in
20X1 statement of financial position × 30/20 the increase in the general price index since
20X1.

Statement of cash flows

31.12 An entity shall express all items in the statement of cash flows in terms of the
measuring unit current at the end of the reporting period.

Notes

The statement of cash flows provides information about the changes in cash and cash
equivalents of an entity for a reporting period.
Under hyperinflationary conditions, to provide relevant and comparable cash flow
information, nominal cash flows are adjusted for the effects of general price-level
changes during the reporting period. Consequently, amounts in the statement of cash
flows are expressed on the basis of the purchasing power of an entity’s functional
currency at the end of the reporting period (ie the measuring unit that is current at the
end of the reporting period).
An entity that has constant monthly cash receipts from customers of CU100 (on the first
day of each month—January to December 20X1) would account for total nominal cash
inflows from customers of CU1,200 (ie CU100 × 12 months) for the year ended
31 December. However, in a hyperinflationary economy (eg 10 per cent inflation per
month) the purchasing power of nominal currency units changes significantly over only

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a short time. To measure the amount of cash receipts from customers (CU1,200) using
the measuring unit at 31 December 20X1, nominal cash inflows from customers must be
restated by the inflation rate from the date the cash was received to 31 December 20X1,
as follows:

Date of cash Nominal cash Accumulated inflation to (a) Restated (b)

receipt inflow year-end cash inflow
1 January 100 213.84% 313.84
1 February 100 185.31% 285.31
1 March 100 159.37% 259.37
1 April 100 135.79% 235.79
1 May 100 114.36% 214.36
1 June 100 94.87% 194.87
1 July 100 77.16% 177.16
1 August 100 61.05% 161.05
1 September 100 46.41% 146.41
1 October 100 33.10% 133.10
1 November 100 21.00% 121.00
1 December 100 10.00% 110.00
Total 1,200 2,352.26

(a)
Accumulated inflation to 31 December 20X1 is calculated using the following formula:
Accumulated inflation = (1 + 10%) ^ number of months to 31 December 20X1
(b)
Restated cash inflows are calculated using the following formula:
Restated cash inflows = (1 + accumulated inflation) × nominal cash inflow

Examples—gain or loss on net monetary position

Ex 20 SME A, a consulting partnership, was incorporated on 1 December 20X2 when

the partners collectively contributed capital of CU100,000 in cash.
SME A’s functional currency is the currency of a hyperinflationary economy.
In December 20X2, SME A entered into the following transactions:
 10 December: CU30,000 accrual of accounts payable to service suppliers
 11 December: recognised CU50,000 revenue for services rendered (CU20,000 due
on 20 December 20X2 and CU30,000 due on 1 January 20X3)
 20 December: CU20,000 cash receipt from customers
 25 December: CU25,000 payment to suppliers.

The relevant general price index for the period is:

 1 December 20X2 = 1.00
 10 December 20X2 = 1.03
 11 December 20X2 = 1.05

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 20 December 20X2 = 1.08

 25 December 20X2 = 1.09
 31 December 20X2 = 1.10
Restated profit for the month ended 31 December 20X2 is CU10,000 (ie CU52,381
restated revenue less CU32,039 restated expenses less CU10,342 loss on net
monetary position), calculated as follows:

Nominal (ie before Calculation: Restated Reference:

restatement) CU paragraph
CU of the
IFRS for
SMEs
Capital contributions (100,000) 1.1/1 index × (110,000) 31.10
CU100,000
Income—revenue from services 1.1/1.05 index
rendered (50,000) × CU50,000 (52,381) 31.11
Expenses—in rendering services 1.1/1.03 index
30,000 × CU30,000 32,039 31.11
Expense—loss on net monetary Balancing
position figure 10,342 31.13
Liability—trade creditor (5,000) 1.1/1.1 index × (5,000) 31.6
CU5,000
Asset—trade debtor 30,000 1.1/1.1 index × 30,000 31.6
CU30,000
Asset—cash 95,000 1.1/1.1 index × 95,000 31.6
CU95,000
– –

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Statement of cash flows for the month ended 31 December 20x2—indirect method

Operating activities
Cash flows from operating activities
Profit for the month 10,000
Changes in operating assets and liabilities
Increase in receivables (30,000)
Increase in accounts payable 5,000
Net cash outflow from operating activities (15,000)

Financing activities
Cash inflow from financing activities—capital 110,000
contributed by owners

Net increase in cash 95,000

Cash at incorporation (1 December 20X2) –
Cash at 31 December 20X2 95,000

Statement of cash flows for the month ended 31 December 20x2—direct method

Operating activities
Cash flows from operating activities
Cash receipts from customers 20,370(a)
Cash payments to suppliers (25,229)(b)
Purchasing power loss in cash (10,141)(c)
Net cash outflow from operating activities (15,000)

Financing activities
Cash inflow from financing activities— 110,000
capital contributed by owners

Net increase in cash 95,000

Cash at incorporation (1 December 20X2) –
Cash at 31 December 20X2 95,000
(a)
The cash received from customers is restated from 20 December to 31 December by multiplying the
nominal cash inflow CU20,000 by 1.1/1.08 general price index = CU20,370.
(b)
The cash paid to suppliers is restated from 25 December to 31 December by multiplying the nominal
cash outflow CU25,000 by 1.1/1.09 general price index = CU25,229.
(c)
Loss in cash purchasing power can be calculated by hypothetically assuming cash is a non-monetary
asset and comparing restated figures with actual monetary figures presented at the end of the
reporting period.
The cash received from partners is restated from 1 December to 31 December by multiplying the
nominal cash inflow CU100,000 by 1.1/1.0 general price index = CU110,000.
The cash received from customers is restated from 20 December to 31 December by multiplying the
nominal cash inflow CU20,000 by 1.1/1.08 general price index = CU20,370.
The cash paid to suppliers is restated from 25 December to 31 December by multiplying the nominal
cash outflow CU25,000 by 1.1/1.09 general price index = CU25,229.

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Consequently, if cash were a non-monetary asset, its balance on 31 December would be CU105,141
(CU110,000 + CU20,370 – CU25,229). However, cash is a monetary asset and actual balance on
31 December is CU95,000. By comparing actual cash balance (CU95,000) with cash balance that
should exist (if it were non-monetary, ie ‘protected’ from losses in purchasing power) of CU105,141,
a loss of CU10,141 in the purchasing power of cash is determined for the period ended 31 December.

Gain or loss on net monetary position

31.13 In a period of inflation, an entity holding an excess of monetary assets over monetary
liabilities loses purchasing power, and an entity with an excess of monetary liabilities over
monetary assets gains purchasing power, to the extent the assets and liabilities are not
linked to a price level. An entity shall include in profit or loss the gain or loss on the net
monetary position. An entity shall offset the adjustment to those assets and liabilities
linked by agreement to changes in prices made in accordance with paragraph 31.7
against the gain or loss on net monetary position.

Notes

Monetary items are subject to the effects of changes in price levels. Under
hyperinflationary accounting, monetary items lose purchasing power because their fair
value does not change with changes in the general price index. Consequently, monetary
assets generate losses because they expose the entity to decreasing purchasing power
(ie reductions in the economic benefit embodied in expected cash inflows arising from
those monetary assets). Conversely, monetary liabilities generate gains for the entity in
real terms.
The net gain or loss arising from exposed monetary items can be calculated directly
through the monetary items using a general price index. Alternatively, it can be
calculated indirectly as the balancing figure that results from restating all non-monetary
and all equity items.

Examples—gain or loss on net monetary position

Ex 21 The facts are the same as in Example 20. However, in this example, on 1 December
20X2 the owners contributed laptops with a value of CU48,000 and the remainder
of the capital, CU52,000, in cash. The owners estimate the useful life of the laptops
at 2 years from 1 December 20X1 and their residual value at nil.
SME A received laptops in exchange for equity issued. Consequently, the unrestated
carrying amount of property, plant and equipment at 1 January 20X2 is CU48,000.
That non-monetary asset is restated by applying the inflation rate for the month ended
31 December 20X2, which was 10 per cent. The restated carrying amount at
31 December 20X2 is CU52,800.

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In December 20X2, because the currency unit (ie CU) lost 10 per cent of its purchasing
power due to hyperinflation, the 31 December 20X2 trial balance is restated as follows:

Nominal (ie before Calculation: Restated Reference:

restatement) CU paragraph
CU of the
IFRS for
SMEs
Capital contributions (100,000) 1.1/1 index × (110,000) 31.10
CU100,000
Income—revenue from services 1.1/1.05 index
rendered (50,000) × CU50,000 (52,381) 31.11
Expenses—in rendering services 30,000 1.1/1.03 index 32,039 31.11
× CU30,000
Expense—loss on net monetary Balancing 5,542 31.13
position figure
Expense—depreciation 2,000 1.1/1 index × 2,200(a) 31.11
CU2,000
Liability—trade creditor (5,000) 1.1/1.1 index × (5,000) 31.6
CU5,000
Asset—trade debtor 30,000 1.1/1.1 index × 30,000 31.6
CU30,000
Asset—PPE: computers 46,000 1.1/1 index × 50,600(b) 31.8(b)
CU46,000
Asset—cash 47,000 1.1/1.1 index × 47,000 31.6
CU47,000
– –
(a)
CU48,000 cost × 1/24 month useful life = CU2,000 depreciation for the month ended 31 December
20X1 before restatement. CU2,000 × 1.1/1 general price index = CU2,200.
(b) (a)
CU48,000 cost less CU2,000 depreciation = CU46,000 carrying amount at 31 December 20X1 before
restatement. CU46,000 × 1.1/1 general price index = CU50,600.

Ex 22 The facts are the same as in Example 21. However, in this example, income tax is
not ignored. SME A is subject to an income tax rate of 10 per cent of its unrestated
accounting profit (ie taxable income = unrestated profit). In other words,
no restatement is allowed for the tax basis of the entity’s assets and liabilities.
Current tax is recognised on the last day of the year and it is paid in full on the first
day of the following year.

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Nominal (ie before Calculation: Restated Reference:

restatement) CU paragraph
CU of the
IFRS for
SMEs
Capital contributions (100,000) 1.1/1 index × (110,000) 31.10
CU100,000
Income—revenue from services 1.1/1.05 index
rendered (50,000) × CU50,000 (52,381) 31.11
Expenses—in rendering services 30,000 1.1/1.03 index 32,039 31.11
× CU30,000
Expense—loss on net monetary Balancing
position - figure 5,542 31.13
Expense—depreciation 2,000 1.1/1 index × 2,200 31.11
CU2,000
Expense—income tax (current) 1,800(a) 1.1/1 index × 1,800(a) 31.11
CU1,800
Expense—income tax (deferred) - - 460(b) 29.15
Liability—trade creditor (5,000) 1.1/1.1 index × (5,000) 31.6
CU5,000
Liability—tax payable (1,800) (a) 1.1/1 index × (1,800)(a) 31.6
CU1,800
Liability—deferred income tax - (460)(b)
Asset—trade debtor 30,000 1.1/1.1 index × 30,000 31.6
CU30,000
Asset—PPE: computers 46,000 1.1/1 index × 50,600 31.8
CU46,000
Asset—cash 47,000 1.1/1.1 index × 47,000 31.6
CU47,000
– –

(a)
CU1,800 = taxable income × 10% = (CU50,000 less CU30,000 less 2,000) × 10%
(b)
CU460 = (restated net assets less tax basis net assets) × 10% = (CU120,800 less CU116,200) × 10%.
Alternatively, in this example because PPE is the only asset restated, the deferred tax balance can be
computed as follows: (CU50,600 less CU46,000) × 10% = CU460 deferred tax liability.

According to Section 29 Income Tax an entity must account for income tax arising from
temporary differences (paragraph 29.3 (d)). A temporary difference arises when there is a
difference between the carrying amounts and tax bases of assets and liabilities and
deferred tax liability must be recognised when the temporary difference is expected to
increase taxable profit in the future.

Because the tax base of the computers is not restated (ie there is no restatement for the
purpose of calculating income tax), future depreciation expense for determining taxable
profit will be lower than accounting depreciation expense . Consequently, future
taxable income will be greater than accounting profit. Therefore the temporary
difference (ie the difference between the carrying amount of the computers of CU50,600
and the tax base of CU46,000 is subject to deferred income tax expense recognition.

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Economies ceasing to be hyperinflationary

31.14 When an economy ceases to be hyperinflationary and an entity discontinues the
preparation and presentation of financial statements prepared in accordance with this
section, it shall treat the amounts expressed in the presentation currency at the end of the
previous reporting period as the basis for the carrying amounts in its subsequent
financial statements.

Example

Ex 23 SME A’s functional currency is that of a country that experienced hyperinflation

from 20X1 to 20X7. Consequently, SME A applied Section 31 when preparing its
financial statements from 20X1 to 20X7.
Statement of financial position at 31 December 20X7 (with comparative amounts
for 20X6)

20X7 20X7 20X6 20X6

Unrestated Unrestated
CU Restated CU CU Restated CU
Property, plant and equipment 20 200 21 220
Investment property 1,000 1,000 450 900
Cash 300 300 100 200
Total assets 1,320 1,500 571 1,320

Share capital 60 600 60 600

Retained earnings 1,260 900 511 720
Total equity 1,320 1,500 571 1,320

Statement of income and retained earnings for the year ended 31 December 20X7
(with comparative amounts for 20X6)

20X7 20X7 20X6 20X6

Unrestated Restated Unrestated Restated
CU CU CU CU
Rental income 200 300 50 150
Fair value—investment property 550 100 225 0
Depreciation expense (1) (20) (1) (20)
Loss on net monetary position - (200) - (100)
Net profit for the year 749 180 274 30
Opening retained earnings 511 720 237 690
Closing retained earnings 1,260 900 511 720

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On 1 January 20X8 hyperinflation ceased. During 20X8, SME A earned

(and received) rental income of CU303 and the fair value of its investment property
at 31 December 20X8 is CU1,005. On 31 December 20X7, the remaining useful life
of SME A’s property, plant and equipment is 10 years (no residual value).
Because, starting 1 January 20X8, the functional currency of SME A is no longer the
currency of a hyperinflationary economy, restated balances of the statement of financial
position at 31 December 20X7 are the basis for the carrying amounts starting 1 January
20X8 and no further restatement is made.

Statement of financial position at 31 December 20X8 (with comparative amounts

for 20X7)

20X8 20X7
CU CU
Property, plant and equipment 180 200
Investment property 1,005 1,000
Cash 603 300

Total assets 1,788 1,500

Share capital 600 600

Retained earnings 1,188 900

Total equity 1,788 1,500

Statement of income and retained earnings for the year ended 31 December 20X8
(with comparative amounts for 20X7)

20X8 20X7
CU CU
Rental income 303 300
Change in fair value of
investment property 5 100
Depreciation expense (20) (20)
Loss on net monetary position - (200)
Profit for the year 288 180
Opening retained earnings 900 720
Closing retained earnings 1,188 900

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Disclosures
31.15 An entity to which this section applies shall disclose the following:
(a) the fact that financial statements and other prior period data have been restated for
changes in the general purchasing power of the functional currency.
(b) the identity and level of the price index at the reporting date and changes during the
current reporting period and the previous reporting period.
(c) amount of gain or loss on monetary items.

Example

Ex 24 An entity whose functional currency is that of a hyperinflationary economy could

satisfy the requirements of paragraph 31.15 as follows:

SME A
Statement of income and retained earnings for the year ended 31 December 20X2

20X2 20X1

CU CU
Revenue from providing services 40,000 –
Loss on the net monetary position on
restating for hyperinflation (110,000) (200,000)
Loss for the year (70,000) (200,000)
–
Opening accumulated deficit (200,000)
Closing accumulated deficit (270,000) (200,000)

SME A
Accounting policies and explanatory notes to the financial statements for the year ended 31
December 20X2 [extract]

2. Basis of preparation and accounting policies [extract]

Measuring unit

Because the primary economic environment in which the entity operates (Country X) is
experiencing hyperinflation, all amounts (including all comparative amounts) in these
financial statements are stated in terms of currency units (CU) as at 31 December 20X2.
Restating for general inflation provides information that is comparable over time.
The general price index published by the government of Country X is used in restating
amounts to CU at 31 December 20X2. The index was 400 at 31 December 20X2; 200 at
31 December 20X1 and 100 at 31 December 20X0. The rate of inflation was constant
(100 per cent per year) in 20X1 and 20X2.
The effect of general inflation on the net monetary position is included as a separate line
item within profit or loss (‘Net loss on net monetary position’) in the statement of
comprehensive income.

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SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS

Applying the requirements of the IFRS for SMEs to transactions and events often requires
judgement. Information about significant judgements and key sources of estimation
uncertainty is therefore useful in assessing the financial position, performance and cash flows
of an entity. Consequently, in accordance with paragraph 8.6, an entity must disclose the
judgements that management has made in the process of applying the entity’s accounting
policies and that have the most significant effect on the amounts recognised in the financial
statements. Furthermore, in accordance with paragraph 8.7, an entity must disclose
information about the key assumptions concerning the future, and other key sources of
estimation uncertainty at the reporting date, that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next financial year.
Other sections of the IFRS for SMEs require disclosure of information about particular
judgements and estimation uncertainties. The restatement of financial statements in
accordance with Section 31 requires the application of particular procedures as well as
judgement. The consistent application of those procedures and judgements from period to
period is more important than the precise accuracy of the resulting amounts included in the
restated financial statements.

Identifying hyperinflation

Determining whether an economy is experiencing hyperinflation requires judgement.

An entity exercises that judgement by considering all available information including, but not
limited to, the possible indicators of hyperinflation listed in paragraph 31.2.

Measuring unit

In restating financial information for the effects of hyperinflation, an entity must adjust for
the change in the general purchasing power of its currency. In most economies there is a
recognised general price index, normally produced by the government, which entities will use.
When a reliable general price index is not available it is necessary for the entity to estimate
general price inflation. That estimate could be made, for example, on the basis of movements
in the exchange rate between the entity’s functional currency and a relatively stable foreign
currency.

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COMPARISON WITH FULL IFRSs

Full IFRSs (see IAS 29 Financial Reporting in Hyperinflationary Economies) and the IFRS for SMEs
(see Section 31 Hyperinflation) issued at 9 July 2009 share the same principles for accounting for
hyperinflationary effects in financial statements. However, the IFRS for SMEs is drafted in
simple language with less guidance on how to apply the principles than is provided in full
IFRSs.

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TEST YOUR KNOWLEDGE

Test your knowledge of the requirements for the accounting for hyperinflation in accordance
with the IFRS for SMEs by answering the questions below.
Once you have completed the test check your answers against those set out below this test.
Assume all amounts are material.

Mark the box next to the most correct statement.

Question 1

An economy is deemed hyperinflationary when:

(a) 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.
(b) 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.
(c) 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
(d) interest rates, wages and prices are linked to a price index.
(e) the cumulative inflation rate over three years is approaching, or exceeds, 100 per cent.
(f) considering all available information including, but not limited to, (a)–(e) above, the
economy is judged to be hyperinflationary.

Question 2

If the functional currency of an entity is that of a hyperinflationary economy, which of the

following items are restated for the effects of general inflation (ie using a general price index)?
(a) Assets and liabilities linked by agreement to changes in prices.
(b) Assets and liabilities carried at fair value (fair value is determined at the end of the
reporting period).
(c) Non-monetary assets and non-monetary liabilities carried at cost (or cost less
depreciation) and all equity items.
(d) Monetary assets and monetary liabilities.

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Question 3

An entity farms beef cattle on farmland that it owns.

The fair value of the entity’s cattle is readily determinable without undue cost or effort.
The farmland secures a mortgage loan advanced to the entity from a local bank.
The entity has two employees, who receive their monthly salaries on the fifth day of the
month following the month in which the service was provided to the entity.
Which of the following items are restated to the measuring unit that is current at the end of
the reporting period?
(a) bank loan.
(b) farmland.
(c) cattle.
(d) salaries payable.

Question 4

An entity was incorporated on 31 December 20X7. It immediately issued equity instruments

in exchange for CU1,000,000 cash. The entity did not enter into any other transactions in
20X7 and 20X8. The functional currency of the entity is the currency of a hyperinflationary
economy. Inflation during 20X8 is 40 per cent.
In its financial statements at 31 December 20X8 the entity must present cash at:
(a) CU1,000,000 at 31 December 20X8 and CU1,000,000 at 31 December 20X7.
(b) CU1,000,000 at 31 December 20X8 and CU1,400,000 at 31 December 20X7.
(c) CU1,400,000 at 31 December 20X8 and CU1,000,000 at 31 December 20X7.
(d) CU1,400,000 at 31 December 20X8 and CU1,400,000 at 31 December 20X7.

Question 5

The facts are the same as Question 4.

The gain or loss on the net monetary position for the year ended 31 December 20X8 is:
(a) CU400,000 loss.
(b) CU400,000 gain.
(c) zero.
(d) It is impossible to measure the amount of the gain or loss with the information
provided.

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Question 6

The facts are the same as in Question 4.

The entity’s retained earnings at 31 December 20X8 is:
(a) CU400,000 deficit.
(b) CU400,000.
(c) zero.
(d) It is impossible to determine retained earnings balances with the information
provided.

Question 7

The facts are the same as in Question 4. However, in this example, the entity received land
(instead of cash) in exchange for the equity instruments issued. The entity classifies the land
as property, plant and equipment.
The gain or loss on the net monetary position for the year ended 31 December 20X8 is:
(a) CU400,000 loss.
(b) CU400,000 gain.
(c) zero.
(d) It is impossible to measure the amount of the gain or loss with the information
provided.

Question 8

In 20X1 an entity recognised revenue of CU250,000 on the first day of each of the twelve
months.
The entity’s functional currency is the currency of a hyperinflationary economy. Inflation is
5 per cent per month.
Revenue for the year ended 31 December 20X1 is:
(a) CU3,000,000.
(b) CU4,178,246.
(c) CU3,150,000.
(d) CU2,857,143.

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Question 9

An entity’s functional currency is the currency of a hyperinflationary economy. The entity’s

financial position at 31 December 20X5 restated in accordance with Section 31 of the IFRS for
SMEs is:
 monetary assets: CU200,000
 land—property, plant and equipment: CU300,000
 monetary liabilities: CU150,000
 equity: CU350,000
The entity’s only transaction in 20X6 involved earning revenue of CU80,000 for a service
provided on 31 December 20X6. The customer settled in cash on 31 December 20X6.
Inflation for the year ended 31 December 20X6 is 80 per cent.
The gain or loss on the entity’s net monetary position to be included in profit for the year
ended 31 December 20X6 is:
(a) gain of CU40,000.
(b) loss of CU40,000.
(c) gain of CU24,000.
(d) gain of CU80,000.

Question 10

The facts are the same as in Question 9.

The entity’s profit for the year ended 31 December 20X6 is:
(a) CU80,000.
(b) CU40,000.
(c) CU144,000.
(d) CU104,000.

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Answers

Q1 (f) see paragraph 31.2.

Q2 (c) see paragraphs 31.8 and 31.10.

Q3 (b) see paragraphs 31.6 and 31.8.

Q4 (b) in accordance with paragraph 31.3, all amounts in the financial statements of an
entity whose functional currency is the currency of a hyperinflationary economy must
be stated in terms of the measuring unit at the end of the reporting period.
Comparative amounts as of 31 December 20X7 must also be presented in the measuring
unit of the latest reporting period (ie at 31 December 20X8). Consequently, the figures
originally presented in the 20X7 statement of financial position must be restated to be
comparable to the latest reporting period (20X8). Because inflation for the year ended
31 December 20X8 is 40 per cent, CU1,000,000 cash balance at 31 December 20X7 must
be restated and increased by 40 per cent to be presented as a comparative amount stated
in measuring the unit that is current at 31 December 20X8 (ie CU1,000,000 × 1.40 =
CU1,400,000).

Q5 (a) because the only event to be accounted for is the effect of inflation (ie there are no
changes in nominal balances on the statement of financial position), the loss on the
entity’s net monetary position can be calculated directly by comparing the actual cash
balance (CU1,000,000 on 31 December 20X8) and the comparative amount in the same
measuring unit (CU1,400,000 on 31 December 20X7 as per Question 4). Because the
entity had no cash inflows or outflows, it is clear that the CU400,000 loss in purchasing
power of its cash took place (due to inflation of 40 per cent) in 20X8. Another way to
calculate the loss on the entity’s net monetary position is by calculating the restatement
of equity balance from 31 December 20X7 (CU1,000,000) to 31 December 20X8 (using the
inflation rate of 40 per cent) and recognising such restatement as follows:

Dr Loss on net monetary position CU400,000

Cr Equity CU400,000
To recognise equity items restatement.

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Q6 (a) the entity had no transactions or events, except for the effects of inflation. The entity
would recognise a loss of CU400,000 on its net monetary position in 20X8 (see Question
5). Consequently, on 31 December 20X8 the entity has an accumulated deficit of
CU400,000 (ie the loss accounted for in its statement of comprehensive income for the
year ended 31 December 20X8).

Q7 (c) the entity has no monetary item exposure during the period. Because both its equity
and land are equal and restated by the same inflation rate there is no gain or loss (ie
there is no loss of purchasing power). The journal entries for the property and equity
restatement (inflation for the reporting period is 40 per cent) are as follows:

Dr Loss on net monetary position CU400,000

Cr Equity CU400,000
To recognise equity items restatement.

Dr Property, plant and equipment CU400,000

Cr Gain on net monetary position CU400,000
To recognise equity items restatement.

Q8 (b) each monthly revenue of nominal CU250,000 has to be restated by the inflation from
the date the revenue was recognised until year-end, according to paragraph 31.11.
In this exercise, for instance, accumulated inflation from January to December (12
months) can be calculated as [((1+5%)^12) – 1] = 0.7959 or 79.59 per cent. Consequently,
the restated amount is calculated by multiplying the nominal revenue amount of
January by (1 + 79.59%). The table below shows accumulated inflation for all months of
year 20X1 considering 5 per cent monthly inflation and the respective restated amounts.

Month Nominal Accumulated Restatement Restated

amount inflation to year-end factor amount
(a) (b) (c) = [1 + (b)] [(c) x (a)]

January 250,000 79.59% 1.7959 448,964

February 250,000 71.03% 1.7103 427,585
March 250,000 62.89% 1.6289 407,224
April 250,000 55.13% 1.5513 387,832
May 250,000 47.75% 1.4775 369,364
June 250,000 40.71% 1.4071 351,775
July 250,000 34.01% 1.3401 335,024
August 250,000 27.63% 1.2763 319,070
September 250,000 21.55% 1.2155 303,877
October 250,000 15.76% 1.1576 289,406
November 250,000 10.25% 1.1025 275,625
December 250,000 5.00% 1.0500 262,500
Total 4,178,246

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Q9 (b) the effects of inflation on the entity’s net monetary position have to be determined,
either through the calculation of gains and losses from monetary items exposed to
changes in the purchasing power of the functional currency due to inflation or through
the restatement of non-monetary and equity items as a double entry through profit and
loss. Using the latter method, land has to be restated for the full year’s inflation rate
because it was recognised in the financial position for the whole period.

The restatement effect on land is 80 per cent over the initial balance of CU300,000 and
the double journal entry to restate land balance is as follows:

Dr Land CU240,000
Cr Gain on net monetary position CU240,000
To recognise land restatement.

Moreover,

Dr Loss on net monetary position CU280,000

Cr Equity CU280,000
To recognise equity restatement.

Net effect of monetary position is therefore a loss of CU40,000 (gain of CU240,000 from
land restatement less a loss of CU280,000 from equity restatement).

Q10 (b) CU80,000 revenue less CU40,000 loss on net monetary position (see Question 9) =
CU40,000 profit for the year.

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APPLY YOUR KNOWLEDGE

Apply your knowledge of the requirements for accounting and reporting in hyperinflationary
economies in accordance with the IFRS for SMEs by solving the case studies below.
Once you have completed the case studies check your answers against those set out below this
test.

Case study 1

SME A’s functional currency is the currency of a hyperinflationary economy.

SME A—Unrestated statement of financial position at 31 December 20X3 (in thousands of
currency units)

20X3 20X2
CU CU
Property, plant and equipment 1,325 1,375
Inventory 536 680
Account receivables 300 210
Cash and cash equivalents 50 60
Total 2,211 2,325
Share capital 400 400
Share premium 100 100
Retained earnings 250 250
Long-term debt 750 770
Accounts payable 711 805
Total 2,211 2,325

Historical general price

index
Property, plant and equipment 125
Share capital 100
Share premium 110

The general price index on 31 December 20X2 and 31 December 20X3 is 625 and 807
respectively.

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Information about the inventories for the year ended 31 December 20X2:
Cost General price index
CU
Raw material Purchased 22 November 100 610
Purchased 19 December 110 621
Work in progress Raw materials 7 October 95 595
Other direct + indirect costs 160 610
Finished goods Raw materials 10 September 95 585
Other direct + indirect costs 120 605

Information about the inventories for the year ended 31 December 20X3:

Cost General price index

CU
Raw material Purchased on 17 November 90 785
Purchased on 18 December 95 800
Work in progress Raw materials purchased on 13
October 80 771
Other direct and indirect costs 130 789
Finished goods Raw materials purchased on 16
September 50 757
Other direct and indirect costs 91 782

PART A: Prepare SME A’s statement of financial position restated to the measuring unit
that is current at 31 December 20X2.

PART B: Prepare SME A’s statement of financial position restated to the measuring unit
that is current at 31 December 20X3, including comparative amounts for 20X2.

Note: in this case study, for simplicity, income tax is ignored.

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Answer to case study 1 Part A

SME A
Statement of financial position at 31 December 20X2 (all amounts restated to CU’000 at 31 December
20X2).

20X2

(1)
Property, plant and equipment 6,875.00

(2)
Inventory 702.36

(3)
Account receivables 210.00

(3)
Cash and cash equivalents 60.00

Total assets 7,847.36

(4)
Share capital 2,500.00

(5)
Share premium 568.18

(6)
Retained earnings 3,204.18

(3)
Long-term debt 770.00

(3)
Accounts payable 805.00

Total equity and liabilities 7,847.36

(1)
(CU1,375 ÷ 125) × 625 = CU6,875.00
(2)

20X2 Cost General Adjustment Restated for

Price Index hyperinflation

Raw material Purchased

22 November 100 610 625/610 102.46

Purchased
19 December 110 621 625/621 110.71

Work in progress Raw materials

7 October 95 595 625/595 99.79

Other direct +
indirect costs 160 610 625/610 163.93

Finished goods Raw materials

10 September 95 585 625/585 101.50

Other direct +
indirect costs 120 605 625/605 123.97

Total 680 702.36

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(3)
Monetary items are not restated because they are already expressed in terms of the measuring unit that is
current at the end of the reporting period.
(4)
(CU400 ÷ 100) × 625 = CU2,500.00
(5)
(CU100 ÷ 110) × 625 = CU568.18
(6)
CU7,847.36 less CU2,500.00 less CU568.18less CU770.00 less CU805.00 = CU3,204.18

PART B

SME A
Statement of financial position at 31 December 20X3 (all amounts and all comparative amounts restated
to CU’000 at 31 December 20X3).

20X3 20X2
(2) (1)
Property, plant and equipment 8,554.20 8,877.00

(3) (1)
Inventory 552.27 906.89

(4) (1)
Account receivable 300.00 271.15

(4) (1)
Cash and cash equivalents 50.00 77.47

Total assets 9,456.47 10,132.51

(5) (1)
Share capital 3,228.00 3,228.00

(6) (1)
Share premium 733.64 733.64

(7) (1)
Retained earnings 4,033.83 4,137.24

(4) (1)
Long-term debt 750.00 994.22

(4) (1)
Accounts payable 711.00 1,039.42

Total equity and liabilities 9,456.47 10,132.51

(1)
All balances of the statement of financial position at 31 December 20X2 must be stated
(for comparative purposes) in terms of the measuring unit as at 31 December 20X3. All comparative
balances in the statement of financial position at 31 December 20X2 (originally presented in terms of the
measuring unit as at 31 December 20X2—see Part A) must be restated to present comparative figures in
terms of the measuring unit at the end of the current reporting period (ie 31 December 20X3) as shown
below:

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20X2 as Adjustment 20X2 at

originally measuring
presented unit at 31
December
20X3

Property, plant and equipment 6,875.00 807/625 8,877.00

Inventory 702.36 807/625 906.89

Account receivable 210.00 807/625 271.15

Cash and cash equivalents 60.00 807/625 77.47

Share capital 2,500.00 807/625 3,228.00
Share premium 568,18 807/625 733.64
Retained earnings 3,204.18 807/625 4,137.24
Long-term debt 770.00 807/625 994.22
Accounts payable 805.00 807/625 1,039.42

(2)
(CU1,325 ÷ 125) × 807 = CU8,554.20
(3)

20X3 Cost General Adjustment Restated for

Price Index hyperinflation

Raw Purchased 17 November 90 785 807/785 92.52

material
Purchased 18 December 95 800 807/800 95.83
Work in Raw materials 13 October 80 771 807/771 83.74
progress
Other direct + indirect costs 130 789 807/789 132.97
Finished Raw materials 16 September 50 757 807/757 53.30
goods
Other direct + indirect costs 91 782 807/782 93.91
Total 536 552.27

(4)
Monetary items are not restated because they are already expressed in terms of the measuring unit that is
current at the end of the reporting period.
(5)
(CU400 ÷ 100) × 807 = CU3,228.00
(6)
(CU100 ÷ 110) × 807 = CU733.64
(7)
CU9,456.47 less CU3,228.00 less CU733.64 less CU750.00 less CU711.00 = CU4,033.83

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Case study 2

SME A’s functional currency is the currency of a hyperinflationary economy. SME A was
incorporated on 31 December 20X1 when it issued shares in exchange for cash and land
(the land is classified as property, plant and equipment).

SME A’s statement of financial position on 31 December 20X1 is as follows:

20X1
CU

Property, plant and equipment—

land 10,000.00

Cash and cash equivalents 5,000.00

Total assets 15,000.00

Share capital 15,000.00

Total equity and liabilities 15,000.00

During 20X2 SME A entered into the following transactions:

Date Description
30 June 20X2 Recognition of revenues of CU1,500 from services rendered during the first
half of the year, due on 31 December 20X2.
30 June 20X2 Payment of expenses of CU1,900 incurred during the first half of the year.
31 December 20X2 Cash receipt of revenues of CU1,500 earned in the first half of the year.
31 December 20X2 Recognition of revenues of CU1,800 from services rendered due on 31 January
20X3.
31 December 20X2 Payment of expenses of CU900 incurred during second half of the year.

Consequently, the unrestated statement of financial position at 31 December 20X2 and its
unrestated statement of income for year ended 31 December 20X2 are as follows:

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SME A—unrestated statement of financial position at 31 December 20X2

20X2
CU

Property, plant and equipment—

land 10,000.00

Trade receivables 1,800.00

Cash and cash equivalents 3,700.00

Total assets 15,500.00

Share capital 15,000.00

Retained earnings 500.00

Total equity and liabilities 15,500.00

SME A—unrestated statement of income for the year ended 31 December 20X2

20X2
CU

Revenue 3,300.00

Expenses (2,800.00)
---------------------
Profit for the year 500.00
=========

The relevant general price index is as follows:

Date General price index

31 December 20X1 1.00
Average first half-year 1.50
30 June 20X2 2.00
Average second half-year 3.00
31 December 20X2 4.00

Prepare the statement of financial position at 31 December 20X2 and the statement of
income for the year ended 31 December 20X2, stated in terms of the measuring unit that
is current at 31 December 20X2.

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Answer to case study 2

SME A—Statement of financial position as at 31 December 20X2 (in currency units)

31 December 20X2 31 December 20X1

Property, plant and equipment—

(1) (2)
land 40,000.00 40,000.00
(3) (1)
Trade receivables 1,800.00 -
(3) (1)
Cash and cash equivalents 3,700.00 20,000.00

Total assets 45,500.00 60,000.00

(4) (1)
Share Capital 60,000.00 60,000.00
(5) (1)
Retained earnings (14,500.00) -

Total equity and liabilities 45,500.00 60,000.00

(1)
(CU10,000 / 1) × 4 = CU40,000.00
(2)
All balances of the statement of financial position at 31 December 20X1 must be stated (for comparative
purposes) in terms of the measuring unit at 31 December 20X2. Accordingly, all comparative balances in
the statement of financial position at 31 December 20X1 (originally presented in terms of the measuring
unit at 31 December 20X1) must be restated to present comparative figures in terms of the measuring unit
at the end of the current reporting period (ie 31 December 20X2) as demonstrated below:

20X1 as Adjustment 20X1 at

originally measuring
presented unit at 31
December
20X2

Property, plant and equipment—land 10,000.00 4.00/1.00 40,000.00

Cash and cash equivalents 5,000.00 4.00/1.00 20,000.00

Share Capital 15,000.00 4.00/1.00 60,000.00

(3)
Monetary items are not restated because they are already expressed in terms of the measuring unit that is
current at the end of the reporting period.
(4)
(CU15,000 / 1) × 4 = CU60,000.00
(5)
CU45,500 less CU60,000.00 = (CU15,000)

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SME A—Statement of income for the year ended 31 December 20X2 (in currency units)

20X2

(1)
Revenue 6,400.00

(2)
Expenses (6,266.67)

(3)
Net loss on monetary position (14,633.33)
-------------------------
Loss for the period (14,500.00)
===========

(1)

Nominal amount Adjustment Restated

amount

Revenue (first half of the year) 1,500.00 4.00/1.50 4,000.00

Revenue (second half of the year) 1,800.00 4.00/3.00 2,400.00

Total 3,300.00 6,400.00

(2)

Nominal amount Adjustment Restated

amount

Expenses (first half of the year) 1,900.00 4.00/1.50 5,066.67

Expenses (second half of the year) 900.00 4.00/3.00 1,200.00

Total 2,800.00 6,266.67

(3)
Net loss can be obtained as a balancing figure as follows:
Net loss on monetary position = Total assets (restated) – Share capital (restated) + Revenues (restated) –
Expenses (restated)
45,500.00 – 60,000.00 - 6,400.00 + 6,266.67 = (14,633.33)
It can also be obtained as the net result of all restatement adjustments (ie arising from restatement of
non-monetary assets, equity and comprehensive income items):

Nominal amount at Restated amount at Net gain

31 December 20X2 31 December 20X2 (loss)

PPE—land 10,000.00 40,000.00 30,000.00

Share capital (15,000.00) (60,000.00) (45,000.00)

Revenues (3,300.00) (6,400.00) (3,100.00)

Expenses 2,800.00 6,266.67 3,466.67

Total (14,633.33)

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