General

One of the objectives of IAS 29 is to account for the financial gain or loss that arises from holding monetary assets or liabilities during a reporting period (the monetary gain or loss).

All monetary assets and liabilities (net monetary position) held during the year are represented in the financial statements, either by non-monetary assets and liabilities recognised on the balance sheet, or by transactions recorded in comprehensive income or directly in equity.

The monetary gain or loss can be calculated as the difference between the historical cost amounts and the result from the restatement of non-monetary items, shareholders’ equity, items in the statement of comprehensive income and the adjustment of index-linked items to year-end purchasing power.

The monetary gain or loss is reported in the restated statement of comprehensive income, and it is separately disclosed.

It is possible to calculate the gain or loss on the entity’s daily net monetary position. The costs of such a calculation, however, are likely to be onerous. The monetary gain or loss can be estimated by applying the change in a general price index to the weighted average for the period of the difference between monetary assets and monetary liabilities.

This approach can be used to assess the reasonableness of the monetary gain or loss derived by restating the non-monetary assets and liabilities.

Monetary gains and losses: calculation and proof The calculation and proof of the monetary gain or loss that arises on the carrying amounts of monetary assets and liabilities is an important element of applying IAS 29. Restatement in accordance with IAS 29 requires the application of certain procedures and judgement. It is therefore necessary to verify that the results are reasonable; the proof might reveal restatement errors. The monetary gain or loss can be estimated by applying the change in a general price index to the weighted average, for the period, of the difference between monetary assets and monetary liabilities. The weighted average of the opening monetary position and the monetary position at year end can be used for the purpose of this calculation. This approach can be used to assess the reasonableness of the monetary gain or loss derived by restating the non-monetary assets and liabilities. It is possible, however, for a difference to arise between the monetary gain or loss in the income statement and the estimate, as calculated by the proof, if the monetary position has not been relatively constant throughout the year. A more accurate proof of the monetary gain or loss can be obtained by using the quarterly or monthly weighted average monetary position if the monetary position is changing significantly, or inflation rates fluctuated throughout the year.

Proof: statement of sources and application of net monetary assets and liabilities method A statement of sources and application of net monetary assets or liabilities is often prepared as an alternative proof of the net monetary gain or loss. The items that cause changes in the monetary assets or liabilities are analysed, and the net balance of the monetary assets or liabilities is initially determined as if there were no changes and is then adjusted for current year movements. Restatements are performed, and the comparison with the actual net balance and movements of net monetary assets or liabilities enables the monetary gain or loss to be approximated. Opening position currency units Inflation adjustment Closing position currency units at the end of the reporting period C C C Conversion factor 1.649 for the year Balance sheet: – cash 10,000 – 10,000 – share capital 10,000 6,490 16,490 – retained earnings – (6,490) (6,490) Income statement: – monetary loss (6,490) (6,490) Monetary loss proof: Average monetary position for the year (C10,000 + C10,000) / 2 C10,000 Change in inflation factor (1.649 − 1.000) 0.649 Monetary loss estimated for the year C6,490

Procedures needed to prepare the statement of sources and application of net monetary assets and liabilities The procedures needed to prepare a statement of sources and application of net monetary assets and liabilities are as follows: Historical column 1. Calculate the net monetary position at the beginning of the period under restatement. 2. Identify all items that caused changes in the monetary position during the period. These should be the actual or un-inflated changes in the monetary position. These items can be obtained from the historical cost income statement or cash flow statement. 3. Determine the monetary position at the end of the period, by adding or subtracting the changes as identified. Check that the monetary position, as calculated, is equal to the actual monetary position at the end of the period. Restated column 1. Calculate the net monetary position at the beginning of the period as in step 1 above, but restate it for inflation for the entire period. The inflation adjustment restates the opening monetary position as if there was no monetary gain or loss – that is, by adjusting the opening monetary position as if the opening monetary assets and liabilities were not eroded as a result of inflation. 2. Inflate the changes in the monetary position (step 2 above). Adjusting the changes in monetary position for inflation restates the monetary changes as if the monetary assets and liabilities obtained or disposed of during the period were not eroded as a result of inflation. These items can be obtained from the inflation-adjusted income statement and/or cash flow statement. 3. Determine the net monetary position restated at the period end as if inflation had not affected the monetary assets and liabilities. Note that the real monetary position does not change as a result of the inflation adjustment. Proof 1. Compare the actual net monetary position at the end of the period included in the ‘historical’ column with the restated net monetary position at the end of the period in the ‘restated’ column. The difference between the actual position and the restated monetary position is the estimate of the monetary gain or loss. This estimate is compared to the actual gain or loss in the income statement. The proof of the monetary gain or loss might be more challenging if indexation differences on those monetary items that are linked to the inflation index were offset with the monetary gain or loss in the income statement, as required by IAS 29. Such components of the monetary gain or loss, as well as the IFRIC 7 inflation gains or losses on the tax bases of assets and liabilities, should be analysed separately.

Detailed calculation of monetary gains and losses The following example illustrates the preparation of a statement of sources and application of net monetary assets and liabilities. The inflation factor is 1.650. The profit and loss transactions, except for depreciation, occurred evenly throughout the period (and the average inflation factor of the period applied to those transactions is 1.3). Tax effects are not included for simplicity. Opening position Closing position Inflation adjustments Closing position at period end purchasing power Balance sheet: – cash 100 100 – 100 – trade receivables – 200 – 200 – property, plant and equipment 100 80 521 132 200 380 52 432 – trade payables – 100 – 100 – share capital 200 200 130 330 – current profit – 80 (78) 2 200 380 -52 432 1The inflation adjustment only considers the impact of applying the inflation factor of the year, as it is applied to the restated opening balance. Closing position Inflation adjustments Closing position at period end purchasing power Income statement – credit sales 200 60 260 – cost of service (100) (30) (130) – depreciation (20) (13) (33) – monetary loss * – (95) (95) – profit 80 (78) 2 * Monetary loss is calculated as follows: Monetary loss from sales 60 Monetary gain from cost of services (30) Restatement of property, plant and equipment2 (65) Restatement of share capital 130 95 2Considers the restatement of the opening balance of the non-monetary assets ((C100 x 1.650) – C100). Movements in property, plant and equipment due to depreciation are non-cash movements, and therefore the monetary gain / loss on the depreciation charge and on the accumulated depreciation offset. Monetary loss proof – statement of sources and application of net monetary assets and liabilities: Historical Restated C C Net monetary asset at the beginning of the period 100 165 Add movement in receivables 200 260 Deduct movement in payables (100) (130) Net monetary position at the end of the period 200 Net restated monetary position at the end of the period 295 The monetary loss is C95 (C200 − C295).

Calculation of monetary gain or loss on tax base A loss on the tax base is a monetary loss. An example showing how the loss is calculated is given below. An entity acquired equipment for C1,000 at 1 January 20X6. The equipment is depreciated in a straight line over 10 years for IFRS and tax purposes. Inflation for the year was 80% and the tax rate is 30%. The IFRS carrying amount of the equipment is C1,620 (C1,000 × 1.8 less 10% depreciation) at 10 December 20X6. The tax base of the equipment is C900 at 10 December 20X6. The entity should therefore recognise a deferred tax liability of C216, being 30% × (C1,620 − C900). This deferred tax liability arose as a result of the following: C Monetary loss on the tax base of the asset: (C1,000 × 80%) multiplied by the tax rate of 30% 240 Difference between tax depreciation of C100 and IFRS depreciation of C180 (10% of the restated cost of C1,800) multiplied by the tax rate of 30% (24) Deferred tax liability 216

IFRIC 7 identifies inflation gains and losses on the tax bases of assets and liabilities as a separate component on the determination of the monetary gain or loss.

Statement of cash flows

All items in the statement of cash flows are expressed in a measuring unit current at the balance sheet date; they are therefore restated by applying the relevant conversion factors from the date on which the transaction occurred. There is no detailed guidance for this area in IAS 29. An entity should therefore consider the objectives of IAS 29 and IAS 7 to appropriately present and disclose the effects of inflation on cash and cash equivalents.

Statement of cash flows The preparation of a statement of cash flows under IAS 29 presents some challenges. All activity is presented in current purchasing power, but readers of the financial statements should also be able to follow cash flows between the restated balance sheets and income statements. Most entities use the indirect method permitted by IAS 7. There are two specific features of the cash flow statement to be considered: net income before tax is adjusted for the monetary gain or loss for the period; and the monetary loss on cash and cash equivalents may be presented separately.

Statement of cash flows: impact on financing activities The following example illustrates how the monetary gain affects financing activities in the statement of cash flows. The historical and price level adjusted movements in borrowing are set out below. Inflation in the year is 100%; average inflation for the year is 41%; assume that movements occur rateably over the year: Balance 20X7 Drawdown Repaid Monetary gain Balance 20X8 Historical movements (C) 1,000 500 (700) 800 Conversion factor 2.0 1.41 1.41 1.0 Price level adjusted (C) 2,000 705 (987) (918) 800 The cash flow from financing activities should include a drawdown of C705 and a repayment of C987. The monetary gain of C918 is recorded in the income statement, and it is eliminated from the cash flow statement as a non-cash item. This should be explained as part of the disclosure requirements in IAS 7 on changes in liabilities that arise from financing activities.

Group reporting

A parent with functional currency of a hyper-inflationary economy

A parent that reports in the currency of a hyper-inflationary economy might have subsidiaries that also report in the currencies of hyper-inflationary economies. The financial statements of such subsidiaries are restated by applying a general price index of the country in whose currency it reports before they are included in the consolidated financial statements issued by the parent.

The restated financial statements of foreign subsidiaries are translated at closing rates. The financial statements of subsidiaries that do not report in the currencies of hyperinflationary economies are dealt with initially in accordance with IAS 21.

Parent in a hyper-inflationary economy: exchange rate for a subsidiary Question What exchange rates are used when consolidating a foreign subsidiary of a group that presents its consolidated financial statements in a hyper-inflationary currency? Answer A foreign subsidiary that operates in an economy that is not experiencing hyper-inflation, and whose functional currency therefore is not the currency of a hyper-inflationary economy, should translate the income statement into a hyper-inflationary presentation currency using the exchange rates at the transaction date. In practice, monthly or weekly average exchange rates can be used as an approximation. We believe it is acceptable, but not required, for items included in comprehensive income that are first translated in accordance with IAS 21 then to be restated in accordance with IAS 29 from the transaction date. The balance sheet is translated into the hyper-inflationary currency using the closing rate method. The investor’s share of net assets in the subsidiary at the beginning of the year is adjusted for current year inflation. The difference between the parent’s share of the closing net assets and the opening balance and earnings for the period, is recognised in other comprehensive income as a translation adjustment.

Parent in a hyper-inflationary economy: exchange rate for an associate Question What exchange rates are used when accounting for a foreign associate of an entity presenting its financial statements in a hyper-inflationary currency? Answer The investor’s share of the results of operations of an associate with a stable functional currency is translated into the group’s hyper-inflationary presentation currency at the dates on which the earnings were accrued. We believe it is acceptable, but not required, for the earnings translated in accordance with IAS 21 then to be restated to year-end purchasing power in the consolidated financial statements from the date of translation. The opening investment balance, accounted for using the equity method at the opening exchange rates, is adjusted for inflation to year-end purchasing power. The investee’s balance sheet is translated into the group’s presentation currency at year end rates. This forms the basis for the carrying value of the investment. The difference between the carrying value and the opening balance plus earnings for the period, is recognised in other comprehensive income as a translation adjustment.

An investee that is accounted for using the equity method in the consolidated financial statements might report in the currency of a hyper-inflationary economy. The statement of financial position and statement of comprehensive income of such an investee are restated in accordance with IAS 29 in order to calculate the investor’s share of its net assets and profit or loss. The restated financial statements of the investee are translated at closing rates if they are expressed in a foreign currency.

A parent might consolidate subsidiaries that report in the currency of a hyper-inflationary economy and whose reporting periods end on different dates from the parent’s reporting period end.

In this case, all items in the subsidiaries’ financial statements, whether non-monetary or monetary, are restated into the measuring unit current at the period-end date of the parent’s consolidated financial statements.

A subsidiary, associate or joint arrangement with functional currency of a hyper-inflationary economy

A foreign subsidiary, associate or joint arrangement operating in a hyper-inflationary economy might be required, for group purposes, to report to its overseas parent in a stable currency, usually the group’s presentation currency. IAS 21 requires the financial statements of a subsidiary entity that has the functional currency of a hyper-inflationary economy to be restated in accordance with IAS 29 before being included in the consolidated financial statements.

Hyperinflation accounting is applied to all of the subsidiary’s assets and liabilities before translation. This might include any goodwill and fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of a foreign operation.

All amounts in the subsidiary’s financial statements are then translated at the closing rate. Comparative amounts presented previously in a stable currency are not restated.

Restatement of goodwill Goodwill is a non-monetary item. The carrying value of goodwill, and any related impairment, is restated on the balance sheet date using a general price index. There is no explicit guidance on how to account for the credit resulting from an uplift to goodwill, because it is outside the subsidiary’s local accounts. We consider that it is acceptable to recognise the impact in equity instead of the income statement (monetary gain or loss). This is based on the argument that, if the goodwill was pushed down to the subsidiary’s financial statements, the credit would go to equity. The non-monetary gain or loss would be offset by the uplift of goodwill and the corresponding equity item. Also, it does not contribute to any changes in the subsidiary’s monetary position.

Investments in associates and subsidiaries in separate financial statements

IAS 27 requires investments in subsidiaries and associates that are not classified as held for sale under IFRS 5 to be generally held either at cost, using the equity method or in accordance with IFRS 9 (IAS 39). Investments that are held at fair value in accordance with IFRS 9 (IAS 39) would not be restated in the separate financial statements.

Investments in subsidiaries and associates that are held at cost in an entity’s separate financial statements are restated. Investments accounted for using the equity method would follow the same treatment of associates and subsidiaries in consolidated financial statements.