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ICAZ CPD
IAS 29 HYPERINFLATIONARY
REPORTING – BY ANESU DAKA
Presenter: Commissioner Anesu Daka CA(SA)(Z)
• Chartered Accountant SA & Zim
• Founder and Group CEO of CAA and TAS
• ICAZ Counselor
• Commissioner of Enquiry into pension and insurance conversion from ZW$ to US$
• Technical Advisor on IFAC PAIB committee
• Lecturer of IFRS for ICAZ and ACCA
• Former IFRS Specialist for EY Central Africa
• Member of ICAZ APC, Insurance & Banking
• Technical Advisor to ICAZ and PAABwww.tas.co.zw
OBJECTIVE OF TODAY’S SESSION
Why IAS 29- Objective of Fin Reporting in Zim Context
Assessment of Zimbabwe as a hyperinflationary environment
Implication of hyperinflation at a macro and microeconomic level
Hyperinflationary reporting
Impact of change in functional currency and other practical challenges
Expected disclosures
Possible audit implications
WHY IAS 29- OBJECTIVE OF FIN REPORTING IN ZIMCONTEXT
PICKING UP FROM WHERE WE LEFT OFF
• 2018/2019 ACCOUNTS ADVERSE OPINION (MOST AFS)
• NON-COMPLIANCE OVER IAS 21 – LEGAL COMPLIANCE PREFERRED (SI33)
• AREAS OF NONCOMPLIANCE
• DATE OF CHANGE
• EXCHANGE RATE ISSUES
• OPENING RTGS BALANCES POTENTIALLY MISSTATED
SUBSEQUENT
Inflation continues unabated
MoF stops publishing
annual inflation
statistics – July 2019
SI142
Convergence in exchange rate (for a
while)
WHAT IS ZIM INFLATION RATE?
WHAT IS THE OBJECTIVE OF FINANCIAL STATEMENTS?
to provide financial information about the reporting entity that is useful in making economic decisions
ARE ZWL$ AFS USEFUL?
QUESTIONS?
IMPLICATION OF HYPERINFLATION AT A MACRO AND MICROECONOMIC
LEVEL
AN ECONOMIC LESSON!!
INFLATION VS HYPERINFLATION
• INFLATION
IN ECONOMICS, INFLATION IS A SUSTAINED INCREASE IN THE GENERAL PRICE LEVEL OF GOODS
AND SERVICES IN AN ECONOMY OVER A PERIOD OF TIME.
• HYPERINFLATION
HYPERINFLATION IS WHEN THE PRICES OF GOODS AND SERVICES RISE MORE THAN 50 PERCENT
A MONTH.
CAUSES OF HYPERINFLATION (SUPPLY SIDE)
CAUSES OF HYPERINFLATION (DEMAND SIDE)
SPECULATIVE TRADING
• EVERY CHASING THE US$!!
IMPACT OF HYPERINFLATION
MACROECONOMIC:
• NEGATIVE:
UNEMPLOYMENT RISES/STAFF TURNOVER/STAFF MORALE/INDUSTRIAL ACTIONS
COST OF LIVING RISES
ECONOMY'S GROWTH RATE TUMBLES
BUSINESSES SUFFER AS IMPORT COSTS RISE
POLITICAL INSTABILITY AS A RESULT OF THE ANGRY PUBLIC
BANK DEPOSITS, SAVINGS AND INVESTMENTS ERODES
HOARDING OF GOODS
• POSITIVE:
EXPORTS INCREASE AND IMPORTS DECREASE IMPROVING THE COUNTRIES CURRENT ACCOUNT
IMPACT OF HYPERINFLATION
MICRO_ECONOMIC:
NEGATIVE:
PRICING?
INVESTMENTS?
OPERATIONS
SALARIES?
POSITIVE:
RECOVERY OF BAD DEBTS?
BUSINESS OPPORTUNITIES- IAS 29 TRAINING
IMPACT OF HYPERINFLATION
Microeconomics
Pressure on future plans
Inability to compare between periods and
competitors
More cost-cutting measures
Pressure from employees to increase
salaries (or USD)
Macroeconomics
Rampant price increases – slowdown
of business
Speculative trading
Hoarding of basic commodities
KEY ISSUE
• HOW ARE ENTITIES IDENTIFYING IMPACT OF HYPERINFLATION?
• HOW ARE ENTITIES HARNESSING THESE?
• SHOULD THESE BE REPORTED? – IAS 29 & IFRS PG 1 – MANAGEMENT COMENTARY
QUESTIONS?
ASSESSMENT OF ZIMBABWE AS A HYPERINFLATIONARY ENVIRONMENT
• 11 OCTOBER 2019 PAAB ISSUED A PRONOUNCEMENT
ON THE APPLICATION OF IAS 29 IN ZIMBABWE
• PRONOUNCEMENT CONFIRMED THAT THE CONDITIONS
FOR THE APPLICATION OF HYPERINFLATION HAD BEEN
MET.
• RECOMMENDED PRESENTATION OF HISTORICAL COST AFS
ALONGSIDE IAS 29 ADJUSTED AFS
• EFFECTIVE 1 JULY 2019
• OTHER JURISDICTIONS – RSA HAD ALREADY PUT ZIM IN
IAS 29
PAAB GUIDANCE
IS ZIMBABWE A HYPERINFLATIONARY ECONOMY?
HYPERINFLATION INDICATORS – IAS 29. PARA 3
1
The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency.;
2
the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency.
3
sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power(d) interest rates, wages and prices are linked to a price index; and
4
the cumulative inflation rate over three years is approaching, or exceeds, 100%.
INTERNATIONAL PRACTICE TASK FORCE (IPTF)
COUNTRIES WITH THREE-YEAR CUMULATIVE INFLATION RATES EXCEEDING 100%:
• ANGOLA
• ARGENTINA
• DEMOCRATIC REPUBLIC OF CONGO
• SOUTH SUDAN
• SUDAN
• VENEZUELA
INTERNATIONAL PRACTICE TASK FORCE (IPTF)COUNTRIES WITH PROJECTED THREE-YEAR CUMULATIVE INFLATION RATES EXCEEDING 100%:
• ISLAMIC REPUBLIC OF IRAN
• YEMEN
• ZIMBABWE
HYPERINFLATIONARY REPORTING
STANDARDS
IAS 29 Financial Reporting in
Hyperinflationary Economies
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial
Reporting in Hyperinflationary
Economies
APPLYING IAS 29
• UNLIKE OTHER IFRSs, WHICH
ALLOW ENTITIES TO EXERCISE
JUDGEMENT BASED ON THE FACTS
AND CIRCUMSTANCES, IAS 29
RECOMMENDS THAT ALL ENTITIES
APPLY THE STANDARD FROM THE
SAME DATE (IAS 29.4).
IFRIC 7
CURRENT COST APPROACH VS HISTORICAL COST
Current cost approach
SFP and P/L figures will reflect costs that are current at reporting date (at fair value as at
reporting date)
Historical cost approach
Financials maintained at historical cost amounts and adjusted using the index
IAS 29 REPORTING : RESTATEMENT – PARA 8
• THE FINANCIAL STATEMENTS WHETHER THEY ARE BASED ON A HISTORICAL COST APPROACH
OR A CURRENT COST APPROACH, SHALL BE STATED IN TERMS OF THE MEASURING UNIT
CURRENT AT THE END OF THE REPORTING PERIOD.
• THE CORRESPONDING FIGURES AND ANY INFORMATION IN RESPECT OF EARLIER PERIODS
SHALL ALSO BE STATED IN TERMS OF THE MEASURING UNIT CURRENT AT THE END OF THE
REPORTING PERIOD.
• THE GAIN OR LOSS ON THE NET MONETARY POSITION SHALL BE INCLUDED IN PROFIT OR
LOSS AND SEPARATELY DISCLOSED.
IAS 29 REPORTING : RESTATEMENT
• SELECTION OF A GENERAL PRICE INDEX AND CALCULATION OF ADJUSTING FACTOR.
• SEGREGATION OF MONETARY AND NON-MONETARY ITEMS.
• RESTATEMENT OF NON-MONETARY ITEMS (EXCLUDING SHAREHOLDERS’ EQUITY).
• RESTATEMENT OF SHAREHOLDERS’ EQUITY.
• RESTATEMENT OF COMPREHENSIVE INCOME.
• CALCULATION AND PROOF OF THE MONETARY GAIN OR LOSS.
• COMPARATIVES.
• GROUP REPORTING.
• ECONOMY BECOMES HYPER-INFLATIONARY IN AN INTERIM PERIOD.
• OTHER CONSIDERATIONS.
SELECTION OF A GENERAL PRICE INDEX
• THE RESTATEMENT OF FINANCIAL STATEMENTS IN ACCORDANCE WITH THIS STANDARD
REQUIRES THE USE OF A GENERAL PRICE INDEX THAT REFLECTS CHANGES IN GENERAL
PURCHASING POWER.
• IT IS PREFERABLE THAT ALL ENTITIES THAT REPORT IN THE CURRENCY OF THE SAME ECONOMY
USE THE SAME INDEX.
• CONVERSION FACTORS
CONSIDERING WHICH INDEX TO USE
IAS 29 recommends that entities in the same
hyperinflationary environment use the same general price
index for adjustment – however, this is just a recommendation
and not prescribed
Entities would need to make an assessment of the index which they will adjust their financial
statements by.
DETERMINATION OF INDICES TO USE – INFLATION-BASED INDEX (CPI)
Pros Cons
DETERMINATION OF INDICES TO USE – EXCHANGE RATE-BASED INDEX
Pros Cons
Practitioners wary of using exchange rate as an index
Not commonly used in normal cases
Prices in Zimbabwe mainly moving in
line with the exchange rate
Data available on a day to day basis
CALCULATION OF ADJUSTING FACTORIFRIC 7 – ILLUSTRATIVE EXAMPLE
RESTATING MONETARY AND NON-MONETARY
ITEMS WHAT ARE MONETARY ASSETS AND LIABILITIES
WHAT ARE NON-MONETARY ASSETS AND LIABILITIES
MONETARY VS NON-MONETARY?– EXAMPLE
AFS line item Monetary Non-monetary
Property, plant and equipment
Intangible assets
Cash at bank
Accounts receivable
Investment in money market
instruments
Investment in associate
Share capital
Non-controlling interest
Accounts payable
IAS 21 PAR 16 –MONETARY VS NON-MONETARY ITEM
SEGREGATION OF MONETARY AND NON-MONETARY ITEMS
Non-monetary assets and liabilities are restated in terms of the measuring unit current at the end of the reporting period.
An entity should use the increase in the general price index from the transaction date when they were first recognised to the end of the reporting period.
No restatement is required for non-monetary assets and liabilities carried at amounts current at the end of the reporting period, such as net realisable value or fair value.
RESTATEMENT OF SHAREHOLDERS EQUITY
Restate at the beginning of the year using indices excluding Retained earning and
Revaluation
Revaluation surplus is eliminated, and balancing figure is retained earnings
PPE RESTATEMENT CHALLENGES
Detailed records of the acquisition dates of items of
property, plant and equipment may not be available or capable
of estimation.
In these rare circumstances, it may be necessary, in the first period of application of this Standard,
to use an independent professional assessment of the
value of the items as the basis for their restatement.
GENERAL PRICE INDEX ABSENCE
A general price index may not be available for the periods for which the restatement of property, plant and equipment is required by this Standard.
In these circumstances, 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.
ASSETS AT CURRENT VALUES –FAIR VALUE In these cases, the carrying amounts are restated from the
date of the revaluation.
Some non-monetary items are carried at amounts current at dates other than that of acquisition or that of the statement
of financial position, for example property, plant and equipment that has been revalued at some earlier date.
DEFERRED TAX
• THE ENTITY REMEASURES THE DEFERRED TAX ITEMS IN ACCORDANCE WITH IAS 12 AFTER IT HAS
RESTATED THE NOMINAL CARRYING AMOUNTS OF ITS NON-MONETARY ITEMS AT THE DATE OF
THE OPENING STATEMENT OF FINANCIAL POSITION OF THE REPORTING PERIOD BY APPLYING
THE MEASURING UNIT AT THAT DATE.
• THE DEFERRED TAX ITEMS REMEASURED ARE RESTATED FOR THE CHANGE IN THE MEASURING
UNIT FROM THE DATE OF THE OPENING STATEMENT OF FINANCIAL POSITION OF THE
REPORTING PERIOD TO THE END OF THAT REPORTING PERIOD.
RESTATEMENT OF COMPREHENSIVE INCOME
All items in comprehensive income for the current year are restated by applying the change in the index from the dates when the items of income and expense were originally recorded.
Current year restated net income is added to the balance of the restated opening retained earnings.
Income statement items, such as interest income and expense are adjusted for inflation and, along with the monetary gain or loss, presented as separate line items in the income statement.
STATEMENT OF CASH FLOWS
No guidance on cash flows in IAS 29
Using the restated figures, the statement of cash flows shall be compiled in the same manner as if there was no restatement.
Net monetary gain or loss should be included in net profit before tax but should be adjusted for in the operating activities as a non-cash item.
Monetary gain or loss is presented as a separate line item in the statement of cash flows
AREAS OF CONSIDERATION
DEFERRED TAXES (BOTH IN P/L AND SFP)
CURRENT TAX EXCHANGE GAINS AND LOSSES
DATE OF CHANGE IN FUNCTIONAL CURRENCY
WILL AFFECT REMEASUREMENT
COMPARATIVES
The prior year comparatives, for both monetary and non-monetary items, are restated in terms of the measuring unit
current at the end of the latest reporting period. If prior year financial statements have already been prepared to conform to IAS 29, the current year change in the
general price index is applied to the prior year financial statements.
IAS 1 requires entities to present an additional balance sheet as at the beginning of the preceding period
where the entity applies a change in accounting policy retrospectively, makes a retrospective restatement of items, or
reclassifies items in its financial statements.
The initial application of IAS 29, however, does not fall within those
categories, but it is rather a change in circumstances and therefore no
additional balance sheet is required.
INTERIM REPORTING CONSIDERATIONS
• IAS 34, ‘INTERIM FINANCIAL REPORTING’, REQUIRES AN ENTITY THAT REPORTS INTERIM
FINANCIAL INFORMATION TO PRESENT THE STATEMENT OF COMPREHENSIVE INCOME FOR THE
CURRENT INTERIM PERIOD AND THE CURRENT YEAR-TO-DATE, TOGETHER WITH COMPARATIVE
INFORMATION FOR THE EQUIVALENT PERIODS IN THE PREVIOUS YEAR.
• IAS 29 SHOULD BE APPLIED AS IF THE ECONOMY HAD ALWAYS BEEN HYPER-INFLATIONARY.
THEREFORE FOR EXAMPLE, FOR THE SIX MONTHS TO HALF YEAR THE ENTITY SHOULD RESTATE
ALL THE ITEMS IN COMPREHENSIVE INCOME IN 2019 FROM THE DATES WHEN THOSE ITEMS OF
INCOME AND EXPENSE WERE ORIGINALLY RECORDED.
QUESTIONS?
IMPACT OF CHANGE IN FUNCTIONAL CURRENCY AND OTHER PRACTICAL CHALLENGES
REFLECTIONS ON PRE-DOLLARIZATION HYPER-INFLATION- 2008 STORY
• INITIALLY SUPPRESSED NUMBERS FOR INFLATION BY GOVERNMENT
• ZIMSTATS THEN STOPPED PUBLISHING INFLATION STATISTICS DUE TO NON-AVAILABILITY OF
PRICE INFORMATION
• IAS 29 ACCOUNTS STILL DID NOT PROVIDE ADEQUATE INFORMATION FOR DECISION MAKING
• SOME ENTITIES OPTED AN IAS 29 QUALIFICATION
• IN 2010, ENTITIES HAD TO APPLY IFRS 1
IMPACT OF CHANGE IN FUNCTIONAL CURRENCY ON IAS 29
CHALLENGES WITH HYPERINFLATIONARY REPORTING
Extracting information –dates of
acquisition/transaction may not be available
Indices for dates of acquisition may not be
available
Discerning between monetary and non-
monetary
QUESTIONS?
EXPECTED HYPEINFLATIONARY DISCLOSURES
DISCLOSURES
ZIMBABWEAN ENTITIES APPLYING IAS 29 SHALL DISCLOSE THE FOLLOWING:
• THE FACT THAT THE FINANCIAL STATEMENTS AND THE CORRESPONDING FIGURES FOR PREVIOUS PERIODS HAVE BEEN
RESTATED FOR THE CHANGES IN THE GENERAL PURCHASING POWER OF THE FUNCTIONAL CURRENCY AND, AS A
RESULT, ARE STATED IN TERMS OF THE MEASURING UNIT CURRENT AT THE END OF THE REPORTING PERIOD;
• WHETHER THE FINANCIAL STATEMENTS ARE BASED ON A HISTORICAL COST APPROACH OR A CURRENT COST
APPROACH;
• THE IDENTITY AND LEVEL OF THE PRICE INDEX AT THE END OF THE REPORTING PERIOD AND THE MOVEMENT IN THE
INDEX DURING THE CURRENT AND THE PREVIOUS PERIOD; AND
• AREAS OF SIGNIFICANT ESTIMATES AND JUDGMENTS WHICH INCLUDE THE DETERMINATION OF THE ADJUSTING
FACTORS UTILISED AND THE ASSESSMENT OF ZIMBABWE AS A HYPERINFLATIONARY ECONOMY.
PRESENTATION
Anesu Daka CA (SA) Chartered Accountants Academy
QUESTIONS?
POSSIBLE AUDIT CONSIDERATIONS
AUDIT IMPLICATIONS
• KNOWLEDGE GAP – SOME TEAM MEMBERS MAY NOT HAVE APPLIED IAS 29 BEFORE
• HIGH RISK AREAS:
• INDICES CHOSEN FOR ADJUSTMENT
• CLASSIFICATION OF BALANCE SHEET ITEMS BETWEEN MONETARY AND NON-MONETARY
• FOLLOWING THROUGH ON CLIENT CALCULATIONS
• ACCURACY OF DATA AND INPUTS INTO RESTATEMENTS