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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://frs102.com/members/premium-toolkit/section-31/” type=”big” color=”red”] Return to Section 31 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Section 31- Hyperinflation
Section 31 provides the rules to be applied where an entity’s 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.
Hyperinflationary economy
Extract from FRS102: Section 31.2 – 31.14
31.2 This section does not establish an absolute rate at which an economy is deemed hyperinflationary. An entity shall make that judgement 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.
(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.
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.
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.
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.
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. 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.
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.
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.
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.
OmniPro comment
Section 31.2 does not provide a definitive definition of what constitutes hyper-inflation however it does provide five indicators as per above with the most important being the fact that where the cumulative inflation rate over the year is approaching or exceeding 100%, this is indicative of a hyper-inflationary economy.
Examples of monetary items as referred to in S.31.6 would include:
- bank and cash on hand
- marketable investments
- trade receivables and other debtors
- trade payables and other payables
- accrued expenses
- corporation taxes
- borrowings and other payables
- warranty provisions where a cash refund is provided
Examples of non-monetary items as referred to in S.31.8 would include:
- Property, plant and equipment
- Intangible assets
- Investments in associates, subsidiaries and joint ventures
- Inventories
- Equity instruments
- advances paid on purchases (if linked to specific purchases)
- advances received on sales (if linked to specific sales)
- deferred income
- warranty provisions where a cash refund is not provided (i.e. where a repair or replacement is provided).
OmniPro comment
Once hyper-inflation has been identified, the steps involved in restating the results so as to show the measuring unit current at the end of the reporting period are (note these are applicable for the comparative year also):
- select a general price index
- segregate monetary and non-monetary assets/liabilities
- restate non-monetary items excluding shareholders equity
- restate shareholders’ equity
- restate comprehensive income
- restate the cash flow statement
- calculate the gain or loss on net monetary position
General price index
The price index used should be the general price index in that country.
Retranslation of non-monetary assets of statement of financial position
Monetary assets/liabilities do not need to be restated as the amount stated is the amount that needs to be paid or the amount that will be received at the period end. Therefore, only non-monetary assets need to be restated to current purchasing prices.
Note where revaluations have been performed, the conversion factor to use will be the movement in the general price index between the date of the revaluation and the reporting date.
Where inventory is stated at net realisable value, no restatement is required as it is already stated in the measuring unit current at the reporting date.
Example 1: Conversion non-monetary items balance sheet
Company A purchased a piece of equipment in September 2014 for FC10,000. The year end is now the 31 December 2015. The general price index in that country and the conversion factors are as follows:
|
Year Ended |
General Price Index |
Conversion Factor |
|
31 December 2014 |
25 |
5.2 (130/25) |
|
31 December 2015 |
130 |
1(130/130) |
In this case the restated property plant and equipment is FC52,000 (FC10,000*5.2). The difference of FC42,000 is posted to the profit and loss account/retained earnings.
Shareholders equity
Shareholders equity is determined by applying the change in general price index from the prior year or the date of funds invested to the year end date. On initial application of Section 31, the shareholders equity should be restated using the conversion rate from the date of application to the year end reporting date. From then on the conversion factor from the prior year is utilised.
Retained earnings
The amount shown in retained earnings is the balancing figures i.e. the amount to be posted after all non-monetary assets have been restated.
Restatement of income statement
For the income statement, all income and expenses are recorded in the financial statements in terms of the measuring unit at the end of the reporting period. Therefore, changes in the general price index between the time of recognition of the income/expense in the financial statements and the period end date should be applied. Where inflation movement is material throughout the year, the conversion should be based on the monthly amounts reconverted to the year end rate.
Example 2: Conversion income statement
Company A had sales of FC10,000 during February and FC10,000 sales in November 2015. No other sales were made in the year. The conversion factors are as per below and the year end general price index is 140:
|
Month |
General Price index |
Conversion Factor |
|
February 2015 |
25 |
5.6 (140/25) |
|
November 2015 |
130 |
1.076 (140/130) |
From the above the amount to be shown in revenue in the financial statements for the year is:
|
February Sales = FC10,000*5.6= |
FC56,000 |
|
November Sales= FC10,000*1.076= |
FC10,760 |
|
Total Revenue |
FC66,760 |
Cash flows
For the cash flow statement, all receipts and payments are recorded in the financial statements in terms of the measuring unit at the end of the reporting period.
See illustration of the above points in the example below:
Procedures required to calculate the net monetary gain/loss as required by Section 31.13
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.
3) Arrive at the monetary position at the end of the period by adding/subtracting the changes.
4) Calculate the net monetary position at the beginning of the period, 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.
5) Inflate the changes in the monetary position.
6) Determine the net monetary position restated at the period end as if inflation had effected the monetary assets and liabilities.
7) Compare the actual net monetary position at the end of the period included in the historical cost column with the net monetary position at the end of the period in the ‘restated’ column. The difference between the actual position and restated monetary position is the estimate of the monetary gain or loss.
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