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