CHAPTER

BLUE NOTES
54 S
L
Hyperinflation
Inflation growing at a very high rate in a very short time.
Characteristics that indicates hyperinflation include but are not limited to the following:
 The general population prefers to keep its wealth in nonmonetary assets or in relatively stable foreign
currency.
 The general population regards nonmonetary amounts not in terms of local currency but in terms of a
relatively stable foreign currency.
 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.
 Interest rates, wages and prices are linked to a price index.
 The cumulative rate over 3 years is approaching or exceeds 100%

Definition of terms
 Purchasing power – the goods and services that money can buy.
 General Price change – increase or decrease in the overall level of prices of goods or services throughout the
economy. Measured using general price index.
 Inflation – increase in the general price. Purchasing power of money has decreased.
 Deflation – decrease in the general price. Purchasing power of money has increased.
 General Price index – is a tool showing how much overall level of prices in the economy has changed over time.
 Specific Price change – increase or decrease in the price of a specific good or service. It occurs primarily
because of change in supply and demand for a particular good or service.
 Constant peso accounting (otherwise known as purchasing power or price level accounting) – is the
restatement of conventional or historical financial statements in terms of the current purchasing power of the
peso through the use of index number.
 Nominal peso accounting – the traditional concept of preparing financial statements based on historical cost.
 Monetary items – money held and assets and liabilities to be received or paid in fixed or determinable amount
of money. Its essential feature is the right to receive or an obligation to deliver a fixed or determinable amount
of money. Monetary assets and liabilities remain the same regardless of the change in the general price level.
 Nonmonetary items – items in which their peso amounts reported in the financial statement differ from the
amounts that are ultimately realizable or payable. Its essential feature is the absence of the right to receive or
an obligation to deliver a fixed or determinable amount of money.

List of statement of financial position items with their proper classification as monetary or nonmonetary
Monetary Nonmonetary
Cash X
Financial assets held for trading X

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Financial assets at fair value through other comprehensive income X

Financial assets at amortized cost X
Accounts and notes receivable X
Allowance for doubtful accounts and notes X
Inventories X
Advances to employees X
Prepaid insurance, taxes, advertising, rent X
Prepaid interest X
Receivable under finance lease X
Long term receivables X
Special deposits which are recoverable X
Pension, sinking and other fund:
Consisting of financial assets at fair value X
Consisting of bonds at amortized cost X
Property, plant, and equipment X
Accumulated depreciation
Cash surrender value X
Advances to suppliers X
Discount on bonds payable X
Intangible assets X
Goodwill X
Accounts and notes payable X
Accrued expenses X
Cash dividend payable X
Liability for refundable deposits X
Advances from customers X
Accrued losses on firm purchase commitments X
Bonds payable X
Obligations under finance lease X
Pension benefits to be paid in cash X
Provisions that are to be settled in cash X
Deferred revenue X
Noncontrolling interest X
Preference share capital X
Ordinary share capital X
Share premium X
Retained earnings –residual and should not be classified as either
monetary or nonmonetary.
Gain or Loss on Purchasing Power
Inflation Deflation
Monetary assets Purchasing power loss Purchasing power gain
Monetary liabilities Purchasing power gain Purchasing power loss

Financial Reporting in Hyperinflationary Economy

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Chapter 54 – Hyperinflation USL Blue Notes 197

 PAS 29, paragraph 8, states that the financial statements of an entity that reports in the currency of a
hyperinflationary economy, whether they are based on historical cost approach or a current cost approach,
shall be stated in terms of the measuring unit current at the end of reporting period.
 The restatement of financial statements is accomplished by means of constant peso accounting and current
cost accounting.
 Monetary items are not restated because they are automatically stated in terms of current purchasing power
of the peso. Only nonmonetary items are restated in preparing constant peso financial statements.
 Formula for restatement:
Index number at end of reporting period X Historical cost
Index number on acquisition date
 Procedures for restatement:
1. The restatement is made by applying a general price index.
2. The items in the financial statements are classified into monetary and nonmonetary.
3. Monetary items are not restated because these are already expressed in terms of the monetary unit
current at the end of reporting period.
4. Nonmonetary items are restated by applying the general price index from the date of acquisition to
the end of reporting period. Some nonmonetary items are carried at amount current at the end of
reporting period, such as net realizable value and fair value. Thus, inventory carried a net realizable
value and financial assets measured at fair value are no longer restated.
5. Some nonmonetary items are carried at amount current at date other than acquisition date, for
example, property, plant and equipment are revalued. In such case, the carrying amounts are restated
from the date of revaluation.
6. All items in the income statement are restated by applying the change in the general price index from
the dates when the items of income and expenses were initially recorded. However, for practical
purposes, the average index may be used.
7. The general purchasing power gain or loss is computed. This pertains only to monetary items. The gain
or loss on purchasing power is included in profit or loss and separately disclosed.
8. The restated amount of a nonmonetary item is reduced when it exceeds the recoverable amount.
9. Any revaluation surplus recognized previously is eliminated.
10. Retained earnings would be the balancing figure in the restated statement of financial position.
11. When comparative statements are prepared, the monetary items of the preceding year are expressed
in terms of the index number at the end of the current year.

Economy ceasing to be hyperinflationary

 The economy ceases to be hyperinflationary when the cumulative inflation rate drops below 100% in a three-
year period.
 An entity shall discontinue the preparation and presentation of financial statements under a condition of
hyperinflationary economy.
 The amounts expressed in measuring unit current at the end of the previous reporting period shall be the
carrying amounts in subsequent financial statements.

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Disclosures
1. The fact that the financial statements have been restated for changes in the general purchasing power of the
reporting currency.
2. Whether the financial statements are based on historical cost or current cost approach.
3. The nature and level of the price index at the end of reporting and the movement in the index during the
current and previous reporting period.

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