Restatement For Effects Of Hyperinflation – FAQ | IFRS

Restatement for effects of hyperinflation

This example accompanies, but is not part of, IFRIC 7.

IE1 This example illustrates the restatement of deferred tax items when an entity restates for the effects of inflation under IAS 29 Financial Reporting in Hyperinflationary Economies. As the example is intended only to illustrate the mechanics of the restatement approach in IAS 29 for deferred tax items, it does not illustrate an entity’s complete IFRS financial statements.

Facts Restatement for effects of hyperinflation

IE2 An entity’s IFRS balance sheet at 31 December 20X4 (before restatement) is as follows:

(a) In this example, monetary amounts are denominated in currency units (CU).

Notes Restatement for effects of hyperinflation

1 Property, plant and equipment

All items of property, plant and equipment were acquired in December 20X2. Property, plant and equipment are depreciated over their useful life, which is five years.

2 Deferred tax liability

The deferred tax liability at 31 December 20X4 of CU30 million is measured as the taxable temporary difference between the carrying amount of property, plant and equipment of 300 and their tax base of 200. The applicable tax rate is 30 per cent. Similarly, the deferred tax liability at 31 December 20X3 of CU20 million is measured as the taxable temporary difference between the carrying amount of property, plant and equipment of CU400 and their tax base of CU333.

IE3 Assume that the entity identifies the existence of hyperinflation in, for example, April 20X4 and therefore applies IAS 29 from the beginning of 20X4. The entity restates its financial statements on the basis of the following general price indices and conversion factors:

(a) For example, the conversion factor for December 20X2 is 2.347= 223/95.

Restatement Restatement for effects of hyperinflation

IE4 The restatement of the entity’s 20X4 financial statements is based on the following requirements:

  • Property, plant and equipment are restated by applying the change in a general price index from the date of acquisition to the balance sheet date to their historical cost and accumulated depreciation.
  • Deferred taxes should be accounted for in accordance with IAS 12 Income Taxes.
  • Comparative figures for property, plant and equipment for the previous reporting period are presented in terms of the measuring unit current at the end of the reporting period.
  • Comparative deferred tax figures should be measured in accordance with paragraph 4 of the Interpretation.

IE5 Therefore the entity restates its balance sheet at 31 December 20X4 as follows:

Notes Restatement for effects of hyperinflation

1 Property, plant and equipment Restatement for effects of hyperinflation

All items of property, plant and equipment were purchased in December 20X2 and depreciated over a five-year period. The cost of property, plant and equipment is restated to reflect the change in the general price level since acquisition, ie the conversion factor is 2.347 (223/95).

2 Deferred tax liability Restatement for effects of hyperinflation

The nominal deferred tax liability at 31 December 20X4 of CU30 million is measured as the taxable temporary difference between the carrying amount of property, plant and equipment of CU300 and their tax base of CU200. Similarly, the deferred tax liability at 31 December 20X3 of CU20 million is measured as the taxable temporary difference between the carrying amount of property, plant and equipment of CU400 and their tax base of CU333. The applicable tax rate is 30 per cent.

In its restated financial statements, at the balance sheet date the entity remeasures deferred tax items in accordance with the general provisions in IAS 12, ie on the basis of its restated financial statements. However, because deferred tax items are a function of carrying amounts of assets or liabilities and their tax bases, an entity cannot restate its comparative deferred tax items by applying a general price index. Instead, in the reporting period in which an entity applies the restatement approach under IAS 29, it (a) remeasures its comparative 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 balance sheet of the current reporting period by applying the measuring unit at that date, and (b) restates the remeasured deferred tax items for the change in the measuring unit from the date of the opening balance sheet of the current period up to the balance sheet date.

In the example, the restated deferred tax liability is calculated as follows:

IE6 In this example, the restated deferred tax liability is increased by CU34 to CU151 from 31 December 20X3 to 31 December 20X4. That increase, which is included in profit or loss in 20X4, reflects (a) the effect of a change in the taxable temporary difference of property, plant and equipment, and (b) a loss of purchasing power on the tax base of property, plant and equipment. The two components can be analysed as follows:

The loss on tax base is a monetary loss. Paragraph 28 of IAS 29 explains this as follows: Restatement for effects of hyperinflation

The gain or loss on the net monetary position is included in profit or loss. The adjustment to those assets and liabilities linked by agreement to changes in prices made in accordance with paragraph 13 is offset against the gain or loss on net monetary position. Other income and expense items, such as interest income and expense, and foreign exchange differences related to invested or borrowed funds, are also associated with the net monetary position. Although such items are separately disclosed, it may be helpful if they are presented together with the gain or loss on net monetary position in the statement of comprehensive income.

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