Hyperinflation Flashcards
Explain a general price change.
A general price change is increase or decrease in the overall level of prices of goods or services throughout the economy.
An increase in the general price means that purchasing power has decreased. I.E. INFLATION.
A decrease in the general price means that purchasing power has increased. I.E. DEFLATION.
Explain a specific price change.
A specific price change is increase or decrease in the price of a specific good or service. These occur primarily because of changes in supply and demand for a particular good or service.
The specific price of a good or service may change at a different rate and even in the opposite direction from the general level price change in the economy.
Distinguish inflation and deflation.
Inflation = overall price levels increase, purchasing power decreases
Deflation = overall price levels decrease, purchasing power increases
What is hyperinflation?
Hyperinflation is extremely rapid or out of control inflation. There is no precise numerical indication of hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless.
PAS 29 does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgment.
What are the characteristics of an economic environment indicating hyperinflation?
A. The general population prefers to keep its wealth in NONMONETARY ASSETS or in relatively stable FOREIGN CURRENCY to maintain purchasing power
B. The general population regards monetary amounts not in terms of local currency but in terms of a relatively stable FOREIGN 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, wages, prices are linked to a price index.
E. The cumulative inflation rate over 3 years is approaching or exceeds 100%.
Explain the financial reporting in a hyperinflationary economy.
PAS 29, paragraph 8, provides that F/S of an entity that reports in the currency of a hyperinflationary economy, whether they are based on historical cost approach or current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period.
Presentation of information under PAS 29 as a supplement to unrestated F/S is not permitted.
The restatement of FS of an entity reporting under hyperinflationary economy is achieved by constant peso accounting and current cost accounting.
What is constant peso accounting?
Constant peso accounting is the restatement of conventional or historical F/S in terms of the current purchasing power of the peso through the use of index number. AKA purchasing power / price level accounting
Explain monetary items.
PAS 21 defines monetary items as “money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.”
The essential feature of a monetary item is a right to receive or an obligation to deliver a fixed or determinable amount of money.
Monetary items refer to cash and assets that represent a fixed amount of pesos to be received, or obligations that represents a fixed amount of pesos to be paid.
They remain the same regardless of the change in the general price level.
Explain nonmonetary items.
Nonmonetary items are those whose peso amounts reported in the F/S differ from the amounts ultimately realizable or payable.
Essential feature: Absence of a right to receive or an obligation to deliver a fixed or determinable amount of money.
Only nonmonetary items are restated when preparing constant peso financial statements.
What is purchasing power?
Purchasing power means the goods and services that money can buy.
In a period of inflation, a purchasing power loss is incurred on monetary assets and purchasing power gain is realized on monetary liabilities.
In a period of deflation, a purchasing power gain is realized on monetary assets and a purchasing power loss is incurred on monetary liabilities.
What items are restated in the financial statements prepared in a hyperinflationary economy?
Only nonmonetary items are restated when preparing constant peso financial statements.
Monetary items are not restated anymore because they are automatically stated in terms of current purchasing power of the peso.
What is the formula for restatement of F/S under hyperinflationary economy?
(Index number, end / Index number, acqui) x historical cost
What are the procedures for restating financial statements in a hyperinflationary economy?
- The restatement is made by applying a general price index.
- The items in the F/S are classified into monetary and nonmonetary.
- Monetary items are not restated.
- Nonmonetary items are restated by applying the general price index from acqui. date to the end of reporting period.
Some nonmonetary items, however, are already carried at amounts current at end of reporting period, such as NRV and FV. These items are no longer restated (e.g. inventory @ NRV, financial assets at FV).
- Some nonmonetary items are carried at amounts current at dates other than acqui date, such as revalued PPE. The carrying amounts are restated from the date of revaluation.
- All items in the I/S 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.
- 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 P/L and separately disclosed.
- The restated amount of PPE, goodwill, and other intangible asset is reduced when it exceeds the recoverable amount.
- Any revaluation surplus recognized previously is eliminated.
- Retained earnings would be the balancing figure in the restated SFP.
- 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.
Explain the accounting treatment when an economy ceases to be hyperinflationary.
Judgment is also exercised.
Criterion: Cumulative inflation rate drops below 100% in a three-year period.
When an economy ceases to be hyperinflationary, an entity shall discontinue the preparation and presentation of F/S under a condition of hyperinflationary economy. The amounts expressed in the measuring unit current at the end of the previous reporting period shall be the carrying amounts in subsequent F/S.
What are the disclosures when F/S are prepared in a hyperinflationary economy?
A. The fact that the F/S have been restated for changes in general purchasing power of reporting currency
B. Whether the F/S are based on historical cost approach or current cost approach
C. The nature and level of the price index at the end of the reporting period and the movement in the index during the current and previous reporting period
