Inflation in Sudan worksheet
https://docs.google.com/spreadsheets/d/1D1t2OpT9E37zM1U49crn5f9Lt3pmUd6UiJJ_qdYfHWM/edit?usp=sharing
At 6 pages IAS29 is one of the briefest accounting standards. It should be read in the context of the Basis for Conclusions. IAS8 Accounting policies, changes in accounting estimates and errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. The standard makes reference to current cost accounting which became common among plcs in the UK in the 1980s. see also SIC 19, SIC 30.
Learning.
AEBB Slideshow introduction to IAS29
As ever there is no substitute for reading what the Standard actually says. The procedures described therein are pretty clear and its possible to construct a simplified spreadsheet. Worked example. Bear in mind the objective of expressing the statement of financial position (and the comparatives) in terms of the Purchasing Power at the balance sheet date. In theory a shareholders equity is the value of the goods and services he can buy with that equity. The net profit should represent the increase or decrease that value of equity in terms of purchasing power at the reporting date.
There are plenty of interesting issues around inflation accounting. The change in exchange rates compared to a stable currency can be differant from the change in CPI (consumer price index) but for consistency of comparison its best to stick to CPI.
Set out below is the Consumer Price Index for Sudan. Source Central Bureau of Statistics
http://sudandataportal.org/
AEBB Slideshow introduction to IAS29
As ever there is no substitute for reading what the Standard actually says. The procedures described therein are pretty clear and its possible to construct a simplified spreadsheet. Worked example. Bear in mind the objective of expressing the statement of financial position (and the comparatives) in terms of the Purchasing Power at the balance sheet date. In theory a shareholders equity is the value of the goods and services he can buy with that equity. The net profit should represent the increase or decrease that value of equity in terms of purchasing power at the reporting date.
There are plenty of interesting issues around inflation accounting. The change in exchange rates compared to a stable currency can be differant from the change in CPI (consumer price index) but for consistency of comparison its best to stick to CPI.
Set out below is the Consumer Price Index for Sudan. Source Central Bureau of Statistics
http://sudandataportal.org/
• Explain
when an economy is deemed hyperinflationary and identify the circumstances in which
IAS 29 must be applied.
• Explain
the restatement effect on current and prior year financial statements.
• Prepare
financial statements applying the hyperinflation principles.
IAS 29
Financial Reporting in Hyperinflationary Economies
as issued
at 1 January 2012.
This
Standard shall be applied to the financial statements, including the
consolidated financial statements, of any
entity whose functional currency is the currency of a hyperinflationary
economy. This Standard does not establish an absolute rate at which
hyperinflation is deemed to arise. It is a matter of judgement when restatement
of financial statements in accordance with this Standard becomes necessary.
Hyperinflation
is indicated by characteristics of the economic environment of a country which
include, but are not limited to, the following:
(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; and
(e) the
cumulative inflation rate over three years is approaching, or exceeds, 100%. 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 corresponding figures for the
previous period required by IAS 1 Presentation of Financial Statements 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.
For the
purpose of presenting comparative amounts in a different presentation currency,
paragraphs 42(b) and 43 of IAS 21 The Effects of Changes in Foreign Exchange Rates
(as revised in 2003) apply.
The
restatement of financial statements in accordance with this Standard requires
the application of certain procedures as well as judgement. The consistent
application of these procedures and judgements from period to period is more
important than the precise accuracy of the resulting amounts included in the
restated financial
statements.
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.
When an
economy ceases to be hyperinflationary and an entity discontinues the
preparation and presentation of financial statements prepared in accordance
with this Standard, it shall treat the amounts expressed in the
measuring
unit current at the end of the previous reporting period as the basis for the
carrying amounts in its subsequent financial statements.
Notes
Scope
- Functional currency.
Hyperinflationary economy.
- Not useful without restatement.
Comparison of amounts.
- The cumulative inflation rate over
three years approaches or exceeds 100%
- from the beginning of the
accounting period.
The
restatement of financial statements
- Prices change. Supply of money.
- Historical basis. Fair value.
Current cost approach.
- Expressed in terms of the
measuring unit at the end of the period. Supplement not permitted.
- Corresponding figures for
previous period. Different presentation currency.
- Gain or loss included in
P&L and separately disclosed.
- Procedures as well as
judgement. Consistency more important than accuracy.
Historical
cost financial statements
Statement of
financial position
- Amounts not expressed in terms
of the measuring unit are restated by applying a general price index.
- Monetary items not retated.
Cash. Receivables. Payables.
- Index linked items are adjusted
in accordance with the agreements
- All other assets and
liabilities are non monetary. Some non monetary items carried at net
realisable and fair value so not restated.
- Most non monetary items are
carried at cost or cost less depreciation
- Property, plant and equipment,
inventories, Goodwill is restated from the date of purchase. Inventories
of partly finished and finished inventory are restated from the date of
their purchase and conversion.
- If index not available use
movement in exchange rate of the functional currency to the stable
currency.
- If revalued carrying amounts
revalued from the date of revaluation.
- Restated amount of non-monetary
item reduced if it exceeds recoverable amount. Restated amounts of
property, plant and equipment , goodwill, patents and trademarks are
reduced to recoverable amount. Restated amounts of inventories are reduced
to net realisable value.
- Investee accounted for under
the equity method. Restated financial statements of the investee are
translated at closing rates.
- Borrowing costs
- Impractical to impute the
amount of interest.
24 At
beginning of first period of application owners equity other than retained
earnings restated
25 At the end
of the first period all are restated
Statement
of comprehensive income
26 All
items expressed in terms of currency at the end of the period.
Gain or
loss on net monetary position
27 monetary
assets in excess of monetary liabilities loses purchasing power if unlinked to
a price level.
Non monetary
items
Owners equity
Items in
the statement of comprehensive income
Current
cost financial statements
29-34
Consolidated
financial statements
35, 36
Selection
and use of a general price index
Ceasing
38
Disclosures
39
40
41
