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1. MODULE 3 Financial Reporting in Hyperinflationary Economies Tracey Gribben 21 October 2011 Dublin title goes here

2. Module 3 – Financial Reporting in Hyperinflationary Economies Definition of Hyperinflation Hyperinflationary economies are those where money loses purchasing power at such a rate that comparison of transactions which have taken place at different times is misleading. IAS 29 does not set out an absolute rule as to what constitutes hyperinflation. This is a matter of judgementfor management. However, it does provide guidance on indicators which may indicate that the economic environment of a country may be experiencing hyperinflation. These indicators are as follows: • the general population prefers to keep its wealth in non-monetary assets or in a relatively stable currency; • the general population regards monetary amounts, not in terms of the local currency, but in terms of a stable currency. Prices may be quoted in that stable currency; • sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period; • interest rates, wages and prices are linked to a price index; and • the cumulative inflation rate over three years is approaching or exceeds 100%.

3. Module 3 – Financial Reporting in Hyperinflationary Economies Commencement Date of Application of IAS 29 The standard states that it is preferable if all entities that report in the currency of an economy that has been identified as hyperinflationary should apply the IAS from the same date. However, the IAS further states that the requirements apply to any entity from the beginning of the reporting period in which it identifies the existence of hyperinflation in the country in whose currency it reports, regardless of decisions made by other entities. The Restatement of Financial Statements Most entities prepare their financial statements on the historical-cost basis. No adjustment is usually made for changes in the general level of prices, with the notable exception of property, plant and equipment and investments, which are often stated at revalued amount. IAS 29 requires that the financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether prepared on a historic-cost basis or on a current-cost basis, must be stated in terms of the measuring unit current at the reporting date. Adjustment is also required to the corresponding figures for the previous period, which are restated in terms of the measuring unit at the reporting date. The net gain or loss on the net monetary position must be included in profit or loss for the period and disclosed separately.

4. Module 3 – Financial Reporting in Hyperinflationary Economies Key Summary Point IAS 29 requires that financial statements of entities operating in hyperinflationary economies be stated in terms of the measuring unit current at the reporting date. These economies are those where money loses purchasing power at such a rate that comparison of transactions that have taken place at different times is misleading. Presentation of information required by IAS 29 as a supplement to un-restated financial statements is not permitted and the presentation of financial statements before restatement is discouraged.

5. Module 3 – Financial Reporting in Hyperinflationary Economies • Restatement of Individual Balances • Restatement of Individual Balances • At the year-end, non-monetary items in the Statement of Financial Position are restated by applying a general price index. The index used will apply from the date of original acquisition to the period-end date. • No adjustment is required to monetary items as they are already stated in terms of the monetary unit at the period-end. An exception to this rule arises where there is an agreement on changes in prices, such as an index-linked loan. In this case the adjustment required will be in line with the agreement. • If inventory has been written down to NRV, no additional adjustment will be required as it is already stated at an amount current at the reporting date. Other assets stated at market value, such as investments, do not require adjustment for the same reason. • The standard requires that all items in the SOCI are expressed in terms of the measuring unit current at the period end. This is achieved by applying a general price index from the dates when transactions occurred to the period end. • Index The standard requires that a general price index be used to reflect the changes in general purchasing power. It also states that it is preferable that all entities reporting in the currency of the same economy use the same index. • Key Summary Point • At year-end, non-monetary items that are not re-valued to current valuation must be restated by applying a general price index.

6. Module 3 – Financial Reporting in Hyperinflationary Economies Cessation of Application • When the economy ceases to be hyperinflationary, the entity must cease to restate its financial statements. The amounts reported in the last set of restated financial statements form the basis for the preparation of subsequent financial statements. Disclosure: An entity must disclose the following: • the fact that the financial statements and the corresponding figures for previous periods have been restated for changes in general purchasing power of the functional currency at the period-end; • whether the financial statements are based on historic cost or current cost; and • the identity and level of the price index at the period end and the movement in the index during the current and previous period.

7. Module 3 – Financial Reporting in Hyperinflationary Economies Example On 1 January 2006 a UK-based company set up in a country suffering from hyperinflation. It acquired land in that hyperinflationary country on 1st January 2006 for T400,000. Exchange rates 1 January 2006: T5=£1 31.December 2010: T25=£1 Relevant price index 1 January 2006: 100 31 December 2010: 550 If no general price index adjustment is made the position would be as follows At 1 January 2006: 400,000/5 80,000 At 31 December 2010: 400,000/25 16,000  Exchange loss 64,000  Under IAS 29 adjustment 400,000x 550/100=2,200,000  At 1 January 2006: 400,000/5 80,000 At 31 December 2010: 2,200,000/25 88,000 Exchange gain  8,000 

8. Key Points Module 3 – Financial Reporting in Hyperinflationary Economies • Accounting in hyperinflationary economies is dealt with in IAS 29. • Hyperinflationary economies are those where money loses purchasing power at such a rate that comparison of transactions which have taken place at different times is misleading. • IAS 29 sets out the factors which may indicate that an economy is experiencing hyperinflation. • One indication is where cumulative inflation over three years is approaching or exceeds 100%. • An entity whose functional currency is that of a hyperinflationary economy must be restated in terms of the measuring unit current at the reporting date • Presentation of information required by IAS 29 as a supplement to un-restated financial statements is not permitted. • Presentation of financial statements before restatement is discouraged. • It is preferable if all entities that report in the currency that has been identified as hyperinflationary should apply the IAS from the same date.

9. Module 3 – Financial Reporting in Hyperinflationary Economies Differences between UKGAAP and IFRS IAS 29 deals with the situation where the reporting entity itself reports in the currency of a hyper-inflationary economy. Prior to the issue of FRS 24 (see below), this was not specifically dealt with in UK GAAP. Instead, UITF 9 dealt with the translation of foreign entities included in consolidated financial statements. UITF 9 permits a choice of policy for translating the result of a subsidiary in a hyper-inflationary economy – either adjusting the local currency financial statements to reflect current price levels prior to translation or using a relatively stable currency as the measurement currency of the foreign operation. Under IAS 21, the results of an entity whose functional currency is the currency of a hyper-inflationary economy must be restated under IAS 29 prior to the translation into a different presentation currency. IAS 29 requires such an entity’s results to be restated in terms of the measuring unit current at the balance sheet date. FRS 24 In December 2004, the ASB issued FRS 24 (IAS 29), ‘Financial reporting in hyper-inflationary economies’, which is almost identical to IAS 29.

10. Disclosures – Refer to Appendix Page 127: Smurfit Kappa Plc Year ended 31 December 2009 (Ireland) Module 3 – Financial Reporting in Hyperinflationary Economies

11. Module 3 – Financial Reporting in Hyperinflationary Economies Smurfit Kappa Plc Year ended 31 December 2009 (Ireland) continued

12. Module 3 – Financial Reporting in Hyperinflationary Economies Smurfit Kappa Plc Year ended 31 December 2009 (Ireland) continued

13. Module 3 – Financial Reporting in Hyperinflationary Economies