Hyperinflation accounting refers to the accounting and financial reporting practices that entities adopt in environments where hyperinflation is prevalent. Hyperinflation is an extreme economic condition characterized by extremely high and typically accelerating inflation. In such environments, the usual accounting principles may not provide relevant and reliable information due to the rapid erosion of the real value of the currency.
The International Accounting Standards Board (IASB) provides guidance on hyperinflation accounting in International Financial Reporting Standards (IFRS). According to IFRS, an economy is considered hyperinflationary if it experiences cumulative inflation of approximately 100% or more over three years.
Key features of hyperinflation accounting include:
- Restatement of Financial Statements:
- Financial statements of entities operating in hyperinflationary economies are restated to reflect changes in the general price level.
- Historical cost financial statements are adjusted to current values using an appropriate price index.
- Monetary Items and Non-Monetary Items:
- Monetary items (e.g., cash, receivables, payables) are restated using the current exchange rate.
- Non-monetary items (e.g., property, plant, and equipment) are generally not restated, as their value is considered to be relatively stable in terms of purchasing power.
- Use of General Price Index:
- A general price index, such as a consumer price index, is often used to adjust financial statements for the effects of hyperinflation.
- Functional Currency:
- The functional currency of an entity operating in a hyperinflationary economy may be a more stable foreign currency.
- Reporting Requirements:
- Disclosures are required to inform users of financial statements about the fact that the financial statements have been restated due to hyperinflation.
- Entities may need to disclose the inflation rate, the general price index used, and other relevant information.
- Frequency of Reporting:
- In hyperinflationary economies, entities may be required to report financial information more frequently to provide more timely and relevant information to users.
It’s important for entities operating in hyperinflationary environments to adhere to the specific accounting requirements outlined in IFRS or other applicable accounting standards. This ensures that financial statements accurately reflect the economic reality of the business despite the challenges posed by hyperinflation.