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IAS 29 Hyperinflation: First-Time Adoption of IAS 29

Go To List of IFRIC Issues Issue Description: While this project started out focusing on the calculation of the comparative amount of deferred taxes when an entity in a hyperinflationary economy restates its financial statements for the first time under IAS 29, it has evolved to address more broadly the issues of restatements when applying IAS 29 for the first time. Discussion at IFRIC Meeting April 2003 The IFRIC did not reach a decision on this issue and will discuss whether it should be taken onto its agenda or not at a future meeting. In the meantime, the staff will work to clarify the examples in the agenda paper. Discussion at IFRIC Meeting September 2003 The IFRIC agreed that a two step approach should be applied for recognising deferred taxes when an economy becomes hyperinflationary for the first time and, therefore, IAS 29 is applied. This method does not differentiate whether the deferred taxed is a non-monetary or monetary item under IAS 29. Under this approach, the entity first recalculates its opening balance for the corresponding period as if the Standard was already applied in the previous year. This amount is recorded in equity. The entity then applies the current year inflation rate to the deferred tax item (with change recognised in income) to arrive at the ending balance. The IFRIC discussed whether there are other issues to which this approach may be applied, for example, asset impairments, revaluations through equity, provisions where repricing is involved, and pension obligations. The staff will prepare a draft interpretation to be discussed at the next meeting. Discussion at the IFRIC Meeting December 2003 The staff came back to the Board with a draft Interpretation including an example clarifying the restatement principles under IAS 29. The staff proposed a retrospective approach as it is required under IAS 29. Several IFRIC members were concerned that the proposed approach was impractical, as many entities will not be able to retrace the information. Additionally, it was inconsistent with the notion that balances are not restated for the effects of inflation during periods of normal inflation – so why restate 40 years of balances if the most recent year is considered hyperinflationary? Therefore, IFRIC concluded that the staff should explore paragraph 16 of IAS 29, to allow entities to use an independent valuation of fair value when information is not available. It was noted that first-time adopters will be allowed to chose the prospective approach by using the alternative treatment under IFRS for PP&E (revaluation at the day of transition). The IFRIC concluded that these choices would not set an accounting policy to revalue the assets continuously. Discussion at the IFRIC Meeting February 2004 The IFRIC continued its discussion of the appropriate financial reporting when an entity begins to apply IAS 29. The IFRIC noted that this is not a change in accounting policy, but rather a change in circumstance (an economy becoming hyperinflationary). However, the IFRIC agreed that the commencement of accounting under IAS 29 should be treated similarly to a change in accounting policy, and consistent with IAS 8 an entity should apply IAS 29 as if it had always applied the standard where practicable. The IFRIC approved issuance of a draft interpretation subject to any minor editorial amendments. IFRIC D5 IFRIC D5 Applying IAS 29 Financial Reporting in Hyperinflationary Economies for the First Time was issued 11 March 2004. Comment deadline was 14 May 2004. Discussion at the IFRIC Meeting February 2005 The staff recommended that IFRIC not undertake a project to amend IAS 29 as proposed at the last meeting that this draft interpretation was discussed. This recommendation was based on cost-benefit considerations that the IASB noted whilst developing IFRS 1, compounded by the fact that the changes that some IFRIC members had in mind were of a broad nature and may result in convergence issues that would best be dealt with by the Board. IFRIC agreed with the staff. It was noted that following a recent visit by the Chairman of the IASB, the Mexican standard setters had embarked on a project exploring IAS 29, Some broad issues related to hyperinflationary accounting as well as seeking to extract guidance from other literature currently in existence. A draft paper would be presented to the IASB in April or May for the Board's consideration. This would be in addition to a research project currently being conducted by the Canadian standard setters. The IFRIC agreed to proceed with D5 despite the above as well as to clarify that D5 would apply where an economy had ceased to be hyperinflationary at some point but had deteriorated into a hyperinflationary status again. As a result of this, IFRIC agreed to amend the title of the pronouncement in order that it should not be perceived to apply to first-time application of IAS 29 only, but rather, to the application of the restatement provisions of that standard in general. The IFRIC discussed whether deferred tax assets and liabilities are monetary or non-monetary assets. Some IFRIC members believed that regardless of how the amount is computed, these balances are monetary items when the definitions of deferred taxes and monetary items in IAS 12 and IAS 21 respectively are read together. Others, however, believed these balances are non-monetary. Consequently, the IFRIC decided to amend the draft interpretation to remove the statement that suggests that deferred tax balances are neither monetary nor non-monetary, as these items are mutually exclusive. The treatment of deferred tax balances in the draft interpretation was not amended as a result of this decision. The IFRIC discussed whether 'value' as used in IAS 29.16 refers to 'fair value', a point that had been clarified by a paragraph in the initial draft interpretation, which had subsequently been deleted. There was general support for the notion that value in this context would be any value that reasonably represented a 'current value', not necessarily fair value. The IFRIC discussed the effective date of the draft interpretation and agreed that it should be set for 'periods beginning on or after' a particular date. It was unclear what the actual effective date set would be. Discussion by the IASB at its March 2005 Meeting At its meeting in February 2005, the IFRIC decided to issue its Interpretation Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies, subject to additional clarification and editorial changes. The final Interpretation as approved by the IFRIC was tabled, and the IASB approved it subject to certain additional clarifications and editorial changes. November 2005: IFRIC 7 Issued On 24 November 2005, the IFRIC issued IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies.