Date recorded:

Agenda paper 14: High Inflation — Project recommendation

The Senior Director of Technical Activities introduced the agenda paper. He explained the history of the project. He said that the IASB had received a request from the Argentinian standard-setter, and the Group of Latin American Standard Setters (GLASS) to eliminate or reduce the cumulative inflation rate threshold currently included in IAS 29 Financial reporting in Hyperinflationary Economies to identify when hyperinflation exists; and to modify the procedures for reporting the adjustments resulting from restating the financial statements. The request came from some stakeholders who were concerned that the financial position and performance of entities was being distorted in countries subject to medium- or long-term high inflation levels. The requests relate mainly to the Latin America region, but were equally applicable to entities in other high-inflation countries. He also mentioned that the IASB’s emerging economies group discussed inflation accounting as its main topic at the December 2013 meeting. He said that GLASS presented a paper to the Accounting Standards Advisory Forum (ASAF) in December 2014, considering some of the problems with the existing requirements of IAS 29 and how the Standard could be improved. The paper recommended that the ‘trigger’ for the application of IAS 29 should be lowered to 26 per cent over three years (i.e. 8 per cent per annum). This threshold was the same as that proposed by the Argentinian standard setter, but the GLASS recommendation was to lower the threshold for IAS 29 rather than proposing a new general inflation Standard. The Brazilian standard-setter recommended that general price level adjustments should be required for entities in high-inflation economies, not merely those in hyperinflation. He mentioned that CIMAC had also considered the issue. He said that the message from CIMAC was that the threshold should not be lowered because lowering the threshold would put a lot of pressure on the credibility of the particular price index used, because most countries would have experienced high inflation  in the last 20 years; IAS 29 was a very blunt instrument that was trying to fundamentally correct a major economic event in a country and lowering the threshold without considering the Standard more carefully would be dangerous and that analysts coped with price changes.  He indicated that he made an analysis of inflation data from 1970 to 2013 using information provided by the World Bank. He said that the analysis showed that if the threshold had been 8 per cent (i.e. 26 per cent over three years), IAS 29 would clearly had been applied far more frequently, and by entities in virtually all jurisdictions. Finally he mentioned that his recommendation was to remove this project from the agenda. He then opened the discussion to the Board.

There was general support for his recommendation as the Board members agreed that lowering the threshold in IAS 29 would not be solution because IAS 29 was to be applied in very extreme cases and the high inflation issue would require a long term project instead of amending IAS 29. There were comments expressed by several Board members regarding different approaches to deal with the issue of high inflation.

One Board member asked whether adding specific disclosures in entities operating in high inflation environments would help. The Senior Director of Technical Activities responded that additional information would be helpful; however, currently the accounting standards did not have any specific requirements. The Board member then said that reliance only on IAS 1 did not seem to work; however, investors were in general knowledgeable and should have an understanding of the business. He said that it would be difficult to determine what the appropriate threshold should be. He also said that in the 70s when there was a period of high inflation in many countries, an alternative solution was to revalue fixed assets.

Another Board member said that one issue was that financial statements from entities operating in high inflation were not comparable with entities operating in low inflation economies.

The Chairman said that the revaluation of fixed assets could be a partial solution. He said that an entity would be able to change accounting policies when the high inflation period is over. Another Board member raised a concern that in order to change an accounting policy an entity was required to have a proper justification.

One Board member said that he believed there was no simple solution; he said that IAS 29 was only useful in extreme circumstances. He said that there could be alternative solutions instead of reconsidering IAS 29; for example a combination of disclosures and revaluation options.

Some Board members also mentioned that they would like to see if this issue would be raised during the next agenda consultation. One Board member also mentioned that the discussion with CIMA was very helpful to understand how investors dealt with this issue.

Another Board member mentioned that it would also be important to understand the interactions between foreign exchange translation issues and high inflation.

One Board member asked if currently there was anything stopping a company from providing more information than that required. The Senior Director of Technical Activities responded that a company was not being prevented from providing more information.

One Board member asked what the investors’ idea was to solve this issue. The Senior Director of Technical Activities responded that they did not have a practical solution; however, investors know the economies with high inflations and were able to make adjustments. He said that on the other hand, inflation accounting would not actually show how a company was coping with inflation. He said that there was an additional issue related to high inflation which was consolidating companies with high and low inflation. He then suggested that there should be additional discussions with the Emerging Economies Group (EEG) so that they could suggest different paths to solve this issue.

The Chairman concluded that there was a general agreement to take the issue off the agenda, to consult with the EEG and to mention the issue in the agenda consultation.

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