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IAS 29 — Applicability of the concept of financial capital maintenance defined in constant purchasing power units

Date recorded:

In September 2012, the Committee received a request to clarify whether an entity is permitted to use the financial capital maintenance concept, defined in terms of constant purchasing power units, when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29 Financial Reporting in Hyperinflationary Economies and whether the entity needs to apply IAS 29 to its financial statements prepared under that concept of financial capital maintenance when it falls within the scope of IAS 29.

Staff’s paper focuses on two specific issues:

  • Issue 1: whether an entity whose functional currency is not the currency of a hyperinflationary economy is permitted to use the financial capital maintenance concept that is defined in constant purchasing power units when preparing IFRS financial statements.
  • Issue 2: whether IAS 29 is applicable to an entity whose functional currency is the currency of a hyperinflationary economy if its financial statements have been prepared under a specific model of a financial capital maintenance concept that is defined in constant purchasing power units.

In relation to Issue 1 there are three different views:

  1. IFRSs provide an entity with no ability to use any model of the financial capital maintenance concept defined in constant purchasing power units;
  2. the Conceptual Framework permits an entity to select a specific model of the financial capital maintenance concept defined in constant purchasing power units if certain conditions are met; or
  3. the Conceptual Framework permits an entity to select the financial capital maintenance concept defined in constant purchasing power units if certain conditions are met, but should apply IAS 29 by analogy.

Staff noted that when preparing IFRS financial statements an entity is required to apply the applicable standards. When measuring items on the basis of the measuring unit current at the end of the reporting period, the resulting measurement would be contrary to the requirements of other IFRS (except for IAS 29). For example, when applying a model under financial capital maintenance, defined in constant purchasing power units, to intangible assets, this would result in a measurement from cost to a restated amount, which is inconsistent with the requirements of paragraph 74 of IAS 38 Intangible Assets. The amount of the cost adjusted for changes in a general price level would not represent the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction as stated in paragraph 8 of IAS 38. Other IFRSs such as IAS 2 Inventories, and IAS 16 Property, Plant and Equipment, define or describe “cost” in similar ways.

Entities are unable to depart from the requirements of IFRS unless expressly permitted or required by a standard such as in hyperinflationary situations under IAS 29. In this regard, IAS 29 is applicable only in a specific situation in which the conditions set out in IAS 29 are met (i.e. only when the entity’s functional currency is the currency of a hyperinflationary economy). Consequently, Staff are of the view that IFRSs prohibit an entity from preparing its financial statements under the concept of financial capital maintenance defined in constant purchasing power units unless the entity falls within the scope of IAS 29.

From the outreach activities performed by staff, they identified there were no jurisdictions in which entities prepare, or are trying to prepare, the financial statements stated in constant purchasing power units in non-hyperinflationary economies, and hence none of the issues discussed above are widespread. Consequently, staff do not believe the issue meets the Committee agenda criteria and recommended the Committee do not add this issue on its agenda.

In the September 2013 meeting, the Committee were alerted that the Emerging economies group will be meeting to see if pricing level adjustments in financial reporting is ideal or not and therefore the focus of this paper is to focus on the applicability of the concept of financial capital maintenance defined in constant purchasing power units when preparing financial statements.

There were members that agreed with Staff’s proposal but one member highlighted if there was a need to include a lengthy discussion within the agenda decision paper. When compared to previous agenda decision papers, the discussions have been much shorter, and therefore the member suggested staff should follow the same approach. Staff explained they adopted this approach as the issue was more complex and they wanted to highlight its importance.

A member emphasised that the conceptual framework does not override IFRS. IAS 29 only applies when there is hyperinflation and the objective is to have inflation adjusted financial statements to provide its users with better information. The member explained that those firms not operating in an economy with hyperinflation can produce inflation adjusted statements by looking at the conceptual framework. In doing so, when producing the statements they would need to adopt the principles in IAS 29.

There was disagreement between members where the majority agreed that IAS 29 would only apply to firms that were effected by hyperinflation and not otherwise. In addition, the application of IAS 29 is an accounting choice and once it has been adopted, it overrides the requirements of other standards such as IAS 16.

The Committee agreed that IAS 29 may only be applied by those in a hyperinflation economy. The answer to the submitter’s question is that it is not permitted to use the financial capital maintenance concept when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29. Staff are to prepare the agenda decision with the help of members where they will incorporate the principle that the conceptual framework does not override any standard. The updated agenda decision is to be presented to the board in the November 2013 meeting.

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