Background

The Committee received a submission about the accounting applied by a parent (Entity P), whose functional currency is the currency of a hyperinflationary economy, when it consolidates a subsidiary (Entity S) whose functional currency is the currency of a non-hyperinflationary economy. The submission asked whether, in preparing its consolidated financial statements, the parent applies IAS 29 to restate the current year and comparative amounts presented for its non-hyperinflationary subsidiary in terms of the measuring unit current at the reporting date.

Staff analysis

From the outreach performed, many respondents said the submitted fact pattern is common in particular jurisdictions. Some of those respondents said the matter does not always have a material effect for entities affected because non-hyperinflationary subsidiaries might only represent a small portion of operations of a group. Most respondents said they had observed diversity in accounting for it.

Proponents of the view that Entity P does not restate Entity S's results and financial position highlighted the requirement in the last sentence of IAS 29:35 that Entity P only applies IAS 21 in translating the financial statements of Entity S for inclusion in its consolidated financial statements. They were of the view that the objectives and restatement requirements in IAS 29 apply only to entities within a group whose functional currency is that of a hyperinflationary economy.

Opponents of that view highlighted that (i) IAS 29:1 includes within the scope of IAS 29 the consolidated financial statements of any entity whose functional currency is that of a hyperinflationary economy; (ii) the overall objective and requirements in IAS 29 require the financial statements to be stated in terms of measuring unit current at the reporting period; (iii) IAS 21:35 does not prevent Entity P from restating Entity S's financial statements after having applied IAS 21:39-41; and (iv) IAS 29:36 requires restating financial statements into the measuring unit current at the date of the consolidated financial statements and it does not differentiate between hyperinflationary and non-hyperinflationary subsidiaries.

The staff concluded that, the principles and requirements in IFRS Accounting Standards do not provide an adequate basis for an entity to determine the required accounting because an entity could reasonably read the applicable requirements in IAS 21 and IAS 29 to either not restate or restate Entity S's results and financial position in terms of the measuring unit current at the reporting date.

In determining whether to add a standard-setting project to the work plan, the staff considered that the matter may have widespread effect and the effect might be more material on those affected than in the past with more countries considered hyperinflationary. Nonetheless, hyperinflation occurs relatively infrequently, and neither this matter nor other matters related to IAS 29 have been raised as a priority project by respondents in response to the IASB’s agenda consultation. There could be other matters with respect to the application of IAS 29 that stakeholders might suggest the IASB considers and views may be divided on what is considered to be the ‘best’ accounting. The staff therefore could not conclude whether to add a standard-setting project to the work plan.

Staff recommendation

The staff recommended that they conduct further research and outreach to obtain further information before asking the Committee to decide on whether to add a standard-setting project to the work plan.

Committee discussion

Committee members had diverse views on whether restatements of the non-hyperinflationary subsidiaries are required or whether there is a choice interpreting the current Standards. They also had different views on whether a standard-setting project is required for this issue.

Some Committee members agreed with the staff's analysis that an entity could reasonably read the applicable requirements in IAS 21 and IAS 29 either as not to restate or to restate Entity S's financial statements. They said IAS 29:35 states what to do explicitly (i.e. not to apply IAS 29 but to apply IAS 21 to non-hyperinflationary subsidiaries' translations) and the resulting "not to restate" outcome appears to be a technically correct answer. On the other hand, the objective in IAS 29:1 is that the financial statements should be stated in terms of measuring unit current at the reporting period. In addition, the restatement requirement in IAS 29:36 does not differentiate between hyperinflationary and non-hyperinflationary subsidiaries. Thus, "restating" could be an appropriate interpretation.

However, some Committee members said they did not see a choice and considered "restating" is the only alternative because it gives more meaningful, consistent and faithfully representative financial information of the reporting entity. They considered that "not restating" could be seen as hiding information and conflicts with what is intended in the Standard. It would therefore mislead the readers of financial statements.

The remaining Committee members considered that "not restating" is the only technically correct answer because IAS 29:35 is explicit and a simpler approach. They were not convinced that "restating" is meaningful because it would be misleading, confusing and time consuming.

Committee members also had an extensive discussion on whether a standard-setting project is required. Some Committee members considered that this occurs only in limited circumstances and questioned whether it warrants allocating IASB resources to it. Other Committee members considered it to be a significant issue and that it could be increasingly prevalent in the future due to the current economic uncertainties. Given that the majority of Committee members did not agree that different options are available and given they had different views of the only acceptable treatment, a narrow-scope standard setting project was suggested. In terms of the urgency, the staff will clarify in the next paper what the scope would look like and what the key questions to ask are.

Committee vote

6 of the 14 Committee members agreed with the staff conclusion that both options are a reasonable interpretation of the existing requirements.

4 Committee members viewed "not to restate" as the only acceptable treatment.

4 Committee members viewed "restate" as the only acceptable treatment.