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IFRS 1 – Severe hyperinflation

Date recorded:

The staff presented an analysis of comment letters received on the exposure draft Severe Hyperinflation (amendment to IFRS 1 First-time adoption of International Financial Reporting) published in September 2010.

The Board has received 28 comments letters, all supporting the proposed amendment, however respondents raised concerns on the following matters:

Scope of amendment

Some respondents asked the Board to clarify if the amendment would apply to any entity whose functional currency had been subject to severe hyperinflation in the past, whether or not this entity prepared financial statements under IFRS at the time. Some Board members were confused by the question, especially since IFRS 1 allows an entity to use fair value as the deemed cost on initial adoption. The staff explained that the fair value as deemed cost exemption only applies to tangible fixed assets but is not available to other assets such as intangible assets. After a short deliberation, the Board agreed that the amendment should be made available to all entities whose functional currency has been subject to severe hyperinflation in the past and that is should be made clear that it not only applies to entities that are resuming IFRS accounting.

Respondents also asked the Board to clarify to which assets and liabilities the proposed amendments could be applied to. Some respondents identified the risk that an entity could unnecessarily apply the exemption to assets and liabilities that were acquired after the functional currency normalisation date. In addition, the respondents asked whether the exemption may be applied to assets and liabilities on an 'item by item' basis.

Some Board members were supportive of allowing the exemption to be applied on an 'item-by-item' basis as this would be consistent with the application of the other exemptions in IFRS 1. However, some other Board members could not envisage why it would be possible to apply to requirements of IFRS 1 to some assets but not for others. The staff explained that once an entity has suffered severe hyperinflation, there would be not real alternative than to apply the exemption. The Board deliberated the matter and considered a situation where a group with a functional currency that is suffering from severe hyperinflation has a subsidiary that doesn't suffer from severe hyperinflation. The Board did not consider it appropriate for the subsidiary to be fair valued through the exemption. The Board agreed that the exemption should apply to all the assets and liabilities in a group that with a functional currency that suffered from severe hyperinflation at the transition date. The Board asked the staff to redraft the amendment how they see fit and return it for consideration at a later date.

Comparative information

The Board considered whether it would be appropriate for an entity to have a short comparative period when the functional currency normalisation date falls within the comparative period. Although some Board members were uncomfortable with situations where the comparative period would only be a month or two, it was acknowledged that the situation is not unique to normalisation of severe hyperinflation, but equally applies to newly incorporated entities. The Board unanimously agreed to allow a comparative period that is shorter than 12 months.

Other comments

The Board considered other comments received from respondents and agreed that no further changes need to be made to include a description of severe hyperinflation or to exempt an entity from the reconciliation to previous GAAP as required by IFRS 1.24.

The Board approved an effective date of reporting periods beginning on or after 1 July 2011 with early adoption permitted.

The staff would circulate a marked-up ballot to the Board during the course of the meeting.

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