Background

In its June 2022 meeting, the IFRS IC discussed a submission about the accounting applied by a parent, whose functional currency is the currency of a hyperinflationary economy, when it consolidates a subsidiary, whose functional currency is the currency of a non-hyperinflationary economy. The IFRS IC concluded that the parent could not restate or restate the subsidiary’s results and financial position in terms of the measuring unit current at the end of the reporting period.

Staff analysis

Considering the conclusion at its June 2022 meeting, the IFRS IC asked staff to conduct additional research. From the research, respondents said the submitted fact pattern is prevalent and could be material in hyperinflationary economies and observed diversity in accounting treatment. Other than the two views expressed in the paper, respondents said that some entities apply another accounting treatment, under which the hyperinflationary parent does not restate the subsidiary’s current period income and expenses but restates only the subsidiary’s comparative information by applying the change in the general price index from the beginning of the reporting period to the comparative information. Many respondents said that restating gives more useful information while other respondents said none of the alternative views is necessarily more useful because each of the accounting treatments have their own costs and benefits.

Regarding the scope of any narrow-scope standard-setting project, some respondents said it has merits because it will remove diversity and improve financial reporting while others said there are other challenges when applying IAS 29 and the submitted fact pattern is not the most important one. The related matter that most respondents suggested addressing at the same time is a situation where an entity with a non-hyperinflationary functional currency presents its financial statements in a hyperinflationary currency. The staff said in this related matter, the entity cannot restate its current period income and expenses or comparative amounts because IAS 29:1 is applicable to an entity whose functional currency is the currency of a hyperinflationary economy only. Therefore, the principles and requirements in IAS 21 provide an adequate basis for the accounting for this related matter. However, noting IAS 29:2, some stakeholders considered such reporting might not be useful because current period income and expenses and comparative information are not expressed in the current measuring unit. Also, they commented that not applying IAS 29 to such an entity leads to a lack of comparability between its financial statements and entities in the same hyperinflationary economy that are in the scope of IAS 29. Accordingly, the staff agreed that in both the submitted fact pattern and the related matter, there is a question as to whether applying IAS 21:39 in these situations results in useful information and recommended both to be addressed in a narrow-scope amendment.

Based on the staff’s research and the reasons noted in IAS 29:2, the staff considered that expressing financial statements that are presented in a hyperinflationary currency in terms of the current measuring unit would improve the usefulness of information. However, requiring an entity to apply the IAS 29 restatement methodology to the related matter would be a significant change in the scope of IAS 29. As a result, the possible solution would be amending IAS 21 by requiring a reporting entity to translate all items (assets, liabilities, equity items, income and expenses, including comparatives) at the most recent closing rate when the entity has a non-hyperinflationary functional currency and presents financial statements in a hyperinflationary presentation currency (related matter); or translates the results and financial position of a foreign operation that has a non-hyperinflationary functional currency (submitted fact pattern).

Staff recommendation

The staff recommended that the IFRS IC refers the matter to the IASB by recommending that the IASB develop a narrow-scope amendment that addresses the submitted fact pattern and the related matter.

IFRS IC discussion

IFRS IC members generally agreed with the staff recommendation to refer the matters (the submission and the related matter) to the IASB. Some of them commented that there is diversity in practice and although the standard does give an answer, it is not exact. They therefore agreed that standard-setting is required to eliminate this diversity. They agreed not to amend IAS 29, but to amend IAS 21 instead.

One IFRS IC member commented that this matter should not be a priority to the IASB because he thinks that there are not many entities that restate and there are other projects which are more urgent. Some of the IFRS IC members also considered that it is too costly to instigate standard-setting on this matter and it is not the best solution due to time restraints. The staff replied that, given there are two matters (the submission and the related matter) close enough to be addressed together, that restating does not work on the related matter, and that IAS 21 has some missing pieces and can therefore not address the two matters, there are grounds for the IFRS IC to suggest standard-setting. Some acknowledged that standard-setting is not a perfect solution, but it would close the gap in some of the scenarios, and would therefore not be an inappropriate solution. There was still one IFRS IC member who said that restating may be more meaningful to investors but that there are entities who restate. The staff said that this will be presented to the IASB as well.

IFRS IC decision

All IFRS IC members agreed with the recommendation to refer the matter to the IASB and the IFRS IC will present to the IASB all the facts and analysis, including the merits of restating.