An economy is hyperinflationary, in the guidance to IAS 29 and Ind AS 29, when a cumulative inflation rate over three years approaches or exceeds 100%. The list of supporting indicators is longer, covering whether people hold wealth in non-monetary assets or a stable foreign currency, whether prices are quoted in a foreign currency, and whether credit sales are priced for expected purchasing-power loss over even short periods. In practice the three-year test does the work, and standard-setters, regulators and the large accounting firms publish assessments each period naming the economies that qualify. That list moves. Argentina, Turkey, Venezuela, Zimbabwe, Lebanon, Iran, Syria, Sudan, Yemen, Haiti, South Sudan and Ethiopia have all appeared on it in recent years. Check any specific membership claim against the published assessment for your reporting date. Verify it against the IASB's and the large firms' current hyperinflation assessments for the period you're reading.
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How do IAS 29 and US GAAP differ?
What the two rulebooks do about it couldn't be further apart.
IAS 29 and Ind AS 29 restate, then translate. The subsidiary's own statements are first expressed in the measuring unit current at the reporting date, using a general price index. Non-monetary items are restated from their acquisition dates. Monetary items are already in current units and aren't restated. The whole income statement is restated from the dates the items were recognised. The difference is a gain or loss on the net monetary position, and it goes to profit or loss, where it is one of the largest lines in the statement. Only then is the restated statement translated into the presentation currency, and every current-period line, assets, liabilities, equity, income and expenses alike, goes at the closing rate.
Comparatives follow that rule only where the presentation currency is itself hyperinflationary. Where the group presents in a stable currency, IAS 21 leaves last year's comparatives as they were reported, unadjusted for the inflation and the rate move that have happened since. The two columns are then in different measuring units, and a growth rate read straight off them isn't a growth rate at all.
ASC 830 does the opposite. US GAAP requires that a subsidiary in a highly inflationary economy be treated as though its functional currency were the reporting currency, which means the temporal method, with non-monetary items at their historical exchange rates. There is no price-level restatement at all. The remeasurement gain or loss goes to profit.
The two answers differ, and the direction is predictable. Under IAS 29 a fixed asset is restated upward by the general price index and then translated at a devalued closing rate. Under ASC 830 the same asset is translated at the historical exchange rate and never restated. If the currency has devalued faster than prices have risen, the American treatment leaves the asset higher. If prices have risen faster than the currency has fallen, the international treatment does.
Worked example: an Argentine subsidiary
Work it once and the abstraction disappears. It's long, but every step is one you've already done in the current rate method and the temporal method. Pampas Riego SA (synthetic) is an Argentine irrigation-equipment maker. Its general price index ran 100.0 at the start of the year, 150.0 on average and 220.0 at the close, so inflation for the year was 120.0000%. Its plant was bought when the index was 50.0. Opening inventory dates from an index of 100.0 and closing inventory from 190.0.
The local historical-cost statements, in millions of pesos: revenue 4,000.0, cost of goods sold 2,400.0, other costs 500.0, depreciation 150.0, so profit is 950.0. A dividend of 800.0 was paid at the year end. Inventory moved from 300.0 to 700.0, so purchases were 2,800.0. Gross plant is 1,500.0 with accumulated depreciation of 300.0 opening and 450.0 closing. Monetary assets went from 500.0 to 900.0 and monetary liabilities from 900.0 to 1,400.0, so the net monetary position moved from −400.0 to −500.0. Equity moves 1,100.0 + 950.0 − 800.0 = 1,250.0, which checks.
How do you calculate the gain on the net monetary position?
The monetary gain comes first, because everything else depends on it. Restate the opening position and the flows into closing-date units and compare with the actual closing position. Net monetary flow is 4,000.0 − 2,800.0 − 500.0 = 700.0, and it checks against the position: −400.0 + 700.0 − 800.0 = −500.0.
Expected closing position in closing units: (−400.0 × 220 ÷ 100) + (700.0 × 220 ÷ 150) − (800.0 × 220 ÷ 220) = −880.000000 + 1,026.666667 − 800.000000 = −653.333333. Actual: −500.0. The company is better off by +153.333333 million pesos. That's a gain, because it owed money in a currency that was losing value.
Decompose: holding a net monetary liability of 400.0 through 120% inflation is worth 400.0 × 1.2 = +480.000000. The net monetary inflow of 700.0, received at an index of 150 and held to an index of 220, loses 700.0 × (220 ÷ 150 − 1) = −326.666667. The dividend was paid on the closing date, so it carries no restatement effect, 0.000000. Sum: +153.333333.
There are a lot of decimal places from here on. They're there so that every check closes to the last digit, so don't round as you go.
The restated income statement, in millions of pesos of closing purchasing power:
| Line | Historical | Factor | Restated |
|---|---|---|---|
| Revenue | 4,000.0 | 220/150 | 5,866.666667 |
| Cost of goods sold | (2,400.0) | layered | (3,956.140351) |
| Gross profit | 1,600.0 | 1,910.526316 | |
| Other costs | (500.0) | 220/150 | (733.333333) |
| Depreciation | (150.0) | 220/50 | (660.000000) |
| Operating profit | 950.0 | 517.192982 | |
| Gain on net monetary position | none | 153.333333 | |
| Net profit | 950.0 | 670.526316 |
Cost of goods sold restates layer by layer, just as under the temporal method: 300.0 × 220 ÷ 100 + 2,800.0 × 220 ÷ 150 − 700.0 × 220 ÷ 190 = 660.000000 + 4,106.666667 − 810.526316 = 3,956.140351.
Now the restated balance sheet. Inventory is 700.0 × 220 ÷ 190 = 810.526316 and net plant is (1,500.0 − 450.0) × 220 ÷ 50 = 4,620.000000. Monetary assets stay at 900.0, so total assets are 6,330.526316. Liabilities stay at 1,400.0, which leaves equity of 4,930.526316. Prove it by rolling restated opening equity, which is (−400.0 × 2.2) + (300.0 × 2.2) + (1,200.0 × 4.4) = 5,060.000000. Then 5,060.000000 + 670.526316 − 800.000000 = 4,930.526316.
Translate at the closing rate of 180.0 pesos to the dollar and the American parent's group accounts would carry equity of $27.391813 million, profit of $3.725146 million and total assets of $35.169591 million.
How does the same subsidiary look under US GAAP?
Except that an American parent is forbidden from doing any of that. Under ASC 830 the same subsidiary is remeasured with the temporal method, using exchange rates of 90.0 opening, 130.0 average, 180.0 closing, 45.0 for the plant, 85.0 for opening inventory and 160.0 for closing inventory. The result is equity of $24.930556 million and profit of $3.623366 million, with the remeasurement gain of $0.726496 million replacing the monetary gain of $0.851852 million.
The equity gap is $2.461257 million, which is 9.8725% of the American figure, and it is almost all plant: $2.333333 million of it, with $0.127924 million on inventory. The profit gap is only $0.101780 million.
One subsidiary, one year of facts, two respectable rulebooks, and a tenth of the equity in dispute. Both roll forward correctly, and the American one is worth checking: opening remeasured net assets of $25.751634 million plus profit of $3.623366 million less the dividend at the closing rate of $4.444444 million gives $24.930556 million, which is the balance sheet.
The reading is simple enough to state and hard to remember under time pressure. When you compare a group with hyperinflationary subsidiaries against a peer under the other rulebook, the equity difference is concentrated in long-lived assets, it grows with the age of those assets, and it has nothing to do with either company's operations.