[Global Financial Insights] IASB Proposes Amendments for IAS 21 With Respect to Hyperinflationary Economy and More

Global Financial Insights is a weekly feature for the Accounts and Audit Module subscribers of Taxmann.com. It provides you with the latest updates on financial reporting and auditing practices from across the globe. Here is this week’s financial update.

1. IASB proposes amendments for IAS 21 with respect to hyperinflationary economy

1.1 Background

The Interpretations Committee of the International Financial Reporting Standard (IFRS) identified the need for amendment in IAS 21, The Effects of Changes in Foreign Exchange Rates. The committee noticed that the existing provision of IAS 21 does not provide the adequate basis for accounting for the translation of the financial information, when the presentation currency of the entity is of a hyperinflationary economy and the functional currency is of a non-hyperinflationary economy.

When the reporting entity’s presentation currency is the currency of a hyperinflationary economy and the functional currency is of a non-hyperinflationary economy, the existing provision of IAS 21 requires the entity to translate the income, expenses, and comparative amounts at historical exchange rates. The IASB observed that in a hyperinflationary economy, money loses purchasing power at such a rapid rate that information is generally useful only if amounts are expressed in terms of a measuring unit current at the end of the most recent reporting period. Thus, the committee discussed and recommended to the International Accounting Standard Board (IASB) a proposed solution that it considered would improve the usefulness of the resulting information. The IASB agreed with the committee’s recommendation and proposes to amend IAS 21 and hence issued the exposure draft.

1.2 Amendment

The IASB proposes that when an entity translates amounts from a functional currency which is the currency of a non-hyperinflationary economy to a presentation currency which is the currency of a hyperinflationary economy, the entity translates those amounts, including comparative amounts, using the closing rate at the date of the most recent statement of financial position.

The IASB expects the following benefits through this proposed amendment:

• more consistent and useful information in financial statements presented in hyperinflationary currencies
• removal of diversity in accounting practices related to translation into a hyperinflationary currency
• improved comparability of financial statements among companies and jurisdictions
• simpler and low-cost accounting requirements for affected companies.

The IASB is inviting feedback from its stakeholders on the aforementioned amendment and the exposure draft. It shall remain open for comment till 22nd November, 2024.

Source: IFRS Foundation

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