(Hyperinflation)

Acedera, Danicka S. BSA – 4A

August 5, 2012 Mrs. Gasic, CPA Financial Accounting 3

Chapter 13. Hyperinflation Hyperinflation 1) Explain a general price change.  A general price level change is increase or decrease in the overall level of prices of goods or services throughout the economy. 2) Explain a specific price change.  A specific price change is increase or decrease in the price of a specific good or service, such as food, clothing and car. 3) Distinguish inflation and deflation. Inflation – rising  rising prices, a purchasing power loss is incurred o n monetary assets and purchasing power gain is  Inflation – realized on monetary liabilities.  Deflation – Deflation – falling  falling prices, a purchasing power gain is realized on monetary assets and purchasing power loss is incurred on monetary liabilities. 4) What is hyperinflation?  PAS 29 on financial reporting in a hyper inflationary economy does not establish an absolute rate at which hyperinflation is deemed to arise. This is a matter of judgment.  Rapid monetary inflation that is great enough to threaten th reaten nation’s economic stability. 5) Explain the financial reporting in a hyperinflationary economy.  PAS 29, paragraph 8, provides that the financial statement of an entity that r eports in the currency of a hyperinflationary economy, whether they are based on historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end o f the reporting period.  Presentation of the information required under PAS 29 as a supplement to understated financial statements is not permitted.  The restatement of financial statements of an entity that reports in the currency o f a hyperinflationary economy is accomplished by means of constant peso accounting and current cost accounting. 6) What is constant peso accounting?  Constant peso accounting is the restatement of conventional or historical financial statements in terms of the current purchasing power of the t he peso through the use of index number. This is also known as purchasing power or price level accounting. acco unting.  The traditional concept of preparing financial statements based on historical cost is called nominal peso accounting. 7) Explain monetary items.  PAS 21 defines monetary items as money held and assets and liabilities to be received or paid in fixed or determinable amount of money.  The essential feature of a monetary item is a right or an obligation to deliver a fixed or determinable amount of money. 8) Explain nonmonetary items.  By the process of exc lusion, may be defined as those items that cannot be c lassified as monetary items.  Their peso amounts reported in the financial statements differ from the amounts that are ultimately realizable or payable.  Absence of right to receive rece ive or an obligation to deliver a fixed or determinable amount of money. 9) Give examples of monetary and nonmonetary items. MONETARY  Cash, financial asset at amortized cost, accounts and notes re ceivable, allowance for doubtful accounts and notes, advances to employees, prepaid interest, rece ivable under finance lease, long term rece ivables, recoverable special deposits, discounts on notes payable, payable, accounts and notes notes payable, accrued expenses, cash dividend payable, obligation under finance lease, pension benefits, provisions that are to be settled in cash.

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NONMONETARY  Financial asset held for trading, inventories, prepaid insurance, property, plant and equipment, ac cumulated depreciation, advances to suppliers, intangible assets, advances from customers, deferred revenue, noncontrolling interest, preference share capital, ordinary share capital, share premium. What is purchasing power?  Goods and services that money can buy. Explain purchasing power gain or loss.  In period of inflation, rising prices, a purchasing power loss is incurred o n monetary assets and purchasing power gain is realized on monetary liabilities.  In period of deflation, falling prices, a purchasing power gain is realized on monetary assets and purchasing power loss is incurred on monetary liabilities. What items are restated in the financial statements prepared in a hyperinflationary economy?  Only monetary items are restated when preparing constant peso statement. What is the formula for restatement?  Index number on reporting date ---------------------------------------------------------X historical cost index number on acquisition date x historical cost What are the procedures for restating financial statements in hyperinflationary economy?  The restatement is made by applying a general price index.  The items in the financial statements are classified into monetary and nonmonetary.  Monetary items are not restated because they are already expressed in terms of the monetary unit current at the end of reporting period.  Nonmonetary items are restated by applying the ge neral price index from the date of acquisition to the end of reporting period.  Some monetary items are carried at the amount current at the date other than acquisition date.  All items in the income statement ar e restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded.  The general price level or purchasing power gain or loss is computed. This pertains only to monetary items.  The restated amount of a nonmonetary item is reduced when it exceeds the recoverable amount.  Any revaluation surplus recognized prev iously is eliminated.  Retained earnings would be the balancing figure in the restated statement of financial position.  When comparative statements are prepared, the monetary items of the preceding year are expressed in terms of the index number at the end of the current year. Explain the accounting treatment when an economy ce ases to be hyperinflationary.  Judgment shall be exercised whether an economy is no longer hyperinflationary, when an economy ceases to be hyperinflationary, an entity shall discontinue the preparation and presentation of financial statement under a condition of hyperinflationary economy. What are the disclosures when financial statements are prepared in hyperinflationary economy?