# Hyperinflation Restatement

U.S. GAAP says use temporal method, no restatement. IFRS says first restate your statements to account for hyperinflation, then use current rate mathod. How do you do that? 1. Cash is cash, no adjustment. 2. Inventory seems to be adjusted as if all inventory were purchased at current prices. I would think it should be done on weighted average or some other way, but that’s what I have written in my notes. Can someone confirm? 3. Capital stock should be valued at current prices…makes sense. You spent \$1 billion in stock 5 years ago, with hyperinflation, this stock is worth more, just like land and gold appreciate due to inflation. 4. Retained earnings will have to be adjusted to offset all changes. 5. Sales are adjusted based on average inflation. Makes sense. Another question I have is that in one example, they show price index at beginning of year as 100, and 200 at year end, that’s 100% hyperinflation. The average price index is given as 125. Here is my question: In restating sales of \$10,000, for example, they set it at \$16,000, apparently \$10,000 * 200/125 = \$16,000. If the average price index is 125, why not adjust sales to \$12,500? How do you explain 200/125?

1. Cash initially no adjustment. But at the end of adjustment for inflation you recognize “purchasing power gain/loss” which includes beginning cash, change in cash, receivables and monetary liabilities. 2. Non monetary assets are translated (adjusted) for inflation. 3.Yes. 4. NI is translated at current prices, Dividends @ the fx rate when they were declared. Thus, RE has a mixed effect. 5. Yes. Because, say, next year beg PI is 200 and ending PI is 300, the avg was 250, you’ll be using yr2 beg values * 300/250 and NOT yr2 beg values * 2.50. Makes sense? I guess, I did a terrible job explaining the last question.

I dont think inventory is adjusted at current prices, it is translated at the price it was bought, so if it was bought in 2008, they will likely give you the average 2008 exchange rate to estimate.

This part is very similar to what you would do in a Temporal method application… all inventory/AR etc. is at the Historic Rate. (so New Inflation/Old Inflation Rate) * 200 / 125 e.g.

@palantir: I think you’re talking about “normal” economies, not hyperinflationary.

ooo crap, yes you are right. Restate for inflation and then do current rate.

cpk’s reply got me to ask this in a different way: What is the difference between temporal method and IFRS’s restatement? Remember we always do current rate method, but in one case we have to do temporal first then current rate, and in another we go stratight to current rate. In addition, with hyperinflation, we either do it U.S. GAAP way (temporal then current), or IFRS way (restatement then current rate). So, Which elements get treated differently between temporal and IFRS restatement? And in what way? I know it’s only beginning of February, but let us get busy this early.

In which case do you do temporal first and then current rate???

U.S. GAAP temoral method.

I need to get back to the real books as things are a bit hazy. To answer my own question on the difference between the temporal method and IFRS’s restatement, restatement is using the same currency to adjust for hyperinflation effect, while the temporal method is a translation method, from one currency to another.

Hyperinflationary economies don’t require “temporal then current” under US GAAP. You just do temporal method. In IFRS you restate for inflation then do current rate. “U.S. GAAP requires a very different approach for translating the foreign cur- rency financial statements of foreign entities located in highly inflationary economies. SFAS 52 does not allow restatement for inflation, but instead requires the temporal method to translate financial statements kept in a highly inflationary currency. However, despite the use of the temporal method, the resulting transla- tion adjustment is included as a gain or loss in determining net income.”

You are right, what I said isn’t as absolute as I made it sound. I guess (still rusty, pardon me), and see if you agree with that: If the functional currency is DIFFERENT from the presentation currency, then you always have to do current rate method, whether you did temporal translation before that or not. Back to the original question how are temporal method translation adjustments differ from IFRS’s restatement?

For IFRS restatement (hyperinflationary economies): 1) Foreign currency values * inflation = Inflation adjusted FC, EXCEPT monetary items. (for B/S items this is year end inflation, for I/S items it is average inflation for the year) 2) carrying value * Exchange rate at the year end (or as of reporting date) 3) RE is a plug for step 1, then multiplied by the FX rate in step 2. 4) purchasing power G/L in I/S: loss from Increase in cash @ avg inflation, gain from holding payables @ year end inflation, loss in beg balance in cash @ y/e inflation—>net pp G/L For temporal method, nothing changes. hope this helps.