HYPERINFLATION

General price change

A general price change is increase or decrease in the
overall level of prices of goods or services throughout
the economy.

General Price Purchasing Power = INFLATION

General Price Purchasing Power = DEFLATION

Purchasing power means the goods and services that
money can buy.

General price changes are measured by using a

general price index constructed by a government
body like the overall level of prices constructed by a
government body like the Bangko Sentral ng Pilipinas.
Specific price change
A specific price change is increase and decrease in
the price of a specific good or service, such as food,
clothing and car.

Specific price change primarily occurs primarily

because of change in supply and demand for a
particular good or service.
Definition of hyperinflation
In economic terms, hyperinflation is the condition in
which inflation is out of control and the value of the
currency is on a rapid decline.
PAS 29 on financial reporting in a hyperinflationary
economy does not establish an absolute rate at
which hyperinflation is deemed to arise .

Hyper inflation is a matter of judgment.

Hyperinflation is indicated by characteristics of the
economic environment of a country which include but
are not limited to the following:
a. The general population prefers to keep its wealth in nonmonetary
assets or in a relatively stable foreign currency.
b. The general population regards monetary amounts not in terms of
local currency but in terms of a relatively stable foreign currency.
c. Sales and purchases on credit take place at prices that compensate
for the expected loss of purchasing power during the credit period even
if the period is short.
d. Interest rates, wages and prices are linked to a price index.
e. The cumulative rate over 3 years is approaching or exceeds 100%
Financial reporting in
hyperinflationary economy
Currency of 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 of reporting period.
The restatement of financial statements of an entity
that reports in the currency of a hyperinflationary
economy is accomplished by means of constant peso
accounting and current cost accounting.
Constant peso accounting
Constant peso accounting is the restatement of
conventional or historical financial statements in
terms of the current purchasing power of the peso
through the use of index number.
The traditional concept of preparing financial
statements based on historical cost is known as
nominal peso accounting.
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.
Stated differently, assets and liabilities are classified as
monetary because by their very nature, these are already
expressed in terms of current pesos and therefore realizable or
payable at no more or no less than their face or stated amounts.
Monetary assets and liabilities remain the same regardless of
the change in the general price level.
ESSENTIAL FEATURE: Right to receive or an obligation to
deliver a fixed or determinable amount of money.
Nonmonetary items
Nonmonetary items, by the process of exclusion, may be
defined as those items that cannot be classified as
monetary.
These items are so called nonmonetary because their
peso amounts reported in the financial statements
differ from the amounts that are ultimately realizable
or payable.
ESSENTIAL FEATURE: Absence of a right to receive
or an obligation to deliver a fixed or determinable
amount of money.
Gain or loss on purchasing power
Purchasing power means the goods and services that
money can buy.
In a period of inflation or rising prices, a purchasing
power loss is incurred on monetary assets and
purchasing power gain is realized on monetary
liabilities.
In a period of deflation or falling prices, a
purchasing power gain is realized on monetary assets
and a purchasing power loss is incurred on monetary
liabilities.
Illustration
A person deposits P100,000 in a savings account at the beginning of the
current year to earn 8% interest. Five years later, having withdrawn
neither the principal nor the interest, the depositor owns a passbook
that shows a balance of P146,930, which is the amount of P100,000
compounded annually at 8% for 5 years.
Is there gain or loss?
If during the five year period, the price level approximately increased
100%, then to maintain the purchasing power of the P100,000 in the
current year, the depositor should have P200,000 after 5 years. But the
depositor has only P146,930 . Thus, there is an economic loss of
P53,070.
Clearly, when prices increase the value of money decreases.
What items are restated?
Only nonmonetary items are restated when preparing
constant peso financial statements.
Monetary items are not restated anymore because they are
automatically stated in terms of current purchasing power of the
peso.
Formula for restatement:
Index number at end of reporting period
x Historical Cost
Index number on acquisition date
Procedures for restatement
1. The restatement is made by applying a general price index.
2. The items in the financial statements are classified into monetary and
nonmonetary.
3. Monetary items are not restated.
4. Nonmonetary items are restated.
5. Some monetary items are carried at amount current at date other than
acquisition date, for example, property plant and equipment are revalued. It
is restated at the date of revaluation.
6. All items in the income statement are restated.
7.The general purchasing power gain or loss is computed. This pertains only
to monetary items.
8. The restated amount of property, plant and equipment, goodwill and
other intangible asset is reduced when it exceeds the recoverable amount.
9. Any revaluation surplus recognized previously eliminated.
10. Retained Earnings would be the balancing figure in the restated
statement financial position .
11. When comparative statements are prepared, the monetary items of the
preceding year are expressed in terms of the index number ate the end of
the current year.