Question

ABC Corp, a public limited company, operates in the energy and power sector. The company has experienced significant growth in recent years and has expanded its operation internationally by the acquisition of overseas subsidiaries. Group policy is to translate the financial statements of these subsidiaries using the closing rate method with goodwill calculated at the rate of exchange ruling at the date of acquisition.
One of these subsidiaries, XYZ, is incorporated in a country that is suffering from a very high inflation (120% over the last 3 years) as a result of political and economic problems. Additionally, it is difficult to repatriate funds from the country. ABC Corp owned 91% of the shares of XYZ, with the foreign government owning the balance. Most of the products produced by XYZ are sold locally, but approximately 10 % of the product sold at cost to ABC. Because of a dispute XYZ has created a provision for doubtful debt against an intercompany amount owing from ABC. As a part of its risk management policies, ABC hedges the profit made by XYZ and denominates XYZ’s Financial Statements in US $ rather than the local currency. XYZ non-current assets are carried at a US dollar valuation, which is prepared by the chief accountant.

Discuss and Comment the treatment by ABC Corp based on IAS 29

Answer 1

Answer:

IAS-29: Financial Reporting in Hyperinflationary Economies:

Main objective of IAS-29 is to establish standards for countries suffering from hyperinflationary conditions to report meaningful information.

In the given case: ABC incorporated at US is holding company holds XYZ incorporated in another company which is suffering from hyper-inflation.

Restatement of financial information is required in such cases. Financial statements are prepared at the end of the year. But in case of hyperinflation, prices rise at very fast rate. Hence, the amounts stated in the statements are not true. Therefore, price index is necessary to make the information meaningful.

• This standard IAS-29 does not give standard rate to calculate but judgemental decision can be made. The gain or loss so calculated (using general price indices) are transferred to Profit or Loss Account
• It has to make clear notation for Histoical Cost method or Current Cost method is used to prepare financial statements.
• Non-current assets are restated using general price index at the current cost.
• Goodwill will be restated using general price index from the date of revaluation last made.   

"If a parent has subsidiary which reports in the currency of a hyperinflationary economy, then the financial statements of such subsidiary will be restated to the currency units at the end of reporting period using the general price index at reporting period of the country in which it reports before consolidation. If such a subsidiary is a foreign subsidiary then its financial statements will be first restated to the currency units at the end of reporting period before translating into the presentation currency of the parent." This implies that, XYZ Company has to restate the statements in the country of its incorporation and then it has to consolidate statements with parent company - ABC Company Ltd.

Conclusion:

XYZ Co., being into hyperinflationary country, has to restate its financial statements.

• Non-current assets, Goodwill and other long-term liabilities and assets has to be restated using general price index.
• The treatment by ABC to hedge losses against the profits is a good move.
• ABC company (being a parent/ holding company) stating financial statements in US $ is also correct. But, first preparing the statements in the country of XYZ's incorporation is also necessary using general price index.

Comment if clarifiaction or more explanation is needed.

All the best !!