Question

aud Bahwan Group has an established presence in fields like automotive, heavy vehicles,
construction equipment, special equipment’s, property and real estate, travel and tourism. Playing
a humble role in building a nation. They have well qualified technical, commercial and managerial
professionals grouped into specialized teams. The Saud Bahwan Group has come up into many
infrastructure and other projects with renowned partners inside and outside the country. In recent
times, Saud Bahwan Group have invested in Argentina, who are famous for rich natural resources,
export-oriented agricultural sector, and a diversified industrial base.
Sohail Bahwan Group (SBG) purchases several properties in Argentina for starting an industrial
unit. Over the last few years, the Argentina currency has been in double-digit inflation and in 2019,
inflation recorded at 54.4 %. SBG have to prepare their financial statement and record their
transactions for the property they owned
a. If SBG are preparing their financial statement, are they going to adjust the value of their
properties with the fluctuation of currency?
b. What benefits SBG will get if they record the same value of their property in their financial
statement? How the statement can be consistent, comparable, verifiable and reliable?
Your answer should be around 400 words for each question.

Answer 1

The restatement of financial statements in accordance with this Standard IFRS IAS 29 ,requires the application of certain procedures as well as judgement. The consistent application of these procedures and judgements from period to period is more important than the precise accuracy of the resulting amounts included in the restated financial statements. The restatement of financial statements in accordance with this Standard requires the use of a general price index that reflects changes in general purchasing power.

It is preferable that all entities that report in the currency of the same economy use the same index. When an economy ceases to be hyper inflationary and an entity discontinues the preparation and presentation of financial statements prepared in accordance with this Standard, it shall treat the amounts expressed in the measuring unit current at the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements.

• All other assets and liabilities are non-monetary. Some non-monetary items are carried at amounts current at the end of the reporting period, such as net realisable value and market value, so they are not restated. All other non-monetary assets and liabilities are restated.
• Most non-monetary items are carried at cost or cost less depreciation; hence they are expressed at amounts current at their date of acquisition. The restated cost, or cost less depreciation, of each item is determined by applying to its historical cost and accumulated depreciation the change in a general price index from the date of acquisition to the end of the reporting period. For example, property, plant and equipment, inventories of raw materials and merchandise, goodwill, patents, trademarks and similar assets are restated from the dates of their purchase. Inventories of partly-finished and finished goods are restated from the dates on which the costs of purchase and of conversion were incurred.
• Detailed records of the acquisition dates of items of property, plant and equipment may not be available or capable of estimation. In these rare circumstances, it may be necessary, in the first period of application of this Standard, to use an independent professional assessment of the value of the items as the basis for their restatement.

IAS 29 establishes specific standards for entities reporting its financial statements in a functional currency that is the currency of a hyperinflationary economy. In a hyperinflationary environment, financial statements, including comparative information, must be expressed in units of the functional currency current as at the end of the reporting period. Restatement to current units of currency is made using the change in a general price index. Non-monetary items are restated using the change in the general price index between the date those items were acquired or incurred and the balance sheet date, while monetary items that are already stated at the measuring unit at the balance sheet date are not restated. The gain or loss on the net monetary position must be included in profit or loss for the period and must be disclosed separately.

For financial institutions with mainly monetary assets and liabilities in their balance sheet, in most cases the inflation adjustment will produce a net loss, as assets exceed liabilities. It’s important to highlight that this loss is not tax deductible, so inflation losses impact directly the bottom line. In addition, items of the income statement are also restated in units of the functional currency current as at the end of the reporting period, by applying the change in the CPI index from the date each income or expense was recorded.

In most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued."[5]

Ignoring general price level changes in financial reporting creates distortions in financial statements such as[5]

• reported profits may exceed the earnings that could be distributed to shareholders without impairing the company's ongoing operations
• the asset values for inventory, equipment and plant do not reflect their economic value to the
• business
• future earnings are not easily projected from historical earnings
• the impact of price changes on monetary assets and liabilities is not clear
• future capital needs are difficult to forecast and may lead to increased leverage, which increases the business's risk
• when real economic performance is distorted, these distortions lead to social and political consequences that damage businesses (examples: poor tax policies and public misconceptions regarding corporate behavior)

2. imoact of preparing based on inlation rate

Fixed assets - Because fixed assets are valued at historic cost, the assets are stated at a much lower figure than their current replacement costs. During a period of rising prices the Historical Cost of assets obtained becomes dated. Reporting assets using their original costs will be liable to understate financial position because current values will be higher. The understatement will be greater, the higher the rate of inflation. Assets, for example, equipment held at the end of an accounting period will normally be procured at different dates. This makes the company vulnerable to takeover bids, shareholders will need to bear in mind this will lead to lower valuations for their shares.

Depreciation - As the assets are undervalued, consequently the depreciation on such assets are also undervalued. This leads to distortions in the make or buy decisions of the assets. This again will overstate the profit of an enterprise.

Tax Payment - Because historical accounting overstates profits, these are taxed and unless various additional tax allowances are given, the taxation paid is excessive, and more than true profits adjusted for inflation. This leads to companies having a shortage of cash and inadequate finance being available for future assets.

Profits and return on investments are overstated as revenues are recorded at increased price levels whilst costs are not, this will cause deficits in Historical Cost Balance Sheets and Profit Calculations.

Unless adjustments are made, users of accounts may be seriously misled about the value and profitability of a business and about what may be suitable levels of dividends, wages or prices. If adjustments are not made to correct for changing prices, some expenses based on past costs will be matched against revenues based on current sales prices.

Adjustments need to be made for the benefit of the users of financial statements. For example shareholders will need to know how effectively directors are performing and use financial statements as a base for decisions. Other users include employees, bankers, revenues and customs, management, public etc.