Financial Accounting in Inflationary Economies and IAS 29

Abstract

In the past few years, we have seen a global spike in inflation that hadn’t been seen since the 1970’s and 80’s. This has raised inflation into a major topic of interest. In this thesis I will be looking into the effects of high inflation on financial accounting. The objective of this thesis is to investigate the modern-day applications, history, relevance and usefulness of International Accounting Standard 29 – Financial Reporting in Hyperinflationary Economies. The method used is a literary review with real examples taken from companies’ financial statements.

There is no definitive definition for hyperinflation, but IAS 29 considers a cumulative inflation of 100% over three years as one of the characterizations of hyperinflation. This would mean an annual inflation rate of about 26%, which is considerably low compared to other definitions of hyperinflation. Even several developed economies had inflation rates that peaked not far from 26% in 2022. However, despite there currently being 12 jurisdictions that according to the International Accounting Standards Boards should be considered hyperinflationary, IAS 29 is widely used only in Zimbabwe.

The main findings of this thesis are that prior research is inconclusive in answering if inflation-adjusted financial figures are more value relevant than historical cost ones, with research from different economies at different times giving different results on the matter. Historical cost figures were found to be more used by analysts and directors; they were also better at predicting future free cash flows. Most research seem to suggest that inflation-adjusted figures and historical cost ones should be considered complimentary instead of exclusionary. This is also the way publicly listed companies in Zimbabwe present their financial statements. This is in conflict with the IAS 29 guidelines, which discourage the publishing of historical cost figures.