Consolidation of a Non-Hyperinflationary Subsidiary by a Hyperinflationary Parent (IAS 21 and IAS 29)

The IFRS Interpretations Committee received a submission about the accounting applied by a parent (Entity P), whose functional currency is the currency of a hyperinflationary economy, when consolidating a subsidiary (Entity S) whose functional currency is the currency of a non-hyperinflationary economy. The submission asked whether, in preparing its consolidated financial statements, the parent applies IAS 29 to restate the current-year and comparative amounts presented for its non-hyperinflationary subsidiary in terms of the measuring unit current at the reporting date.

Many respondents said they had observed diversity in practice.

Proponents of the view that Entity P would not restate Entity S's results and financial position emphasised the requirement in the last sentence of IAS 29:35 to apply only IAS 21 when translating Entity S's financial statements for inclusion in Entity P's consolidated financial statements. They held that the objectives and restatement requirements of IAS 29 apply only to entities within a group whose functional currency is that of a hyperinflationary economy.

Opponents of this view argued that

(i) IAS 29:1 brings within the scope of IAS 29 the consolidated financial statements of any entity whose functional currency is that of a hyperinflationary economy; (ii) the general objective and requirements of IAS 29 require financial statements to be expressed in terms of the measuring unit current at the reporting date; (iii) IAS 21:35 does not prevent Entity P from restating Entity S's financial statements after applying IAS 21:39-41; and (iv) IAS 29:36 requires financial statements to be restated in terms of the measuring unit current at the date of the consolidated financial statements and does not distinguish between hyperinflationary and non-hyperinflationary subsidiaries.

The Committee concluded that the principles and requirements in IFRS Accounting Standards do not provide an adequate basis for an entity to determine the required accounting, because an entity reading the applicable requirements of IAS 21 and IAS 29 could reasonably read them either as requiring it not to restate/index or as requiring it to restate/index Entity S. In other words, the Standards are neither clear nor fully consistent on this matter.

Committee members held different views on whether restatement/indexation of non-hyperinflationary subsidiaries is required or whether there is a choice in interpreting the existing Standards.

6 of the 14 Committee members considered that entities could apply either option as a reasonable interpretation of the existing requirements,

4 Committee members regarded non-indexation as the only acceptable treatment under "the existing Standards", and

4 Committee members regarded indexation as the only acceptable treatment, taking the view that "the existing Standards need to be revised".

Our view: We believe that the International Accounting Standards Board (IASB) should take up this matter again in the future. In addition, companies need to assess their own circumstances and choose the method appropriate to them. The view currently accepted in Türkiye is that, when consolidating a subsidiary whose functional currency is the currency of a non-hyperinflationary economy, the accounting is carried out under IAS 21 without indexation.