PwC shares insights to hyperinflationary accounting implications for financial reporting

Tuesday, 28 February 2023 00:00 - - {{hitsCtrl.values.hits}}

From left: PwC Sri Lanka Partner Malinda Boyagoda, PwC Argentina Partners Flavia Maslaton and Sergio Cravero and PwC Sri Lanka and Maldives Partner Thivanka Jayasinghe

As a timely and important topic of discussion relevant for these turbulent times, PwC recently held a webinar on Hyperinflationary Accounting Implications for Financial Reporting.

Hyperinflation is very high and typically accelerating inflation that erodes the real value of the local currency, as prices of goods and services increase. General price levels rise even more as the general public try to rid themselves of a devaluing currency. Government budget deficit financed by currency creation are attributed to this phenomenon as well as uncertain and unprecedented events, socio-political upheavals, wars and their adverse impacts.

The core consideration of the discussion was whether Sri Lanka meets the accounting definition of a hyperinflation economy consequent to the pandemic effects exacerbated by the sheer magnitude of economic turbulence. It was noted that the financial year ending December 2022, cannot be termed as a hyperinflationary economy, whereas the financial years ending March 2023 and beyond, will need to be viewed through this lens and decided. As such, close monitoring of the economy is needed to understand whether Sri Lanka is moving towards hyperinflationary status.

Regulatory bodies should prepare in advance and assess the impact LKAS 29 Financial Reporting in Hyperinflationary Economies will have on various areas of regulatory supervision. They should take cognisant of certain qualitative factors that need to be evaluated in making a final decision on whether the economy has moved into hyperinflation. The panel highlighted that corporate management and Boards of Directors need to be aware of the impact of rising inflation on budgets, targets and performance evaluations within entities and emphasised that decisions taken disregarding extreme levels of inflation could lead to wrong conclusions and business failures.

The experienced panel, consisted of PwC Sri Lanka Partner Malinda Boyagoda, PwC Argentina Partners Flavia Maslaton and Sergio Cravero. PwC Sri Lanka and Maldives Partner Thivanka Jayasinghe moderated the session.

Flavia Maslaton said: “It is important to consider the adjustments needed for internal reports such as budgets and KPIs in a hyperinflationary situation and focus on early awareness and training of staff. It is critical to start preparing with the detailed information early and quantify the effects of applying LKAS 29 for the first time. Companies should also consider enhancements needed to their IT and accounting systems to facilitate some of the complex calculations needed.

Sergio Cravero was of the view that: “At board level, it’s crucial to understand the pervasive impact of macroeconomic variables, including inflation on an organisation’s businesses and its governance.”

“It is important for corporates to engage early with the tax authorities through their respective trade associations or Chambers, to have consensus on how inflationary accounting adjustments will be treated in tax computations. Entities operating in regulated industries should engage with the Regulators to assess regulatory impacts including regulatory reporting implications,” added Malinda Boyagoda.