IAS 29 becomes applicable in Lebanon and Iran
What is the issue?
At a glance
IAS 29, ‘Financial reporting in hyper-inflationary economies’, should be applied by entities with a functional currency of the Lebanese pound and Iranian rial for accounting periods ending on or after 31 December 2020. IAS 29 should be applied as if the economy had always been hyper-inflationary.
Inflation in Iran started to increase at the end of 2018 and beginning of 2019. After a slight decrease and stabilisation by the end of 2019, inflation in Iran sharply increased at the beginning of 2020. Consequently, it is highly probable that the three-year cumulative local inflation rate will be above 100% at the end of December 2020. Local forecasts suggest that three-year cumulative inflation at the end of 2020 will be around 120% and it is unlikely to fall significantly below 100% in the near term thereafter. The IMF will publish their inflation forecast in October and this forecast is expected to confirm this projection.
The qualitative indicators are mixed; however, taking into account recent developments, including the devaluation of the currency and a deficit in financing as a result of pressure on oil prices, the indicators do not contradict the conclusion that Iran is expected to become a hyper-inflationary economy for accounting purposes by December 2020.
Inflation in Lebanon was less than 10% per annum until the end of 2019. Since the beginning of 2020, inflation in Lebanon has increased significantly, and information indicates that the three-year cumulative inflation at the end of September 2020 will exceed 100%. This increase is expected to continue in the future. Qualitative indicators, following the deteriorating economic condition and currency controls, also support the conclusion that Lebanon will be a hyper-inflationary economy for accounting purposes for periods ending on or after 31 December 2020.
What is the impact and for whom?
Application of IAS 29
Lebanon and Iran are hyper-inflationary economies for accounting periods ending on or after December 2020 (assuming that no contradictory information will be issued by the IMF for Iran in October 2020). Paragraph 4 of IAS 29 states that it is preferable for all entities that report in the currency of a hyper-inflationary economy to apply the standard at the same date.
IAS 29 requires financial statements of an entity whose functional currency is the currency of a hyper-inflationary country to be restated into the current purchasing power at the end of the reporting period. Therefore, transactions in 2020 and non-monetary balances at the end of the period would be restated to reflect a price index that is current at the balance sheet date. Comparatives should also be restated to reflect a price index that is current at the balance sheet date. This is because IAS 29 is applied as if the economy had always been hyper-inflationary.
Entities are not, however, required to present an additional balance sheet as at the beginning of the preceding period.
Multinational companies that have subsidiaries with the Lebanese pound and Iranian rial as their functional currency should consider paragraph 43 of IAS 21. This requires the financial statements of a subsidiary entity that has the functional currency of a hyper-inflationary economy to be restated in accordance with IAS 29 before being included in the consolidated financial statements. Comparative amounts presented previously in a stable currency are not restated.
When does it apply?
IAS 29 is applicable for entities with the functional currency of the Lebanese pound and Iranian rial for periods ending on or after 31 December 2020, and it should be applied as if the economy had always been hyper-inflationary.
Where do I get more details?
For more information, refer to the PwC publication, ‘In depth: IAS 29 becomes applicable in Argentina
’, which explains the application of IAS 29.