Before diving into the phenomenon of hyperinflation and getting to know its consequences on accounting in Argentina, first it’s necessary to understand what exactly inflation is. It is defined as the general and sustained increase in prices of goods and services in a country over a period of time, usually calculated annually. When the general level of prices increases, with each unit of currency one acquires less goods and services. Meaning, inflation reflects a decrease in purchasing power of a currency. Some inflation is expected in healthy economies, usually ranging between 1 and 5%.
Hyperinflation is considered a particular case of inflation that occurs when there is an exaggerated increase in prices, ranging up to thousands or millions of percentage points.
Inflation is measured though indexes. In Argentina, the indices used have changed over time. Until December 2016, the country used the Domestic WPI (Wholesale Price Index) as the measurement of inflation; since January 2017, it has used the CPI (Consumer Price Index). In 2018, Argentina´s inflation was 47.6%, and has continues to grow into 2019.
Now, why does hyperinflation generate an impact in accounting?
The answer is simple: during periods of inflation, non-adjusted financial statements present distorted information. Therefore, an adjustment for inflation is used as a tool so all figures of financial statements are expressed in the purchasing power of a currency at the closing date of the financial year, making the financial statements useful for economic decision-making.
In Argentina, the re-adjustment of accounting statements has been and will continue to be indispensable, for the following reasons:
- The accumulated inflation rate in the last three years has exceeded 100%
- It is highly probable that the projected triennial accumulated rate will follow this trend
There are other qualitative factors that demonstrate a hyperinflation situation, such as a general correction of salaries and investment in non-monetary assets or in a foreign currency which is stable.
Due to these issues, the Argentine Federation of Professional Councils in Economics Sciences (FACPCE) has issued General Resolution 539/18, with the objective of providing a regulatory framework for the re-adjustment of financial statements.
In summary, the regulation stipulates:
- The adjustment for inflation should be applied to fiscal years initiated on 07/01/2018. In the financial statements closed on 06/30/2018, a descriptive note of the situation should be included, as the adjustment for inflation is not mandatory for the said date.
- The re-adjustment coefficient to be used will be a combination of WPI and CPI.
- The re-adjustment method is discussed in Technical Resolution 6 (this method, due to its complexity and technical specifics, will not be explained in this article).
Until now, the derivative effects of adjustments for inflation to accounting remain unknown. Moreover, one must consider that to this day the only tool utilized by the Argentinian government is indexation, despite insistence from companies to have an adjustment for inflation in order to guard against paying income tax on fictitious profits. For this reason, in Argentina, a review of the impact of the adjustment for hyperinflation in accounting is still pending, as well as establishing norms regulating this particular situation of the Argentine economy.
For more detailed consultation on how to adjust accounting for inflation, please reach out to Agustina and our team, here.