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International Financial Reporting StandardsFinancial Reporting in Hyperinflationary Economies – Understanding IAS 29

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May 2006

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PrefaceInternational Financial Reporting Standards (IFRS) are popular with entities that raise international capital throughdebt or equity and that operate in emerging markets or fast-developing economies. These economies may behyperinflationary environments.

IAS 29, Financial Reporting in Hyperinflationary Economies, is an integral part of IFRS. It requires the IFRSfinancial statements of any entity operating in a hyperinflationary economy to take full account of the effects of inflation using a ‘current purchasing power’ approach.

The IAS 29 requirements also need to be considered by any entity located outside the hyperinflationaryenvironment preparing IFRS consolidated financial statements that include a foreign entity (such as a subsidiary,associate or joint venture) that operates in a hyperinflationary economy.

The preparation of financial statements using a current purchasing power approach requires an understanding of the underlying economic concepts and a complex series of procedures and reconciliations to ensure accurate results.

This guide is intended as a practical aid for entities applying IAS 29. It has been updated as of December 2005 to reflect the changes that arise as a result of the release of IFRIC 7 and other changes to IFRS.PricewaterhouseCoopers has helped many entities to apply this difficult standard. We hope that our experienceand proven methodology will make applying IAS 29 less burdensome.

Preface


2 PricewaterhouseCoopers

ContentsSection 1 Introduction 3

Why is this guide needed? 3Inflation or changes in the general purchasing power of money 3Characteristics of hyperinflation 3Benefits of purchasing power adjusted financial statements 4Objectives of IAS 29 4Who must apply IAS 29 5Presenting financial statements in a stable currency 5Intra-group reporting 5Transition to IFRS 5

Section 2 Applying the standard 6Selection of the price index 6Segregation of monetary and non-monetary items 7Restatement of non-monetary items 8Income statement 9Calculation of monetary gain or loss 9Cash flow statement 10Restatement of comparatives 10Disclosures 10Economies that cease to be hyperinflationary 10

Section 3 Restatement procedures for non-monetary balance sheet items 12Non-monetary items at fair value or net realisable value 12Prepaid expenses 12Advances paid on purchases 13Inventories 13Investments in associates 14Property, plant and equipment and accumulated depreciation 15Intangible assets 16Advances received 16Deferred income 17Restatement of shareholders’ equity 17Transition to IFRS 19

Section 4 Restatement of the income statement 20Revenue 20Cost of goods sold 20Depreciation and amortisation of intangible assets and realisation of prepaid

expenses and deferred income (grant) 21Other items included in the income statement 21Adjustments or reclassifications made to statutory financial statements

to arrive at historical financial statements 22Income taxes 22Monetary gain or loss 23

Section 5 Monetary gain or loss 24Proof – average monetary position method 24Proof – statement of sources and application of net monetary assets

and liabilities method 24

Section 6 Cash flow statement 28

Section 7 Illustrative example of IAS 29 29

Contents



IntroductionWhy is this guide needed?

IAS 29 is based on current purchasing power principles and requires financial statements prepared in thecurrency of a hyperinflationary economy to be stated in terms of the value of money at the reporting balancesheet date. This requirement needs an understanding of complex economic concepts, a knowledge of theentity’s financial and operating patterns and a detailed series of procedures. It represents a challenge forreporting entities and auditors.

This guide provides an overview of the concepts in the standard, descriptions of the necessary procedures and a detailed illustrative example.

Inflation or changes in the general purchasing power of money

The purchasing power of money declines as the level of prices of goods and services rises. The purchasingpower of money in an inflationary environment and the price level are interdependent.

Financial statements unadjusted for inflation in most countries are prepared on the basis of historical cost withoutregard to changes in the general level of prices. The individual assets, liabilities, shareholders’ equity, revenue,expenses and gains and losses are therefore stated at cost at the time at which these items were originated. The impact of inflation is ignored. This produces a meaningful result provided that there are no dramatic changesin the purchasing power of money.

Significant changes in the purchasing power of money mean that financial statements unadjusted for inflation arelikely to be misleading. Amounts are not comparable between periods, and the gain or loss in general purchasingpower that arises in the reporting period is not recorded. Financial statements unadjusted for inflation do notproperly reflect the company’s position at the balance sheet date, the results of its operations or cash flows.

Inflation-adjusted financial statements are an extension to, not a departure from, historical cost accounting. IAS 29 aims to overcome the limitations of historical cost financial reporting in hyperinflationary environments.

Characteristics of hyperinflation

There is no absolute definition of hyperinflation. The characteristics identified in IAS 29 are as follows:

• People accumulate wealth in non-monetary assets or in a stable foreign currency;

• Monetary amounts are expressed in terms of a relatively stable foreign currency. Prices (for example, rent,wages and capital goods) may be quoted in that foreign currency;

• Prices for credit sales and purchases are calculated to compensate for the expected loss of purchasing powerduring the credit period, even for short-term credit;

• Interest rates, wages and prices are linked to a price index; and

• The cumulative inflation rate over three years is approaching, or exceeds, 100%.

A cumulative three-year inflation rate exceeding 100% is a strong indicator of hyperinflation, but the qualitativefactors should also be considered. The factors have to be carefully weighed because it is not desirable to move inand out of hyperinflationary reporting within a short time period. Reporting entities in the same country shouldstart applying IAS 29 at the same time in order to achieve comparability.

Introduction1



Other characteristics that are not mentioned in the standard but that can be useful in determining the presence ofhyperinflation include:

• severe exchange controls to protect the local currency; and

• frequent Central Bank intervention in the currency.

Benefits of purchasing power adjusted financial statements

Financial statements that are expressed under IAS 29 in a measuring unit that is current at the balance sheet dateprovide several benefits:

• They provide management, shareholders and other users with comparable information from period to period,relating to the underlying results of operations, capital maintenance and trends in performance;

• They enable management to make more reliable decisions on capital expenditure plans, as the financialstatements are more relevant; and

• They become more useful to international investors and other users of financial statements in that they arecomparable with other companies in the same industry.

Objectives of IAS 29

The IAS 29 approach is to restate all balances recorded in the financial statements (including comparativenumbers) to the year-end general purchasing power of the functional currency. The effects of the IAS 29restatement on the financial statements will depend on the magnitude of inflation and the composition of theentity’s assets and liabilities.

The remeasurement process requires the application of judgement as well as certain required procedures. The standard states:

‘The consistent application of these procedures and judgements from one period to another is more importantthan the precise accuracy of the resulting amounts included in the restated financial statements.’

Introduction1


Frequently asked questions

Economies ceasing to be hyperinflationary

If the cumulative inflation in an economy deemed to be hyperinflationary drops below 100% in a three-year period, has hyperinflation ceased?

The economy has probably ceased to be hyperinflationary. However, this quantitative measure should be evaluated in the context of overall economic developments and trends.

Although judgement is involved in determining when an economy is no longer hyperinflationary, all entitiesshould cease to apply IAS 29 from the same date to ensure financial statements are comparable fromentity to entity.


Introduction1


Who must apply IAS 29

Compliance with IAS 29 is mandatory for any entity if the primary economic environment in which it operates ishyperinflationary and it therefore has to measure items in its IFRS financial statements in the currency of a hyperinflationary economy.

The standard applies to an entity’s financial statements from the beginning of the reporting period in which it identifies the existence of hyperinflation in the country of its functional currency.

Presenting financial statements in a stable currency

The restatement process outlined in IAS 29 specifically applies to those situations in which an entity measuresitems in its IFRS financial statements in the currency of a hyperinflationary economy.

When an entity presents financial statements in a stable currency, it should ensure that the financial statementshave dealt with the impact of hyperinflation before being translated into a stable currency for presentation purposes.

The IFRS financial statements presented in local currency at historical cost should be restated in accordance withIAS 29. Entities may then apply translation procedures in IAS 21 to present them in a stable currency. The year-end exchange rate is used to translate the financial statements into the stable currency for all periods presentedunless the entity also presented financial statements in a stable currency in the previous year. Where this is thecase, the comparative amounts should be those that were presented as current-year amounts in the relevantprior-year financial statements. The amounts presented in a stable currency are not subsequently adjusted forchanges in the price level or exchange rates.

Intra-group reporting

A foreign subsidiary operating in a hyperinflationary economy may be required for group purposes to report to its overseas parent in a stable currency, usually the group’s presentation currency. IAS 21 requires the foreignsubsidiary to restate its local currency IFRS financial statements in accordance with IAS 29 before translation intothe group’s presentation currency.

Transition to IFRS

IFRS 1 requires retrospective application of the wording of IFRS standards effective at the reporting date of theentity's first IFRS financial statements – that is, as if the current wording of each of the effective standard hadalways been applied – unless IFRSs provide an exemption. This includes retrospective application of the currentwording of IAS 29.


Applying the standard2


Applying the standardIAS 29 requires management to restate the financial statements, including the cash flow statements, into thecurrent purchasing power at the balance sheet date. This should be done in a number of steps, and judgementshould be applied. The consistent application of procedures is more important than the precise accuracy of the results.

The restatement procedures are summarised as:

• the selection of a general price index,

• the segregation of monetary and non-monetary items,

• the restatement of non-monetary items,

• the restatement of the income statement,

• the calculation and proof of the monetary gain or loss,

• the preparation of the cash flow statement with recognition of inflationary effects, and

• the restatement of corresponding figures.

Selection of the price index

IAS 29 requires the use of a general price index to reflect changes in purchasing power. Most governments issueperiodic price indices that vary in their scope, but all entities that report in the currency of the same economyshould use the same index.

The most reliable indicator of changes in general price levels is the consumer price index. The consumer priceindex is normally closest to the concept of the general price index required by IAS 29 because it is at the end ofthe supply chain and reflects the impact of prices on the general population’s consumption basket.

The most important attributes for a reliable general price index are:

• a wide range of reference, such as inclusion of most of the goods and services produced in theeconomy, in order to reflect varying price fluctuations;

• an accurate reflection of price changes;

• the availability of prior-year indices, as well as those of the current year;

• regular, preferably monthly, updating; and

• consistency, uniformity and continuity.


Conversion factors need to be calculated based on the increase in the general price index in order to restatehistorical cost amounts to current purchasing power.

Segregation of monetary and non-monetary items

Management should restate all balance sheet amounts that are not expressed in terms of the measuring unitcurrent at the balance sheet date. Monetary items do not need to be restated, as they represent money held, to be received or to be paid. Monetary items are therefore already expressed in current purchasing power.

All balance sheet items must be segregated into monetary and non-monetary items. Most balance sheet itemsare obviously monetary or non-monetary. In less straightforward cases, the determination as to whether acomponent is monetary depends on its underlying characteristics. For example, the provision for doubtfulreceivables is considered monetary because receivables are monetary. The provision for inventory obsolescence is non-monetary because inventory is non-monetary.

Examples of monetary assets and liabilities are:



Example

An item of property, plant or equipment was purchased in December 20X0 at a price of 200 millioncurrency units.

The restated asset cost at 31 December 20X2, determined using the conversion factors below, is 200 x 4.114 = 822.8 million currency units, current at 31 December 20X2.

General price index Conversion factor

31 December 20X0: 54.224 4.114 (223.100/ 54.224)31 December 20X2: 223.100 1.000 (223.100/223.100)

Assets

Cash and amounts due from banksMarketable debt securitiesTrade receivablesNotes receivableOther receivables

Liabilities

Trade payablesAccrued expenses and other payablesCurrent income taxes and withholding taxes payableBorrowings Notes payable

Assets and liabilities other than monetary items are called non-monetary items. All elements of shareholders’equity are non-monetary once paid in or accumulated.

Examples of non-monetary items are:

IFRIC 7 addresses accounting for deferred taxes when IAS 29 is applicable. An entity should calculate deferredtaxes in accordance with IAS 12 after it has restated all non-monetary balances in accordance with IAS 29.Classification of deferred taxes as either monetary or non-monetary is not therefore relevant.

For comparative balance sheets, the deferred tax calculation is done in two steps:

1. The deferred tax is calculated based on the carrying amounts expressed in the purchasing power current atthe comparative balance sheet date.

2. The whole comparative balance sheet, including the calculated deferred tax, is restated to the purchasingpower at the reporting date to take account of inflation for the reporting period.

IFRIC 7 explains that IAS 29 restatement should be applied as if the economy had always been hyperinflationary.It also extends this principle to the calculation of deferred taxes in the opening balance sheet prepared inaccordance with IAS 29 when the entity’s functional currency initially becomes hyperinflationary.

Restatement of non-monetary items

Non-monetary assets and liabilities are restated in terms of the measuring unit current at the balance sheet date,using the increase in the general price index from the transaction date when they arose to the balance sheet date.

Specific issues arise when restatement increases the carrying amount of assets beyond the net realisable value or if non-monetary assets are carried at fair value.

Detailed guidance on these issues and on the restatement of non-monetary items included in the balance sheet is in Section 3.




Assets

Prepaid expensesAdvances paid on purchases*InventoriesMarketable equity securitiesInvestments in associatesProperty, plant and equipmentIntangible assets

Liabilities

Advances received on sales*Deferred income (for example, government grants)Shareholders’ equity

* Advances paid or received are considered non-monetary if theyare linked to specific purchases or sales; otherwise they shouldbe considered monetary.


Income statement

The historical cost income statement generally reports revenues and costs that were current when the underlyingtransaction or event occurred. All items in the income statement should be expressed in terms of the measuringunit current at the balance sheet date. All amounts should therefore be restated by applying the change in thegeneral price index from the dates when the items of income and expenses originated. Income statements arenormally restated on a monthly basis.

Income statement items, such as interest income and expense, and foreign exchange differences related toinvested or borrowed funds are also associated with the net monetary position. These items are adjusted forinflation and, along with the monetary gain or loss, presented as separate line items in the income statement.These items are normally presented below an operating profit subtotal.

Section 4 provides detailed guidance on restatement of the income statement.

Calculation of monetary gain or loss

One of the two main objectives of IAS 29 is to account for the financial gain or loss that arises from holdingmonetary assets or liabilities during a reporting period (the monetary gain or loss).

The monetary gain or loss is calculated based on the entity’s monetary position. The monetary position can bederived from the equation below:

All monetary assets and liabilities (net monetary position) held during the year are represented in the financialstatements either by non-monetary assets and liabilities recorded on the balance sheet, or by transactions recordedin the profit and loss account or directly in equity. The monetary gain or loss may be calculated by restating non-monetary items (including the profit and loss account and transactions recorded directly in equity) to year-endpurchasing power and comparing the restated values to the historical cost amounts or, where balances existed atthe beginning of the year, to the historical amounts restated to the beginning of the year purchasing power.



Assets• monetary• non-monetary

Liabilities• monetary• non-monetary

Shareholders’equity

Monetaryassets

Monetaryliabilities

Non-monetaryassets

Shareholders’equity

Monetary position Non-monetary position

Therefore:Therefore:

= +

Non-monetary liabilities+ = + +

It is also possible to calculate the gain or loss on the entity’s daily net monetary position. The costs of such a calculation, however, would be onerous. An approximation of the monetary gain or loss can be calculated using average monetary positions during the period as a test of the reasonableness of the monetary gain or loss derived by restating the non-monetary assets and liabilities.

In addition to the gain or loss on the net carrying amount of monetary assets and liabilities (net monetaryposition), IFRIC 7 identifies inflation gains or losses on the tax bases of assets and liabilities as a separatecomponent of the monetary gain or loss. Additional detail on calculation of the monetary gain or loss and proof ofthe amount is provided in Section 5.

Cash flow statement

All items in the cash flow statement should be expressed in a measuring unit current at the balance sheet date.All items in the cash flow statement are therefore restated by applying the relevant conversion factors from thedate on which the transaction originated. There is no detailed guidance for this complex area. However, it ispossible to arrive at an appropriate presentation by considering the objectives of IAS 29 and IAS 7. This includesseparate disclosure of the effects of inflation on cash and cash equivalents.

Guidance on preparation of the cash flow statement is included in Section 6.

Restatement of comparatives

The prior-year comparatives are restated in terms of the measuring unit current at the end of the latest reportingperiod. If prior-year financial statements have already been prepared to conform with IAS 29, the current-yearconversion factor is applied to the prior-year financial statements.

Disclosures

Management should describe in the accounting policy note the methodology used in applying IAS 29. Thefollowing information should be disclosed:

• The fact that the financial statements and the comparatives have been restated for the changes in the generalpurchasing power of the functional currency and, as a result, that they are stated in terms of the measuring unitcurrent at the balance sheet date;

• The identity and level of the price index at the balance sheet date and the movement in the index during thecurrent and previous reporting period; and

• The three-year cumulative inflation at the balance sheet date for each period presented in the financialstatements (although this is not required by the standard, it is useful to disclose).

Economies that cease to be hyperinflationary

Judgement should be applied to determine when an economy ceases to be hyperinflationary. A number ofqualitative and quantitative indicators should be considered – for example, stabilisation of the price level andincreased preference to keep wealth in the local rather than stable foreign currency or non-monetary assets.Although much of the weight is given to a decrease in the cumulative three-year inflation below 100%, otherqualitative factors may indicate that the price stabilisation is only temporary and the country is therefore not out of hyperinflation. It is not beneficial for an entity’s financial reporting to go in and out of hyperinflation withinshort period of time. An entity should cease applying IAS 29 at the end of the reporting period that is previous to





the date on which the country moves out of hyperinflation. The amounts in the financial statements as at thatdate should be considered as the carrying amounts for the subsequent financial statements – that is, thoserestated amounts should be the cost bases of the non-monetary items in subsequent balance sheets.

If, for example, a country moves out of hyperinflation at 31 October 2005, an entity’s last financial statements forthe year ended 31 December 2004 would be used to derive cost bases for non-monetary items at any balancesheet date on or after 1 November 2005. This IAS 29 requirement results in ignoring inflation for a period of 10 months, from 1 January 2005 to 31 October 2005. The inflation in the last period before moving out ofhyperinflation should be insignificant because the decrease in inflation reflects one of the reasons for an economyceasing to be hyperinflationary.

An entity may have presented interim reports before the country moves out of hyperinflation. These interimreports should not be subsequently amended to exclude hyperinflationary restatement. An entity should considerthe closing date of the last interim report as the ‘end of the previous reporting period’ for the purpose of derivingthe cost bases for non-monetary items at subsequent balance sheet dates in post-hyperinflationary periods.

Entities preparing IFRS financial statements for the first time in economies that have ceased to behyperinflationary will need to make a cumulative adjustment to the non-monetary items in the balance sheet. All adjustments to non-monetary items will be charged or credited to retained earnings.




Economies that cease to be hyperinflationary

An economy ceased to be hyperinflationary at 31 October 2005. Company A’s last interim financialstatements are for six months to 30 June 2005, and its last year-end financial statements are for theyear to 31 December 2004. Company B prepares only annual financial statements, and its lastreporting date was 31 December 2004. How should these companies apply IAS 29 in their financialstatements for 2005?

Company A should consider the date of the last interim report, 30 June 2005, as the ‘end of the previousreporting period’ for the purpose of deriving the cost bases for non-monetary items at 31 December 2005.Company B will use the restated amounts in its 31 December 2004 financial statements to derive costbases of non-monetary items at 31 December 2005.


Restatement procedures for non-monetary balance sheet items3


Restatement procedures for non-monetary balance sheet itemsAll non-monetary components in the balance sheet, excluding retained earnings, are restated by applying ageneral price index from the dates on which the items arose at the first application of IAS 29. Restated retainedearnings, excluding current-year earnings, are the balancing figure derived from all the other amounts in theopening restated balance sheet.

Non-monetary items at fair value or net realisable value

Some non-monetary assets may be carried at fair value at the balance sheet date – such as property, plant andequipment revalued by an independent appraiser as allowed under IAS 16; marketable equity securities fairvalued under IAS 39; and investment properties carried at fair value under the IAS 40 fair value model. Thehistorical cost amounts should be restated to obtain the appropriate monetary gain or loss. The restated carryingamount should then be compared to the ‘current’ values and the difference, if any, charged or credited to theincome statement or shareholders’ equity in accordance with the appropriate standard.

The net realisable value of an asset may be less than its restated amount. Application of the normal impairmentrequirement would therefore result in a write-down of the carrying amount in the restated financial statements,even if no impairment of the asset was required in the historical cost financial statements.

Prepaid expenses

• Obtain the ageing of prepaid expenses.

• Restate prepaid expenses from the date of the payments to the balance sheet date.


Marketable equity securities

Should equity securities that are carried at fair value be restated?

Equity securities classified as either available-for-sale assets or designated as at fair value through profitor loss (including held-for-trading assets) are carried at fair value on the balance sheet under IAS 39. Fair value gains and losses on assets designated as at fair value through profit or loss are recognisedimmediately in the income statement. Fair value gains and losses on available-for-sale assets arerecognised directly in equity. Fair value gains and losses deferred in equity are recycled to the incomestatement on disposal or impairment.

The historical cost of the equity securities should be restated. The difference between the fair value of theequity securities and the restated historical cost of the equity securities is the fair value gain or loss.




Advances paid on purchases

• Obtain a breakdown of advances paid, ensuring that, where appropriate, the relevant specific advances havealready been netted off against accounts payable.

• For advances paid in respect of purchases of future inventories, property, plant and equipment (PPE) orintangibles, obtain the ageing of advances, including the amounts and payment dates.

• Restate advances according to the ageing schedule from the payment dates to the balance sheet date.

• When the inventory, an item of PPE or an intangible asset is received, add the restated carrying value of theadvance to the restated cost base of the asset.

Inventories

Raw materials

• Obtain the historical cost prices and acquisition dates of raw materials. The average ageing of items could(subject to materiality considerations) be estimated using inventory turnover if a detailed ageing of inventorycannot be obtained.

• If the FIFO or weighted average method is used, restate raw materials inventories based on the ageing of therelated items using the increase in the general price index for the period from the purchase dates to the balancesheet date.

• If an annual average is used, restate raw materials using the annual average increase in the general price index.

Semi-finished and finished goods

• Obtain the ageing of semi-finished and finished goods.

• Deduct the historical depreciation expense of property, plant and equipment that is included in the cost ofsemi-finished goods, as this will be replaced with the restated depreciation expense.

• If the FIFO or weighted average method is used, restate the balance of semi-finished goods, based on theageing of the composition of cost elements included in inventories. If annual average costing is used, restateusing the annual average increase in the general price index.

• After completion of the restatement, add back to inventory the attributable depreciation calculated by referenceto the restated property, plant and equipment balances.

• After the inventory has been restated, review the restated balances to determine the need for any net realisablevalue provisioning.

Investments in associates

• Obtain the historical cost prices and acquisition dates of investments according to the purchase date and cost of purchase.

• Restate the balance of investments using the increase in the general price index from the purchase date to the balance sheet date.

• Compare the restated investment balance with the market value, and adjust the investment balance, if an impairment is identified.





Inventory

Will the costing method of inventory (for example FIFO or weighted average) have an impact on theIAS 29 restatement?

The costing method should have no impact on the final restated value of the inventory if there are no pricechanges in real terms. Restatement would result in the same inventory value if there had been no changein the price in real terms. In practice, however, there are likely to be different results, as the changes in the cost of inventory may not be equal to the change in the general price index (for example, there may bea real change in the inventory cost).

How are inventory and the related provision for net realisable value treated when the inventory issubsequently sold or disposed of?

Inventory is a non-monetary item. The carrying value of the inventory and any related provision for netrealisable value should be inflated up to the date of the sale or disposal.


Subsidiaries and associates

What exchange rates should be used when consolidating a foreign subsidiary of a group thatpresents its consolidated financial statements in a hyperinflationary currency?

A foreign subsidiary that operates in an economy that is not experiencing hyperinflation and whosefunctional currency is therefore not hyperinflationary should translate the income statement into ahyperinflationary presentation currency using the exchange rates at the date of the transactions (inpractice, monthly or weekly average exchange rates may be used as an approximation). The incomestatement items should then be restated in accordance with IAS 29 from the date of the transaction, whichwould be the same date used to translate the stable foreign currency into the hyperinflationary presentationcurrency. This will facilitate the elimination of any inter-company transactions, as the transactions will beon the same basis of accounting and therefore comparable.

continued




Property, plant and equipment and accumulated depreciation

• Obtain the original historical cost prices and acquisition dates of property, plant and equipment. The restatementshould be based on the original purchase date of the asset, not the date of reclassification from theconstruction-in-progress account.

• Eliminate from the IFRS historical financial statements any revaluation of construction in progress, property,plant and equipment and the associated accumulated depreciation that does not comply with IAS 16, if any.

• Restate the original purchase cost of property, plant and equipment from the date of the purchase of each itemto the balance sheet date using the general price index.

• Calculate the depreciation charge for the period on the basis of the restated property, plant and equipment.Opening accumulated depreciation is also calculated on the basis of restated property, plant and equipment.

• For disposals, determine the original date of purchase and the historical cost. Calculate and then deduct therestated property, plant and equipment balance that has been disposed of and its accumulated depreciation.

• Replace historical depreciation charges included in general administrative expenses, idle-time expenses, costof goods sold and inventory balances, with the depreciation expense calculated on the basis of the restatedproperty, plant and equipment balances.

• Obtain the historical cost prices and acquisition dates of the ‘construction in progress’ balance and restate thebalances by applying indices according to transaction date. When the construction in progress is subsequentlytransferred to items of property, plant and equipment, the related inflation adjustment should be transferred andapplied to the asset.

continued from p14

The balance sheet should be translated into the hyperinflationary currency using the closing rate method.The investor’s share of net assets in the subsidiary at the beginning of the year (as calculated by the equitymethod of accounting) should be adjusted for current-year inflation. The difference between the parent’sshare of the closing net assets and the opening balance and earnings for the period, both adjusted forinflation as described above, should be charged to equity as a translation adjustment.

What exchange rates should be used when accounting for a foreign associate of an entitypresenting its financial statements in a hyperinflationary currency?

The investor’s share of the results of operations of an associate with a stable functional currency shouldbe translated into the group’s hyperinflationary presentation currency at the dates on which the earningsaccrued. The earnings should then be restated to year-end purchasing power in the consolidated financialstatements from the date of translation.

The opening investment balance accounted for using the equity method at opening exchange rates shouldbe adjusted for inflation to year-end purchasing power. To calculate the net investment in the associate, theinvestee’s balance sheet should be translated into the group’s presentation currency at year-end rates,which forms the basis for carrying value of the investment. The difference between the carrying value andthe opening balance plus earnings for the period, both adjusted for inflation, should be recorded in equity as a translation adjustment.

• If the entity capitalises interest in accordance with IAS 23, recognise the part of the capitalised borrowing costthat compensates for the inflation during the same period as an expense in the period in which those costswere incurred.

• For the first year of adopting the IAS 16 alternative treatment for measurement, restate the historical cost of the asset in accordance with IAS 29 to obtain the correct monetary gain or loss in the income statement. Thenreplace the carrying value with the appraised value, and treat the difference in accordance with IAS 16.39-42.

• Assess for impairment in accordance with IAS 36.

Intangible assets

• Intangible assets, including goodwill, are inflated in the same manner as property, plant and equipment.

Advances received

• Obtain a breakdown of advances received, ensuring that, where appropriate, the relevant specific advanceshave been netted off against the relevant accounts receivable.

• Obtain the ageing of advances received.

• Restate advances according to the ageing, by the increase in the general price level from the date of receipt to the balance sheet date.

• The restated advances received should be transferred to revenue when the sale is recognised.





Property, plant and equipment

What indices are used to restate construction in progress (CIP)? How does the restatement of CIPaffect the future value of items of PPE?

CIP should be restated from the date on which the payment was made. An asset or project within CIPshould be restated within CIP. When transferred to assets in use, the related inflation adjustment shouldalso be transferred and added to the cost base of the item of property, plant or equipment.

Management should consider the inflation effect on assets that were previously held in CIP when initiallyadopting IAS 29 where the economy of the reporting entity has been experiencing hyperinflation inprevious years.

How are assets that have been remeasured by an independent appraiser in accordance with IAS 16 treated when restating them in accordance with IAS 29?

If assets are revalued during a year of restatement, the historical cost should be restated to arrive at thecorrect monetary gain or loss. The restated cost should then be compared to the appraised amount, andthe difference treated as required by IAS 16. In subsequent years, the appraised carrying amount and therevaluation reserve (unless it is the first year of IAS 29 application when eliminated) should be restated.




Deferred income

• Obtain the ageing of deferred income according to the date of receipt.

• Restate the original amount of deferred income received from the transaction date to the balance sheet date.

• Calculate accumulated amortisation and current-period amortisation on the basis of the restated deferredincome balance.

• Replace historical amortisation credited to the income statement with the amortisation calculated on the basisof the restated deferred income.

Restatement of shareholders’ equity

• At the beginning of the first period of application of IAS 29, the components of shareholders’ equity in theopening balance sheet, excluding retained earnings, should be restated by applying a general price index fromthe dates on which the items arose. Any revaluation surplus that arose in previous periods should be eliminated.Restated retained earnings is the balancing figure derived from all the other restated amounts in the restatedopening balance sheet.

• At the end of the first period and in subsequent periods, all components of shareholders’ equity are restated byapplying a general price index from the beginning of the period, or the dates on which the items arose, if later.This restatement forms part of the monetary gain or loss calculation.

• Any statutory revaluation surplus (that is not in accordance with IAS 16) arising in subsequent periods iseliminated against the related revalued assets.

• Current-year restated net income is added to the balance of the restated opening retained earnings.

• For the purpose of the statement of changes in shareholders’ equity, dividends paid during a period should berestated by applying a general price index from the date at which the shareholders’ right to receive payment isestablished to the balance sheet date.


Provisions for liabilities and charges

Are provisions for liabilities and charges monetary or non-monetary items?

Provisions for liabilities and charges could be monetary, monetary but inflation linked or non-monetary.Their classification depends on the nature of the liability. For example, if warranty obligations are limited toa defined original amount, the warranty provision is monetary. However, if the entity’s liability is specifiedas a repair or exchange of the item under warranty, the provision is non-monetary.





Equity

What are the components of shareholders’ equity that need to be restated? Which dates should be used for the restatement?

All components of shareholders’ equity should be restated, with certain exceptions for revaluationreserves. Legal and extraordinary reserves are generally a part of retained earnings in IFRS financialstatements. These reserves are not considered for restatement purposes. It may be beneficial to disclosethe historical statutory reserves in the footnotes to the financial statements.

Capital increases should be restated from the date on which the consideration was received. If considerationwas received in the form of a non-monetary contribution (such as contributed PPE), the fair value of theasset should be used as the historical cost.

Can management present share capital at historical cost and the IAS 29 adjustment separately on the balance sheet?

No. Share capital presented on the balance sheet should be expressed in year-end purchasing power.However, an entity may present the historical cost share capital and the related IAS 29 adjustmentseparately in the notes with an appropriate description.

How is the revaluation reserve in equity treated?

Statutory regulations for countries operating in a hyperinflationary economy often allow companies toincrease the carrying value of PPE based on prescribed rules, with a corresponding increase in equity –usually the revaluation reserve. These statutory revaluation adjustments are not in accordance with IAS 16and should be eliminated from the IFRS financial statements.

If a revaluation has been performed at year-end in accordance with IAS 16, the revaluation reserve wouldbe the difference between the historical values restated in accordance with IAS 29 and the revaluedamounts according to IAS 16. There would be no need to inflate the revaluation reserve, as it would becurrent at year-end. The revaluation reserve would be inflated in subsequent years.

How should a share capital increase by way of a transfer from the statutory revaluation surplus be treated?

The statutory revaluation surplus is eliminated from the IFRS restated financial statements, as notedabove. A share capital increase by way of a transfer from the statutory revaluation surplus is not thereforeconsidered in calculating the restated paid-in capital. The increase of the share capital is represented by atransfer from retained earnings to reflect the legal transaction. The amount of the transfer is the restatedamount of statutory increase inflated from the date of authorisation of the share capital increase.

How are dividends payable treated?

A dividend payable is a monetary liability that will result in a monetary gain for the entity. The dividendamount should therefore be excluded from retained earnings at the date on which the dividend becomespayable.

continued




continued from p18

Should unpaid capital that the shareholders have committed to pay be inflated?

The treatment of the unpaid share capital depends on whether the shareholder is legally bound to pay thecapital or whether the commitment is nothing more than an unbinding promise to pay.

If the shareholder has no legal obligation to pay this capital, there would be no receivable recorded by theentity. The unpaid capital and commitment would be disclosed in the notes at the historical amount, whichis the consideration expected to be received by the entity. There is no effect on monetary gain or loss, asthe entity does not have an enforceable receivable.

However, if the capital increase is legally binding and approved by the general assembly, the entity wouldshow a receivable from shareholders with a corresponding increase in share capital (the fact that the sharecapital has not been paid would be disclosed in the notes). The share capital would be restated to accountfor any subsequent changes in inflation that creates a monetary loss in the income statement from holdingthe receivable.

Transition to IFRS

IFRS 1 requires retrospective application of the wording of IAS 29 effective at the reporting date of the entity’sfirst IFRS financial statements – that is, as if the current wording of IAS 29 had always been applied.

An entity should restate its non-monetary assets and liabilities that were acquired or originated during a pastperiod of hyperinflation for the effects of changes in purchasing power from transaction date until the end of theperiod of hyperinflation. Equity components, such as share capital, have to be restated. These exemptionsshould not be applied to other items by analogy. IFRS 1 provides some exemptions from retrospectiveapplication of IFRSs to some equity items, such as an exemption from a requirement to determine cumulativetranslation reserve at the date of transition. However, it also states that these exemptions should not be appliedto other items by analogy.


Restatement on transition to IFRS

A country moved out of hyperinflation eight years ago. Is it possible to avoid restatement inaccordance with IAS 29 on transition to IFRS by electing to use the IFRS 1 ‘fair value as deemedcost’ exemption?

The IFRS 1 'fair value as deemed cost' exemption only covers property, plant and equipment, investmentproperty under the cost model, and intangible assets carried at fair value. A company may have non-monetary liabilities in the balance sheet requiring restatement, such as deferred income. Intangibleassets carried at cost less amortisation, for example when there is no active market, will also require IAS 29 restatement if acquired during the period of hyperinflation. Components of equity, such as sharecapital, also have to be restated for inflation effects from the transaction date to the end of the period of hyperinflation.

Restatement of the income statementAll items in the income statement should be restated by applying the change in the general price index from the dates when the items of income and expense were originally recorded.

Most entities will restate activity on a monthly average basis – provided inflation is occurring at a relatively stablerate – with all transactions presumed to occur evenly throughout the relevant period.

Revenue

• Obtain a monthly break-down of revenue.

• Restate each period using the appropriate indices to year-end.

Cost of goods sold

• Obtain the monthly breakdown of the items included in production costs.

• Restate all components of production costs, except depreciation and raw materials, from the month when thecosts were incurred to the year-end.

• Calculate raw material used in the production process through the reconciliation of restated opening rawmaterials and closing raw materials balances.

• Calculate depreciation related to production costs on the basis of the restated property, plant and equipment,as explained in the balance sheet section, and replace the historical depreciation with the restated depreciation.

• Restate opening and closing historical finished and semi-finished goods, as explained in the balance sheet section.



Selection of the index

What is the correct index to be used to restate the income statement?

The items within the income statement should be restated from the date of the transaction. However, it isgenerally not practical to restate the items from the date of the transaction – average indices may be usedas approximations. The average indices to use would depend on the frequency of the transactions (ie, salesearned evenly throughout the period) and whether inflation was relatively constant throughout the period.

If the income statement transactions occurred evenly throughout the year without seasonal fluctuationsand inflation was relatively constant during the year, the annual average index may be used for therestatement. In periods of unstable inflation or where there have been seasonal fluctuations influencing the income statement, quarterly or monthly indices would be more appropriate.

Restatement of the income statement4





• The ‘restated cost of goods sold’ figure is obtained by: adding to purchases and other production costsrestated from the date when the costs were incurred; the restated opening finished and semi-finished goods;and deducting the restated closing finished and semi-finished goods. The restated opening finished goods andsemi-finished goods are derived by:

– restating amounts to the prior balance sheet date purchasing power, and

– inflating the restated cost of opening amounts as calculated above by the conversion factor for the entire year.

Depreciation and amortisation of intangible assets, and realisation of prepaidexpenses and deferred income (grant)

This is calculated on the basis of the restated asset or liability balance.

Other items included in the income statement

• Obtain a monthly breakdown of all items.

• Restate all items for each month using the increase in the general price index from the related month or quarteruntil the year-end.

• Certain non-monetary items included in the opening balance sheet could subsequently be realised through the income statement – for example, inventory and disposed property, plant and equipment. In that case, the restatement should consider the restatement surplus accumulated while the item was recognised in thebalance sheet.


Foreign exchange

Should interest income or expense and foreign exchange gains or losses be restated?

All items in the income statement should be restated. There are no exceptions to this requirement.

Impairment loss on trade and other receivables

If the impairment loss on trade and other receivables is inflated, the movement schedule of theprovision does not reconcile. How are the opening and closing balances reconciled?

Management should provide against an impairment loss on trade and other receivables at the time atwhich the impairment is identified. The provision is a monetary item, as the underlying asset it relates to ismonetary. A monetary gain will therefore result from carrying this provision (which offsets the monetaryloss being incurred as a result of holding the receivable). The impairment loss on trade and otherreceivables is inflated from the date on which the provision was initially recorded.

All items must be expressed in terms of the measuring unit current at the balance sheet date to ensure thereconciliation of the provisions. The difference between the restated opening balance, restated currentperiod expense (net of any restated provision reversals) and the closing balance is a monetary gain.


Adjustments and or reclassifications made to statutory financial statements to arrive at IFRS historical financial statements

• If the adjustment or reclassification made in accordance with IFRS relates to a specific period or specific date,the adjustment or reclassification calculated in historical terms should be restated for the related time period,using the increase in the general price index from the specific date to the balance sheet date.

Income taxes

Current taxes

• Obtain details of monthly or quarterly taxation calculated on the basis of the entity’s monthly or quarterlytaxable income. Restate monthly or quarterly tax expenses for each month or quarter in terms of balance sheetdate purchasing power, using the increase in the general price index from the related month or quarter until thereporting date.

Deferred taxes

• Calculate deferred tax expense or income and deferred tax liability or asset with reference to historicaladjustments made (if any) in moving from the tax accounts to the IFRS historical financial statements.

• Calculate deferred tax in relation to temporary differences arising from the restatement of non-monetary assetsand liabilities. Deferred tax is calculated in full on the temporary differences arising from the restatement of non-monetary assets and liabilities.

• As the closing deferred tax position is calculated based on the applicable temporary differences between thetax base and the IAS 29-adjusted IFRS balance sheet (ie, expressed in the measuring unit current at thebalance sheet date), there is no need to adjust the closing deferred tax asset or liability for inflation. A practicalapproach to deferred taxes is to charge or credit to the tax line in the income statement the difference betweenthe opening deferred tax asset or liability, adjusted to year-end purchasing power and the closing deferred taxasset or liability.

• Opening deferred tax is calculated as if IAS 29 had always been applied. It is calculated for temporarydifferences between tax bases of assets and liabilities and their carrying amounts expressed in the purchasingpower at the opening balance sheet date. The calculated tax is then inflated to the purchasing power at theclosing balance sheet date.

• The movement in the deferred tax balance for the reporting period includes a monetary gain or loss on taxbases of assets and liabilities. For example, if the opening tax base of PPE is 100, inflation for the year is 50% and income tax rate is 30%, the loss on the tax base of the PPE, in accordance with IFRIC 7, is 15, being 30% x (100 x 1.5 – 100).




Monetary gain or loss

• The gain or loss on the net monetary position arises from holding monetary assets and liabilities and is reportedas a separate item in the restated income statement (see Section 5 for details of the monetary gain or loss). The monetary gain or loss is derived from restating the closing balance sheet (less the inflation adjustments to the opening balance sheet in prior year-end purchasing power) and the items in the income statement.

• IFRIC 7 also identifies inflation gains or losses on the tax bases of assets and liabilities as a separatecomponent of the monetary gain or loss. This is in addition to the gain or loss on the net monetary position from the carrying amounts of monetary assets and liabilities.

• The derived monetary gain or loss may need additional netting off with the indexation differences that wererecognised in the income statement on those monetary items that are linked to inflation index. These aresubject to inflationary risks or holding benefits, such as monetary gains or losses.




Monetary gain or loss5


Monetary gain or lossCalculation and proof of the monetary gain or loss that arises on the carrying amounts of monetary assets andliabilities is an important element of applying IAS 29. Restatement in accordance with IAS 29 requires theapplication of certain procedures and judgement. It is therefore necessary to verify that the results arereasonable; the proof may well reveal restatement errors. The monetary gain or loss may be estimated byapplying the change in a general price index to the weighted average difference between monetary assets andmonetary liabilities. The weighted average of the opening monetary position and the monetary position at year-end may be used for the purpose of this calculation. It is possible, however, for a large difference to arisebetween the monetary gain or loss in the income statement and the estimate as calculated by the proof if themonetary position has not been relatively constant throughout the year.

If the monetary position is changing significantly, a more accurate proof of the monetary gain or loss would beobtained by using the quarterly or monthly weighted average monetary position.

Proof – average monetary position method

A simple example with a constant monetary position is set out below. It would be appropriate to use the weightedaverage of the opening and closing monetary position in this example.

Proof – statement of sources and application of net monetary assets and liabilities method

A statement of source and application of net monetary assets or liabilities is often prepared as alternative proof of the net monetary gain or loss (see below). The items that cause changes in the monetary assets or liabilitiesare analysed, and the net balance of the monetary assets or liabilities is initially determined as if there were nochanges, and is then adjusted for current-year movements. Restatements are performed, and the comparisonwith the actual net balance and movements of monetary assets or liabilities enables the monetary gain or loss tobe approximated.

Conversion factor 1.649 for the yearClosing position

currency unitsOpening at theposition Inflation balance sheet

currency units adjustment dateBalance sheet:– cash 10,000 – 10,000– share capital 10,000 6,490 16,490– retained earnings – (6,490) (6,490)Income statement:– monetary loss (6,490) (6,490)

Monetary loss proof:Average monetary position for the year

(10,000+10,000)/2 10,000Change in inflation factor (1.649-1.000) 0.649Monetary loss estimated for the year 6,490Monetary loss per income statement (6,490)




Historical column

1. Calculate the net monetary position at thebeginning of the period under restatement.

2. Identify all items that caused changes in themonetary position during the period. Theseshould be the actual or uninflated changes in the monetary position. These items can be obtained from the historical cost incomestatement or cash flow statement.

3. Arrive at the monetary position at the end of theperiod by adding or subtracting the changes asidentified. Check that the monetary position ascalculated is equal to the actual monetaryposition at the end of the period.

Restated column

4. Calculate the net monetary position at thebeginning of the period as in Step 1 above, but restate it for inflation for the entire period.The inflation adjustment restates the openingmonetary position as if there were no monetarygain or loss – ie, by adjusting the openingmonetary position as if the opening monetaryassets and liabilities were not eroded as a resultof inflation.

5. Inflate the changes in the monetary position(Step 2 above) but restate as if there were no

monetary gain or loss; adjusting the changes inmonetary position for inflation restates themonetary changes as if the monetary assets andliabilities obtained or disposed of during theperiod were not eroded as a result of inflation.These items may be obtained from the inflationadjusted income statement and/or cash flowstatement.

6. Determine the net monetary position restated atperiod end as if inflation had not affected themonetary assets and liabilities. Note that the realmonetary position does not change as a result ofthe inflation adjustment.

Proof

7. Compare the actual net monetary position at the end of the period included in the ‘historical’column with the restated net monetary positionat the end of the period in the ‘restated’ column.The difference between the actual position andthe restated monetary position is the estimate ofthe monetary gain or loss. This estimate shouldbe compared to the actual gain or loss in theincome statement.

A simple example is set out on the next page. In this example, the inflation factor was 1.650, andthere were two types of transactions that occurredevenly throughout the period.

Procedures for the preparation of a statement of source and application of net monetary assets andliabilities are as follows:




Closing positionat period end

Opening Closing Inflation purchasingposition position adjustments power

Balance sheet:– cash 100 100 – 100– trade receivables – 200 – 200

100 300

– trade payables – 100 – 100– share capital 100 100 65 165– current profit – 100 (65) 35

100 300

Profit and loss:– credit sales 200 60 260– cost of sales (100) (30) (130)– monetary loss * – (95) (95)– profit 100 (65) 35

*Monetary loss is calculated as follows:Monetary loss from sales 60Monetary gain from cost of sales (30)Restatement of share capital 65

95

Monetary loss proof – statement of sources and application of net monetary assets and liabilities:

Historical RestatedNet monetary asset at the beginning of the period 100 165Add movement in receivables 200 260Deduct movement in payables (100) (130)

(A) 200 (B) 295

Monetary loss is ((A)-(B)) 95

The proof of the monetary gain or loss may be more challenging if indexation differences on those monetaryitems that are linked to the inflation index were offset with the monetary gain or loss in the income statement, as required by IAS 29. Such components of the monetary gain or loss, as well as the IFRIC 7 inflation gains orlosses on the tax bases of assets and liabilities, should be analysed separately.





Monetary gain or loss on the tax base

What is the monetary gain or loss on the tax base and how should it be calculated.

A loss on the tax base is a monetary loss. Assume a company acquired equipment for 1,000 at 1 January20X6, and the equipment is depreciated in a straight line over 10 years for IFRS and tax purposes. Inflationfor the year was 80%, and the tax rate is 30%.

The IFRS carrying amount of the equipment is 1,620 (1,000 x 1.8 less 10% depreciation) at 31 December20X6. The tax base of the equipment is 900 at 31 December 20X6. The company should thereforerecognise a deferred tax liability of 216, being 30% x (1,620 – 900). This deferred tax liability arose as aresult of the following:

Monetary loss on the tax base of the asset: (1,000 x 80%) multiplied by the tax rate 30% 240

Difference between tax depreciation of 100 and IFRS depreciation of 180 (10% of the restated cost of 1,800) multiplied by the tax rate 30% (24)

Deferred tax liability 216


Cash flow statementThe preparation of a cash flow statement under IAS 29 presents some challenges. All activity should bepresented in current purchasing power, but readers of the financial statements must also be able to follow cashflows between the restated balance sheets and income statements. Most entities use the indirect method,although both methods are presented in the detailed example in Section 7.

There are two unique elements in the hyperinflationary cash flow statement:

• Net income before tax is adjusted for the monetary gain or loss for the period; and

• The monetary loss on cash and cash equivalents is presented separately.

The example below shows how the monetary gain element impacts financing activity.

The cash flow from financing activities should include a drawdown of 705 and a repayment of 987. The monetarygain of 918 is recorded in the income statement and is eliminated from the cash flow statement as a non-cashitem. It is useful to disclose the amount of the monetary gain in the notes to enable readers to understandmovements in borrowings in the balance sheet.

Cash flow statement6


Example

Below are the historical and price level adjusted movements in borrowings. Inflation in the year is 100%;average inflation for the year is 41%; assume movements occur rateably over the year.

Balance Draw- Monetary Balance20X7 down Repaid gain 20X8

Historical movements 1,000 500 (700) – 800

Conversion factor 2.0 1.41 1.41 1.0

Price level adjusted 2,000 705 (987) (918) 800


Illustrative example of IAS 297


Illustrative example of IAS 29Contents

This section provides a detailed illustrative example of the application of IAS 29. The term ‘restated’ is used todescribe financial statements after the application of IAS 29. The term ‘historical’ is used to describe financialstatements before restatement to current purchasing power. This example is prepared for illustrative purposesonly; income statement, statement of changes in shareholders’ equity and statement of cash flows are presentedfor one year. Comparatives are required to be disclosed by the reporting entity under IAS 1.

This example does not cover all possible circumstances, nor does it take into account any specific legalframework. Further specific information may be required in order to ensure fair presentation under IFRS.

Page

A Historical financial statements (without notes) 33A.I Historical balance sheets as at 31 December 2004 and 2005 33A.II Historical income statement for the year ended 31 December 2005 34A.III Historical statement of cash flows for the year ended 31 December 2005 35A.IV Historical statement of changes in equity for the year ended 31 December 2005 37

B Additional historical information required for IAS 29 restatement 38B.I Property, plant and equipment 38B.II Investments 39

B.II.1 Investment in an associate 39B.II.2 Other long-term investments 39B.II.3 Trading investments 39

B.III Inventories and production expenditures incurred 40B.III.1 Inventory movements for the year 40B.III.2 Analysis of production costs incurred within the period 40B.III.3 Holding period of inventory 40

B.IV Equity 41B.IV.1 Share capital 41B.IV.2 Dividends 41

B.V Long-term liabilities 41B.V.1 Deferred income – government grant 41B.V.2 Borrowings 41

B.VI Revenue and expenses 42B.VI.1 Monthly revenue and expenses 42B.VI.2 Quarterly non-taxable income and non-deductible expenses 42

B.VII Monetary items and cash flows 43B.VII.1 Other receivables 43B.VII.2 Other payables 43B.VII.3 Revenue – cash receipts 43B.VII.4 Operating cash disbursements 43B.VII.5 Rent prepayments 44B.VII.6 Trade accounts receivable 44

B.VIII Net monetary position per quarter 44




PageC Inflation indices and conversion factors 45

C.I Monthly inflation indices 45C.II Conversion factors to 31 December 2004 purchasing power 45C.III Conversion factors to 31 December 2005 purchasing power 46C.IV Mid-month and average conversion factors for 2005 46C.V Other average conversion factors used 47

D Background information for the illustrative example 48

E Restatement procedures 49E.I Support schedule – monetary vs non-monetary balance sheet components 49E.II Restatement of property, plant and equipment and depreciation 50

E.II.1 Restatement of cost to 31 December 2004 purchasing power 50E.II.2 Restatement of cost to 31 December 2005 purchasing power 50E.II.3 Calculation of accumulated depreciation at 31 December 2004 51E.II.4 Calculation of depreciation charge for 2005 51E.II.5 Calculation of disposal at 31 December 2005 purchasing power 52E.II.6 Accumulated depreciation reconciliation (31 December 2005 purchasing power) 52E.II.7 Inflation adjustment journal entries 53E.II.8 Restated property, plant and equipment 53

E.III Restatement of investment in associate 54E.IV Restatement of long-term investment accounted for at cost 54E.V Restatement of trading investments 55E.VI Restatement of inventories and cost of sales 56

E.VI.1 Process of the restatement of inventories 56E.VI.2 Restatement of raw materials 57E.VI.3 Restatement of sundry supplies 57E.VI.4 Restatement of work in progress 58E.VI.5 Restatement of finished goods and cost of sales 59E.VI.6 Restated inventories – summary 60E.VI.7 Inventory restatement overall adjustment 60

E.VII Restatement of deferred income – government grant 61E.VIII Restatement of revenue and expenses 62E.IX Restatement of equity components and movements 63

E.IX.1 Restatement of paid-in share capital 63E.IX.2 Restatement of dividends (declared and paid) 63E.IX.3 Reversal of statutory revaluation of property, plant and equipment 64

E.X Deferred tax calculations 65E.XI Current-year inflation adjustment to opening retained earnings 67E.XII Summary schedule of inflation adjustment journal entries 68E.XIII Monetary loss on the tax base of assets and liabilities 70E.XIV Tax reconciliation: non-deductible expenses and non-taxable income 71




PageF Monetary proof 72

F.I Monetary proof based on average quarterly net monetary position 72

G Support for restatement of statement of cash flows 73G.I Revenue collected 73G.II Operating outflows 73

G.II.1 Raw materials 73G.II.2 Wages, utilities and overheads 73G.II.3 Rent payments 73G.II.4 Income tax paid 73

G.III Trade receivables and impairment loss on trade and other receivables 74G.IV Inflation effect on: 74

G.IV.1 Cash 74G.IV.2 Bank overdrafts 74G.IV.3 Borrowings 75G.IV.4 Non-operating activities and income tax 75

G.V Other accounts receivable and payable 76

H Restated financial statements 77H.I Restated balance sheets at 31 December 2004 and 2005 77H.II Restated income statement for year ended 31 December 2005 78H.III Restated statement of cash flows for year ended 31 December 2005 79H.IV Restated statement of changes in equity for year ended 31 December 2005 81H.V Income tax reconciliation 82H.VI Non-temporary element of monetary loss 82

HCU – Historical currency units CCU – Current currency units




A.I Historical balance sheet

(all amounts expressed in HCU)

Additionalhistorical 31 December 31 December

information 2005 2004ASSETSNon-current assetsProperty, plant and equipment B.I 54,163 43,337Associates B.II.1 35,630 16,320Other long-term investments B.II.2 11,000 10,000

100,793 69,657Current assetsInventories B.III 19,410 15,170Trade receivables B.VII.6 28,170 19,400Other receivables B.VII.1 1,500 1,000Trading investments B.II.3 15,000 5,000Cash 9,742 5,750

73,822 46,320Total assets 174,615 115,977

EQUITY AND LIABILITIESEquityShare capital B.IV.1 22,000 17,000Revaluation reserve 47,157 38,130Translation reserve 13,010 –Retained earnings 22,328 20,697

104,495 75,827Non-current liabilitiesDeferred income – government grant B.V.1 2,800 3,200Borrowings B.V.2 29,000 15,000

31,800 18,200Current liabilitiesBank overdrafts 8,060 5,200Trade payables 24,760 10,750Current tax liabilities 353 153Other payables B.VII.2 5,147 5,847

38,320 21,950Total equity and liabilities 174,615 115,977

A. Historical financial statements





A.II Historical income statement


Additional Year-endedhistorical 31 December

information 2005

Sales B.VI.1 104,250Cost of sales (69,750)Gross profit 34,500

General and administrative expenses:Wages and salaries B.VI.1 (7,000)Depreciation expense (3,447)Rent expense B.VI.1 (3,000)Impairment loss on trade and other receivables (2,450)Other administrative expenses B.VI.1 (8,000)Amortisation of government grant B.V.1 400Gain on sale of property, plant and equipment B.I 386

(23,111)

Operating profit 11,389

Finance income and costs:Gain on trading investments B.II.3 4,000Interest income 762Interest expense (2,000)Net foreign exchange losses B.VI.1 (12,620)

(9,858)Share of result of associate B.II.1 6,300

Profit before tax 7,831

Income tax expense B.VI.1 (1,200)

Profit for the year 6,631




A.III Historical statement of cash flows

DIRECT METHOD CASH FLOW(all amounts expressed in HCU)


information 2005

Cash flows from operating activitiesCash receipts from customers B.VII.3 94,410Cash paid for production materials and other supplies B.VII.4 (18,484)Cash paid to employees and for utilities and overheads B.VII.4 (53,386)Rent paid B.VII.5 (3,200)Income tax paid (1,000)Net cash flow from operating activities 18,340

Cash flows from investing activitiesPurchase of trading investments, net B.II.3 (6,000)Purchase of other investments B.II.2 (1,000)Purchase of property, plant and equipment B.I (10,000)Interest received 162Proceeds from sale of property, plant and equipment B.I 1,500Net cash flow used in investing activities (15,338)

Cash flows from financing activitiesProceeds from paid-in share capital B.IV.1 5,000Proceeds from bank overdrafts, net 2,860Interest paid (1,870)Dividends paid B.IV.2 (5,000)Net cash from financing activities 990

Net increase in cash 3,992

Cash at the beginning of the period 5,750Cash at the end of the period 9,742






A.III Historical statement of cash flows (continued)

INDIRECT METHOD CASH FLOW(all amounts expressed in HCU)


information 2005

Cash flows from operating activitiesProfit before tax 7,831

Adjustments for:Depreciation charge 7,087Impairment loss on trade and other receivables 2,450Amortisation of government grant B.V.1 (400)Gain on sale of property, plant and equipment (386)Share of result of associate (6,300)Increase in fair value of trading investments (4,000)Interest income (762)Interest expense 2,000Foreign exchange loss on financing and investing activities 14,000

Profit before changes in working capital 21,520

Changes in working capital:Increase in trade receivables B.VII.6 (11,220)Increase in inventory (4,240)Decrease in other receivables B.VII.1 100Increase in trade payables 14,010Decrease in other payables B.VII.2 (830)

(2,180)

Cash generated from operations: 19,340

Income tax paid (1,000)

Net cash flow from operating activities (same as for direct method) 18,340




A.IV Historical statement of changes in equity


Additionalhistorical Share Revaluation Translation Retained

information capital reserve reserve earnings Total

Balance at 1 January 2005 B.IV.1 17,000 38,130 – 20,697 75,827

Revaluation of property, plant and equipment B.I – 9,027 – – 9,027

Currency translation differences B.II.1 – – 13,010 – 13,010Net income recognised directly

in equity – 9,027 13,010 – 22,037Profit for the year – – – 6,631 6,631Total recognised income – 9,027 13,010 6,631 28,668

Share capital paid in B.IV.1 5,000 – – – 5,000Dividends declared in 2005 B.IV.2 – – – (5,000) (5,000)

5,000 – – (5,000) –

Balance at 31 December 2005 22,000 47,157 13,010 22,328 104,495






B.I Property, plant and equipment


Property, plant and equipment2004 2005

Gross book value (GBV) 58,600 79,200Accumulated depreciation (15,263) (25,037)Net book value (NBV) 43,337 54,163

Gross book valueDate of GBV (as Historical

acquisition revalued) expendituresWorkshop building 23 January 2002 12,800 1,600Production line 12 January 2003 30,000 9,000Leasehold improvements January 2002 8,000 1,200Office equipment January 2002 7,800 1,500Total at 31 December 2004 58,600 13,300

Acquired during 2005 June 2005 10,000 10,000Disposed during 2005 27 December 2005 (2,600) (500)2005 statutory revaluation 13,200 –Total at 31 December 2005 79,200 22,800

Production line: equipment and installation worksCost of production line which was put into operations on 12 January 2003 were incurred as follows:

Cost incurred HCUEquipment bought 27 February 2002 3,700Installation cost – phase II within April 2002 1,300Environmental block 29 July 2002 1,670Installation cost – phase II within October 2002 1,300Final testing first week of December 2002 1,030Total expenditures incurred 9,000

Accumulated depreciationEstimated useful life 2004 2005

(years) HCU HCUWorkshop building 20 1,920 2,560Production line 10 6,000 9,000Leasehold improvements 6 4,000 5,333Office equipment 7 3,343 4,457Acquired in 2005 5 x 1,000Disposed of in 2005 x (1,486)2005 statutory revaluation x 4,173Total accumulated depreciation 15,263 25,037

Note: Current-year depreciation charge of HCU 7,087 is comprised of HCU 3,640, included in conversion costs for production, and HCU 3,447,included in administrative and general expenses.

B. Additional historical information required for IAS 29 restatement

NoteGBV is the historical cost as revalued for statutoryreporting purposes.

Details of acquisition/disposalThe workshop was received as a contribution to share capital and was originally recorded at fair value.

The production line was constructed within a year. The table below contains data onexpenditures incurred.

The office building is rented under an operatinglease agreement for 6 years. It was completelyrenovated at inception of the lease.

New office equipment was acquired.

1/3 of office equipment was disposed of for acash consideration of HCU 1,500.

The index prescribed by the statute was 1.2 forall assets recorded at 31 December 2005.




B.II Investments

B.II.1 Investment in an associate

A 25% share in company A, a company incorporated in Cyprus, was acquired on 30 December 2004.HCU

Fair value of net assets acquired 16,000Cash paid (16,000)Goodwill –Share of net assets at 31 December 2004 16,320Share of result for 2005 6,300Foreign exchange differences 13,010Share of net assets at 31 December 2005 35,630

Note: The associate’s financial statements comply with IFRS.

B.II.2 Other long-term investments

Other long-term investments represent a 6% interest in Company B. Company B is a domestic company and is not listed. It is carried at cost.

Date of acquisition % acquired HCUInitial purchase 31 March 2003 5% 10,000Balance at 31 December 2004 10,000Additional purchase in 2005 27 March 2005 1% 1,000Balance at 31 December 2005 11,000

The fair value of the investment at 31 December 2005 was HCU 41,000 (2004: HCU 23,500).

B.II.3 Trading investments

Trading investments represent equity investments in ‘blue chips’, which are carried at market value. Excess cashis invested in the blue chip market in order to realise short-term trading gains.

Movements of trading investments are summarised as follows:(all amounts expressed in HCU) Additions Disposals Balance

(at cost) (at proceeds) (at market value)Balance at 31 December 2004 5,000Quarter I 9,900 (6,950)Quarter II 8,750 (5,700)Quarter III 5,300 (5,160)Quarter VI 6,000 (6,140)

29,950 (23,950) 6,000Gain on trading investments (income statement) 4,000Balance at 31 December 2005 15,000






B.III Inventories and production expenditures incurred

B.III.1 Inventory movements for the year

(all amounts expressed in HCU) 2004 Receipts Utilised/sold 2005Raw materials 3,520 34,870 33,070 5,320Sundry supplies 340 2,376 1,986 730Work in progress 1,850 71,800 70,340 3,310Finished goods 9,460 70,340 69,750 10,050

15,170 179,386 175,146 19,410

Note: The inventory is valued using average cost approach. Net realisable value as at 31 December 2005 is HCU 30,000 (2004: HCU 24,000).

B.III.2 Analysis of production costs incurred within the period

2005 HCU % 2004 HCU %Direct:Direct raw materials 33,070 46.1% 23,340 41.1%Labour* 20,362 28.3% 17,690 31.2%Depreciation 3,640 5.1% 3,640 6.4%Utilities and other* 5,321 7.4% 3,829 6.8%Overhead materials 1,986 2.8% 1,711 3.0%Other overheads* 7,421 10.3% 6,510 11.5%

71,800 100.0% 56,720 100.0%

Note: Work in progress average stage of completion is 50% with all direct materials being input at the beginning of the production cycle.

*Quarterly labour, utilities and overhead expenses are as follows:HCU

Quarter II 8,172Quarter II 7,902Quarter III 9,232Quarter IV 7,798Total for the year 33,104

B.III.3 Holding period of inventory

(in months) Holding Within work Withinperiod in progress finished goods

Raw materials 1.6 2.0 3.7Sundry supplies 3.2 3.6 5.3Work in progress (WIP) 0.4 x 2.1Finished goods 1.7 x x

Note: The actual age of the inventories, including WIP, should be determined based on the date of purchase or costs incurred. This example usesan average age of WIP and finished goods turnover for simplicity. Average age of inventory may not be appropriate for use in the IAS 29 calculationin some circumstances.




B.IV Equity

B.IV.1 Share capital

An analysis of share capital contributions is as follows:

Date of contribution HCU CommentsHalf of the shares were paid in cash and half in consideration of workshop (see B.I)

Initial contributions 23 Jan 2002 6,400 at par value.Initial contributions 30 Jun 2002 3,600 Paid in cash at par value.

Second issue registered at 3 May 2004Paid in first installment of second issue 5 Dec 2004 7,000 was HCU 12,000.Balance at 31 December 2004 17,000

Paid in remainder of second issue 24 Sep 2005 5,000 The shares were paid in cash at par value.Balance at 31 December 2005 22,000

B.IV.2 Dividends

Dividends of HCU 5,000 were declared in June 2005 and paid in cash at the end of November 2005.

B.V Long-term liabilities

B.V.1 Deferred income – government grant

On 30 June 2002, the Company received a grant of HCU 4,000 for capital expenditures and accounted for thisas deferred income. The grant was conditional based on installment of an environmental block in the productionline (see B.I). The grant is amortised to income on a straight-line basis over the depreciation period of the relatedassets starting January 2003.

B.V.2 Borrowings

Borrowed funds represent a US$ loan. The loan is to be repaid in 2007.There were no movements during the year in US$ terms, unrealised foreign exchange loss was as follows:

US$ Exchange rate HCUBalance at 31 December 2004 5,000 3.00 15,000Balance at 31 December 2005 5,000 5.80 29,000Foreign exchange loss charged to the income statement 14,000





B.VI Revenue and expenses

B.VI.1 Monthly revenue and expenses


General and admin expenses Foreign exchange CurrentRevenue Rent Wages Other Gain Loss* tax**

January 5,750 233 (124) 1,094February 6,245 233 (49) 194March 7,940 234 (104) 1,412Quarter I 19,935 700 1,477 1,558 (277) 2,700 254April 7,475 233 (207) 1,842May 9,250 233 (164) 1,584June 9,370 234 (121) 1,495Quarter II 26,095 700 1,506 1,921 (492) 4,921 572July 11,150 233 (109) 1,319August 10,115 233 (113) 1,036September 9,455 234 (26) 1,557Quarter III 30,720 700 1,901 2,263 (248) 3,912 21October 9,970 300 (85) 479November 8,850 300 (101) 871December 8,680 300 (177) 1,117Quarter IV 27,500 900 2,116 2,258 (363) 2,467 353

104,250 3,000 7,000 8,000 (1,380) 14,000 1,200

* The foreign exchange loss results from borrowings. The foreign exchange gain results from a number of small receivables.

**The Company calculates and accrues income tax only at the end of each quarter based on quarterly tax returns. A monetary gain related to thecurrent tax liability will result from the time there is a legal liability to the government.

B.VI.2 Quarterly non-taxable income and non-deductible expenses


Non-taxable Non-deductiblerevenue expenses

Quarter I – 728Quarter II – 2,148Quarter III 801 555Quarter IV 593 432

1,394 3,863




B.VII Monetary items and cash flows

B.VII.1 Other receivables

At 31 December 2005, other receivables included HCU 600 (2004: HCU nil) of dividends from trading investmentsdeclared but not paid and HCU 900 (2004: HCU 700) of quarterly rent paid in advance in accordance with a lease agreement.

The rest of the other receivables are sundry pre-payments of an operating nature.

B.VII.2 Other payables

As at 31 December 2005, other payables included HCU 190 (2004: HCU 60) of December interest on borrowingspayable within five days after each month-end.

The rest of other payables are sundry payables of operating nature.

B.VII.3 Revenue – cash receipts


Quarter I Quarter II Quarter III Quarter IVJanuary 7,340 April 7,420 July 6,720 October 7,730February 8,740 May 8,030 August 7,720 November 8,220March 8,160 June 7,330 September 8,240 December 8,760Quarter 24,240 22,780 22,680 24,710Total for the year 94,410

B.VII.4 Operating cash disbursements


Raw materials Wages, utilitiesand overheads

Quarter I 4,477 10,810Quarter II 3,923 12,373Quarter III 4,651 14,692Quarter IV 5,433 15,511

18,484 53,386





B.VII.5 Rent prepayments

Rent is payable quarterly in advance. The following payments were made:Date of cash outflow HCU27 March 70029 June 70017 September 90025 December 900

3,200

B.VII.6 Trade accounts receivable

(all amounts expressed in HCU) 2004 2005Trade receivables, gross 22,650 33,870Impairment loss on trade and other receivables (3,250) (5,700)Trade receivables, net 19,400 28,170

Note: The Company reassesses its impairment loss provision for trade and other receivables once a year at the year-end.

B.VIII Net monetary position per quarter

(all amounts expressed in HCU) 31 December 31 March 30 June 30 September 31 December2004 2005 2005 2005 2005

ASSETSTrade receivables 22,650 18,945 22,760 31,400 33,870Impairment loss provision for

trade and other receivables (3,250) (3,250) (3,250) (3,250) (5,700)Other receivables 1,000 1,125 1,250 1,500 1,500Cash 5,750 5,745 7,746 8,741 9,742Total assets 26,150 22,565 28,506 38,391 39,412

LIABILITIESBorrowings (15,000) (17,700) (22,621) (26,533) (29,000)Bank overdrafts (5,200) (5,922) (6,630) (3,340) (8,060)Trade payables (10,750) (15,037) (19,878) (23,991) (24,760)Dividends payable – – (5,000) (5,000) –Current income tax liability (153) (254) (572) (21) (353)Other payables (5,847) (4,847) (4,847) (4,847) (5,147)Total liabilities (36,950) (43,760) (59,548) (63,732) (67,320)Net monetary position (10,800) (21,195) (31,042) (25,341) (27,908)




C.I Monthly inflation indices

Monthly inflation indices represent monthly general growth in prices; that is, the ratio of a month’s end prices tothe prior month-end prices. Generally, such indices are publicly available.

Inflation for a month/monthly inflation index2002 2003 2004 2005

January 9.0%/1.090 5.6%/1.056 6.5%/1.065 3.6%/1.036February 5.8%/1.058 6.2%/1.062 4.5%/1.045 3.4%/1.034March 7.0%/1.070 6.0%/1.060 4.0%/1.040 4.0%/1.040April 8.1%/1.081 5.5%/1.055 4.2%/1.042 5.3%/1.053May 4.1%/1.041 5.2%/1.052 3.2%/1.032 3.2%/1.032June 2.7%/1.027 3.4%/1.034 1.6%/1.016 1.8%/1.018July 2.4%/1.024 5.3%/1.053 2.5%/1.025 4.0%/1.040August 3.8%/1.038 5.3%/1.053 2.4%/1.024 3.3%/1.033September 5.1%/1.051 6.3%/1.063 5.3%/1.053 5.9%/1.059October 5.5%/1.055 6.6%/1.066 4.2%/1.042 3.7%/1.037November 5.1%/1.051 5.6%/1.056 3.4%/1.034 3.9%/1.039December 3.9%/1.039 5.4%/1.054 2.5%/1.025 3.9%/1.039Accumulated for the year 83.5%/1.835 90.8%/1.908 54.3%/1.543 56.9%/1.569

C.II Conversion factors to 31 December 2004 purchasing power

From the end of: 2002 2003 2004January 4.965 2.789 1.448February 4.691 2.626 1.385March 4.383 2.477 1.332April 4.055 2.347 1.280May 3.894 2.231 1.240June 3.791 2.157 1.221July 3.703 2.049 1.191August 3.568 1.946 1.163September 3.395 1.831 1.104October 3.219 1.717 1.060November 3.062 1.626 1.025December 2.946 1.543 1.000

Conversion factor for the end of December 2004 is 1.000; for the end of any other month, it is calculated bymultiplying monthly inflation indices for all subsequent months up to December 2004.

For example: end of September 2004 factor is 104.2/100 x 103.4/100 x 102.5/100 (see monthly inflation indicesabove) = 1.104

C. Inflation indices and conversion factors






C.III Conversion factors to 31 December 2005 purchasing power

From the end of: 2002 2003 2004 2005January 7.790 4.376 2.273 1.515February 7.360 4.120 2.173 1.466March 6.877 3.886 2.089 1.410April 6.363 3.682 2.009 1.339May 6.110 3.500 1.945 1.297June 5.948 3.385 1.916 1.274July 5.810 3.215 1.868 1.225August 5.599 3.053 1.824 1.186September 5.327 2.873 1.732 1.120October 5.050 2.693 1.663 1.079November 4.805 2.551 1.608 1.039December 4.623 2.421 1.569 1.000

Conversion factor for the end of December 2005 is 1.000; for the end of any other month, it is calculated bymultiplying monthly inflation indices for all subsequent months up to December 2005.

For example: end of September 2005 factor is 103.7/100 x 103.9/100 x 103.9/100 (see monthly inflation indicesabove) = 1.120

C.IV Mid-month and average conversion factors for 2005

• The nearest conversion factor is used to restate a specific transaction. The average conversion factor for theperiod is generally used to restate a significant volume of transactions of similar type (eg, sales).

• As inflation is constant within each month, the mid-month conversion factors have been used as a monthlyaverage. Mid-month conversion factor is the geometrical average, as illustrated in the following example:For October, the conversion factor is 1.099 = square root ([103.7/100]x[103.9/100]x[103.9/100]).

• Quarterly averages and average for the year were calculated as arithmetic average of the mid-month indices.

Conversion factorsMonthly indices Mid-month (and Quarterly Average

(C.I+100%) monthly average) average for the yearJanuary 103.6% 1.542February 103.4% 1.491March 104.0% 1.438 1.490April 105.3% 1.374May 103.2% 1.318June 101.8% 1.285 1.326July 104.0% 1.249August 103.3% 1.205September 105.9% 1.153 1.202October 103.7% 1.099November 103.9% 1.059December 103.9% 1.019 1.059 1.269




C.V Other average conversion factors used

The following conversion factors required for restatement were calculated, based on the same principles asdescribed at C.IV.

Conversion factor up to Conversion factor up to31 December 2004 31 December 2005purchasing power purchasing power

Average for April 2002 4.216 6.615Average for October 2002 3.306 5.187Mid-July 2004 1.206 1.892Mid-September 2004 1.088 1.707Mid-November 2004 1.042 1.635Mid-December 2004 1.012 1.588






D.I Background information for the illustrative example

1. The historical financial statements comply with IFRS, except for the following:1.1. Property, plant and equipment is revalued using pre-defined statutory indices. These indices are accepted

for tax purposes.1.2. Investment in unlisted company targeted for acquisition is accounted at cost.1.3. Hyperinflationary restatement was not applied.1.4. Deferred tax was not calculated and accrued.

2. The following measurement units are used in the illustrative example:• HCU – historical currency units – the nominal currency of the hyperinflationary economy;• CCU – current currency units – the units of year end purchasing power (2004 or 2005 depending on the

underlying item).

If the relevant year-end purchasing power is not evident, the following abbreviations are used:• 2004 CCU – current currency units in 31 December 2004 purchasing power;• 2005 CCU – current currency units in 31 December 2005 purchasing power.

3. The relevant line items in the statements of income and of cash flow may be restated on a monthly, quarterly,or annual average basis, or on the basis of actual expenditure or cash flows, depending on the level offluctuation of the underlying transactions, rate of inflation, and materiality of the respective amounts. Althoughthere is an element of judgement inherent in the determination of the basis of restatement for these items, theassumptions used and judgements made should be consistent between the items and statements. In order toillustrate the effects of the application of a range of indices, various conditions have been assumed, and thesehave resulted in varying bases for the restatement.

4. All investing and financing activities’ cash flows including property, plant and equipment purchases andinstallation works are close to the date of the underlying acquisition or disposal transaction unless otherwise indicated.

5. The company is not subject to VAT or any other taxes besides income tax.

6. Income tax is calculated based on the historical income statement except for certain non-tax deductibleexpenses and non-taxable income. There are no temporary differences between the historical carrying valuesand their tax bases except for the associate. Income from associate is not taxed if not repatriated throughdividends or sale of business. Profit repatriation tax is 30% on cash received.

The Company pays its current income tax liabilities one month after each quarter-end without delay. Enactedincome tax rate of 30% applies to the current and all future periods.

D. Background information for the illustrative example




E.I Support schedule – monetary vs non-monetary balance sheet components

Monetary Non-monetary(accumulate monetary

gains/losses, to be used for (restate and includemonetary proof) in adjustment schedule)

ASSETSNon-current assetsProperty, plant and equipment 4

Investment in associates 4

Other long-term investments (6% investment in Company B) 4

Current assetsInventories 4

Trade receivables 4

Impairment loss provision for trade and other receivables 4

Other receivables 4

Trading investments (equity securities) 4

Cash 4

LIABILITIES AND EQUITYCapital and reservesShare capital 4

Revaluation reserve n/aTranslation reserve 4

Retained earnings 4

Non-current liabilitiesDeferred income – government grant 4

Borrowings 4

Current liabilitiesBank overdrafts 4

Trade payables 4

Current income tax liability 4

Other payables 4

Classification of deferred taxes as either monetary or non-monetary has no impact on the calculated amount of deferred tax assets or liabilities recognised in the balance sheet in accordance with IAS 12 and IAS 29.

E. Restatement procedures






E.II Restatement of property, plant and equipment, and depreciation

E.II.1 Restatement of cost to 31 December 2004 purchasing power

HCU Conversion 2004 2004Acquired/incurred (B.I) factor (C.II) CCU CCU-HCU

Equipment bought 27 February 2002 3,700 4.691 17,357Installation cost – phase II within April 2002 1,300 4.216 5,481Environmental block 29 July 2002 1,670 3.703 6,184Installation cost – phase II within October 2002 1,300 3.306 4,298Final testing first week of December 2002 1,030 3.062 3,154Total production line 9,000 36,474Workshop building 23 January 2002 1,600 4.965 7,944Leasehold improvements January 2002 1,200 4.965 5,958Office equipment January 2002 1,500 4.965 7,448

13,300 57,824 44,524 a

E.II.2 Restatement of cost to 31 December 2005 purchasing power

HCU Conversion 2005 2005Acquired/incurred (B.I) factor (C.III) CCU CCU-HCU

Equipment bought 27 February 2002 3,700 7.360 27,232Installation cost – phase II within April 2002 1,300 6.615 8,600Environmental block 29 July 2002 1,670 5.810 9,703Installation cost – phase II within October 2002 1,300 5.187 6,743Final testing first week of December 2002 1,030 4.804 4,948Total production line 9,000 57,226Workshop building 23 January 2002 1,600 7.790 12,464Leasehold improvements January 2002 1,200 7.790 9,348Office equipment January 2002 1,500 7.790 11,685Total cost at 31 December 2004 13,300 90,723 77,423Addition June 2005 10,000 1.274 12,740 2,740Disposal January 2002 (500) 7.790 (3,895) (3,395) cTotal cost at 31 December 2005 22,800 99,568 76,768 b

Note: The statutory revaluation surplus has been reversed against revaluation reserve in order to calculate actual historical costs (see E.IX.3)




E.II.3 Calculation of accumulated depreciation at 31 December 2004

The restated cost calculated above is the basis for determining the restated depreciation. The historicaldepreciation was reversed (see ADJ 2 on E.XII) and has been replaced by CCU amounts calculated below:

Useful In use as at Accumulatedeconomic 31 December depreciation at

life 2004 31 December 2004 2005 CCU-2004 CCU 2005 CCU 2004 CCU

UEL Y Y*E.II.1/UEL Y*E.II.2/UELProduction line 10 2 7,295 11,445Workshop building 20 3 1,192 1,870Leasehold improvements 6 3 2,979 4,674Office equipment 7 3 3,192 5,008

14,658 22,997 8,339 d

E.II.4 Calculation of depreciation charge for 2005

DepreciationUseful Used in charge

economic life the year 2005 CCUProduction line 10 1 5,723 }ProductionWorkshop building 20 1 623 expenses 6,346 eLeasehold improvements 6 1 1,558Office equipment 7 1 1,669 } General &Office equipment – addition 5 1/2 1,274 admin 4,501H.II,f

10,847 H.III






E.II.5 Calculation of disposal at 31 December 2005 purchasing power

Conversion HCU (B.I) Date factor (C.III) CCU

Proceeds 1,500 27 December 2005 1.000 1,500

HCU (B.I) CCU CCU-HCUGross book value 2,600 3,895 1,295Accumulated depreciation (1/3 of total

depreciation on office equipment) (1,486) (2,226) (740)Proceeds (1,500) (1,500) –(Gain)/loss on disposal (386) 169 555

E.II.6 Accumulated depreciation reconciliation at 31 December 2005 purchasing power

Source CCUAccumulated depreciation at 31 December 2004 E.II.3 22,997Depreciation charge for 2005 E.II.4 10,847Disposed E.II.5 (2,226) hAccumulated depreciation at 31 December 2005 31,618 g




E.II.7 Inflation adjustment journal entries

i) Reversal of statutory depreciation (recorded in E.XII as ADJ 2)Property, plant and equipment Dr 20,864Gain on disposal of property, plant

and equipment Dr 1,486Retained earnings – opening balance Cr (8,093)Revaluation reserve Cr (7,170)General and administrative expenses,

depreciation Cr (3,447)Temporary holding account (current period expenses)* Cr (3,640)

22,350 (22,350)

ii) Restatement of property, plant and equipment cost (recorded in E.XII as ADJ 3)Property, plant and equipment Dr 76,768 bGain on disposal of property, plant

and equipment Dr 3,395 cRetained earnings – opening balance Cr (44,524) a

80,163 (44,524)Net monetary loss Cr (35,639) b+c–a

80,163 (80,163)

iii) Accumulated depreciation in 2005 purchasing power (recorded in E.XII as ADJ 4)Retained earnings – opening balance Dr 14,658 dGeneral and administrative expenses,

depreciation Dr 4,501 eTemporary holding account (current

period expenses)* Dr 6,346 fProperty, plant and equipment Cr (31,618) gGain on disposal of property, plant and equipment Cr (2,226) h

25,505 (33,844)Net monetary loss Dr 8,339 d

33,844 (33,844)

The depreciation forms part of period costs allocated among WIP, finished goods and cost of goods sold.However, for simplicity, no allocation of the current period depreciation is done at this stage. A temporaryholding account was used to accumulate the depreciation on the historical cost of the assets, which is beingeliminated. The amounts included in this holding account are appropriately allocated to inventories or cost ofgoods sold during the restatement of inventory. See section E.VI.

E.II.8 Restated property, plant and equipment

(all amounts expressed in 2005 CCU) Source 2004 2005Gross book value E.II.2 90,723 99,568Accumulated depreciation E.II.6 (22,997) (31,618)Net book value 67,726 67,950

Prior-year revaluation of accumulateddepreciation

2005 historical depreciation charged to generalexpenses

2005 historical depreciation included in costs ofconversion

(opening accumulated depreciation in2004 CCU)

(2005 inflation surplus on openingaccumulated depreciation)

Historical accumulated depreciation for disposedassets

Historical accumulated depreciation at 31 December 2004

Historical accumulated depreciation at31 December 2005






E.III Restatement of investment in an associate

As the foreign associate is accounted for at exchange rates current at the balance sheet date, no restatement of this balance sheet component is required at 31 December 2005. However, the restatement is necessary tocalculate the appropriate translation reserve charge and monetary gain or loss for the period. Share of result ofthe associate was restated by the average conversion factor for 2005.

ConversionHCU (B.II.1) factor (C.III) CCU CCU-HCU

Share of net assets at 31 December 2004 16,320 1.569 25,606 9,286 cShare of result of associate 6,300 1.269 7,995 1,695 bForeign exchange difference 13,010 Balancing 2,029 (10,981) aShare of net assets at 31 December 2005 35,630 1.000 35,630 –

IAS 29 adjustment entry (recorded in E.XII as ADJ 6)Translation reserve Dr 10,981 aShare of result of associate Cr (1,695) bNet monetary loss Cr (9,286) c=a+b

10,981 (10,981)

E.IV Restatement of long-term investments accounted for at cost

The investment in Company B should be restated from the date of acquisition. Such investments fall in available-for-sale investments group and should be fair valued in accordance with IAS 39.

At cost Conversion Fair FairConversion (B.II.2), factor Cost CCU- value value-factor date HCU (C.II, C.III) CCU HCU (B.II.2) CCU

Initial acquisition 31 March 2003 10,000Balance at 31 December 2004

in 2004 purchasing power 2.477 24,770 14,770 23,500 (1,270) b2005 inflation of 56.9%

(from conversion factor 1.569) 14,094 13,372 cBalance at 31 December 2004

in 2005 purchasing power 3.886 38,864 28,864 36,872 (1,992)

Additions 27 March 2005 1,000 1.410 1,410 410 1,410 dCost at 31 December 2005 11,000 40,274 29,274 aFair value adjustment (equity) (calculated) 2,718Carrying value at 31 December 2005 (B.II.2) 41,000 726 e

IAS 29 and IAS 39 adjustment entry (recorded in E.XII as ADJ 7)Other long-term investments Dr 30,000 a+eFair value reserve Cr (726) eRetained earnings – opening balance Cr (14,770) b (CCU – HCU)Net monetary loss Cr (14,504) c (for cost)+d

30,000 (30,000)




E.V Restatement of trading investments

As trading investments are carried at market value (ie, a unit current at the balance sheet date), no restatementof this balance sheet component is required at 31 December 2005.

However, the restatement is necessary to calculate the appropriate income statement effect of the change inmarket value of the trading investments and monetary effect for the period.

Conversion Conversionfactor date HCU (B.II.3) factor (C.III) CCU CCU-HCU

Balance at 31 December 2004 (market value) 31 Dec 2004 5,000 1.569 7,845 2,845

Additions, at cost Q1 average 9,900 1.490 14,751Additions, at cost Q2 average 8,750 1.326 11,602Additions, at cost Q3 average 5,300 1.202 6,371Additions, at cost Q4 average 6,000 1.059 6,354Disposal, at proceeds Q1 average (6,950) 1.490 (10,356)Disposal, at proceeds Q2 average (5,700) 1.326 (7,558)Disposal, at proceeds Q3 average (5,160) 1.202 (6,202)Disposal, at proceeds Q4 average (6,140) 1.059 (6,502)Net additions for 2005 6,000 1.410 8,460 2,460

11,000 16,305 5,305Balance at 31 December 2005

(market value) 31 Dec 2005 15,000 1.000 15,000 –Income statement, gain/(loss) on

trading investments 4,000 (1,305) (5,305)

IAS 29 adjustment entry (recorded in E.XII as ADJ 8):

Gain on trading investments Dr 5,305Net monetary loss Cr (5,305)






E.VI Restatement of inventories and cost of sales

E.VI.1 Process of the restatement of inventories

The order of restating inventory should follow the production process. The order is necessary in order toconsider the cumulative effect of holding materials and expenditures throughout the production process.

The restatement may be broken down into four stages:

1) Restatement of opening inventoriesThe restatement is based on the period of holding the inventory or costs incurred (for work in progress (WIP)and goods produced).

a) The opening balances should be restated to the prior year-end purchasing power. That is, all rawmaterials and component costs of finished goods and WIP should be restated from the date of acquisitionor expenditure to the opening balance sheet date. The difference (inflation effect) relates to the prioryear(s) and is included in the opening retained earnings.

b) The opening inventories presented in prior-year purchasing power should be restated to current year-endpurchasing power. The resulting difference would be credited to monetary loss for the current period.

2) Restatement of period additionsThe restatement of additions to inventory may require the historical information to be restated on a monthly or quarterly basis, depending on the rate of inflation during the year and timing of expenditures. However,yearly average inflation (ie, conversion factor of 1.269) has been used in this illustrative example. WIPadditions throughout the year should be inflated from the date of acquisition or expenditure.

3) Restatement of closing inventoriesRestatement of closing inventory should be performed in the same manner as the restatement of openinginventories.

4) Calculation of the inventory used in the production processInventory disposals in terms of current year-end purchasing power could be calculated as follows (all amountsshould be expressed in 2005 CCU):

Opening inventory balancePlus additions on account for 2005Less closing inventory balanceRaw materials shipped for conversion, WIP completed or cost of sales (depends on type of inventory) in 2005 CCU




E.VI.2 Restatement of raw materials

The following restatement of inventories was performed following the described algorithm:

HCU Conversion 2004 2005 CCU-(B.III.1) factor* CCU CCU HCU

Opening balance (1.6 months holding period) 3,520 1.042 3,668 148 a

2005 inflation of 56.9% (from conversion factor 1.569) 1.569 2,087

Opening balance in 2005 CCU 1.635 5,755 2,235Receipts 34,870 1.269 44,250 9,380

Less: closing balance(1.6 months holding period) (5,320) 1.059 (5,634) (314) b

Raw materials usage 33,070 44,371 11,301

*Conversion factor for the inventory balances is calculated based on inventory holding period (see B.III.3). That is, for a 1.6 month holding period, the conversion factor used is from middle of November of the respective year (see section C).

E.VI.3 Restatement of sundry suppliesConversion

HCU factor 2004 2005 CCU-(B.III.1) (section C) CCU CCU HCU

Opening balance(3.2 months holding period) 340 1.104 375 35 d

2005 inflation of 56.9% (from conversion factor 1.569) 1.569 213

Opening balance in 2005 CCU 1.732 588 248Receipts 2,376 1.269 3,015 639

Less: closing balance(3.2 months holding period) (730) 1.120 (818) (88) e

Usage of sundry supplies 1,986 2,785 799






E.VI.4 Restatement of work in progress

ConversionHolding Conversion factor factor CCU-

Opening WIP* period date HCU (section C) CCU HCULabour, utilities and services 0.4 Mid December 2004 649 1.012 657 8Raw materials 2.0 (0.4+1.6) End of October 2004 1,078 1.060 1,143 65

Depreciation** 84 left as notmaterial 84 –

Overhead materials 3.6 (0.4+3.2) Mid September 2004 39 1.088 42 3Opening WIP (B.III.1) – total 1,850 1,926 76 h

Opening WIP at 31 December 2004 CCU 1,9262005 inflation of 56.9% (from conversion factor 1.569) 1,096Opening balance in 2005 CCU 3,022 1,172

Receipts (B.III.2):Labour, utilities and services:Quarter I x Q1 average 8,172 1.490 12,176 4,004Quarter II x Q2 average 7,902 1.326 10,478 2,576Quarter III x Q3 average 9,232 1.202 11,097 1,865Quarter IV x Q4 average 7,798 1.059 8,258 460Raw materials x x 33,070 see E.VI.2 44,371 11,301Depreciation x x 3,640 see E.II.4 6,346 2,706 fOverhead materials x x 1,986 see E.VI.3 2,785 799

Total expenditures incurred 71,800 95,511 23,711

Less: closing balance*Labour, utilities and services(46%x50%=23.0%) 0.4 Mid December 2004 1,042 1.019 1,062 20Raw materials (46.1%) 2.0(0.4+1.6) End of October 2004 2,089 1.079 2,254 165

Depreciation left as not(5.1%x50%=2.5%)** 116 material 116 –

Overhead materials(2.8%x50%=1.4%) 3.6(0.4+3.2) Mid September 2004 63 1.153 73 10

Closing balance (B.III.1) total (73.0%) 3,310 3,505 195 gGoods produced 70,340 95,028 24,688 j*The split between components of WIP were approximated based on the structure of expenditures incurred (see B.III.2) and the average stage ofWIP completion (50% - see D). The approximation of the opening WIP has been shown below for illustrative purposes:

Component Expenditures Percent of Weight in WIP Total WIP WIP(B.III.2) completion (B.III.1) components

(a) (b) (a)x(b) (c)=((a)x(b))/70.6% (d) (c)x(d)Labour, utilities and services 49.5% 50% 24.8% 35.1% 649Raw materials 41.1% 100% 41.1% 58.3% 1,078Depreciation 6.4% 50% 3.2% 4.5% 84Overhead materials 3.0% 50% 1.5% 2.1% 39

100.0% 70.6% 100.0% 1,850 1,850

**Depreciation included in WIP inventory was not adjusted for inflation as the amount is not significant. However, in different circumstances it couldbe necessary to apply the approach used for finished goods (see E.VI.5).




E.VI.5 Restatement of finished goods and cost of sales

ConversionHolding Conversion factor factor 2004 CCU-

period date HCU (section C) CCU HCUOpening finished goods inventory*

Labour, utilities and services (49.5%) 2.1 (1.7+0.4) End Oct 2004 4,683 1.060 4,964 281

Raw materials (41.1%) 3.7 (1.7+0.4+1.6) Mid Sept 2004 3,888 1.088 4,230 342Depreciation (6.4%)** 605 1.111 672 67Overhead materials (3.0%) 5.3 (1.7+0.4+3.2) Mid July 2004 284 1.206 343 59

Opening balance of finished goods (B.III.1) – total (100%) 9,460 10,209 749 k

Conversion ConversionHolding factor factor 2005 CCU-

period date HCU (section C) CCU HCUOpening balance in 2004 CCU 10,2092005 inflation of 56.9% (from

conversion factor 1.569) 5,809Opening balance in 2005 CCU 16,018 6,558Total period production 70,340 see E.VI.4 95,028 24,688

Less: closing balance*Labour, utilities andservices (46,0%) 2.1 (1.7+0.4) End Oct 2005 4,623 1.079 4,988 365Raw materials (46.1%) 3.7 (1.7+0.4+1.6) Mid Sept 2005 4,633 1.153 5,342 709Depreciation (5.1%)** 513 1.743 894 381Overhead materials (2.8%) 5.3 (1.7+0.4+3.2) Mid July 2005 281 1.249 351 70

Closing balance of finished goods (B.III.1) – total (100%) 10,050 11,575 1,525 l

Cost of sales 69,750 99,471 29,721 m

* The structure of expenditures incurred (presented in B.III.2) was used to approximate the weights of components of finished goods balance.Some accounting systems do not provide sufficient breakdown of WIP and finished goods.They therefore need to be approximated (see E.VI.4 forWIP approximation).

**Depreciation included in finished goods balance was approximated based on the percentage increase in the CCU depreciation charge and theHCU depreciation charge. The percentage increase over the HCU depreciation charge was calculated as follows:

2004 2005(a) Restated depreciation charge 4,045 6,346(b) Historical depreciation charge 3,640 3,640Conversion factor (a)/(b) 1.111 1.743





E.VI.6 Restated inventories – summary (E.VI.2 – E.VI.5)

(all amounts expressed in CCU)

31 December 2004 Receipts Utilised/sold 31 December 2005Raw materials 5,755 44,250 44,371 5,634Sundry supplies 588 3,015 2,785 818Work in progress 3,022 95,511 95,028 3,505Finished goods 16,018 95,028 99,471 11,575 H.II

25,383 237,804 241,655 21,532 H.I

E.VI.7 Inventory restatement overall adjustment

The adjustment is recorded in E.XII as ADJ 5Inventories Dr 2,122 b+e+g+lCost of goods sold Dr 29,721 mTemporary holding account (current period expenses)* Cr (2,706) fRetained earnings – opening balance Cr (1,008) a+d+h+k

31,843 (3,714)Net monetary loss Cr (28,129)

31,843 (31,843)

* A temporary holding account was used to hold the historical depreciation of the current period when it was eliminated at a previous stage in thisexample (see section E.II). This holding account also ensures that the restated depreciation is allocated properly between inventories and cost of sales.





E.VII Restatement of deferred income – government grant

HCU Conversion CCU CCU-(B.V.1) factor (C.II,C.III) HCU

Balance at 31 December 2004 3,200– at 31 December 2004 purchasing power* 3.791 12,131 8,931 a– at 31 December 2005 purchasing power* 5.948 19,034 15,834 b

Current period amortisation (in 2005 CCU) (400) 5.948 (2,379) (1,979) cBalance at 31 December 2005 2,800 16,655 13,855 d=b+c

IAS 29 adjustment entry (recorded in E.XII as ADJ 9):Retained earnings – opening balance Dr 8,931 aNet monetary loss Dr 6,903 b-aAmortisation of government grant Cr (1,979) cDeferred income – government grant Cr (13,855) d

15,834 (15,834)

*Conversion factor from end of June 2002






E.VIII Restatement of revenue and expenses

Restated amounts are calculated by multiplying the historical monthly or quarterly HCU (see B.VI.1) by theaverage conversion factors for that month or quarter (see C.IV) except for current tax, which is restated using theconversion factors from the month-end (based on conditions summarised in section B.VI.1).

For example, January revenue: 5,750 x 1.542 = 8,867; Quarter IV tax: 374 x 1.000 = 374.

Average Restated income statement items (all amounts expressed in CCU)conversion General and admin expenses Foreign exchange

factor Revenue Wages Rent Other Gain Loss Current taxJanuary 1.542 (8,867) 359 (191) 1,687February 1.491 (9,311) 347 (73) 289March 1.438 (11,418) 336 (150) 2,030Quarter I 1.490 (29,596) 2,201 1,042 2,321 (414) 4,006 378April 1.374 (10,271) 320 (284) 2,531May 1.318 (12,192) 307 (216) 2,088June 1.285 (12,040) 301 (155) 1,921Quarter II 1.326 (34,503) 1,997 928 2,547 (655) 6,540 758July 1.249 (13,926) 291 (136) 1,647August 1.205 (12,189) 281 (136) 1,248September 1.153 (10,902) 270 (30) 1,795Quarter III 1.202 (37,017) 2,285 842 2,720 (302) 4,690 25October 1.099 (10,957) 330 (93) 526November 1.059 (9,372) 318 (107) 922December 1.019 (8,845) 306 (180) 1,138Quarter IV 1.059 (29,174) 2,241 954 2,391 (380) 2,586 374

(130,290) 8,724 3,766 9,979 (1,751) 17,822 1,535 H.IICCU-HCU (26,040) 1,724 766 1,979 (371) 3,822 335 ADJ 14;

H.VAdjusting entries (recorded in E.XII as ADJ 14):

Revenue Cr (26,040)Wages and salaries Dr 1,724Rent expense Dr 766Other administrative expenses Dr 1,979Net foreign exchange losses Dr 3,451Interest income Cr (205)Interest expense Dr 538Income tax expense Dr 335Net monetary loss Dr 17,452

26,245 (26,245)

Note: Interest income and expense were restated using the yearly average because interest expense arises evenly over that period, and interestincome is not material.




E.IX Restatement of equity components and movements

E.IX.1 Restatement of paid-in share capital

1) Restatement of the opening balance to 31 December 2004 purchasing powerConversion factor CCU-

Date of contribution/conversion factor used HCU (from C.II) CCU HCU23 January 2002/end January 2002 6,400 4.965 31,77630 June 2002/end June 2002 3,600 3.791 13,6485 December 2004/end November 2004 7,000 1.025 7,175

Balance at 31 December 2004 17,000 52,599 35,599 a

2) Restatement of the opening balance to 31 December 2005 purchasing powerConversion factor CCU-

Date of contribution/conversion factor used HCU (from C.III) CCU HCU23 January 2002/end January 2002 6,400 7.790 49,85630 June 2002/end June 2002 3,600 5.948 21,4135 December 2004/end November 2004 7,000 1.608 11,256

Balance at 31 December 2004 17,000 82,525 65,525

24 September 2005/end September 2005 5,000 1.120 5,600 600 H.VBalance at 31 December 2005 22,000 88,125 66,125 b

3) IAS 29 adjustment entry (recorded in E.XII as ADJ 10)

Retained earnings – opening balance Dr 35,599 aNet monetary loss Dr 30,526 b-aShare capital Cr (66,125) b

66,125 (66,125)

E.IX.2 Restatement of dividends (declared and paid)

Conversion factor CCU-Date of contribution/conversion factor used HCU (from C.III) CCU HCUAccrued (ie, retained earnings movement):

June 2005 5,000 1.274 6,370 1,370 aPaid (ie, cash flow): November 2005 (5,000) 1.039 (5,195) (195) H.IIIMonetary gain on delay in dividends payment 1,175 1,175

IAS 29 adjustment entry (recorded in E.XII as ADJ 11):

Dividends accrued Dr 1,370 aNet monetary loss Cr (1,370) a






E.IX.3 Reversal of statutory revaluation of property, plant and equipment

1) Reversal of 2005 year-end statutory revaluation (recorded in E.XII as ADJ 1a)Revaluation reserve Dr 9,027 H.VProperty, plant and equipment Cr (9,027)

2) Reversal of prior-years statutory revaluation for PPE cost (recorded in E.XII as ADJ 1b)Note

Revaluation reserve Dr 45,300 (A)Property, plant and equipment Cr (43,200) (B)Gain on disposal of property, plant and equipment Cr (2,100) (C)

45,300 (45,300)Note: (A) Opening balance of revaluation reserve.

(B) Surplus on gross book value of property, plant and equipment at 31 December 2005.(C) Surplus on gross book value of the disposal.

3) Reconciliation of revaluation reserve adjustmentsRevaluation reserve at 31 December 2005 (47,157)Less: ADJ 1a 9,027

ADJ 1b 45,300Revaluation reserve debit related to revaluation of accumulated depreciation to be reversed within statutory depreciation reversal (See E.II) 7,170




E.X Deferred tax calculations

IFRS carrying Temporary Deferred taxvalue Tax base difference asset/(liability)

A B B-A (B-A)*30%At 31 December 2004

Property, plant and equipment 43,166 43,337 171 51Investment in associate 16,320 16,000 (320) (96)Other long-term investments 23,500 10,000 (13,500) (4,050)Inventories 16,178 15,170 (1,008) (302)Trading investments 5,000 5,000 – –Deferred income (government grant) (12,131) (3,200) 8,931 2,679

Opening deferred tax (net) in 31 December 2004 purchasing power (1,718) a; E.XIII

2005 inflation of 56.9% (from conversion factor 1.569) (978) c; H.VOpening deferred tax (net) in 31 December 2005

purchasing power (2,696) E.XIII

At 31 December 2005Property, plant and equipment 67,950 54,163 (13,787) (4,136)Investment in associate 35,630 16,000 (19,630) (5,889)Other long-term investments 41,000 11,000 (30,000) (9,000)Inventories 21,532 19,410 (2,122) (637)Trading investments 15,000 15,000 – –Deferred income (government grant) (16,655) (2,800) 13,855 4,157

Deferred tax (net) at 31 December 2005 (15,505) bMovement in deferred tax for the current period (12,809) b-(a+c)

Within deferred tax amount, the following is charged through fair value reserve:IFRS carrying Temporary Deferred tax

value IFRS cost difference asset/(liability)A B B-A (B-A)*30%

At 31 December 2004Other long-term investments 23,500 24,770 1,270 381 f

Opening deferred tax charge to fair value reserve in 31 December 2004 purchasing power 381 g

2005 inflation of 56.9% (from conversion factor 1.569) 217

Opening deferred tax charge to fair value reserve in 31 December 2005 purchasing power 598

At 31 December 2005Other long-term investments 41,000 40,274 (726) (218) d

Deferred tax charge to fair value reserve at 31 December 2005 (218)

Deferred tax charge to fair value reservefor the current period (816) e






E.X Deferred tax calculations (continued)

Within deferred tax amount, the following is charged through translation reserve:

Translation reserve Temporary Deferred taxvalue Tax base difference asset/(liability)

A B B-A (B-A)*30%At 31 December 2004

Investment in associate – – – –Opening deferred tax charge to translation reserve in 31 December 2004 purchasing power –2005 inflation of 56.9% (from conversion factor 1.569) –

Opening deferred tax charge to translation reserve in 31 December 2005 purchasing power –

At 31 December 2005Investment in associate 2,029 – (2,029) (609)

Deferred tax charge to translation reserve at 31 December 2005 (609) h

Deferred tax charge to translation reserve for the current period (609) j

Deferred tax accrual entry (recorded in E.XII as ADJ 12):Retained earning – opening balance Dr 2,099 a-fTranslation reserve Dr 609 hFair value reserve Dr 218 dNet monetary loss Dr 1,195 c+jIncome tax expense Dr 11,384 b-(a+c)-e-j

Deferred tax liability Cr (15,505) b

15,505 15,505)




E.XI Current-year inflation adjustment to opening retained earnings

Retained earnings opening balance will be accumulated in the adjustment schedule as follows:

Currency Description Source unitsOpening historical retained earnings HCU A.I 20,697Add: Sum of all prior-year adjustments to opening

retained earnings from adjustment schedule E.XII (ADJ 1-ADJ 14) 7,108

Opening retained earnings in 2004 CCU E.XII (subtotal) 27,805

2005 inflation of 56.9% (from conversion factor 1.569) C.I 15,821 a

Opening retained earnings in 2005 CCU 43,626

Opening retained earnings adjusting entry (recorded in E.XII as ADJ 15):

Net monetary loss Dr 15,821 aRetained earnings – opening balance Cr (15,821) a


E.XII Summary schedule of inflation adjustment journal entriesHISTORICAL ADJ 1a ADJ 1b ADJ 2 ADJ 3 ADJ 4 ADJ 5 ADJ 6 ADJ 7 ADJ 8

BALANCE SHEET Reversal Reversal Reversal Inventories Associate Long-term Trading(inc. retained earnings reconciliation) 31 Dec 2005 of 2005 of p/y cost of statutory PPE Depreciation and CoS restatement investment investments

revaluation revaluation depreciation restatement in 2005 PP restatement IAS29&IAS39 (P&L effect)ASSETSNon-current assetsProperty, plant and equipment 54,163 (9,027) (43,200) 20,864 76,768 (31,618) – – – –Associates 35,630 – – – – – – – – –Other long-term investments 11,000 – – – – – – – 30,000 –

100,793 (9,027) (43,200) 20,864 76,768 (31,618) – – 30,000 –Current assetsInventories 19,410 – – – – – 2,122 – – –Trade receivables 28,170 – – – – – – – – –Other receivables 1,500 – – – – – – – – –Trading investments 15,000 – – – – – – – – –Cash 9,742 – – – – – – – – –

73,822 – – – – – 2,122 – – –Total assets 174,615 (9,027) (43,200) 20,864 76,768 (31,618) 2,122 – 30,000 –

LIABILITIES AND EQUITYEquityShare capital (22,000) – – – – – – – – –Revaluation reserve (47,157) 9,027 45,300 (7,170) – – – – – –

– – – – – – – – (726) –Translation reserve (13,010) – – – – – – 10,981 – –Retained earnings – opening (20,697) – – (8,093) (44,524) 14,658 (1,008) – (14,770) –Income statement 2005 (6,631) – (2,100) (5,601) (32,244) 16,960 (1,114) (10,981) (14,504) –Dividends declared 2005 5,000 – – – – – – – – –Retained earnings – closing (22,328) – (2,100) (13,694) (76,768) 31,618 (2,122) (10,981) (29,274) –

(104,495) 9,027 43,200 (20,864) (76,768) 31,618 (2,122) – (30,000) –

Non-current liabilitiesDeferred income – grant (2,800) – – – – – – – – –Borrowings (29,000) – – – – – – – – –Deferred tax liabilities n/a – – – – – – – – –

(31,800) – – – – – – – – –Current liabilitiesBank overdrafts (8,060) – – – – – – – – –Trade payables (24,760) – – – – – – – – –Current income taxes (353) – – – – – – – – –Other payables (5,147) – – – – – – – – –

(38,320) – – – – – – – – –Total liabilities and equity (174,615) 9,027 43,200 (20,864) (76,768) 31,618 (2,122) – (30,000) –

Check (Dr –Cr) to be nil – – – – – – – – – –

INCOME STATEMENT

Sales (104,250) – – – – – – – – –Cost of sales 69,750 – – – – – 29,721 – – –(Temporary holding account) – – – (3,640) – 6,346 (2,706) – – –Gross profit (34,500) – – (3,640) – 6,346 27,015 – – –General and administrative:Wages 7,000 – – – – – – – – –Depreciation expense 3,447 – – (3,447) – 4,501 – – – –Rent expense 3,000 – – – – – – – – –Impairment loss on receivables 2,450 – – – – – – – – –Other administrative expenses 8,000 – – – – – – – – –Amortisation of grant (400) – – – – – – – – –Gain on sale of PPE (386) – (2,100) 1,486 3,395 (2,226) – – – –Operating profit (11,389) – (2,100) (5,601) 3,395 8,621 27,015 – – –Share of result of associate (6,300) – – – – – – (1,695) – –Financial income and costs:Gain on trading investments (4,000) – – – – – – – – 5,305 Interest income (762) – – – – – – – – –Interest expense 2,000 – – – – – – – – –Foreign exchange loss 12,620 – – – – – – – – –Net monetary loss – – – – (35,639) 8,339 (28,129) (9,286) (14,504) (5,305)Profit before tax (7,831) – (2,100) (5,601) (32,244) 16,960 (1,114) (10,981) (14,504) –Income tax expense/(credit) 1,200 – – –Profit for the year (6,631) – (2,100) (5,601) (32,244) 16,960 (1,114) (10,981) (14,504) –

Working papers reference A.I, A.II, A.IV E.IX.3.1 E.IX.3.2 E.II.7i E.II.7ii E.II.7iii E.VI.7 E.III E.IV E.V






Should be always nil

E.XII Summary schedule of inflation adjustments journal entries (continued)ADJ 9 ADJ 10 ADJ 11 ADJ 12 ADJ 13 ADJ 14 Subtotal ADJ 15 RESTATED

Deferred Share Dividends Deferred Impairment Other Opening retained Retained BALANCE SHEETincome capital declared income tax loss on P&L items earnings in earnings b/f 31 Dec 2005 (inc. retained earnings reconciliation)

restatement restatement restatement receivables restatement 2004 CCUASSETSNon-current assets

– – – – – – 67,950 – 67,950 Property, plant and equipment– – – – – – 35,630 – 35,630 Associates– – – – – – 41,000 – 41,000 Available-for-sale investments– – – – – – 144,580 – 144,580

Current assets– – – – – – 21,532 – 21,532 Inventories– – – – – – 28,170 – 28,170 Trade receivables– – – – – – 1,500 – 1,500 Other receivables– – – – – – 15,000 – 15,000 Trading investments– – – – – – 9,742 – 9,742 Cash– – – – – – 75,944 – 75,944– – – – – – 220,524 – 220,524 Total assets

LIABILITIES AND EQUITYEquity

– (66,125) – – – – (88,125) – (88,125) Share capital– – – – – – – – –– – – 218 – – (508) – (508) Fair value reserve– – – 609 – – (1,420) – (1,420) Translation reserve

8,931 35,599 – 2,099 – – (27,805) (15,821) (43,626) Retained earnings – opening4,924 30,526 (1,370) 12,579 – – (9,556) 15,821 6,265 Income statement 2005

– – 1,370 – – – 6,370 – 6,370 Dividends declared 200513,855 66,125 – 14,678 – – (30,991) – (30,991) Retained earnings – closing13,855 – – 15,505 – – (121,044) – (121,044)

Non-current liabilities(13,855) – – – – – (16,655) – (16,655) Deferred income – grant

– – – – – – (29,000) – (29,000) Borrowings– – – (15,505) – – (15,505) – (15,505) Deferred tax liabilities

(13,855) – – (15,505) – – (61,160) – (61,160)Current liabilities

– – – – – – (8,060) – (8,060) Bank overdrafts– – – – – – (24,760) – (24,760) Trade payables– – – – – – (353) – (353) Current income taxes– – – – – – (5,147) – (5,147) Other payables– – – – – – (38,320) – (38,320)– – – – – – (220,524) – (220,524) Total liabilities and equity

– – – – – – – – – Check (Dr – Cr) to be nil

INCOME STATEMENT

– – – – – (26,040) (130,290) – (130,290) Sales– – – – – – 99,471 – 99,471 Cost of sales– – – – – – – – –– – – – – (26,040) (30,819) – (30,819) Gross profit

General and administrative:– – – – – 1,724 8,724 – 8,724 Wages– – – – – – 4,501 – 4,501 Depreciation expense– – – – – 766 3,766 – 3,766 Rent expense– – – – – – 2,450 – 2,450 Impairment loss on receivables– – – – – 1,979 9,979 – 9,979 Other administrative expenses

(1,979) – – – – – (2,379) – (2,379) Amortisation of grant– – – – – – 169 – 169 Gain on sale of PPE

(1,979) – – – – (21,571) (3,609) – (3,609) Operating profit– – – – – – (7,995) – (7,995) Share of result of associate

Financial income and costs:– – – – – – 1,305 – 1,305 Loss on trading investments– – – – – (205) (967) – (967) Interest income– – – – – 538 2,538 – 2,538 Interest expense– – – – – 3,451 16,071 – 16,071 Foreign exchange loss

6,903 30,526 (1,370) 1,195 19,033 17,452 10,785 15,821 5,036 Net monetary loss4,924 30,526 (1,370) 1,195 19,033 (335) 3,442 15,821 12,379 Profit before tax

– – – 11,384 19,033 335 (6,114) – (6,114) Income tax expense/(credit)4,924 30,526 (1,370) 12,579 – – (9,556) 15,821 6,265 Profit for the year

E.VII E.IX.1 E.IX.2 E.X E.XIII E.VIII E.XI H.I, H.II, H.IV Working papers reference





E.XIII Monetary loss on the tax base of assets and liabilities

IFRIC 7 paragraph IE6 states that a loss on the tax bases of assets and liabilities due to inflation is a monetaryloss. In this example, tax bases of both the monetary and the non-monetary items lose value due to inflation. The tax base of the company’s net assets may be expressed as the company’s HCU net assets plus relevanttemporary differences (as defined in IAS 12). Monetary loss on the tax bases is then the monetary loss on theHCU equity and an inflation increase in the relevant temporary differences. As stated in D.I, there are notemporary differences between the historical carrying values and their tax bases except for the associate.

Monetary loss on equity, including current year income statementShare capital E.IX.1 30,526 Dividends E.IX.2 (1,370)Retained earnings E.XI 15,821 ADJ 14 income statement items E.XII, ADJ 14 17,452 ADJ 12 loss on deferred tax E.XII, ADJ 12 1,195 Monetary loss on HCU net assets 63,624

Effect of temporary differences Monetary loss on the associate E.III (9,286)Monetary loss on the tax base of

the associate (16,000 x 56.9%) E.X, D.I 9,104 Monetary loss on the temporary differences (182)

63,442Monetary loss on the tax base of net assets x30%= 19,033 ADJ 13

Note: Monetary loss on equity can be proved as follows:

Gain on carrying amounts of net monetary assets (net monetary position) 13,997 Less loss on non-monetary position:

Property, plant and equipment E.II.7 (27,300)Associate E.III (9,286)Other long-term investments E.IV (14,504)Inventory E.VI.7 (28,129)Trading investments E.V (5,305)Deferred income (government grant) E.VII 6,903

Monetary loss on HCU equity (63,624)




E.XIV Tax reconciliation: non-deductible expenses and non-taxable income

Quarter I Quarter II Quarter III Quarter IV TotalNon-deductible expenses HCU 728 2,148 555 432 3,863Inflation factor 1.490 1.326 1.202 1.059Non-deductible expenses CCU 1,085 2,848 667 457 5,057

Tax effect at 30% 326 854 200 137 1,517 H.V

Non-taxable income HCU – – 801 593 1,394Inflation factor 1.490 1.326 1.202 1.059Non-taxable income CCU – – 963 628 1,591

Tax effect at 30% – – 289 188 477 H.V


F.I Monetary proof based on average quarterly net monetary position

The difference between the theoretical monetary gain and the monetary gain that resulted from the restatementprocedures (other than the monetary loss on the tax bases) is not significant (2.7%). This is proof that themonetary gain is reasonable.

31 December 31 March 30 June 30 September 31 December2004 2005 2005 2005 2005

Conversion factors from each date to 31 December 2005 1.569 1.410 1.274 1.120 1.000

Inflation for the year (1.569-1.000) 0.569a Inflation for the year split per quarter* 0.159 0.136 0.154 0.120

Net monetary position, HCU (B.VIII) (10,800) (21,195) (31,042) (25,341) (27,908)

b Quarter average monetary position (15,998) (26,119) (28,192) (26,625)

Theoretical monetary gain for each quarter (a x b) 2,544 3,552 4,342 3,195Theoretical monetary gain for the year

(sum of monetary gain per quarter) 13,633Monetary gain as a result of the

restatement procedures of carrying amounts 13,997Percentage of variation 2.7%

Monetary gain as a result of restatement procedures of carrying amounts 13,997Monetary loss on the tax bases of assets and liabilities (19,033)Total monetary gain/(loss) recognised in income statement (5,036)

* Inflation for quarter is calculated as the difference between the conversion factors at the end of the quarter and the beginning of the quarter.



F. Monetary proof






G.I Restatement of revenues collected

Month HCU (B.VII.3) Conversion factor (C.IV) CCUJanuary 7,340 1.542 11,318February 8,740 1.491 13,031March 8,160 1.438 11,734April 7,420 1.374 10,195May 8,030 1.318 10,584June 7,330 1.285 9,419July 6,720 1.249 8,393August 7,720 1.205 9,303September 8,240 1.153 9,501October 7,730 1.099 8,495November 8,220 1.059 8,705December 8,760 1.019 8,926

94,410 119,604 H.III

G.II Restatement of operating cash outflows

HCU (B.VII.4) Conversion factor (C.IV) CCUG.II.1 Raw materialsQuarter I 4,477 1.490 6,671Quarter II 3,923 1.326 5,202Quarter III 4,651 1.202 5,591Quarter IV 5,433 1.059 5,754

18,484 23,218

G.II.2 Wages, utilities and overheadsQuarter I 10,810 1.490 16,107Quarter II 12,373 1.326 16,407Quarter III 14,692 1.202 17,660Quarter IV 15,511 1.059 16,426

53,386 66,600 H.III

G.II.3 Rent paymentsHCU (B.VII.5) Conversion factor (C.III, C.IV) CCU

27 March 700 1.410 98729 June 700 1.274 89217 September 900 1.153 1,03825 December 900 1.000 900

3,200 3,817 H.III

G.II.4 Income tax paidPerformed based on the quarterly tax accruals and dates due:

HCU (B.VI.1) Conversion factor (C.III) CCUEnd of January 153 1.515 232End of March 254 1.339 340End of July 572 1.225 701End of October 21 1.079 23

1,000 1,296 H.III

G. Support for restatement of statement of cash flows





G.III Trade receivables and impairment loss on trade and other receivables

As provision for impaired receivables is a monetary item, it results in monetary gain (which is offset by the monetaryloss created by holding the related receivables). The inflation effect on the opening provision is a reconciling item inthe indirect cash flow statement, as this is a non-cash item not shown as a change in working capital.

HCU CCUOpening provision for impaired receivables (3,250) (5,099)Impairment loss for the year (2,450) (2,450)Less: closing impairment loss provision 5,700 5,700Difference – inflation effect on related impairment loss provision – (1,849) H.III

Note: Impairment loss for the year was considered to be in 31 December 2005 purchasing power, as the Company only reassesses its impairmentloss provision once a year at the reporting date, which is the year-end.

G.IV Inflation effect on cash and non-operating cash flows

G.IV.1 Calculation of inflationary effect on cash

InflationHCU Source C.IV CCU effect

Opening cash 5,750 9,022 3,272Net movement in cash per quarter:

Quarter I (5) 1.490 (7) (2)Quarter II 2,001 1.326 2,653 652Quarter III 995 1.202 1,196 201Quarter IV 1,001 1.059 1,060 59

Total inflation effect on cash 4,182 H.III

G.IV.2 Restatement of bank overdraftsInflation

HCU Source C.IV CCU effectOpening bank overdrafts 5,200 8,159 2,959Less: closing cash (8,060) (8,060)Net increase/(decrease) in bank overdrafts 2,860 (99)Including:

Quarter I 722 1.490 1,076Quarter II 708 1.326 939Quarter III (3,290) 1.202 (3,955)Quarter IV 4,720 1.059 4,998Net increase, restated at average inflation 3,058 H.IIILess: increase in HCU (2,860)

Inflation effect on net increase in overdrafts 198Monetary gain on bank overdrafts 3,157 G.IV.4




G.IV.3 Calculation of inflationary effect on borrowings

HCU CCUOpening borrowings 15,000 23,535Increase due to foreign exchange loss (B.VI.1) 14,000 E.VIII 17,822Less: closing cash (29,000) (29,000)Reductions of borrowings (due to inflation) – 12,357 H.III

G.IV.4 Inflationary effect on non-operating activities and tax

Inflation effect on financing activities is calculated as the difference between the restated opening and closingbalances of bank overdrafts and borrowings. Inflation effect on non-operating activities includes the inflationeffect on dividends, interest, inflation effect on investing activities and cash.

Inflationeffect

Monetary gain on bank overdrafts G.IV.2 3,157Reductions of borrowings (due to inflation) G.IV.3 12,357Inflation effect on dividends – gain E.IX.2 1,175Inflation effect on interest payable – gain G.V 112Inflation effect on interest receivable – loss G.V (161)Inflation effect on cash – loss G.IV.1 (4,182)Inflation effect on non-operating activities 12,458Inflation effect on income tax – gain G.V 126Monetary loss on tax bases E.XIII (19,033)Inflation effect on non-operating activities and income tax (6,449) H.III

Note: Inflation effect on investing activities is not material due to this example’s conditions.





G.V Other accounts receivable and payable


Total Interest Interest Income Otherincome expense tax operating

Other receivablesClosing balance 1,500 600 – – 900Opening balance 1,000 – – – 1,000Increase/(decrease) in other receivables 500 600 – – (100)

Other payablesClosing balance (5,147) – (190) – (4,957)Opening balance (5,847) – (60) – (5,787)(Increase)/decrease in other payables 700 – (130) – 830


Total Interest Interest Income Otherincome expense tax operating

Other receivablesClosing balance 1,500 600 – – 900Opening balance in 2005 CCU* 1,569 – – – 1,569Increase/(decrease) in other receivables (69) 600 – – (669) H.III

Other payablesClosing balance (5,147) – (190) – (4,957)Opening balance in 2005 CCU* (9,174) – (94) – (9,080)(Increase)/decrease in other payables 4,027 – (96) – 4,123 H.III

Current tax liabilityClosing balance (353) – – (353) –Opening balance in 2005 CCU* (240) – – (240) –(Increase)/decrease in current tax liability (113) – – (113) –Amount accrued (967) 2,538 1,535Amount paid 206 (2,330) (1,296)Monetary gain/(loss) (161) 112 126 G.IV.4

* Opening balance was restated by using the 1 January 2005 conversion factor 1.569.

**Interest expense paid within five days after each month-end was restated using the average of month-end conversion factors for 2005.





H.I Restated balance sheets

(Historical information is presented here for convenience of the example and should not be included into the restated financial statements)

Restated 2005 CCU Historical HCURestatement 31 December 31 December

procedures 2005 2004 2005 2004ASSETSNon-current assetsProperty, plant and equipment E.II.7 67,950 67,726 54,163 43,337Associates E.III 35,630 25,606 35,630 16,320Available-for-sale investments E.IV 41,000 36,872 11,000 10,000

144,580 130,204 100,793 69,657Current assetsInventories E.VI.6 21,532 25,383 19,410 15,170Trade receivables mon 28,170 30,439 28,170 19,400Other receivables mon 1,500 1,569 1,500 1,000Trading investments E.V 15,000 7,845 15,000 5,000Cash mon 9,742 9,022 9,742 5,750

75,944 74,258 73,822 46,320Total assets 220,524 204,462 174,615 115,977

EQUITY AND LIABILITIESCapital and reservesShare capital E.IX.1 88,125 82,525 22,000 17,000 Revaluation reserve – – 47,157 38,130 Translation reserve E.XII, E.III 1,420 – 13,010 – Fair value reserve E.IV 508 (1,394) – – Retained earnings E.XI, E.XII 30,991 43,626 22,328 20,697

121,044 124,757 104,495 75,827 Non-current liabilitiesDeferred income – government grant E.VII 16,655 19,034 2,800 3,200 Borrowings mon 29,000 23,535 29,000 15,000 Deferred tax liabilities E.X 15,505 2,696 – –

61,160 45,265 31,800 18,200 Current liabilitiesBank overdrafts mon 8,060 8,159 8,060 5,200 Trade payables mon 24,760 16,867 24,760 10,750 Current tax liability mon 353 240 353 153 Other payables mon 5,147 9,174 5,147 5,847

38,320 34,440 38,320 21,950 Total equity and liabilities 220,524 204,462 174,615 115,977

Note: mon defines monetary balance sheet items that are already expressed in year-end purchasing power and require no restatement. Monetaryitems of prior-year are adjusted by 1.569 to current year-end purchasing power for comparative purposes, as required by IAS 29.

H. Restated financial statements





H.II Restated income statement for year ended 31 December 2005


Restatement Restated Historicalprocedures 2005 CCU HCU

Sales E.VIII 130,290 104,250Cost of sales E.VI.5 (99,471) (69,750)Gross profit 30,819 34,500

General and administrative expenses:Wages and salaries E.VIII (8,724) (7,000)Depreciation expense E.II.4 (4,501) (3,447)Rent expense E.VIII (3,766) (3,000)Impairment loss on trade and other receivables G.III (2,450) (2,450)Other administrative expenses E.VIII (9,979) (8,000)Amortisation of government grant E.VII 2,379 400Profit on sale of property, plant and equipment E.II.5 (169) 386

(27,210) (23,111)

Operating profit 3,609 11,389

Finance income and costs:(Loss)/gain on trading investments E.V (1,305) 4,000Interest income E.VIII 967 762Interest expense E.VIII (2,538) (2,000)Net foreign exchange losses E.VIII (16,071) (12,620)Net monetary losses E.XI (5,036) –

(23,983) (9,858)

Share of result of associate E.III 7,995 6,300

Profit before tax (12,379) 7,831

Income tax expense E.XII (6,114) (1,200)

Profit for the year (6,265) 6,631





H.III Restated statement of cash flows for year ended 31 December 2005



DIRECT METHOD (see indirect method on following page)

Cash flows from operating activitiesCash receipts from customers G.I 119,604 94,410 Cash paid for production materials and other supplies G.II.1 (23,218) (18,484)Cash paid to employees and for utilities and overheads G.II.2 (66,600) (53,386)Rent paid G.II.3 (3,817) (3,200)Income tax paid G.II.4 (1,296) (1,000)Net cash flow from operating activities 24,673 18,340

Cash flows from investing activitiesPurchase of trading investments – net E.V (8,460) (6,000)Purchase of available-for-sale investments E.IV (1,410) (1,000)Purchase of property, plant and equipment E.II.2 (12,740) (10,000)Interest received average 206 162Proceeds from sale of property, plant and equipment E.II.5 1,500 1,500Net cash flow from investing activities (20,904) (15,338)

Cash flows from financing activitiesProceeds from paid in share capital E.IX.1 5,600 5,000Increase in bank overdrafts – net G.IV.2 3,058 2,860Interest paid G.V (2,330) (1,870)Dividends paid E.IX.2 (5,195) (5,000)Net cash flow from financing activities 1,133 990

Inflation effect on cash G.IV.1 (4,182) –Net increase in cash 720 3,992

Cash at beginning of period 9,022 5,750

Cash at end of period 9,742 9,742





H.III Restated statement of cash flows for year ended 31 December 2005 (continued)



(source)INDIRECT METHODCash flows from operating activities

Profit before tax H.II (12,379) 7,831

Adjustments for:Depreciation charge E.II.4 10,847 7,087Impairment loss on trade and other receivables H.II 2,450 2,450Change in impairment loss provision due to inflation G.III (1,849) –Amortisation of government grant H.II (2,379) (400)Loss/(gain) on sale of fixed assets H.II 169 (386)Share of result of associate H.II (7,995) (6,300)Decrease/(increase) in market value of trading investments H.II 1,305 (4,000)Interest income H.II (967) (762)Interest expense H.II 2,538 2,000Foreign exchange loss on financing and investing activities E.VIII 17,822 14,000Monetary effect on non-operating activities and income tax G.IV.4 6,499 –

Profit before changes in working capital: 16,011 21,520

Changes in working capital:Decrease/(increase) in trade accounts receivable, gross 1,668 (11,220)Decrease/(increase) in inventory H.I 3,851 (4,240)Decrease in other receivables G.V 669 100Increase in trade payables H.I 7,893 14,010Decrease in other payables G.V (4,123) (830)

9,958 (2,180)Cash generated from operations 25,969 19,340

Income tax paid G.II.4 (1,296) (1,000)Net cash flow from operating activities (same as for direct method) 24,673 18,340





H.IV Restated statement of changes in equity for year ended 31 December 2005

(all amounts expressed in CCU)

Restatement Share Translation Fair value Retainedprocedures capital reserve reserve earnings Total

Balance at 1 January 2005 E.IX.1 82,525 _ (1,394) 43,626 124,757

Currency translation differences E.III _ 2,029 _ _ 2,029Fair value gain on investments E.IV _ _ 2,718 _ 2,718Deferred tax on fair value reserve E.X _ (609) (816) _ (1,425)Net income recognised directly

in equity _ 1,420 1,902 _ 3,322

Profit for the year H.II _ _ _ (6,265) (6,265)Total recognised income _ 1,420 1,902 (6,265) (2,943)

Share capital paid in E.IX.1 5,600 _ _ _ 5,600 Dividends declared in 2005 E.IX.2 _ _ _ (6,370) (6,370)

5,600 _ _ (6,370) (770)

Balance at 31 December 2005 E.IX.1 88,125 1,420 508 30,991 121,044





H.V Income tax reconciliation

Restated profit before tax (12,379)

Expected income tax at applicable tax rate of 30% 3,714

Tax effects from:Statutory revaluation of property, plant and equipment (9,027x30%) E.IX.3 2,708Non-deductible expenses E.XI (1,517)Non-taxable income E.XI 477

Difference in tax and IFRS depreciation of property, plant and equipment E.II.4, A.III 1,128Restatement of current taxes E.VIII (335)Non-temporary element of monetary loss H.VI (61)

Actual tax expense 6,114

Recognition of monetary gain or loss on tax bases of assets and liabilities in accordance with IFRIC 7 eliminatesmany reconciling items between the theoretical tax at the statutory tax rate and the actual tax expense. The non-temporary element of monetary loss arose due to approximations made in this example.



H.VI Non-temporary element of monetary loss

Certain approximations were made in this example. Non-temporary element of monetary gains and losses can be analysed as follows:

Effect of monetary loss on tax bases (19,033 x [1-30%]) E.XIII 13,323

Less effect of restatement of:- opening tax bases of non-monetary items

[(43,337+16,000+10,000+15,170+5,000-3,200) x 56.9% x 30%] E.X (14,732)- receipts of inventories during the year (237,804 - 179,386) x 30% E.VI.6, B.III.1 (17,525)- inventories sold during the year (241,655 -175,146) x 30% E.VI.6, B.III.1 19,953- allocation of depreciation to admin costs (3,447-4,501) x 30% ADJ 2, 4 (316)- long-term investments purchased during the year (410 x 30%) E.IV (123)- realised gain on trading investments (2,460 x 30%) E.V (738)- property, plant and equipment purchased during the year (2,740 x 30%) E.II.2 (822)- non-deductible expenses/non-taxable income

1,394 x 30% - 477 - (3,863 x 30% - 1,517) E.XI 299- income and expense items (17,452 x 30%) ADJ 14 5,236- cost of sales (29,721 x 30%) ADJ 5 (8,916)- current income tax (335 x 30%) ADJ 14 101

Add loss on net monetary position (13,997 x 30%) F.I 4,199

Non-temporary element of monetary loss (61)





Notes


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