When currencies go wild: Navigating the IAS 21 hyperinflation amendments

This happens more often than you might think, so much so that the International Accounting Standards Board (IASB) amended IAS 21 for it. For example,

• a Zimbabwean company with a USD functional currency (not hyperinflationary) is required to present their financial statements in Zimbabwe’s ZiG (ZWG), which is hyperinflationary.
• Or a South African company (functional currency: South African Rand (ZAR), a non‑hyperinflationary currency) may choose to present its financial statements in Zimbabwe’s ZiG, which is hyperinflationary.

Before the amendments, IAS 21 didn’t provide clear guidance, and practices diverged. The rules are now clearer, simpler and provide more comparable results between different entities.

In the practical examples below, we refer to the following three fictional entities:

• Entity Zim → based in Zimbabwe, functional currency ZWG, hyperinflationary.
• Entity Zim$ → based in Zimbabwe, functional currency USD, non-hyperinflationary.
• Entity SA → based in South Africa, functional currency ZAR, non-hyperinflationary.

The core change: Use the closing rate for everything (when presenting in a hyperinflationary currency)

Under the amendments, if your functional currency is non-hyperinflationary, but your presentation currency is hyperinflationary, you must translate all amounts using the closing rate at the latest year-end. This includes assets, liabilities, equity, income, expenses, and even your comparatives.

For example:

Scenario A: Functional currency is non‑hyperinflationary, but presentation currency is hyperinflationary

Entity Zim$ is listed on the Zimbabwe Stock Exchange. Its accounting records are in USD. Due to stock exchange requirements, Zim$ must present its financial statements in ZWG.

Under the amendments, Zim$ must:

• Translate all amounts (including comparatives) at the current year‑end closing rate.
• Ignore historic or average rates.

This aligns with hyperinflation accounting which requires amounts to be presented using the current purchasing power of that currency. The IASB acknowledged that using the closing rate is the simplest proxy to achieve this.

When assessing foreign operations the same closing-rate rule applies, but with one exception, as explained in the following scenario:

Scenario B: A hyperinflationary functional currency parent consolidates a non‑hyperinflationary foreign subsidiary

Let’s say:

• Entity Zim applies IAS 29 when preparing its financial statements as it has a ZiG functional currency.
• Zim controls Entity SA. 

Zim must translate SA's results using the closing rate for all periods, except for the comparative amounts, where Zim applies IAS 29.

The Exception

If:

1. The parent’s functional currency is hyperinflationary, and
2. The parent is translating a foreign operation whose functional currency is non‑hyperinflationary…

…then the parent does not retranslate the foreign subsidiary’s prior‑year comparatives using the closing rate. Instead, it applies the same general price index adjustments it applied to its own comparatives under IAS 29.

Scenario B continued

Zim consolidates SA:

• Current‑year amounts of SA → translated using the closing rate.
• Prior‑year comparative amounts → restated using the Zimbabwean inflation index (the same conversion factor Zim will have used to restate its own comparatives).

This avoids messy reconsolidation exercises that would otherwise require full retrospective retranslations.

Other important factors to consider

The amendments also include guidance on when the hyperinflationary economy stabilises and ceases to be hyperinflationary. This is done prospectively applying the normal IAS 21 translation rules.

Given the significant implications of these amendments, additional disclosures are necessary:

• When using the closing‑rate translation method – give a clear statement that all amounts, including comparatives, were translated using the closing rate.
• When the functional currency is hyperinflationary and the exception applies, disclose:

o   summarised financial information about the foreign operations; and

o   a label indicating that comparatives were restated using a general price index.

• If the presentation currency stops being hyperinflationary – disclose this fact. 

The amendments are effective for annual periods beginning on or after 1 January 2027, with early application being permitted. ¹

Final Thoughts

These amendments bring much‑needed clarity to an area that left too much room for interpretation. They simplify the consolidation processes when a non-hyperinflationary entity presents their financial statements in a hyperinflationary presentation currency.

The new approach is more consistent, more transparent, and ultimately more aligned with the economics of hyperinflation.

^{1 _{Consequential amendments to include these amendments were also made to IFRS 19.}}