IFRS and Hyperinflation and the Translation of Foreign Currency Transactions (IAS 21, IAS 29, IFRIC 7, IFRIC 22) Inflation has become a major concern since the beginning of 2022 for many countries. It is expected that, in the near future, some countries transition from an inflationary environment to that of a hyperinflationary economy (according to US GAAP and IFRS, the economy of a country becomes hyperinflationary whenever the country has a cumulative inflation of approximately 100 percent or more over a three-year period). In its May 25, 2022 meeting (page 2), the International Practice Task Force (IPTF) of the Center for Audit Quality (CAQ) indicates that three new countries have become hyperinflationary, with being Turkey the largest economy of the three. IFRS and US GAAP have different accounting models for hyperinflationary economies that create GAAP differences in the numbers reported either when an entity reports in those two accounting frameworks, or when it reports using only one framework and prepares a reconciliation with the other framework. Once identified the functional currency of the entity, the translation of foreign currency transactions using IFRS, or US GAAP is mostly similar.

Two companies are headquartered in Argentina (a hyperinflationary economy). The financial statements of each company are prepared in US Dollars.

Company A is involved in the Oil & Gas business, exporting most of its products to the international market. Most of its operations (sales, purchases, financing, salaries, etc.) are collected or paid in US Dollars. Only 10% of the remaining operations are dealt with in Pesos.

Company B is involved in the agricultural business, being the major market for its products, the Argentinian market, where it exercises significant influence in the setting of products' prices. 85% of Company B's operations (sales, purchases, financing, salaries, etc.) are collected or paid in Pesos. The remaining 15% of operations are dealt with mostly in Euros and US Dollars.

Requirement #1

The KPMG IFRS Compared to US GAAP handbook on its page 91 states the following: [IFRS] Functional and presentation currency Functional and reporting currency. An entity measures its assets, liabilities, equity, income, and expenses in its functional currency, which is the currency of the primary economic environment in which it operates. All transactions in currencies other than the functional currency are foreign currency transactions. [IAS 21.IN7, 8, 20]

Please answer the following: 1. What are the major considerations evaluated when a company is defining its functional currency? 2. What is the functional currency of Company A? Why? 3. What is the functional currency of Company B? Why? 4. What are the major differences with US GAAP for this requirement #1? Requirement #2 The KPMG IFRS Compared to the US GAAP handbook on its pages 93/94 states the following: [IFRS] Translation of foreign currency transactions Remeasurement of foreign currency transactions. Each foreign currency transaction is recorded in the entity's functional currency at the spot rate of exchange at the date of the transaction. This is the date on which the transaction first qualifies for recognition under IFRS Standards. An average of spot exchange rates for a specific period may be a suitable approximate rate for transactions during that period; however, if spot exchange rates fluctuate, then the use of an average rate for a period may be inappropriate. [IAS 21.21-22] At each subsequent reporting date, monetary items denominated in a foreign currency are translated at the closing rate, which is the spot exchange rate at the reporting date. [IAS 21.23] Non-monetary items measured at historical cost in a currency other than the functional currency are not retranslated into the functional currency; they remain at the exchange rate at the date of the transaction. [IAS 21.23] Please answer the following: 5. Taking into consideration Company A's functional currency, in which currency foreign currency transactions are denominated in Company A? 6. Taking into consideration Company B's functional currency, in which currency foreign currency transactions are denominated in Company B? 7. How can you identify a monetary item and a non-monetary item in the balance sheet? For those monetary and non-monetary items originated because of a foreign currency transaction, how those transactions are translated into the functional currency of Company A and Company B? 8. What are the major differences with US GAAP for this requirement #2? Requirement #3 The KPMG IFRS Compared to the US GAAP handbook in its page 112 states the following: [IFRS] Restating for hyperinflation. Remeasuring for highly inflationary economies. When an entity's functional currency is hyperinflationary, its financial statements are adjusted to state all items in the measuring unit current at the reporting date. [IAS 29.8] When an entity identifies the existence of hyperinflation in the economy of its functional currency, it makes price-level adjustments as if the economy had always been hyperinflationary. [IAS 29.8, 34, IFRIC7.3] 9. Considering that the Argentinian economy is hyperinflationary, how the restatement for hyperinflation will be handled in Company A? 10. Considering that the Argentinian economy is hyperinflationary, how the restatement for hyperinflation will be handled in Company B? 11. What are the major differences with US GAAP for this requirement #3?