In the current decade, inflation data from the National Bureau of Statistics (NBS) indicates that the Nigerian economy has experienced a double-digit inflationary trend since 2016, with a brief deceleration between 2017 and 2019. From 2020 till present, the inflation rate has been on the rise year-on-year. Key factors contributing to the rise in inflation between 2020 and 2022 are the outbreak of coronavirus pandemics and their attendant effect on the economy and the misalignment of both monetary and fiscal policies during the Buhari administration.
“Analysts believe these policies are painful but necessary due to the mismanagement by previous governments since the discovery of crude oil and other legacy issues in Nigeria.”
The Tinubu administration, which began in May 2023, announced the removal of subsidies on its inauguration day. Subsequent policies, such as floating the exchange rate and implementing cost-reflective tariffs for electricity distribution companies, have introduced a new level of inflation, pushing the rate past 30 percent. Analysts believe these policies are painful but necessary due to the mismanagement by previous governments since the discovery of crude oil and other legacy issues in Nigeria. As of September 2024, the inflation rate stands at 32.7 percent.
Among other economic indicators, an economy is considered stable if the inflation rate is between 2 and 3 percent. In contrast, Nigeria’s cumulative inflation rate over the past three years is approaching 100 percent. Consequently, the International Monetary Fund (IMF), a Bretton Woods institution, has placed Nigeria on its watchlist of economies at risk of sliding into hyperinflation.
The guidance of international financial reporting standards (IAS 29) on financial reporting for corporations in Nigeria
IAS 29 applies to financial statements of companies that use the currency of a hyperinflationary economy as their functional currency. In Nigeria, companies that use the Nigerian Naira as their functional currency are subject to the requirements of IAS 29. The rest of this article is relevant to these companies.
Read also: Nigeria’s inflation rate hits 32.70 % on petrol price hike after 2-month decline
Professionals who are not accountants or corporate reporting specialists may struggle with the term ‘functional currency.’ A functional currency is the currency in the primary economic environment in which an entity operates. This currency influences sales prices of goods and services, the cost of inputs used in the production of goods and services, and the currency of the country whose competitive forces and regulations influence the sales price of goods and services, among other factors.
IAS 29 though does not establish an absolute rate at which hyperinflation is deemed to arise but provides some indicators in making judgement that an economy is in hyperinflation. Some of these indicators are:
The general population prefers to keep their wealth in relatively stable foreign currency or non-monetary assets.
Interest rates, wages, and prices are linked to the price index.
The general population regards monetary amounts not in terms of local currency but in terms of a relatively stable currency.
The cumulative inflation rate over three years is approaching or exceeding 100 percent. These indicators are not exhaustive.
Financial statements are typically prepared on a historical cost basis, except for some categories of items. However, in a hyper-inflationary economy, reporting financial statements based on historical costs does not accurately reflect the financial situation. Therefore, IAS 29 requires companies whose functional currency is the currency of a hyper-inflationary economy to restate their financial statements to account for changes in the general price index to enable financial statements useful for the primary users to make well-informed decisions about the company based on the financial report.
IAS 29 mandates that items reported in the financial statements not expressed in terms of measuring unit current at the end of the reporting period are restated for effect of the general price index. Monetary items are not restated because they are expressed in terms of monetary unit current at the end of the reporting period. For clarity, monetary items are money or items in the financial statements to be received or paid in money. Restatement applies from the beginning of the comparative period in which hyper-inflationary accounting became effective in Nigeria. This ensures financial statements are adequately comparable for users’ understanding.
Restatement of financial statements for the effect of hyperinflation may sound straightforward in theory, but in practice, this often poses a huge workload on companies. This includes accurately gathering data, tracking financial transactions both in the current and previous periods, and tracking historical changes in the consumer price index, among others. Due to these challenges, IAS 29 emphasises that the consistent application of procedures and judgements adopted from period to period is more crucial than the precise accuracy of amounts included in the restated financial statements.
In conclusion, while restating financial statements in a hyperinflationary economy may seem daunting, the focus on consistency in applying the standards and procedures provides companies with a more manageable framework. By prioritising a systematic approach over exact precision, businesses can ensure the financial information remains useful and relevant to stakeholders, even in the face of economic volatility.
Oluwatobi Abisoye; Chartered Accountant & Corporate Reporting Specialist.
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