Analysis by Christos Antonopoulos and Nektaria Petaroudi

The Hyperinflation Phenomenon and Turkey’s Impact on Greek Balance Sheets

According to Milton Friedman, “inflation is a form of taxation without legislation.” Hyperinflation is the extremely high and accelerating level of inflation, i.e., a generalised rise in prices across both goods and services. An immediate consequence of the steep rise in nominal prices is the rapid erosion of the real value of the local currency, resulting in a reduction of citizens’ purchasing power.

The phenomenon of inflation has been on the rise in recent years, both at a European and global level. The current energy crisis and the adverse effects of the war in Ukraine are intensifying inflationary pressures at an unrelenting pace. Indicatively, inflation in the European Union rose to 10.4% in December 2022, increasing rapidly compared to the corresponding level in 2021 (5.3%). In Greece, inflation in 2022 reached 7.2%, compared to 5.1% in 2021.

At the level of Mediterranean states, Turkey was classified among the hyperinflationary economies in 2022. Specifically, the Turkish Statistical Institute reported that inflation reached a 25-year high of 85.5% in October 2022, although many independent analysts claimed the actual rate was likely even higher. This warrants particular attention, as there are numerous cases where companies headquartered in Greece have subsidiaries in Turkey and will therefore be required to apply appropriate accounting policies to ensure the accurate representation of figures in consolidated financial statements.

Accounting Treatment Under IFRS

In a hyperinflationary environment, the accounting policy adopted by companies preparing financial statements under IFRS changes fundamentally. This is because accounting standards are applied on the assumption that the value of money remains stable over time. For this reason, entities must closely monitor changes in inflation and, when required, restate monetary figures in their financial statements to enable accurate presentation at current price levels and meaningful year-on-year comparison.

Guidelines for restating figures in current monetary units are provided by IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ and are carried out using a general price index. Any resulting differences are recorded in the period’s results as a gain or loss, in a clearly identifiable manner with appropriate disclosure. In this context, entities must disclose the price index used for the restatement and clarify whether the financial statements have been prepared on the basis of historical or current cost, as the case may be.

The entity measures its financial results and financial position in its functional currency. However, it is noted that following the restatement of prices, the entity has the option to present its financial statements in any currency, as provided for under IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’.

Indicators — Criteria for Determining Hyperinflationary Economies

IAS 29 lists five factors that indicate an economy is hyperinflationary:

It should be noted that the cumulative inflation rate (point 5 above) is not the sole criterion for classifying an economy as hyperinflationary and should not be examined in isolation; though it is certainly a strong measurable indicator.

Hyperinflationary Economies

According to the latest report published in November 2022, the following economies are classified as hyperinflationary:

• Argentina
• Suriname
• Ethiopia
• Turkey
• Iran
• Venezuela
• Lebanon
• Yemen
• South Sudan
• Zimbabwe
• Soudan

According to a related IMF report, particular attention should be paid to monitoring inflation changes and the other economic indicators listed above (Table 1) in the following countries, which recorded elevated inflation growth over the past three years:

• Angola
• Sierra Leone
• Ghana
• Sri Lanka
• Haiti
• Ukraine
• Moldova

According to a related IMF report, particular attention should be paid to monitoring inflation changes and the other economic indicators listed above (Table 1) in the following countries, which recorded elevated inflation growth over the past three years:

Finally, it is stressed that of utmost importance is not only the correct assessment of hyperinflationary economies but also ensuring the processes that will allow entities to transition smoothly between the hyperinflationary and non-hyperinflationary accounting models.

Conclusion

Just as it is difficult to avoid inflation in a country, it is equally difficult to avoid the accounting consequences of (hyper)inflation in financial statements. Particular attention is required for the accounting treatment of Greek Groups with a presence in Turkey and Ukraine.

In conclusion, the correct application of IAS 29 helps ensure that financial statements provide a true and fair view of the financial position of companies operating in such economies. At the same time, it enhances the transparency and comparability of financial information, ultimately contributing to the integrity of financial markets and promoting investor confidence.