Financial Information Restatement in Inflation
Classification of Financial Information for Restatement
Financial information is classified for restatement purposes as:
- a) Operation
- b) Funding
- c) Investment
Monetary Effect of the First Update
The monetary effect of the period, resulting in favorable outcomes, will be up to an amount equal to the net financing costs. These costs consist of interest and exchange rate fluctuations, and generally, all concepts grouped within the expenses and financial products accounts. Any surplus will be considered equity.
This takes precedence over other provisions of NIF B-10, which establish that the adverse currency effect of the period must be fully charged to the results. In cases where the financial cost is a net creditor, no amount should be recognized in the income statement as an unfavorable currency effect.
Understanding Monetary Position
The monetary position indicates how a business’s financial structure will be affected by inflation. Three main types are considered:
- a) Long Position or Active
- b) Short Position or Passive
- c) Level Monetary Position
Placement of the Monetary Impact on the Balance Sheet
The unfavorable currency effect of the period must be fully charged to the results. In cases where the cost is a net interest creditor, no amount is recognized in the income statement as an unfavorable currency effect.
Optimal Monetary Position: Assets vs. Liabilities
It is more beneficial for a company to have monetary liabilities because they absorb the impact of inflation. Therefore, the company will likely have a favorable outcome in its monetary position.
Inventory Update with Average Pricing
The update amount is the difference between the historical cost and the updated value in nominal weights. If there is previously re-expressed inventory, the amount to compare against the new value will be the earlier date.
Inventory updates can be performed using the following methods:
- a) Adjustment to Historical Cost Method: Expresses the historical cost of inventories in constant pesos as of the balance sheet date, using a factor derived from the National Consumer Price Index (INPC).
- b) Specific Cost Update Method: Uses the replacement cost, which is the cost to be incurred at the balance sheet date to acquire or produce a product identical to the one in inventory.
For practical purposes, replacement cost can be determined by any of the following means, as these are representative of the market:
- a) FIFO (First-In, First-Out) inventory valuation.
- b) Valuation at the price of the last purchase made during the period.
- c) Valuation at standard cost, when it is representative.
- d) Use of specific indices for inventories.
- e) Using replacement cost when it differs substantially from the last purchase price.
Frequency of Subsequent Updates
Subsequent updates can be performed weekly, monthly, semi-annually, or annually, depending on the periodicity of the financial information. These are updated to account for inflation.
Another factor determining frequency may be the company’s financial policies, established according to specific purposes. Therefore, updates must adhere to the requirements of those policies.
Observations in Monthly Updates (Historical and Current)
Monthly updates primarily show the increase in value due to inflation.
Sequence of Restatement
The restatement sequence involves updating historical figures from a previous year to their present value, accounting for the effects of inflation.