Monitoring inflation when applying ASC 830
FINANCIAL REPORTING INSIGHTS |
Financial statement preparers are responsible for monitoring inflation in countries in which they have operations. Per Topic 830, “Foreign Currency Matters,” of the Financial Accounting Standards Board Accounting Standards Codification (ASC), the determination of a highly inflationary economy begins by calculating the cumulative inflation rate for the three-year period that precedes the beginning of the reporting period, including interim reporting periods. If that calculation results in a cumulative inflation rate in excess of 100%, the economy should be considered highly inflationary in all instances. However, if that calculation results in the cumulative rate being less than 100%, historical inflation rate trends and other pertinent factors should be considered to determine whether such information suggests that classification of the economy as highly inflationary is appropriate.
The Center for Audit Quality International Practices Task Force has developed a framework, Monitoring Inflation in Certain Countries, for compiling inflation data to assist registrants in monitoring inflation statistics in connection with their determination of the inflationary status of countries in which they have operations. (Although prepared to assist registrants, the framework also may be used by nonpublic companies.) The Task Force compiled cumulative inflation data by country (for those countries for which the International Monetary Fund publishes data), and then categorized the countries based on their cumulative inflation rates and the implementation guidance in ASC 830. In addition, the Task Force identified countries where projected cumulative inflation rates would have been categorized into categories considering the guidance in ASC 830 and in circumstances where there was not consistent reliable data, as follows:
- Countries with three-year cumulative inflation rates exceeding 100% (ASC 830, Case A)
- Countries with projected three-year cumulative inflation rates greater than 100%
- Countries with three-year cumulative inflation rates exceeding 100% in recent years, but with three-year cumulative inflation rates between 70% and 100% in the most recent calendar year (ASC 830, Case B)
- Countries with recent three-year cumulative inflation rates exceeding 100% after a spike in inflation in a discrete period (ASC 830, Case C)
- Countries with three-year cumulative inflation rates between 70% and 100%, or with a significant (25% or more) increase in inflation during the last calendar year or a significant increase in projected inflation in the current year
The information in the framework may be helpful to a financial statement preparer in applying ASC 830, in conjunction with its internal controls over financial reporting, to reach a conclusion on whether a country’s economy should be considered highly inflationary. Financial statement preparers should be especially prudent when monitoring inflation data in countries where there is a concern about the reliability of the inflation data. Additionally, significant professional judgment is required when determining if there is sufficient evidence to conclude the country should no longer be classified as highly inflationary.