7.2 Determining a Highly Inflationary Economy

Although an entity may need to use some judgment in determining whether an economy is highly inflationary, it should begin the determination by calculating the cumulative inflation rate. As clarified in ASC 830-10-45-12, if the calculation (as described below) “results in a cumulative inflation rate in excess of 100 percent, the economy should be considered highly inflationary in all instances” (emphasis added). Further, ASC 830-10-45-12 states — and the examples in ASC 830-10-55-24 through 55-26 illustrate — that projections of future inflation rates “cannot be used to overcome the presumption that an economy is highly inflationary if the 3-year cumulative rate exceeds 100 percent.”

An entity should perform this assessment in each reporting period for the three-year period ending as of the beginning of its current reporting period (including interim periods). For example, calendar-year-end entities with interim reporting requirements should calculate a cumulative inflation rate at the end of each quarter on the basis of the inflationary information for the past 36 months.

Once the three-year period has been identified, an entity should determine the appropriate inflation rate or index to use for the cumulative-rate calculation. Although ASC 830 does not specify which rates or indices should be used, general indices or rates, such as those historically reported by the IMF or the Economist Intelligence Unit, are the most common ones employed. The rates or indices used for the analysis should generally be comprehensive (e.g., the comparable rate of the U.S. Consumer Price Index reported to the IMF by foreign governments) rather than industry- or entity-specific. For detailed instructions on obtaining inflationary information from the IMF’s Web site, see Section 7.2.2.

After identifying an appropriate rate or index, an entity must calculate the cumulative inflation rate for the most recent three-year period. ASC 830 does not specify whether period-end rates or average rates for the period should be used in the calculation of the cumulative inflation rate. In practice, entities may exercise judgment in selecting which method to use in calculating a cumulative rate as long as the method is applied consistently. Regardless of the method used, the FASB 52 Implementation Group concluded at its January 1982 meeting that the cumulative three-year inflation index should be calculated on a compounded basis (an annual rate of approximately 26 percent, when compounded, will result in a cumulative inflation rate of 100 percent).

The cases in ASC 830-10-55-24 through 55-26 illustrate how to calculate cumulative inflation on a compounded basis. For example, the table below, adapted from Case A in ASC 830-10-55-24, shows the annual rate and cumulative three-year rate for the first three years.

In this scenario, an entity would perform the following steps in calculating the cumulative inflation rate on a compound basis:

In some cases, an annual index, rather than a specific inflation rate, is available. In such circumstances, an entity must perform the additional step of calculating the annual inflation rate for each year in the three-year period. The calculation of the cumulative inflation rate in such cases is illustrated in the table below.

As noted in ASC 830-10-45-12, when the cumulative inflation rate is greater than 100 percent, the economy should be considered highly inflationary “in all instances.” When the cumulative rate is less than 100 percent, an entity must use judgment and carefully consider additional factors (e.g., trends). For example, when an economy’s cumulative three-year rate has increased each year and is approaching 100 percent, an entity should analyze whether this rate is expected to reach 100 percent in the near future. Similarly, as illustrated in the example in ASC 830-10-55-25, an entity would not automatically cease being considered highly inflationary simply because the cumulative inflation rate falls below 100 percent; rather, the entity should consider whether the decrease is temporary.

The IPTF developed a framework for compiling and presenting inflation data to help entities monitor inflation statistics in certain countries whose economies may be highly inflationary. Entities should consider the recent activities of the IPTF when determining whether an economy is highly inflationary. However, entities should not solely rely on the IPTF’s framework. Rather, they should consider developing their own framework to monitor countries whose economies may be highly inflationary, particularly if they have operations in multiple countries. In addition, although information presented by the IPTF may be helpful to making this determination, management should have appropriate controls in place to independently monitor current reported inflation data as well as to consider other economic indicators.

On May 21, 2019, the IPTF issued a discussion document, Monitoring Inflation in Certain Countries, which states, in part:

As the IPTF notes, ASC 830 provides examples illustrating several of the scenarios listed above. Specifically:

• Case A in ASC 830-10-55-24 provides an example in which the three-year cumulative rate exceeds 100 percent and in which a company must therefore classify the economy as highly inflationary.
• Case B in ASC 830-10-55-25 provides an example in which a country’s economy continues to be classified as highly inflationary even though the three-year cumulative rate is below 100 percent. The reason for this classification is that there is a lack of evidence suggesting that the drop below 100 percent is other than temporary and annual inflation has been consistently high.
• Case C in ASC 830-10-55-26 provides an example in which a country’s economy no longer exceeds 100 percent for the cumulative three-year rate and the classification as highly inflationary resulted from an isolated spike in annual inflation. ASC 830-10-55-26 indicates that this country’s economy should no longer be classified as highly inflationary.

The report includes countries that qualify for each of the categories listed in the discussion document. An example of a single country’s data, obtained from Category 1a, has been provided below. There may be additional countries that should be monitored that are not included in the IPTF report because the sources used to compile the IPTF list do not include inflation data for all countries or current inflation data.

As previously mentioned, although ASC 830 does not specify which rates or indices should be used, those reported by the IMF are some of the most common ones employed. In addition, we encourage entities not to rely solely on reports such as those mentioned above to determine whether a country is highly inflationary, particularly those entities with operations in multiple countries.

The IMF WEO report estimates inflation in instances in which actual inflation data have not been obtained and describes the assumptions and methods used to develop those estimates. The WEO report is generally released semiannually, and the IMF data have limitations (e.g., the use of projected inflation data and inconsistent dates through which actual data are included in the table may not include certain indices). Nevertheless, the calculated three-year cumulative inflation rates in the report are useful for determining which countries must be further analyzed.

The IMF’s Web site indicates that historical information may be updated in the future as more information becomes available. Further, the information may differ from that reported by the respective countries’ central banks or governments (e.g., because a country has not reported inflation data to the IMF in a timely fashion). Accordingly, entities using the IMF data should consider whether they need to supplement such data with other pertinent information.

If an entity determines that such additional information is necessary, management may need to consider the applicable country’s central bank or government Web site to obtain annual or month-end inflationary information. When the presentation of such information differs from that used by the IMF to report the inflation data, the data may need to be converted because of differences in presentation (e.g., certain countries have recently reset their base index to 100).

Although the IMF rates are some of the most commonly used rates, an entity’s management may consider other sources of information. In fact, while the IPTF uses the IMF data to present inflationary data in its meeting minutes, the IPTF acknowledges that the Task Force does “not [perform] procedures to identify any potential differences” between the data used by the Task Force and “the inflation data reported by the respective countries’ central banks or governments.” The IPTF therefore suggests that the “summarized IMF information [be] supplemented, to the extent considered necessary, with other pertinent information that may be available.” Regardless of the data used, however, management must consider both the source and reliability of the information.