Background

As part of the consolidation process, it is necessary to translate the financial statements of subsidiaries into the presentation currency of the group. This presents a challenge to group entities operating in hyperinflationary countries and preparing their accounts in local currency. Including the inflationary impacted translated accounts of subsidiaries would significantly reduce their informative value due to difference between the nominal and real historical currency values. Notably, non-monetary balance sheet items appear to continuously lose value and be completely undervalued over time when using the closing rate at the balance sheet date. This produces phantom profits in the income statement, since the accounting does not reflect the increase in prices.

Currently, financial statements in Turkish lira in particular pose problems for those preparing the financial statements. Since the beginning of 2021, inflation in Turkey has increased significantly. Qualitative indicators, following the deteriorating economic condition and currency controls, also support the conclusion that Turkey is expected to be a hyperinflationary economy, for accounting purposes, for reporting periods ending on or after 30 June.

Accounting in accordance with Swiss GAAP FER

IFRS contains comprehensive requirements for the translation of foreign currency financial statements from hyperinflationary countries. Swiss GAAP FER does neither provide a definition of hyperinflation nor specific guidelines on how to deal with it. 

In the absence of specific accounting guidance in Swiss GAAP FER, its conceptual framework should be applied together with the accounting principles to ensure that the annual financial statements provide a true and fair view (see FER 1.4). 

We consider the following approaches acceptable regarding the accounting treatment of financial statements from hyperinflationary economies in consolidated financial statements prepared in accordance with Swiss GAAP FER. These are to be selected in consideration of the overall circumstances, applied consistently and disclosed in the notes. Failing to adjust the currency translation would contradict the ‘true and fair view’ principle of Swiss GAAP FER, unless the assessed adjustments and positions are determined to be insignificant and immaterial to the group.

Applying IFRS

One option is to use other accounting concepts that are also based on the ‘true and fair view’ principle. Since IFRS is based on such a concept, it seems appropriate to refer to the provisions of IAS 21 on foreign currency translation and IAS 29 on hyperinflation. 

IAS 29 prescribes that, in the case of hyperinflation, financial statements must be adjusted to the current purchasing power at the end of the reporting period (see IAS 29.8). For this purpose, a price index must also be chosen that best reflects changes in purchasing power in the economy. It is essential that the index is applied consistently in order to ensure the comparability of the financial statements. 

According to IAS 29, transactions which occur in the reporting period and non-monetary balance sheet items are adjusted using the price index before being translated into the group’s reporting currency (see IAS 29.29 ff.). The monetary gain or loss can then be derived from the difference resulting from the adjustment of non-monetary assets, equity and items in the statement of comprehensive income. 

Preparing hard currency financial statements

Another option to avoid the effects of hyperinflation is to prepare the local financial statements of a subsidiary in a hard currency. However, this is not our preferred translation method.

Swiss GAAP FER does not contain any regulations on the (functional) currency or the changing from one currency to another. Therefore, it is acceptable if, in compliance with the true and fair view principle, groups with hyperinflationary subsidiaries change the local currency used in their financial statements to another, more stable currency.

When preparing such hard currency financial statements, non-monetary items are translated at historical exchange rates and monetary items at the closing rates. Items in the income statement must be translated at the respective transaction rate, with the exception of depreciation and cost of materials, which would be translated at historical exchange rates.

If the Group reporting currency is different from hard currency selected for a hyperinflationary subsidiary, the regulations of FER 30 for foreign currency translation must be applied (see FER 30.19 f.).

Transitional arrangements

Swiss GAAP FER also does not contain any instructions on how to deal with a change of currency or a change in accounting principles relating to hyperinflationary economies. For such transitional rules, IAS 29 and IAS 21 can be referred to. According to these rules, the first or last adjustment for inflation may be made as of the reporting date, on which the requirements for a hyperinflationary economy are met for the first time or are no longer met. The same applies to the preparation of hard currency financial statements.

Effective date

Based on current economic developments, we expect companies that use the Turkish lira as their local currency to be affected by hyperinflation in reporting periods ending on or after 30 June 2022 at the latest. If these companies are part of a group reporting according to Swiss GAAP FER, the group should consider how to appropriately include them in the consolidated financial statements – by either applying IAS 29 or by preparing hard currency financial statements.

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