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PAKISTAN - A HYPERINFLATIONERY ECONOMY?
09-02-2008, 04:53 PM
Post: #1
PAKISTAN - A HYPERINFLATIONERY ECONOMY?
Dears,


ICAP has already adopted IAS-29, "Financial Reporting In Hyperinflationary Economies". However, it is probably not notified by SECP, so far, for adoption by the listed and economically significant companies under section 234.

This IAS applies to the entities the functional currency of which is a currency of hyperinflationary economy. The IAS stipulates following conditions to decide about whether or not a given economy could be concluded as hyperinflationary.


QUOTE


This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgment when restatement of financial statements in accordance with this Standard becomes necessary. Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following

(a) the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;

(b) the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;

© sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;

(d) interest rates, wages and prices are linked to a price index; and

(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%.


UNQUOTE


In Pakistan, at the moment, the rate of inflation is as high as 25%plus. In my view this is supposed to approach or exceed 100% cumulatively over next three years. All other factors described in above quoted paragraph of IAS 29 are fully evidenced from our economy. However, there could be a debate on this issue.

In case an economy is concluded as hyperinflationary, IAS 29 suggests following to be done


QUOTE


The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period.

The corresponding figures for the previous period required by IAS 1 Presentation of Financial Statements and any information in respect of earlier periods shall also be stated in terms of the measuring unit current at the end of the reporting period. For the purpose of presenting comparative amounts in a different presentation currency, paragraphs 42(b) and 43 of IAS 21 The Effects of Changes in Foreign Exchange Rates (as revised in 2003) apply.

The gain or loss on the net monetary position shall be included in profit or loss and separately disclosed.


UNQUOTE


I wish to have views from qualified and learned members of the forum about what would we be doing with our clients or entrepreneur when preparing their financials in next one or two years, provided this inflation rate persists or goes upwards.

What I feel, this rate does not seem to come down due to so many factors which could be evaluated by studying macro-economic indicators after 2008-2009 budget. If things happen to the contrary, it would just be an engineered situation.


Best regards,




KAMRAN.
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10-25-2008, 04:56 PM
Post: #2
 
Dears,

I don't know where this crunch is going to take the nation.

Some one put a question to me which is really interesting and innocent. He asked, if the quantum of currency notes issued by State Bank and in circulation within the economy are same (without any redemption) then why there is a supposed liquidity crunch within the country. Why WAPDA is failing to pay over hundred billion rupees to IPPs causing historically worst power shortage problems. Why banks are hesitating to lend and why rumors are on air about expected collapse of banking sector. Further, if exports have not been banned why manufacturing sector is on last edge and why production activity is badly affected.

I tried to explain the macro economic situation theoretically and gave the apparent reasons as per my limited knowledge. However, I felt, the explanation did not bring the result.

Personally, I wonder the CFS equity financing (for badla transaction) in stock exchanges is not available even on 100% mark-up rate offers. The major stock brokers wish to fix such CFS rate at 24% which appears to be a joke in this situation. Hundred percent mark-up rate means a lot and if financing is not available even on this rate then God knows where this crunch will lead the nation to.

Regards,



KAMRAN.
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