Notice No.

PN2024-011

UPDATE ON THE APPLICATION OF IAS 29 Financial Reporting in H yperinflationary

Economies (“IAS 29”) – IN MALAWI

October 2024

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 INTRODUCTION

In 2001, Malawi adopted International Financial Reporting Standards (IFRSs) as the basis for financial
reporting. The standards provide a guide on how entities should report under certain conditions. In the
case of a hyperinflationary economy, the standard that deals with reporting in such a condition is IAS 29
– Financial Reporting in Hyperinflationary Economies. The standard applies when an entity's functional currency
is that of a hyperinflationary economy and comparability of financial data becomes questionable.

This paper is an update on the Guide which was issued in August 2024.

1. Determining Whether an Economy is Hyperinflationary

Establishment of when an economy becomes hyperinflationary and more importantly, when it ceases
to be so, requires careful consideration of the prevailing economic indicators. The Standard does
not place premium on quantitative factors over qualitative indicators or vice versa. In this
context, determining whether an economy is hyperinflationary, in accordance with IAS 29, requires
professional judgement. The following five indicators are outlined on which professional
judgement should be applied in determining the existence of hyperinflation (IAS 29.3):

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;

c) 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 Consumer Price Index (CPI); and

e) The cumulative inflation rate over three years’ approaches or exceeds 100%.

2. Status of the Malawi Economy

2.1 Cumulative Inflation and 2025 inflation projections

The computation of cumulative inflation is based on CPI statistics released by the National
Statistical Office (NSO) every month, the latest as of the date of the assessment being the
September 2024 publication.

The three-year assessment points were from September 2022. The cumulative inflation as of
September 2024 was 116.0% (CPIs for the assessment points being: 91.0 for September 2021,
114.6 for September 2022, 146.4 for September 2023, and 196.6 for September 2024 [calculated
as (196.6/91.0)-1] (Source: National Statistical Office, September 2024).

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 Inflation is expected to trend downwards in the near term with the Reserve Bank of Malawi
(RBM) projecting an average inflation of 25% for 2025, while the IMF World Economic
Outlook (imf.org/en/Countries/MWI) projects an average of 15.3%.

2.2 The Impact of a Once-off Alignment of the Malawi Kwacha in Relation to Other Foreign
Currencies

The devaluation of the Malawi Kwacha against the United States Dollar from USD/MK1,180.29
to USD/MK1,700.00 in November 2023, and a further devaluation in March 2024 to
USD/MK1,751.00 has significantly impacted the cost of goods and services. This is because
Malawi is predominantly a net importer, such that adverse movements in foreign exchange rates
influence upward adjustment of prices particularly for imported goods and services.

3. Qualitative Assessment

Applying due professional care and judgement, the Institute has established factors as detailed below
regarding each of the indicators of hyperinflation:

IAS 29 Indicator Malawi observed actual situation

a) The general population prefers to (i). There is high growth in investments in government
keep its wealth in non-monetary securities including treasury notes, treasury bills and
assets or a relatively stable foreign other money market liquid assets as reflected in the
currency. Amounts of local currency half year results to June 2024 of all the top banks in
held are immediately invested to Malawi as well as some listed entities, which helped
maintain purchasing power. mop-up excess liquidity from the market. A review of
financial information published by the RBM on
its website depicts an increase in bank deposits
which is indicative that the general population
still invests in local currency.

(ii). The general population’s decisions to invest in non-

monetary assets are driven by long term objectives and
not short-term economic circumstances.

The above factors are indicative that the general population

continues to keep their wealth in monetary assets in local
currency.

b) The general population regards In the ordinary course of business, prices are quoted
monetary amounts not in terms of in Malawi Kwacha, and the general population regards
the local currency but in terms of a monetary amounts in the local currency. There is no
relatively stable foreign currency. wide-spread use of multiple currencies in trade
Prices may be quoted in that taking place in the local markets patronised by the
currency general population and maintained by local
councils. Pricing for a relatively small section of the
market has traditionally been linked to foreign
currency such as some real estate, international
consultancies, and international schools.

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 IAS 29 Indicator Malawi observed actual situation

c) Sales and purchases on credit take (i) The market observable data does not indicate that
place at prices that compensate for sales and purchases on credit take place at prices that
the expected loss of purchasing compensate for the expected loss of purchasing power
power during the credit period, even even in the short term or charging of interest on
if the period is short. financial instruments payable over a short period of
time even in cases of delayed payments.

(ii) Sales and purchases of imports linked to exchange rate

trends are not subjected to further adjustments to
compensate for loss of purchasing power.

d) Interest rates, wages, and prices are (i) Wages are fixed as part of annual or semi-annual or
linked to a Consumer Price Index specific project budget processes and there have been
(CPI) no frequent wage related strikes linked to the CPI. The
majority of the population is employed in the
Agricultural sector and wages are determined on a
seasonal basis. Salaries are still generally adjusted
on an annual basis and often premised on
respective companies’ financial performance and
are paid fully in local currency.

(ii) One-off adjustments of salaries and wages are made

outside normal budget processes to compensate for
the loss in purchasing power arising mainly due to the
impact of significant devaluation of the local currency.

(iii) There is no market observable data to suggest that

prices are linked to the CPI. Prices are determined
largely by forces of demand and supply. Typically, this
is observed on food pricing especially the staple grain,
maize, which is a seasonal crop.

(iv) Interest rates for commercial banks as well as

mortgage rates are linked to the policy rate. The policy
rate is one of the tools that the RBM uses to check
inflation and is currently lower than the CPI.

e) The cumulative inflation rate over (i) The cumulative inflation rate over a three-year period
three years’ approaches or exceeds has exceeded 100 percent (116 percent as of 30th
100%. September 2024), based on statistics released by the
NSO. The year-on-year inflation as of September 2024
was 34.3% driven mainly by food inflation which was
around 43.5%. Non-food inflation has for the first
time dropped during 2024 to 21.8% in September
2024 having averaged 22.5%. This is a significant
positive attribute given that non-food inflation is
largely driven by foreign exchange rates.

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 IAS 29 Indicator Malawi observed actual situation

(ii) The government and its development partners have

implemented short-term measures in ensuring food
security in the country This has yielded positive effects
as seen from media reports indicating that maize
prices are trending downwards.

(iii) The weather shocks for the past two consecutive years
negatively affected food production which in turn has
pushed up food inflation. The Government and
World Bank initiatives that include extending low-cost
agricultural loans to commercial as well as semi-
commercial farms with a view to mechanising
agricultural activities will also go a long way to sustain
food supply and production which will help to
stabilise and bring down food inflation.

(iv) The resumption of budgetary support by the

European Union (EU) is expected to ease the pressure
on the economy in terms of funding social
development initiatives, which mostly require foreign
currency.

4. Conclusion

Considering that the objective of IAS 29 is to provide specific guidance for entities reporting in the
currency of a hyperinflationary economy, so that the financial information provided is meaningful
and comparable, the Institute hereby guides that Malawi is not operating in a hyperinflationary
economy given that the other four factors are not pointing as such. All accountants in business and
in practice are, therefore, required not to apply the requirements of IAS 29 to their 2024 annual
financial statements.

The Institute of Chartered Accountants in Malawi will continue to monitor the economic situation
in the country and advise all the stakeholders accordingly.

_____________________________________________

ISSUED BY COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS IN MALAWI

CA. Daniel Jere

PRESIDENT

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