The Financial Reporting Council of Nigeria (FRC) has declared that Nigeria does not meet the criteria for a hyperinflationary economy, advising companies against adopting International Accounting Standard 29 (IAS 29) for their 2024 financial reporting. IAS 29, which governs financial reporting in hyperinflationary environments, mandates the restatement of financial statements to reflect changes in the purchasing power of the functional currency when an economy experiences hyperinflation. The FRC’s decision comes after a comprehensive assessment of Nigeria’s economic indicators against the criteria outlined in IAS 29, engaging with various stakeholders including professional accounting bodies, auditors, regulatory agencies, and significant public interest entities.
The FRC’s evaluation focused on five key indicators defined by IAS 29 to determine the existence of hyperinflation. These indicators assess public preference for non-monetary assets or stable foreign currencies, the use of foreign currency as a reference for monetary amounts, inflation-adjusted credit transactions, linkage of interest rates, wages, and prices to a price index, and a cumulative three-year inflation rate approaching or exceeding 100%. The FRC’s analysis revealed that Nigeria currently only meets one of these criteria: the cumulative three-year inflation rate. While this rate reached 110.9% by December 31, 2024, the FRC emphasized that a single indicator does not automatically qualify an economy as hyperinflationary.
The FRC provided substantial evidence supporting its conclusion. Firstly, the continued use of the Naira for daily transactions and investments demonstrates public confidence in the local currency, contradicting the IAS 29 indicator suggesting a preference for non-monetary assets or foreign currencies. Nigerians are not actively converting their Naira holdings to preserve purchasing power, but are instead investing in Naira-denominated assets like treasury bills, mutual funds, and deposits, demonstrating sustained faith in the local currency. This trend is further reinforced by the growth of Nigerian pension assets, which are primarily held in Naira-denominated monetary instruments.
Secondly, the FRC highlighted the continued usage of the Naira as the primary medium of exchange. Prices of goods and services are predominantly quoted and settled in Naira, further negating the notion of a shift towards foreign currencies. This observation contradicts the IAS 29 indicator suggesting that prices are quoted in a stable foreign currency due to a loss of confidence in the local currency. The FRC also noted the absence of inflation adjustments in credit transactions, indicating that lending and borrowing practices have not incorporated mechanisms to compensate for expected purchasing power erosion during the credit period.
Furthermore, the significant growth observed in Naira-denominated investments, including bank deposits and pension funds, underscores the continued reliance on and trust in the Naira. The growth in pension assets, reaching N22.25 trillion in November 2024 from N18.35 trillion in December 2023, further supports the FRC’s assertion that Nigerians are continuing to invest in Naira-denominated instruments. This signifies that despite the inflationary pressures, the Naira remains the dominant currency for savings and investment, counteracting the flight to non-monetary assets or foreign currencies typical of hyperinflationary environments.
Therefore, despite acknowledging the high cumulative inflation rate over the past three years, the FRC maintained its stance that Nigeria does not currently meet the comprehensive criteria for a hyperinflationary economy as outlined in IAS 29. The FRC emphasized the need for a holistic evaluation of all indicators, stressing that the presence of a single indicator is insufficient to warrant the application of IAS 29. The council committed to continuous monitoring of the economic situation and pledged to revise its position if necessary. This proactive approach ensures that financial reporting practices remain aligned with the prevailing economic realities, providing accurate and reliable information to stakeholders.
In conclusion, the FRC’s decision to advise against the adoption of IAS 29 for 2024 financial reporting is based on a comprehensive analysis of Nigeria’s economic landscape. Despite the high cumulative inflation rate, the FRC found insufficient evidence of other key indicators of hyperinflation, such as a widespread shift towards non-monetary assets, the use of foreign currencies as the primary unit of account, or inflation-adjusted credit transactions. The FRC’s commitment to ongoing monitoring of economic conditions ensures that financial reporting standards remain relevant and reflective of the prevailing economic environment. This approach promotes transparency and accuracy in financial reporting, providing stakeholders with the information necessary to make informed decisions.
