Market News

by Chima Nwokoji

THE Financial Reporting Council of Nigeria (FRC) has issued a detailed statement clarifying the application of International Accounting Standard (IAS) 29, Financial Reporting in Hyperinflationary Economies. The move was aimed at guiding entities operating in inflation-challenged economies like Nigeria, ensuring consistency and transparency in financial reporting amidst hyperinflationary pressures. By clarifying its stance, the FRC sought to enable stakeholders to make informed decisions while navigating the complexities of the current economic environment.

IAS 29 outlines financial reporting requirements for entities in hyperinflationary economies but does not explicitly define when hyperinflation occurs. Instead, it provides indicators, such as a preference for non-monetary assets, pricing in stable foreign currencies, credit transactions adjusting for inflation, and a three-year cumulative inflation rate approaching or exceeding 100%.

To determine whether IAS 29 applies in Nigeria, the FRC consulted various stakeholders, including accounting professionals, auditors, regulatory agencies, and public interest entities. The Council also evaluated the five IAS 29 indicators, concluding that Nigeria does not meet the criteria to be classified as a hyperinflationary economy.

The FRC observed that Nigerians continue to transact in the local currency, the Naira, and invest in Naira-denominated assets. Data from the Central Bank of Nigeria (CBN) and financial institutions show increasing investments in monetary assets such as treasury bills, mutual funds, and fixed deposits. Nigerian pension assets, predominantly held in monetary forms, have also grown significantly, rising from N18.35 trillion in December 2023 to N22.25 trillion by November 2024. This confidence in the local currency negates the notion that the population prefers to store wealth in non-monetary assets or foreign currencies.

Prices, wages, and salaries in Nigeria are predominantly quoted and paid in Naira. A review of major e-commerce platforms and shopping malls, such as Jumia, Konga, and Slot, confirmed that goods and services are priced in Naira. This widespread use of the local currency suggests that the general population does not regard monetary amounts in terms of stable foreign currencies, making this indicator inapplicable.

The FRC said it found no evidence that credit sales or purchases in Nigeria are priced to account for inflation-induced losses in purchasing power during the credit period. Businesses determine credit terms based on contractual agreements, risk profiles, and their risk appetite rather than inflationary expectations. The absence of inflation-adjusted pricing for credit transactions further disqualifies Nigeria from being classified as a hyperinflationary economy.

Historical data show that wages and prices in Nigeria are not consistently linked to a price index. For example, the minimum wage remained fixed at N30,000 from 2019 until July 2024, when it was increased to N70,000. Interest rates, adjusted primarily to control inflation, have also fluctuated, with the CBN setting the monetary policy rate at 27.50% in 2024. Prices of goods and services are determined by input costs and operational margins rather than inflation-linked pricing.

Nigeria’s three-year cumulative inflation rate stood at 110.9 percent as of December 2024, surpassing the IAS 29 threshold. However, the FRC attributed this to temporary factors, including global inflationary pressures and domestic policy reforms such as the removal of fuel subsidies. The Council emphasised that inflation is projected to stabilize at 21 percent by the end of 2025, according to the International Monetary Fund (IMF), supported by monetary tightening measures from the CBN.

The FRC highlighted structural reforms and economic developments that are expected to curb inflation and enhance economic stability: The commencement of operations at Dangote Refinery and the revitalisation of Port Harcourt and Warri refineries are anticipated to reduce Nigeria’s reliance on fuel imports. This will lower fuel prices, stabilise the Naira by reducing forex demand for fuel imports, and alleviate inflationary pressures;  Nigeria’s crude oil production reached 1.8 million barrels per day, meeting its OPEC allocation and reducing the need for crude imports; Government initiatives to boost agricultural output, such as farmer support programs and improved infrastructure, aim to reduce food inflation, which accounts for 16.7percent of overall inflation; The removal of import duties on certain food items and easing food import policies are expected to stabilise prices in the short term.

Despite surpassing the three-year cumulative inflation threshold, the FRC concluded that Nigeria is not a hyperinflationary economy based on the broader analysis of IAS 29 indicators. Consequently, entities are not required to apply IAS 29 in preparing their 2024 financial statements.

The Council acknowledged the short-term economic shocks from recent structural reforms but maintained that these do not constitute hyperinflation. Instead, the reforms, including the removal of fuel subsidies and floating of the Naira, are expected to lead to a more stable economic environment.

Looking ahead, the FRC pledged to monitor economic developments closely and provide updates on the application of IAS 29 for the 2025 financial year if necessary.