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Accounting Face-Off

Multinationals See ‘Hyperinflation’ But Ethiopia Says No

While much of the discourse on Ethiopia’s soaring inflation has focused on its corrosive impact on consumers, the country’s business titans have been largely left out of the conversation. That is set to change. According to a recent comprehensive report published by Ernest & Young (EY), one of the world’s four largest accounting firms, at the end of last year, Ethiopia’s steadily increasing inflation, which hit over 33.5 percent last month, is now affecting the bottom lines of several multinationals operating in Ethiopia, forcing them to make adjustment on their balance sheet.

Far from an anomaly, Ethiopia’s predicament highlights how inflation’s effects permeate an economy. Typically viewed as a scourge only for the poor, inflation can significantly deplete the value of companies’ assets and income, according to experts. For multinationals like those in Ethiopia, such losses must be recorded under international financial reporting standards that all adopted.

The damage for corporate Ethiopia could be extensive. With annual inflation in the double digits, the birr’s purchasing power has plunged, while operating costs have skyrocketed. Meanwhile, regulators cap companies’ ability to raise prices, squeezing profit margins. The worst may be yet to come. As EY’s report cautions, higher inflation is forecast for the year ahead.

Taking the suggestion of firms like EY seriously, the Motor & Engineering Company of Ethiopia Limited S.C, subsidiary of Inchcape, a UK-based company, is among companies that have made an adjustment to its balance sheet.

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The parent company of MOENCO, Ethiopia’s largest vehicle supplier, made the adjustment to its consolidated statement due to Ethiopia’s designation as a hyperinflationary economy throughout the course of the year as the nation’s three-year cumulative inflation rate surpassed 100 percent.

“The results and financial position of Ethiopia have therefore been restated to include the effect of indexation, and the resulting £29.6 million net monetary loss on hyperinflation has been recognized within net finance costs and reported as an adjusting item,” the financial statement of the Group reads.

In the world of finance, the application of accounting standards is a crucial aspect of ensuring accurate and reliable financial reporting. One of the fundamental assumptions underlying these standards is that the value of money remains constant over time. This assumption is based on the concept of monetary stability, which holds that the purchasing power of a currency should remain relatively stable over time.

For businesses and organizations, this assumption has significant implications for financial reporting and decision-making. By assuming that the value of money remains constant, accounting standards provide a framework for measuring and comparing financial performance over time. This allows businesses to track their progress and make informed decisions about investments, expenses, and other financial matters.

However, the assumption of monetary stability is not without its challenges.

In reality, the value of money can fluctuate significantly over time, due to factors such as inflation, currency exchange rates, and economic conditions. As a result, businesses are expected consider the potential impact of these factors on their financial performance and adjust their reporting and decision-making accordingly.


As the economy experiences prolonged periods of high inflation rates, entities that rely on historical cost accounting methods may encounter significant challenges that could potentially compromise the accuracy of their financial statements. This can be a cause for concern as it may lead to misleading information being presented to stakeholders.

That’s why the International Accounting Standards Board (IASB) developed IAS 29, a standard that helps companies navigate the treacherous waters of hyperinflation.

But what exactly is hyperinflation, and how does IAS 29 help companies deal with it?

Contrary to popular belief, hyperinflation isn’t just a matter of prices going up a little bit. Rather, it’s a situation where prices are rising so rapidly that they become almost meaningless, and people have to resort to bartering or using foreign currencies just to get by.

IAS 29 doesn’t establish a specific inflation rate at which an economy is deemed hyperinflationary, but instead considers various characteristics of the economic environment, according to Abdulmenan Mohammed (PhD), a financial analyst with over two decades of experience. “IAS 29 does not set absolute rule regarding hyperinflationary countries. It rather puts several indicators to take into account when determining a country is hyperinflationary or not,” the expert said.

The cumulative three years average inflation is the easiest indicator for application, whereas the rest of the indicators are not easy to measure, according to him.  For example, if prices are rising at a rate of 100 percent or more per year, that’s a pretty good indication that hyperinflation is at play. Other factors that might be considered include the availability of goods and services, the stability of the local currency, and the overall economic climate.

“According to IAS 29 if the cumulative inflation in a country for three-year period is  around 100 percent or above, the financial statements of the firm are required to be restated,” said Abdulmeman.

After reviewing numerous economic indicators, Ernst & Young determined in an October 2022 report that Ethiopia’s economy is currently experiencing a period of hyperinflation. The company referred to the World Economic Outlook published by the International Monetary Fund, which stated that as of December 2021, the cumulative rate of inflation over the last three years was 91 percent.

The forecast made by the Fund, which anticipated an inflation rate of 32 percent in 2023 and a three-year cumulative rate of inflation of 111 percent by the end of this year, has been utilized in order to arrive at the same conclusion. EY also highlighted a report by the Ethiopian Statistics Service (ESS), which estimated that the cumulative rate of inflation over the previous three years and 12 months was 107 percent and 33 percent as of August 2022.

“It is possible to make net monetary loss under such scenario, which arises if the company has monetary assets (such as receivables) more than monetary liabilities (such as payables to creditors), and vice versa,” Abdulmenan added.

Multinational corporations have already begun to respond, believing Ethiopia’s economy is hyperinflationary.

With Inchcape, which owns MoENCO, among the early adopters in this regard, Safaricom said last week in its report that it will follow suit.

“We are going to adjust our financial statements in accordance with international standards, which require hyperinflation adjustment when inflation is persistent,” said Peter Ndegwa, CEO of Safaricom, Safaricom Ethiopia’s majority shareholder.

It appears that the Accounting & Auditing Board of Ethiopia (AABE) is not pleased with the decision of the multi-nationals. The Board refuted the assertion that Ethiopia has a hyperinflationary economy in a letter signed by Eyob Tekalign (PhD), State Minister of Finance and AABE Board Chairperson. The Board has its own justification for saying so.

“The public has not lost confidence in Ethiopian birr. The deposit at commercial banks has increased from 899 billion birr in 2019 to 1.7 trillion birr in 2022. Prices of goods and services are not denominated in foreign currencies,” the letter reads.

Economist Patrick Heinisch, who closely follows political and economic developments in Ethiopia and the Horn of Africa, says it’s debatable whether or not the public has lost faith in the birr.”The fact that the black-market exchange rate for one dollar exceeds 100 birr is an indication that confidence in the birr is currently not very high,” he observed.

David Malpass, president of the World Bank, raised another concerning trend, in which Ethiopian exporters store their hard currency in foreign bank accounts rather than transferring them to Ethiopia and converting them into birr. For Patrick, this is also a sign of diminishing confidence.

The Board has other justifications.

“On-credit sales and purchases have taken place at prices that compensate for the expected loss of purchasing power. Credit prices, including the cost of capital (interest rates), wages, and salaries, are not linked to inflation rates or price indexes,” the statement continued.

AABE further stated that Ethiopia should not be designated as hyperinflationary because the major source of the inflation, the conflict in North Ethiopia, had been resolved by a peace agreement.


“The government has taken different measures to curb inflation and shown strong commitments to take necessary action to reduce inflation in the year 2023 as presented to the parliament,” the Board stated.


Based on the aforementioned assumptions or qualitative factors, AABE stated, “companies using IFRS as their reporting framework in Ethiopia should not apply IAS 29 both for the year 2022 and the year ending by June/July 2023.”

Patrick disagrees. The inflation data does not show signs of base effects which is not a sign of decreasing price pressure, he observed.

“The cumulative inflation rate over the past three years as established by the International Practices Task Force (IPTF) of the Centre for Audit Quality (CAQ) exceeds 100 percent. So some of the qualitative factors mentioned in IAS 29 do comply with hyperinflation, with measures taken by the government to curb inflation have not been particularly effective. Therefore, I think there is reason to believe that Ethiopia could be considered as being in a state of hyperinflation in the sense of the stipulations of IAS 29,” the economist said.

For Abdulmenan, the judgement should be left for the reporting entities.

“Here is where the AABE is fundamentally wrong. The AABE took the right of the reporting entities and determined that Ethiopia is not a hyperinflationary economy. In determining Ethiopia is not a hyperinflationary economy, the length the IASB has gone does not make sense,” he said.  

For example, while the standard suggests “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 invested immediately to maintain purchasing power” as one indicator, the Board has come up with the nominal growth of deposits over the past three years as a proof that the general public still keep wealth in monetary assets.

“In fact, the deposit has not grown in real terms,” Abdlumenan argued.

In case of multinationals, experts conclude that the global company group has the final decision on how to prepare its consolidated financial statements. This is true even if the Ethiopian subsidiary restates its local reports to comply with Ethiopian authorities’ interpretation of IAS 29. Ultimately, the global group – not the Ethiopian authorities – has the final say over the consolidated financial statements.

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Video from Enat Bank Youtube Channel.


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