I hope you're having an excellent day.

It's about to get a lot better once we've covered our webinar on hyperinflation.

Before we kick off on this hour long session, I will highlight that the webinar link that you've got makes available the materials that we're gonna be using.

There are a couple of Excel files which have been made available to you, and I strongly recommend that you grab a copy of those, and you work through them.

As we're going through the session today, we are not gonna be building lots of calculations together.

We only have an hour, and I'm gonna be upfront, some of the calculations are pretty complicated, so we'll be reviewing the calculations together during this webinar.

So feel free to grab a copy of the materials and, and work through them with me so that you're familiar, with what's going on with the numbers.

The other thing is please do jump in with questions as we are going through and you can use the q and a, the chat to ask me questions, and I'll pause occasionally just to allow you to digest and jump in with any questions that you have.

Okay. So let's start off with just a little bit of background on what we are going to cover today.

So what we're going to be covering is basically analysis and modeling of companies based in hyperinflation economies.

And that's as opposed to companies that merely have some exposure to emerging markets. Obviously, there's plenty of companies based in the US and the rest of Europe that have some expo exposure to these economies, but we are really talking here about companies which are actually based in these economies.

And lots of our examples today use companies which are based, use lots of examples with Turkish Lira, which is of course a hyperinflation economy at the moment, having experienced annual inflation of between 40 and 70% over the last few years.

So just bear that in mind when we are going through, we're talking about companies really based in those economies.

Also a word of caution hyperinflation and its effects on the reporting and analysis.

It's a really complex topic and we only have one hour.

and it really does require a shift in mindset.

and from personal experience when preparing these materials, I do strongly recommend a good strong cup of coffee and a clear head when you're trying to understand the impacts.

and also when you're about to pick up a set of accounts prepared used using hyperinflation accounting.

So, we will make the recording available on this.

you'll have materials that you can go through, review them follow up with any questions over email.

It's not necessarily something I expect you to feel completely comfortable with within an hour.

and as mentioned, you've got copies of materials to work through and you can look through them at your leisure over the weekend.

I'm sure we'll be rushing to do that.

So what are we going to cover? Okay, so let's start off with the accounting.

and that's going to just to make sure that we have a really solid grounding in the, the reporting requirements under IFRS.

Now, IFRS the standard for hyperinflation is IS 29.

and so we'll have a look at that, have a look at how it affects the balance sheets and the income statements.

We're then going to look at the cashflow statements how it's adjusted for hyperinflation, but also the challenges that this presents in our analysis.

we're then going to look at how hyperinflation affects reported KPIs and some of the extra data points that companies sometimes provide and, and when they're useful to us and kind of any health warnings that come with those.

We're then gonna turn to the modeling implications and the choices that we do have choices that you can make in terms of how you build your forecast and the pros and cons of each option.

and then if we have time, we might be a bit tight on this, we'll maybe pause to discuss how companies provide guidance in a hyperinflationary environment.

so let's dive into the accounting first of all.

And we're gonna start off with a balance sheets.

And you can see on the slide there a companies, historic cost balance sheet.

Okay? and it's a company that's based in a hyperinflation economy.

So what's the issue? Well, the issue is that the value of property plans and equipment inventory, and in fact all the assets and liabilities don't reflect current prices, okay? They're outta date. And that's not just the prior year numbers, even the current year numbers in a hyperinflation economy, if we're running at 50% inflation during the year, those numbers just aren't meaningful to us by the time those results or that balance sheet is, is produced.

The other issue we have is that although receivables but we can see here receivables, cash and debt in the balance sheet, not really moving around much from one year to another.

But in reality, massive inflation will really erode the value of those items from one year to another.

Okay? So that cash balance, which goes up from 250 to 300, in reality, your cash balance at the end of 2024 actually has less purchasing power even, even though it's gone up in historic cost terms than, than the prior year because inflation erodes a cash balance.

And of course, on the opposite side inflation will erode a debt balance in terms of its value in today's terms.

So that's not really reflected in this balance sheet.

So what's gonna happen is that hyperinflation accounting kind of steps in to say, well, hang on, how can we improve how we present the balance sheet? And it does that using IS 29.

And you'll see the numbers on the screen now in front of you.

So what happens? Well, the first thing that happens is that prior year numbers are restated.

So when we see the 2024 balance sheet reported, the numbers for the comparative period are restated to end of year prices, EOY, that's end of year prices, that is reflecting prices at the end of 2024.

So what was, was reported in the previous year for 2023 is now restated.

And that's basically index.

It reflects the rate of inflation during 2024.

And we basically step up all of those values to reflect sort of the prices at the end of that year. And we refer to that as a restatement of the opening balance.

The next thing is to think about what happens to the 2024 numbers, which of course are being reported for the first time.

Well, actually what's gonna happen is we're only gonna restate some of those items.

between 2023 and 2024, we're gonna restate what we refer to as non-monetary items.

That's property, plant, and equipment, inventory and equity in the example we've got here.

So we are restating those to end of year prices.

So we can see kind of in today's terms, in today's money, what things like property, plant and equipment, inventory and equity are worth.

Okay? So that's basically the, the principles in terms of restatement. But you might be thinking yourself, well, hang on a second, Debs, we've got receivables, cash and debt not being restated.

Why? Well, effectively items like debt and cash receivables and even payables, they're not shown here, but we refer to those as monetary items and they're not restated because effectively the accounting is showing us the actual cash figure that they'll convert to cash is nominal.

So we don't need to restate that to for end of year numbers.

So we're basically, the cash that's in the bank is 300.

We don't need to restate it.

The amount we're gonna receive from our customers if we were collect it quite quickly is gonna be 70. That's the amount of cash we're gonna get in the bank.

So we don't restate monetary items, okay? And that's for the current year numbers.

But why, what other benefit does that give us? Well, if we look now at the comparatives that are restated versus the 20, 24 figures, well, for monetary items, we can actually now see the effect of inflation, how it erodes the value of these items.

When we look across from the comps to the current year numbers, for example, the debt figure was the same as a historic cost accounting, it's 400 in both 2023 and 2024.

When we look over to the I 29 figures, you can see that that debt figure now falls from 533 to 400.

It's being eroded by inflation. Okay? So this kind of new way of looking at the balance sheet, really helps us to understand the effect of inflation on monetary items.

And that's really important. If you're a company, you've got, you know, a very high cash balance, that's gonna be a very dangerous position to be in a hyperinflation economy.

'cause that's cash is being eroded.

But likewise having lots of debt that's gonna erode in value as well.

And we can now see that in terms of the balance sheet, what we're now gonna do is jump into the Excel file that, you were given for download.

Okay? So let me just jump into that.

And the numbers I'm using are exactly the same as the numbers on the slide, okay? It's just that we're now gonna look at the calculations, so not just talking about it, we're actually looking at seeing what's been, what's actually happened.

Okay? So this is the historic cost balance sheet up at the top that we were just looking at, at the slide.

And you can see just kind of the ease.

I've highlighted on the left hand side the items which are viewed as non-monetary items, that's property planted, equipment and inventory share, capital retained earnings, and the monetary items, receivables, cash, and basically debt.

Okay? So if we scroll down to look at the I29 version of the balance sheet, let's actually just start off with 2023 numbers.

Now those will have previously been reported under I 29 at the end of 2023.

Okay? Now, property plant and equipment you can see there.

And this property plant equipment was acquired in 2022.

Now that's being indexed up initially, the FY 23 results, using CPI to the end of 2023.

If you see that number is coming from this sell here.

So consumer price index at the end of 2023 versus when it was initially bought.

that gives you the new value for property, plant and equipment at the end of 2023 that then gets restated upwards for the comparative figures to give you the value when it's restated for the FY 24 numbers.

Okay? likewise, we've got our cash balance that just comes from 2023 numbers from before, and that's then gonna get restated.

so the comparatives show everything at end of year prices and share capital that's initially restated from historic cost up to 2023 figures and then restated to the end of 2024. So if I just pop those formulas up on the screen so you can see where these numbers are coming from, we can see retained share capital and cash is just inflated version of what was reported in the prior year.

Property planted equipment is also just restated from the prior year, but we've actually linked that into a proper base calculation.

So the property, plant and equipment, the movements in that during the year I've just shown you below down here, just because then you can also see that that also results in your depreciation being stepped up to end of year prices as well.

And remember, this is when we're re restating the 2023 numbers for the full year 24 reports that's being inflated using the val, the consumer price index at the end of 2024.

So you can see a lot of that links in to that CPI of 200 at the end of 2024.

Okay. What about the 2024 numbers? Well, we kind of just then rolling forward for non-monetary items, we're rolling those forward.

So that's gonna be the base calculation again from below.

We're pulling that across. That's basically now restated, and recalculated to end of 2024.

the cash balance, that's a monetary item, so that's not being restated.

That now reflects exactly what we had in the historical cost balance sheet for 2024 as well.

Share capital, that's a non-military item, so that is being adjusted for inflationary effects during 2024.

Okay? So that's kind of the mechanics of how it works.

I think I'll just pause there because I know kind of this is just kind of setting us up.

Any questions coming in on the balance sheet? Let me just take a quick look.

Nothing coming in just at the moment.

If you do have a question on the balance sheet, feel free just to shout.

As we're going through, that's fine.

I can backtrack if needs be.

just to sort of highlight in terms of the CPI numbers, I mean, those are published.

If you are looking at Turkish companies, you can get, Turkish national inflation figures published by their authorities.

and those are what are gonna be used by the companies, in what, in terms of when they're making their adjustments.

Okay? Right.

now let's go back to our slides and let's of course now talk about the income statement.

Okay? Now, I think the issue with the income statement is actually a bit more obvious than with the balance sheet.

Here's the historic cost version of the same company's income statement for 2023 and 2024.

and we really can see immediately that the year on year comparisons are completely meaningless.

I mean, at first glance, when you look at that income statement the company just looks like it's growing at a tremendous rate, but actually this is mostly nominal growth. It's just inflation.

So it's not really helpful in helping us to understand true performance. And also bearing in mind that hyperinflation tends to be quite volatile.

It'll jump around quite a lot.

You know, looking at, at, you know, the year on year changes on a nominal basis is actually quite challenging.

So, that's kind of the main issue as a year on year comparisons. But I would also just point out that even the 2024 numbers that are reported are already outta date. Because if you've got, you know, revenues being generated in February, March time, and it's a December year end, already those revenues are reflecting very aged prices.

So really those, you know, those revenues and costs for 2024 don't reflect current prices.

So, again, IS 29 kind of comes to the rescue, if you like, and tries to help resolve some of these issues.

It starts off with again, re requiring a restatement of prior numbers.

So whatever is reported in 2023 previously is now gonna get indexed. It's gonna get adjusted for inflation to show the equivalent figures the using pricing at the end of 2024.

Okay? and then in addition to that, we're gonna do the same for 2024 figures. So those are also going to be restated to end of year prices.

Okay? And that means now we've got a nice year on year trend. Effectively what we're showing, for example, that revenue, year on year change is now real revenue growth.

It's completely neutral to the hyperinflation. Okay? So we now have more meaningful year on year trends.

But what else? We've actually got a new number showing in the income statement.

You might have spotted this, that appears towards the bottom of the income statement, a net monetary gain or loss.

Now, this extra adjustment kind of aims to capture how inflation has eroded the net position on monetary items during the year. So we can think of it's a bit like an FX gain or loss on foreign currency transactions.

it's important to note. So for example, if a company has a net debt position, so it's net debt in the balance sheet, then effectively that inflation does it a favor in terms of eroding the value of that debt, and that's gonna lead to a net monetary gain, okay? Whereas if a company has a net cash position, well, the inflation's gonna erode that cash position, and that's gonna lead to a net monetary loss.

So it's a positive value if the company has net debts and a negative value.

So, in broad terms, if the company has a net cash position on its monetary items, so what does that mean? Well, we can infer from that. Well, if companies are very cap intensive, they're likely to have high levels of borrowings, and therefore we'll see the biggest net monetary gains.

and also remember that one of the symptoms of hyperinflation economies is of course, that companies hold a lot of cash in other currencies, what refer to as stable currencies.

And effectively, that means that, you know, companies are more likely to have a net monetary gain, shown in the income statement.

I had a great question that's just come in on the chat about the effect of the non-monetary gain.

Is it linked to the balance sheet adjustment only? Well, it's, it's a reflection of what's happening on the net, on the monetary items in the balance sheet, but it is also gonna play a really important role in the cashflow statement. Effectively, it's gonna make the cash flow statement work.

So hopefully we will see that when we look at the cashflow statement very shortly.

Okay? Because as we know as we cover in lots of our teaching materials, there is an important link between the income statement and the balance sheet and the cash flow statement.

Okay? Let's have a look at the numbers.

We're gonna dive into our spreadsheets.

and again, it's the same numbers, but this time actually with the backup calculations.

and I'm actually gonna start with that net net monetary gain.

'cause I know it's kind of a thing that really I think causes people a lot of, kind of feel a bit uncomfortable initially.

So this net monetary gain for this company we've got a total net gain of 21.1. Shouldn't surprise us. 'cause we saw when we looked at the balance sheet, this is a company that has more debt than the cash and the receivables on the asset side.

and remember that what we're trying to capture with that is the erosion of purchasing power on those monetary items.

Okay? So for example, for receivables, and where does that come from? Well, effectively the beginning balance on our receivables at the start of 2023 is, oh, sorry, the start of 2024 is 93.3.

And the effect of inflation on that balance is basically the effect of the restatement of those 2023 numbers, okay? That's our beginning balance on our receivables.

And so the effect of that that restatement 23.3 is effectively the same as saying, well, we've eroded the by those receivables by 20 20, 23 0.3 during the year.

Okay? So we can see that there. Same with cash.

And it's the beginning cash balance at the moment that we are looking at.

So the beginning cash balance again, gets restated from 250 to 333.3. That's effectively saying it's our cash balance has eroded, by 83.3 during the year.

And so we show that there.

And then the same with the loans payable, but this time it's a positive number because of course, inflation gives us, again, kind of erodes the value of our debt.

However, it does also reflect the erosion of the cash generated in the year by inflation.

Okay? If we're generating cash during the year, which we are, we can remind ourselves that in the balance sheets cash has gone up from 250 to 300.

We've generated a cash inflow during the year of 50.

Inflation also impacts that figure, okay? And so we're gonna see in the net monetary gain, the cash generated during the year, has a, again, a sort of an inflationary impact minus 5.6.

And that is all included in the net monetary gain. Okay? Now before we move on from that net monetary gain, you'll see I've got a little extra calculation down here.

because we know a balance sheet should balance and effectively what we're capturing in that net monetary gain is the effective i 29 on the balance sheet in terms of the opening balances and the in year restatements.

and we can then for calculate it, 'cause we know assets equal liabilities plus equity, we can calculate it indirectly by going from the other side, by basically calculating the effect of restating all our non-monetary items.

So for example, we restate PP&E and that gives you a step up of 300 on the opening balance.

the share capital, we restate that and that gives you a negative of 50.

We restate our open and balance sheet on our retained earnings, and then there's in year transactions. So there's the inventory that's gonna be revalued.

there's going to be the income statement that's also revalued.

and so all of those will also feed into our net monetary gain or loss.

So a nice little crosscheck that we've got the maths correct because it equals the same net monetary gain when we came at it just from looking at the monetary items.

Okay? So that is the net monetary gain or loss, and that then flows into the income statement. So you can see it's just popping in here to the bottom of our income statement for 2024.

just kind of working backwards slightly you can see here we've got the historic cost income statement.

I'm just moving my cursor around there.

the rest of the items in the income statement are all just being restated to end of year prices.

And remember that's end of 2024 prices for both 2023 and 2024.

Let's talk a bit about some of these numbers.

So loan interest, the loan interest on a historic cost basis, well, that's 50 in both years, okay? It's basically the same interest on the same loan balance, okay? But we're gonna restate, that figure to end of 2024 prices.

The inflation effect is relative to the transaction date.

So inflation's gonna have a bigger impact on that 50 for the 2023 numbers than for the 2024 numbers.

So we can actually see in means, in real terms, effectively that interest is reducing in value.

Okay? Maybe slightly counterintuitively, we're recording our PP&E at end of year 2024 prices.

So the depreciation is gonna be the same in both years.

Okay? it's also a really big step up in value compared to the historic cost. It actually doubles in value from the original historic cost numbers of 60 up to 120.

And that's because it's a long lived asset.

So the effect of inflation since the purchase, remember it's from original transaction dates really does dwarf the effects of indexing our revenues and other cash costs, if you like.

So the timing of the transaction, how age that transaction is will meet, will affect the, how the quantum, if you like, of indexation.

Okay? So we are indexing all of our income statement to end of 2024 prices, and we are including our net monetary gain.

And so we now have a kind of a new look income statement where the year on year comparison gives us the real year on year change and revenues and costs, particularly for the current year, which we use to forecast next year's numbers in our model reflect current values.

Okay? So they're much more predictive than they would've been on a historic cost basis.

I'll just pause there. That's our income statement.

any questions coming in? Oh, so a great question that's come in on the chat.

If we had three years of data, would we restate them all to the end of year three prices? Well, in theory, yes.

but actually the requirement under IFRS is only to provide two years of numbers.

And that's one of the big challenges.

One of the logistical challenges we do have as analysts is that if we want to create a, an additional year of trend, provided we have previous years reported on an I29 basis, and that's gonna be important, we can take, for example, 2022 numbers on an I 29 basis and just give them an indexation adjustment to get them to 2024 prices.

Okay? Would PP&E not go up as well? So pp e has gone up as well. Lemme go back to the IS 29 balances.

So, on an original historic cost basis, it was 600, and that's based on end of 2022 sort of I think it was purchased around 2022.

And we're gonna index that up to 2024 prices.

So basically, prices have doubled since 2022.

So that means we get up to 1,200 of PP&E but then the depreciation reflects in both years, the depreciation on the prices at the end of 2024.

Does that answer your question? Oh, but it doesn't make sense.

If you want to come back to me with a further question, then just please do.

So I'm, I mean, I can, I basically, if the PP&&E balance if you think of the, the gross cost, if you like, of the pp and e, it's restated to end of 2024, prices.

And that's what's gonna drive the depreciation that's reflected in both years in our income statement.

So think of it in terms of gross cost.

If we take, I don't know the gross cost and divide it by 10 years, it's gonna be the same depreciation charge in both years.

Great. Sounds like we've got it. Okay, fantastic. Right? That is our income statement.

So hopefully we're feeling a bit more confident now on the kind of the basics for hyperinflation accounting.

now let's move on to the cashflow statement. Let's see if we're still feeling comfortable.

Right so cashflow statement, kinda the principles we follow with the cashflow statement are kind of similar to the income statement in that cash flows and ideally it should say comparatives as well. Comparatives and current year cash flows are adjusted to reflect end of year prices, okay? So we're gonna index cash flows as well.

But, the accounting standard doesn't really provide detailed guidance on how we do this.

And in particular, in terms of the reconciliation between net income and operating cash flows.

We get a little bit of variation, in how companies approach this.

I'm gonna explain the two methods and then we'll have a look at both of those in terms of our practical example.

Okay? So method one which is rarely used, but I think is useful in helping us to understand the mechanics.

But method one is where basically if we assume we have a company, like in our example where it's a monetary gain.

That monetary gain is a non-cash item.

So as with other non-cash items in the cash flow statement, we can add it back, oh, sorry, deduct it in its entirety as a non-cash item.

And then we index the actual cash flows in each line.

So, for example, changes in operating working capital are indexed to reflect inflation effects, okay? And this method were therefore results in having very elevated working capital cash flows, particularly relative to the ending cash balance.

'cause remember, the cash balance is just at the end of the year is in nominal terms.

So we're gonna have a high level of cash burn for a company that's, you know, got a large working capital cash outflows.

If we have method one, method two slightly more common is to kind of go down the route of saying, well, let's use the cashflow statement as a way of kind of just linking up changes in the balance sheet.

Which is to say, well that monetary gain consists of monetary gain on operating items like receivables and payables, but also monetary gain or loss on financing items like debt and cash.

So what we can say is, well, let's lift the the adjustment related to non-operating items only.

So we're gonna take out the net gain if you like, on debt and cash, okay? And leave the monetary gain on operating items as part of your net income.

Okay? So no adjustment on those.

And that then means that the working capital movements reflects the changes year on changes in the balance sheet.

Okay? and remember that's a year on year changes in the current cost balance sheet.

So this is gonna really contract the working capital flows reported in the cash flow statement, okay? Particularly relative to the ending cash balance.

Now, just to be clear before we look at the numbers, total operating cash flows are the same under both methods.

This is all about how you net or gross the gain against the working capital flows.

And we can work backwards from method two to method one if you want to, okay? If you do come across companies that have used differing approaches.

but let's have a look at the actual cash flow statement that we've got and, work through that.

Okay? So just to be clear, if we scroll down in column C, this now reflects 2024 historical cost numbers, okay? Don't be confused by the fact that topics of the Excel file, it says 2022. This is 2024 numbers on a historical cost basis.

So this is a company that's generated operating cash flows of 50.

It started the year with 250 of cash and ended the year of course with 300 of cash because there's no other cash flows.

So the net cash flow just reflects those operating cash flows.

Now, under method one we are gonna start the cash flow statement this time with the net income that was generated on an IS 29 basis.

That's kind of indexed, if you like, and includes the net monetary gain.

We're then gonna add back the depreciation, which again reflects the indexation adjustments.

But this time we're gonna subtract the net monetary gain, that was included in net income.

We've treated it as a non-cash item.

And then our working capital flows effectively reflect indexation of the historical cost, working capital flows.

And that then gives us indexed operating cash flows. Okay? Jumping over to the right, the alternative approach, as I mentioned, is we still start off with the same net income. We still add back depreciation but this time our net monetary gain adjustment is just to deduct out the net monetary gain on the non-operating items.

Effectively the net monetary gain or associated with cash debt and the cash generated in the year, that minus 44.4, comes from here.

In terms of these items, I dunno if you can see my little subtotal at the bottom, 44.4, that's the cash the debt and the cash generated in the year.

So we're carving those out of our operating cash flows.

And that then means that our working capital flows now just reflect the changes in the balance sheet, the year on year change.

Okay? And we still get to the same answer, remember, it's just a netting or grossing difference, okay? So that is how we calculate, oh, hang on a sec, lemme jump back.

That's how we calculate our our operating cash flows. But now let's scroll down and kind of loop in with one of the questions that we had earlier about the effect of the net monetary gain.

because it kind of sort of has an effect, also here 'cause we've kind of added it back in various forms in the operating cash flows.

But we now have a problem, don't we? Because we know that the beginning balance has been inflated 'cause we've restated the prior numbers for, for inflation effects, okay? And we know we've also inflated the operating cash flows and any other cash flows in the year.

So we've now got inflated numbers at the start of the year and inflated numbers in our actual cash flows.

But we know that the cash has to be 300.

So how, how do we get to an ending balance of 300? Well, that is by saying, well, that, what's the effect of inflation on your cash balance at 88.9? That's the effect of inflation on beginning cash balance and also the cash generated in the year.

And that 88.9 is then deducted to ensure that we still end up with the same ending cash balance as we had on a historic cost basis.

Okay? So although the monetary gain kind of is a function of what's happening in the balance sheets, and it's then shown in the income statement, it does also have an impact on the cashflow statement as you would expect.

Okay. So what else does that mean for analysis? Well, as I mentioned, it's gonna affect some of our ratios. So things like the level of working capital, depending on what methodology is used, it could be higher or lower than historic cost basis.

And also we can see things like our usual credit ratios, things like funds from operations relative to net debt, our operating cash flows relative to net debt.

All of those ratios could be quite distorted both by presence of I 29, but also which methodology is being used.

Okay, so that's our cashflow statement. So we've kind of basically looked at hyperinflation accounting kind of in, in terms of mechanics at least.

Before we move on to KPIs I'll just have a pause now to see if there's any questions coming in.

Okay. I think no questions just yet. Oh, hang on. We have just had a question. Apologies. Okay. Right. Yeah. So what if we have CapEx? Yeah, what if we have CapEx? So if we do have CapEx, then obviously on a historical cost basis, that would be the normal CapEx a nominal amount.

And we're gonna basically index that CapEx to show the actual CapEx at end of year prices on an IS 29 basis.

Of course, that's then gonna start to have a, a further effect. It's gonna have further consequences in terms of our PP&E and our balance sheet.

We also using cash, so it's gonna affect our monetary gain, that's shown in the income statement.

So it doesn't just have an isolated effect on, on, on the cashflow statement, of course.

Okay. Finally, I think we've had a question come in.

I might have to take a, I have another cup of coffee for answering this one. Finally, if you have debt in a foreign currency, yeah, so I mean, basically if you have anything in a foreign currency, the rule is that you, you follow the usual rules for foreign currency, which is that you translate foreign currency balances using the sort of the, closing rates.

and then you index.

So, but then you've got the effects of depreciation of the currency rate during the year. If you've got the same debt balance overseas, you've gotta think about, you know, what's happened to actual the, the currency rate, during the course of the year.

But yeah, effectively, you've got you've gotta restate for basically the translate closing rate and then make your indexation adjustment as well.

It does. I think that that probably would slightly break me to try and incorporate that into my numbers, I'm afraid.

Okay. Right, let's have a look at our hyperinflation accounting impact on the KPIs.

Okay? And again, we're gonna have a look at a workout in a minute, but let's just talk through the principles first.

Okay? So the main KPI that we'll all look to when results come out is, of course, what's happening to revenue growth and earnings growth or EPS growth.

So what's gonna happen, well, I 29, if we're comparing that to what we would've seen under high historic cost basis, well your revenue growth and your EPS growth is gonna fall because effectively you've got real growth only on an ICE 29 basis.

Okay? We're basically there's gonna be no inflation impact in your year on year change.

Okay? But what about margins? Well, margins are going to go down and they're gonna go down both for EBITDA and ebit, but for slightly different reasons, okay? EBITDA margin, well, remember that when we index values in the balance sheets and even the transactions in the income statement, it's based on the original transaction date.

So we're gonna restate inventory and that's gonna be indexed from purchase date, okay? And that generally exceeds the effect of restating your revenues.

So you index revenues from the data sale, but your inventory is gonna be indexed from purchase date.

So if you've got particularly long lived inventory, that means that effective indexation on the cost of goods sold exceeds the effect of indexation on your revenues.

So your EBITDA margins will contract.

And then as a follow on, your EBIT margins will contract, of course, because of what's happening to ebitda.

But in addition, as we've seen your restatement of depreciation, so you are indexing your PP and e from acquisition dates.

So if you've got very long lived pp and e, that's gonna have a quite significant impact on your depreciation versus historic cost. And that's definitely gonna have more of an effect than just what's gonna happen to your indexation on your revenues.

Okay? So EBIT margins will contract, and then, then finally your net profit and your operating cash flows.

Well, those of course will go up.

and for the net profit, that's usually as a result of indexation, but also most companies will have a net monetary gain and operating cash flows those will generally go up because of the effects of indexation.

So how significant are these effects? Well, actually CCI, that's Coca-Cola bottling and enterprise in Turkey has quite helpfully provided some data for us.

And their Q3 results they provide numbers both on an IS 29 and without I 29.

they refer to TAS 29. That's just because it's Turkish adoption of IFRS Turkish accounting standards.

And we have for example, net sales revenue, that's their revenue growth on an IS 29 basis.

It's actually negative in real terms, minus 29%.

I'll just circle these numbers. Whereas without IS 29, they've actually got massive growth.

'cause that captures all the hyperinflation, nearly 25% revenue growth.

in terms of the margins, well, the margins are quite different as well. So we've got EBIT margins on an I 29 basis of 17.6% versus EBIT margin on a without I 29 of 19.5%. So that's a 200 basis points difference as a result of what's happening to both the inventory and the depreciation.

and then the bottom line, the profit 5.2 billion in the year versus 4.4 billion.

Remember, that's the effects of indexation and also the net monetary gain.

So I think we really generally have to appreciate that the effects of I 29 are not just a small shift.

It's basically a complete different mindset in terms of how we think about margins, how we think about revenue growth.

We're basically looking at numbers expressed kind of on a real basis, if you like.

Okay? So the, the, the margins, the EBITDA margins are effectively as if you've gone out and bought the inventory today and then immediately sold it, and it was all happening on the last day of the year.

So it's great for prediction, but we just have to be careful.

We're not trying to then try to take historic cost numbers and use those to predict the future.

We're always looking as much as possible to I 29 data to build our forecasts.

one thing I do need to one thing I do need to just caution you on companies do love to report FX neutral KPIs, particularly export companies.

but we have to be really careful because if you are looking at things from a Turkish Lira perspective we can't assume that FX rates are not gonna change.

FX rates and inflation do go hand in hand. If, basically, if hyperinflation is running at 40%, we will expect the currency to depreciate by somewhere around 40% relative to a stable currency like the Euro or the US dollar.

So the idea of holding FX neutral, if we're analyzing the numbers in Turkish Lira, then it, it, it kind of feels a bit awkward. You're kind of not looking at both sides of the story.

However, if you are looking at building your forecasts on a stable currency basis, so if you wanted to build your forecast in, for example, euros or US dollars, then you might start to take into account revenue growth at least on an FX neutral basis.

Okay? and that's particularly if you are looking at an export company, I wouldn't recommend that usually for a company that's domestic.

right we'll come back to those points.

But let's just now quickly look, look at our spreadsheets.

I'm gonna go into the KPIs tab.

and this is just a really quick review 'cause we need to allow some time for our modeling.

So here we have a company which has reported Q1 numbers for 2024.

and q we have Q1 numbers for the previous year, and we've got inflation rates CPI data for both end of year and also end of quarter.

Now, we'll assume that all inventory is purchased at the end of the quarter and sold during the subsequent quarter.

And we've got historic cost data here, so we can see that.

and if we particularly focus on the IS 29 basis, well, the SG&A and revenue figures are indexed to the end of quarter prices from the quarter average.

but then when we look at the cost of goods sold, well remember if we bought the inventory at the end of the previous quarter, we're then indexing it up to end of 24 Q1 24 prices.

So the indexation has a much bigger effect.

What does this mean for our KPIs? Well, as we've mentioned on an IS 29 basis, we've now got revenues on a real basis, revenue growth on a real basis.

So we're no longer looking at 60% revenue growth. We're now looking at negative growth on a real basis.

And then EBITDA margin, EBITDA margins on a, historic cost basis here with 35%.

But those are eroded by two and a half percent, 250 basis points because of your effects of that indexation on your cost of goods sold.

Okay? So it is quite an important driver, if you like, of what's happening to margins.

under IS29 I've also built a little calculation for an export business and the numbers are exactly the same as in the example above.

but just to show you that if you are an export business, let's say you are exporting, to Europe from Turkey and you're generating revenues in Euro terms which give you basic the same values in Turkish Lira translated at the closing rate or the average rate, I think actually it says there if we wanted to, we can calculate constant currency revenues, that's basically translating the latest revenues at the previous FX rate.

and then if you calculate the year on year change in that, basically that's your revenue growth on a currency neutral basis.

which of course is the same as saying, well, what is your revenue growth in Euro terms? So if I take my Euros and translate those, sorry, and calculate the year, year on year change, and that's 28.4%.

So if I was going to forecast my revenues in euros and I know it's a business that basically exports almost exclusively to the stable currency I'm gonna forecast in, that's the situation where I have a useful data point in terms of constant currency revenue growth, any other situation we would need to be very careful about using that in our forecasts.

Right? I'll just pause in case there's any questions, right? Deep breaths. We're gonna just wrap up our accounting and then move on to our modeling and valuation, right? So hyperinflation accounting, let me just get that on the screen.

Just a quick recap, what are the benefits of hyperinflation accounting? Well, the idea is the information is more forward looking.

It's more current, more predictive, but also that the year on year comparisons are much more meaningful.

The downside, as we have seen, just the complexity is a bit mind blowing.

It does take a while to get our heads around it, and there is that issue with the consistencies in the cashflow statement preparation that we have as two methods that can be used.

However, we just have to keep in mind that I 29 is trying to do us a favor.

It's trying to help us build better models and better valuation.

So, we will keep that in mind when we talk about our options.

Okay, now I'm now going to highlight three possible approaches for building a model, where you're looking at hyperinflationary business businesses in hyperinflationary currencies, and bearing in mind inflation and FX rates are generally quite difficult to predict.

Option one, and this is kind of the favorite option by most analysts but I will tell you now it's my least favorite option.

I think it's riddled with risk which is to model, in the hyperinflationary currency on a nominal basis.

And analysts like to do this because that's what they know.

Basically, when you're building a model for any other company, you build it on a nominal basis.

and so that's kind of what analysts tend to clinging to.

however you should strongly consider building the model in a stable currency, you can do that on a nominal basis.

I mean, in theory you can do it on a real basis as well.

but that is a particularly useful option if you are looking at a company which does generate a lot of its revenues in that stable currency.

So, for example, an export business modeling and a stable currency then just kind of shifts your way from having to deal so much with the effects of hyperinflation.

The other option which in theory in some ways gets rid of the hyperinflation in its entirety, it's to model just in the hyperinflation you currently on a real basis.

and really as we'll see, I 29 sets you up that third option.

So that's kind of the preferred approach.

But option two is worth thinking about if you do have, lots of foreign currency transactions, um, from the perspective of a company based in the hyperinflationary economy.

before we look at those in detail, we're just gonna look at the Excel file, for our last activity.

but before we do that, we need to lay out some ground rules.

And I'm gonna apologize in advance to this slide.

I hate slides that just show formulas, but to be honest, we have to agree the rules of the road before we dig into our models.

so the first rule of the road the first formula, is the one really that drives all the others, and that is the calculation of nominal growth.

and really the headline is real growth and inflation on compounding not additive.

I know that when we're building our models, we often approximate nominal growth to real growth plus inflation.

So I think inflation's running at 2% real growth At 1%, we can say, oh, it's roughly 3% nominal growth.

But the reality is, if your inflation's running at 40%, you can't add inflation and real growth.

So we're gonna have to compound them all right? Secondly, if you do forecast in a stable currency whenever we are trying to forecast in another currency and then translate between currencies, which we're gonna have to do, we are gonna assume that FX rates and the cost of capital are infl affected only by the inflation differential.

That's the inflation in the local currency versus inflation in the stable currency.

So if we take the spot rate today, for example, for the Turkish lira, and we want to say, well, what's it going to be worth in a year's time, two years time for the purpose of checking out cash flows or restating them into what they're gonna be worth in a year's time in Turkish lira, or we basically take inflation in Turkey, relative to inflation in euros.

and that's gonna give you a forward rate.

But equally we can go the other way. If we have observed forward rates that gives us the implied inflation in Turkey.

So we're not gonna try and ex make any kind of expectation as to how the Turkish currency will move relative to the Euro or relative to hyperinflation.

So we just assume they move in line with the inflation differential.

in terms of the cost of currency, again, we're just gonna assume the cost of currency and the stable currency is gonna be local currency, WAC adjusted for inflation.

And then the final one is if we're forecasting on a real basis, well, we'll assume, and it's a big assumption that the equity risk premium is unaffected by inflation.

So we take our nominal WACC and adjust for inflation to give your real, your real wack.

The reason I've included these is it just means we can crosscheck between the three methodologies, and those three methodologies should give us the same answer in terms of our valuation.

So let's have a look, shall we? We're gonna move on to looking at our Excel file, but before we do, let's just start off option one, forecasting on a nominal basis, we are not gonna bother to restate historical figures if we're forecasting on a nominal basis 'cause we kind of wanna see the year on year change, capturing that inflation effect.

and we are gonna make sure that any currencies appreciation reflects inflation differential.

What are the benefits? Why is this a popular option? Well, because basically we are not restating prior figures in our model, and we don't have to translate any numbers for results because everything's being done in a domestic currency.

The downside is we're really, we need to remember we're not forecasting on a historic cost basis, okay? Margins and depreciation are gonna be affected by I 29, and that will affect the next set of results.

So we're still keeping everything on an nice 29 basis in terms of our forecasts.

And our forecasts are gonna be very reliant on hyperinflation.

Let me demonstrate that for you.

If we go to the modeling evaluation tab we can see, a model here where we're assuming constant inflation, inflation of 25% and real growth of 1% giving us nominal growth there of 26.3%.

We then take that nominal growth and apply that into our revenues.

We apply that to our CapEx and we're also applying it here to our operating working capital growth.

cash flows, okay? So, we're just keeping everything simple.

All of our assumptions are completely aligned and we have EBITDA margin and I29 basis of 60%.

The only thing that really needs ex, you know, pointing out here on this nominal basis is that we are gonna have i 29 figures adjusted for inflation.

So we're gonna build that into our forecasts on a nominal basis because we're not restating our comparatives, we have to effectively price in inflation each year to our PP&E and that's gonna then drive up our depreciation each year.

So we now have nominal forecasts.

and when we discount those at the cost of capital, you can work through the calculations in your own time.

That does give you an enterprise value of 16486.2.

But as you can see, all of those forecasts very dependent on what we think that inflation rate's gonna be, 25%.

is it gonna be 20%? Is it gonna be 30%? One way to get around that is to say, well, let's just do everything stable currency.

So option two, stable currency forecasts.

So what we're gonna do is we're gonna take the historical figures reported by the company and translate them at the end of year spot rate, but we don't need to go back and restate co comparatives, 'cause that's gonna give us a nice nominal year on year comparison.

currency inflation expectations. If we do have foreign currency transactions, we'll assume that those are going to we can, sorry, include foreign currency, sorry, stable currency inflation rates, but FX transactions are translated using the forward FX rate.

in terms of the pros of this method, well forecasts are much less reliant on hyperinflation expectations.

We're assuming just inflation levels in the stable currency.

it does mean that we can build our forecast in the stable currency, particularly if they are export companies.

but we're still forecasting on an I29 basis.

So we now need to allow for those lower margins in that, particularly in our forecast and think about the effects on property, plant equipment.

And then finally, forecasts, they will need to be translated to domestic currency so we can actually analyze results.

So we need to make sure we are comfortable with that.

Let's have a look at the stable currency forecasts that we've got here.

Now, here we're assuming euro inflation is 2% and our real rate of growth was 1%.

And even using the compounding formula, that does give us 3% nominal growth in Euro terms.

So these historical figures have been report translated at the spot rate.

We then grow those at our nominal growth rates.

We still have an inflation adjustment because those are still gonna be affected by I 29.

So we need to capture that into our pp and e calculations.

So we've got a very small inflation adjustment there.

And then we can calculate our cash flows off the model.

But you can see that if we then calculate our enterprise value and translate that enterprise value to Turkish lira using the spot rate, we do end up with the same valuation as we had before 16486.2.

Okay? Now, in terms of how we can prove that's the correct answer, not just because the same enterprise value, but we actually have the same cash flows.

If we calculate the implied forward FX rate based on the inflation differential, we can then say, well, actually, the implied free cash flow for year one at the end of year one is 617.6, which is exactly the same as what we had before for our first year forecast in Turkish Lira.

Okay. And then finally, our third methodology, and this is my strongly preferred approach, I have to say, this seems to be far and away the easiest is to say, let's just do everything on a real basis either in the hyperinflation currency or you can in theory do it in the stable currency as well.

our historical figures will reflect I29 and we're gonna need to restate comparatives. So this is the downside is a bit of upfront work.

Restating comparatives when results come in, all the forecasts are then on a real basis.

So we're just not gonna be affected by hyperinflation, or at least the headline is that they won't be affected by hyperinflation.

And then we we'll assume that currency depreciation, again, for foreign currency transactions is just the inflation differential, and we're gonna need to remember to use a real discount rate for valuation.

So what are the benefits to this approach? Well, IS 29 is set up for this approach as forecast, use real growth and current prices.

and it's particularly useful for domestic companies as we don't need to worry about foreign currency that, you know, does create complexity in a stable currency model.

On the downside, well, obviously we need to adjust the model in the first forecast year for inflation so that we can actually predict the results.

So as the year progresses and we see, you know, hyperinflation running at 30%, then we can take that adjust our year one forecast that inflation, and that gives us the actual numbers that are expected in the actual results when they're published.

we also bet need to bear in mind that we can't get away from hyperinflation in our forecasts because hyperinflation does affect consumer sentiment and pricing decisions.

So as we have seen that, you know, companies might on a real basis expect to grow at 1% or 2%, if hyperinflation does jump, that can have a negative impact even on real growth.

So we're not completely insulated from the effects of hyperinflation, but we are at least less concerned about predicting the absolute rate, if you like.

so that's the third option in terms of how that looks.

Well, it just basically looks like here in this model we've got the comparative data also restated for I 29, and we're basically building the whole model based on current year prices or current prices.

So our revenue growth is real, and that feeds through into our CapEx and our operating working capital.

Our pp e calculations are nice and straightforward.

We don't need to make any inflation adjustment because we're basically assuming that current prices persist into the future.

And we can see that when we build our forecasts and then discount them using a real cost of capital, we still get to the same valuation answer.

So our enterprise value is not gonna be different depending on each approach.

And all of them in some way, shape, or form ha form have to consider the effects of hyperinflation.

But the logistics around building those forecasts are just so much easier.

if you go with option three.

Okay, so I've also, in this spreadsheet provided an export model.

I'm not gonna have time to go through it now.

but effectively the main difference here is the export model is for to build your revenue forecasts in Euros, regardless of whether you are building a model in Turkish Lira or in Euros.

and then we just translate those if needed to Turkish Lira.

Okay. So, those are, that's just for you to peruse in your own time.

that is, I guess that brings us to the end of our hyperinflationary education.

it gives us hopefully a bit of food for thought when we see a set of results in the coming results cycle of the effects of that on the numbers.

and we hopefully you've all learned a little bit today around hyperinflation accounting.

I'm finished with one minute to go. Any final questions? You, I've had some great questions coming in during this session.

I'll just pause now in case there's any final ones.

Okay, well, I think that's it.

I think I've worn you guys out. Thanks for joining.

I hope you've learned something and I hope you have a wonderful rest of your Friday and a fantastic weekend.

Please do drop me an email if you've got any follow on queries.

Take care.