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Tuesday, 21 October 2014

Currency can be monetary or non-monetary

FOREIGN CURRENCY

A currency as a foreign currency outside its local, non-dollarized economy is a variable real value non-monetary item and its value is determined in the forex markets compared to other foreign currencies. A currency as a foreign currency´s price (real value) outside its local economy is determined second by second in the forex markets.


Foreign currency losses and gains

Foreign exchange losses and gains are calculated and accounted in terms of IFRS under both the traditional Historical Cost Accounting model under the Historical Cost paradigm and under financial capital maintenance in units of constant purchasing power in terms of IFRs under the Units of Constant Purchasing Power paradigm, the second accounting paradigm authorized under IFRS since April, 1989. 

LOCAL CURRENCY

A currency as a local currency - in a non-dollarized economy - is a monetary item and its local real value within its local economy is determined by inflation or deflation. 

A local currency´s real value in a non-dollarized economy is determined by the DAILY change in the general price level within its local economy. It changes at least once per day. It is indicated by the change in the DAILY CPI. It can change more than once per day during hyperinflation. During hyperinflation its real local value is determined by the daily US Dollar parallel rate when no Daily CPI is available. 

Historical Cost Accounting

Net monetary losses and gains in a local currency in a non-dollarized economy are NOT calculated and accounted under the traditional Historical Cost Accounting model. 

The stable measuring unit assumption is implemented under HCA. For example, the real value of issued share capital is never updated and entities do not know whether they have ever maintained or are maintaining the real value (constant purchasing power) of issued share capital over the life of the entity.

FINANCIAL CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER

Totally useless IAS 29 Financial Reporting in Hyperinflationary Economies

Net monetary losses and gains in a hyperinflationary local currency are calculated and accounted during hyperinflation under financial capital maintenance in units of constant purchasing power implemented in terms of the totally useless IAS 29 Financial Reporting in Hyperinflationary Economies. 

The stable measuring unit assumption is still implemented on non-month-end days under the totally useless IAS 29 since the monthly published CPI is mistakenly used when only the use of the DAILY CPI will result in actual capital maintenance in units of constant purchasing power. The result of this is that the constant purchasing power (real value) of capital is not maintained under this totally useless standard.

IASB

The International Accounting Standards Board continues to refuse to change the totally useless IAS 29 to REQUIRE the use of the Daily CPI despite the fact that most accountants in the world (excluding the ones at the IASB) acknowledge that it is absolutely clear to any person with common sense that IAS 29 had no positive effect in Zimbabwe. The totally useless IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy since that economy imploded on 20 November 2008 with full implementation of IAS 29 over that period. The IASB is the only entity in the world who refuses to acknowledge that the totally useless IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy. The totally useless IAS 29 is currently having no positive effect in the Venezuelan and Belarus economies.

Capital Maintenance in Units of Constant Purchasing Power

Net monetary losses and gains in a local currency in a non-dollarized economy are calculated and accounted under the Capital Maintenance in Units of Constant Purchasing Power accounting model at all levels of inflation (low, high and hyperinflation) and deflation

The stable measuring unit assumption is NEVER implemented under CMUCPP. This results in the constant purchasing power (real value) of all constant real value non-monetary items, including all items in shareholders´ equity, always being maintained constant at all levels of inflation (low, high and hyperinflation) and deflation in all entities that at least break-even in real value, ceteris paribus.

BITCOIN

Bitcoin is not a real currency. It is never a monetary item. It is never a unit of measure for accounting purposes. It is only a variable real value non-monetary item and its price changes second by second on the various bitcoin exchanges. 

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Sunday, 19 October 2014

Measurement bases cannot be restricted to Historical Cost Accounting

It is realized by now in the accounting world that International Financial Reporting Standards are almost 100% concerned with financial capital maintenance in nominal monetary units; i.e., with Historical Cost Accounting. It is not 100% because completely useless IAS 29 Financial Reporting in Hyperinflationary Economies has been providing guidance (albeit incorrect and useless guidance) regarding financial capital maintenance in units of constant purchasing power since April 1989; for the last 25 years although the IASB itself only realized it in early 2013 after the elapse of 24 years from the date of authorization of completely useless IAS 29 after I pointed it out to the Board.

There are thus two official paradigms catered for in IFRS:

(i) The centuries old, global, traditional Historical Cost paradigm under which the stable measuring unit assumption is implemented and net monetary gains and losses in monetary items (incorrectly identified and defined in IFRS) are not calculated and accounted.

(ii) The Units of Constant Purchasing Power paradigm authorized as from April, 1989 (for the last 25 years) under which the stable measuring unit assumption is never implemented - currently only required in IFRS during hyperinflation - and under which net monetary gains and losses in monetary items (incorrectly identified and defined in IFRS) are calculated and accounted.

The forthcoming IASB meeting on the Conceptual Framework (22 to 24 October), however, only deals with measurement with regard to HCA in agenda paper 10B. That is consequently a serious mistake if the IFRS Foundation were of the intention to issue high quality IFRSs.

How did this persistent ignoring by the IASB of the Units of Constant Purchasing Power Paradigm come about?

In my opinion, there are various complex reasons.

It was believed at the IASB for 24 years till the first half of 2013 that IFRSs provide NO GUIDANCE regarding the implementation of financial capital maintenance in units of constant purchasing power despite the fact that this had been provided (incorrectly) in the completely useless IAS 29 as from April 1989, i.e., for the last 24 years, at that time. The IASB specifically stated in 2013 that IFRSs provide no such guidance. "10. Under current IFRS, there is no particular guidance on how to prepare financial statements stated in constant purchasing power units."  They only realized their error after I pointed it out to them with recourse to a letter to Hans Hoogervorst as last resort. The IASB subsequently (finally) stated  - after 24 years - that (the completely useless) IAS 29 deals with financial capital maintenance in units of constant purchasing power.

Thus, no-one at the IASB in the first 24 years that the completely useless IAS 29 was implemented realized that an IFRS had been giving (incorrect and useless) guidance regarding the implementation of financial capital maintenance in units of constant purchasing power for almost the entire existence of the IASB and its predecessor bodies.

Why was that?

The reason was (and is) that no-one at the IASB and its predecessor bodies ever understood and today still do not understand the economy wide beneficial effect of implementing financial capital maintenance in units of constant purchasing correctly IN TERMS OF A DAILY CPI in an economy. The reason for that is that the completely useless IAS 29 has never been implemented correctly to actually result in financial capital maintenance in units of constant purchasing power as I pointed out to Mr Hoogervorst in my letter. Why? Because the completely useless IAS 29 still today requires the use of the monthly CPI when only the use of at least the Daily CPI results in actual financial capital maintenance in units of constant purchasing power as it was used, for example, so successfully in 1994 in Brazil as part of their Real Plan to stop hyperinflation overnight with their use of the DAILY Unidade Real de Valor index used very successfully in the entire Brazilian economy on a daily basis. The Brazilian experience with the use of the very successful Unidade Real de Valor DAILY INDEX was and today still is completely ignored by everyone at the IASB.

The proof of that is the fact that no-one at the IASB is, in fact, capable of publicly admitting (in terms of personal understanding) that the completely useless IAS 29 had no positive effect during the 8 years it had been implemented in Zimbabwe´s hyperinflationary economy (because no-one at the IASB today understands the underlying concept and the effects of correct financial capital maintenance in units of constant purchasing power IN TERMS OF A DAILY CPI) although it is generally accepted worldwide by most accountants (excluding the ones at the IASB) that the completely useless IAS 29 obviously had no positive effect in Zimbabwe during hyperinflation: Zimbabwe's economy imploded on 20 November 2008 after 8 years of full implementation of the completely useless IAS 29. The IASB stated that it can only express an opinion regarding the use of IAS 29 in Zimbabwe after carrying out a special review of its use in Zimbabwe. This special review has not yet been undertaken.

The IASB today thus continues to remain ignorant (they have no knowledge of, they do not understand) of the substantial economy-wide stabilizing effect of financial capital maintenance in units of constant purchasing power IN TERMS OF A DAILY CPI under the UCPP paradigm despite what happened in Brazil from 1964 to 1994 and especially in 1994 (having been extensively reported in the media and in many books/academia) and elsewhere in Latin America during that time and afterwards.

What should happen at the forthcoming Conceptual Framework meeting if the IASB were to issue high quality IFRSs?

Measurement in the Conceptual Framework should be stated in terms of the two paradigms.

The IASB's habitual excuse that measurement in units of constant purchasing power MIGHT be dealt with IF the POSSIBLE FUTURE RESEARCH PROJECT on financial reporting in high inflationary economies MAY indicate a need to review (the completely useless) IAS 29 is not a reasonable reason to exclude dealing with measurement under the second paradigm (the units of constant purchasing power paradigm) used in IFRS when it is taken into account that the completely useless IAS 29 (which is intended to be implemented under the units of constant purchasing power paradigm, but fails completely) has been used over the last 25 years by thousand of companies in many countries and is now in use - again with absolutely no positive effect - in Venezuela and Belarus, for example.

The use of measurement in units of constant purchasing power as one of the measurement bases (the other two being HC and fair value as currently stated in IASB staff paper 10B) as provided for in the CF for use as part of HCA under the HC paradigm under which the stable measuring unit assumption is still implemented as the main underlying concept is NOT the same as measurement in units of constant purchasing power in terms of the DAILY CPI under the second Units of Constant Purchasing Power Paradigm under which the stable measuring unit assumption is NEVER implemented.

In my opinion the IASB continues to be irresponsible in its duties and functions on an international basis with regard to the urgently needed review of the completely useless IAS 29 to change it to REQUIRE the use of the Daily CPI instead of the current (25 year) practice that the monthly published CPI is used which is the single and only reason for IAS 29 being completely useless and ineffective today in Venezuela and Belarus exactly as it had no positive effect in Zimbabwe in the past.

In my opinion it would not be reasonable to restrict dealing with measurement in the CF to the three measurement bases in HCA under the HC paradigm. In my opinion it would be reasonable for the IASB to include measurement in units of constant purchasing power in terms of the Daily CPI under the Units of Constant Purchasing Power Paradigm under which the stable measuring unit assumption is never implemented as part of Measurement in the Conceptual Framework.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Least understood, but most powerful economic model of all time

The double entry accounting model is the least understood but most powerful as well as everlasting economic model of all time. It is so powerful, so complete, so indestructible; it will endure all eventualities.

Wolfgang Goethe, the German writer and statesman, described it in the 1750's as "one of the greatest achievements of the human mind". I agree 100% with him. There is no and never will be an economic model greater than the double entry accounting model.

Very few people, for example, understand why bitcoin is based on a public "ledger". The double entry accounting ledger being the central part of the double entry accounting model.

In my view we can easily solve a number of our global, fundamental economic problems with the double entry accounting model. Fundamental problems like, for example, monetary value destruction during inflation and hyperinflation; very destabilizing monetary creation via deflation; very destabilizing national currency differences, economic and financial instability, poverty, inequality, etc.

On the other hand: the most destructive economic assumption of all time is undoubtedly the stable measuring unit assumption: in principle, the very destructive, global, traditional, centuries old, generally accepted Historical Cost Accounting model: currently the worst possible accounting model of our time: an accounting model that has now overstayed its welcome: it was the only viable and easily understood accounting model during the last 100 years: now its time has passed. It has to be finally killed off as soon as possible. It is not required anymore. It served its purpose. It certainly is very backward to implement HCA today when the CPI is almost 100 years old and most countries already publish the all important Daily CPI that is the sine qua non of the new Units of Constant Purchasing Power economy.

As a Units of Constant Purchasing Power accountant I live in exciting times.

The flip side of the coin: Historical Cost Accountants live in the worst of times: the basic substance of their nominal historical cost world is being broken down at an accelerating rate. Fact: they do not even know it or understand that is happening: the HC lemming effect. They are too hard-wired in HCA. They are too hard-wired in believing the stable measuring unit assumption. To HC accountants money was, is and always will be perfectly stable at all rates of inflation from zero to 25.99%. How silly can you get!!

Fact: the HCA status quo will most probably continue for the next 200 years!

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Thursday, 16 October 2014

IASB insists on ignoring measurement in units of constant purchasing power

Rachel Knubley
IASB

Date 16-10-2014

Dear Ms Knubley,


It is completely impossible to deal with measurement in accounting / financial reporting without dealing with the measurement basis called units of constant purchasing power. I am sure you know about it. However, you do not even mention it in your paper about measurement. 

I suppose your justification is that you are dealing with financial capital maintenance in nominal monetary units, i.e., financial reports prepared under the HISTORICAL COST basis. Yes, you are dealing with HC. The CF specifically states that VARIOUS DIFFERENT MEASUREMENT BASES are used when the HC basis is implemented. I am also sure you know that. All entities in the world economy, including you and everyone at the IASB, know that.  The whole word economy (7 billion plus people) use measurement in units of constant purchasing power as part of HCA; for example, the annual adjustment of salaries and wages. Even the IFRS Foundation uses it to adjust your own salaries. 

The units of constant purchasing power measurement basis is used as part of HCA by everyone in the world economy. Every entity in the world economy uses measurement in units of constant purchasing power to adjust salaries and wages on an annual or longer basis. You know that. Everybody at the IASB and IFRS Foundation knows that. All accountants in the world know that. All business people world wide know that. 

When the IASB and FASB had the joint CF program, I was informed that, although it had not been mentioned in your measurement bases listed in the joint program at that time,  measurement in units of constant purchasing power certainly will be discussed in the future. I believed you. 

Now I find out I was misled. You are not going to discuss it. You simply ignore it. 

(1) Ms Knubley, I would appreciate it very much if you could you be so kind as to inform me on what basis do you exclude measurement in units of constant purchasing power from your proposed measurement bases when it is a fact that all entities in the world - implementing IFRS and not implementing IFRS - applying HCA (hundreds of millions) have been using it in the past, use it today and will always use it in the future while they prepare their financial reports on the HC basis in terms of IFRS, US GAAP and all other regimes of HCA?

Please do not mention IAS 29 or the possible future IASB research project on financial reporting in high inflationary economies in your response (if you were to reply). I am here today only dealing with IFRS in terms of financial capital maintenance in units of nominal monetary units; that is, in terms of HISTORICAL COST ACCOUNTING. I am here only dealing with a measurement basis used by ALL entities world wide for the last century implementing HCA, all of them to continue using measurement in units of constant purchasing power in the future exactly as they did in the past, whether you (the IASB) mention it in your MEASUREMENT paper or not.

In my opinion it would be normal to accept the reality that measurement in units of constant purchasing power has been part of HCA for at least the last 100 years (the ILO institutionalized the CPI in 1927)  and will always be part of HCA in the future even if the IASB were to refuse to admit it and continue to ignore it. 

In my opinion it would be normal and correct to include measurement in units of constant purchasing as one of the measurement bases used under HCA in the Conceptual Framework.

Kind regards,

Nicolaas Smith

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

_________________________________________________________________________________

16-10-2014

Dear Mr Smith

Thank you for your email. We will respond to it shortly.

Regards

Rachel



Tuesday, 30 September 2014

Money is not a store of value

The statement that "money is a store of value"  is supposed to mean that money is a store of constant real value over time or a perfectly stable store of constant purchasing power over time. 

However, the statement that "money is a store of value" is not entirely true and valid. In fact, it is a partly false, partly deceiving and partly misleading statement. 

Money is not a store of perfectly stable real value during low and high inflation or hyperinflation.

The world money supply is mainly in a state of inflation.

Money is, on the other hand, a store of increasing real value during deflation. See the Japanese economy. 

In principle, the generally accepted statement that "money is a store of value" is never completely true during inflation and deflation. 

Why? 

Because money is a decreasing store of real value during inflation and an increasing store of real value during deflation.

The CPI is not perfectly stable on a sustainable basis over time. 

The longest period I have seen the CPI perfectly stable was during a period of two months. That certainly does not qualify as "perfectly sustainable over an indefinite period of time" or "perfectly stable over a sustainable period of time.

Money is only a perfect store of constant purchasing power (real value) over time when it is either inflation or deflation-indexed on at least a daily basis, i.e., when it is inflation or deflation-adjusted in terms of the change in the general price level - i.e., at least daily in terms of the Daily CPI.

Examples of money in a state of being "a store of real value" is when it is maintained in the form of government daily inflation-indexed bonds, e.g., US Treasury Inflation-Protected Securities (TIPS). 

Money in the world economy is only a perfect store of constant purchasing power in the USD 3 trillion + maintained perfectly stable in real value in the global government daily inflation-indexed bond market plus the 25% + of the Chilean money supply that is inflation-indexed on a daily basis plus all mortgage bonds (monetary items) in Colombia which are inflation-adjusted on a daily basis in terms of their Daily Real Value Index. 

Summary: Money is not a store of value.

Shares (a variable real value non-monetary item) are - generally - a store of increasing variable real non-monetary value over the long term

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Wednesday, 17 September 2014

Venezuela says: Help! The IASB says: Sorry. It's too much work for us!

An entity in Venezuela has asked the IASB for help.

The IASB, however, has again, in typical IASB fashion, refused to do anything about the effect of financial reporting in Venezuela.

The reasons for this are two-fold:

1. According to the IASB "financial reporting has no effect on the economy".

2. The IASB refuses to change IAS 29 Financial Reporting in Hyperinflationary Economies to require the implementation of the Daily CPI instead of the monthly published CPI as currently required in IAS 29.

The reason for this is the fact that the IASB does not understand the stabilizing effect of implementing Capital Maintenance in Units of Constant Purchasing Power (which is required in IAS 29) in terms of the Daily CPI.

Nicolaas Smith

See the copy of the IASB Staff paper below:



"IASB Agenda ref 12B STAFF PAPER 18–24 September 2014 IASB Meeting

Project IFRS Interpretations Committee issues

Paper topic IAS 21—Foreign exchange restrictions and hyperinflation

CONTACT(S) Hannah King hking@ifrs.org +44 (0) 20 7246 6961

This paper has been prepared by the staff of the IFRS Foundation for discussion at a public meeting of the IASB and does not represent the views of the IASB or any individual member of the IASB. Comments on the application of IFRSs do not purport to set out acceptable or unacceptable application of IFRSs. Technical decisions are made in public and reported in IASB Update. The IASB is the independent standard-setting body of the IFRS Foundation, a not-for-profit corporation promoting the adoption of IFRSs. For more information visit www.ifrs.org

Page 1 of 8

Introduction

1. The IFRS Interpretations Committee (the Interpretations Committee) received a submission requesting guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela when applying IAS 21 The Effects of Changes in Foreign Exchange Rates. The issue arises because of strict foreign exchange controls over the exchange of the Venezuelan Bolivar Fuerte (VEF) combined with Venezuela’s hyperinflationary economy.

2. The Interpretations Committee discussed the issue at its meeting in July 20141. It tentatively decided not to take the issue onto its agenda, as noted in the IFRIC Update reproduced in Appendix A. In addition, after acknowledging the concerns raised by the submitter, the Interpretations Committee specifically asked that the IASB be made aware of the issue.

3. Accordingly, this paper summarises the issue and tentative conclusions reached by the Interpretations Committee, as follows:

(a) Background, which summarises the foreign exchange restrictions in Venezuela, the submission and primary accounting issues identified.

(b) Tentative conclusions reached by the Interpretations Committee. 

1 See http://www.ifrs.org/Meetings/MeetingDocs/Interpretations%20Committee/2014/July/AP16%20-
%20IAS%2021%20Foreign%20exchange%20restrictions%20and%20hyperinflation.pdf for agenda paper 16 of the July 2014 meeting of the Interpretations Committee. 

Agenda ref 12B

IAS 21 │Foreign exchange restrictions and hyperinflation

Page 2 of 8

(c) Next steps.

4. This paper is for information only. 

Background

Foreign exchange controls in Venezuela 

5. There are strict Venezuelan government controls over exchanging VEF. The exact nature of these controls has changed, and continues to change, over time. We understand that there are currently three official exchange mechanisms in Venezuela. Each of these has different exchange rates, available to different entities for different types of transactions depending upon specific circumstances. Furthermore, there are restrictions on the amount of currency that can be exchanged though these exchange mechanisms. 

6. Entities whose functional currency is that of a hyperinflationary economy are required under IAS 29 Financial Reporting in Hyperinflationary Economies to state their financial statements in terms of the measuring unit current at the end of the reporting period by applying a general price index. Groups consolidating such subsidiaries translate these inflation-adjusted subsidiary financial statements into the group’s presentation currency (for example US$) at the closing exchange rate 
in accordance with IAS 21.

Summary of submission

7. The submitter has asked the Interpretations Committee to review the current approach for translating and consolidating foreign operations in Venezuela. 

8. Below is a summary of the submitter’s observations based on the submission and our discussions with the submitter:

(a) Prevalent practice is to translate foreign operations into the group’s presentation currency using official exchange rates.

(b) For operations with a VEF functional currency the official CENCOX fixed exchange rate has typically been used as the closing rate when applying IAS 21 on the basis that it was the only official exchange mechanism available to a group.

(c) In the submitter’s experience, such a rate is only available for a relatively limited amount of currency in practice, with the result that a Venezuelan subsidiary may have more cash in VEF than it is able to convert into US$ (and hence repatriate) using the official exchange rate mechanisms. 

(d) Because of foreign exchange controls, the official exchange rates for VEF (in particular the fixed CENCOX and variable SICAD I rates) do not, according to the submitter, reflect the local rate of hyperinflation. Hence, in the submitter’s view, a substantial devaluation of the VEF from the official fixed exchange rate in the future is almost certain. 

9. As a consequence, the submitter is concerned that, from an economic perspective, the financial statements of group accounts appear not to appropriately reflect:

(a) the Venezuelan operation’s assets and liabilities (including local cash held in VEF);

(b) income from the Venezuelan operations (which is further compounded by the IAS 29 inflation adjustments); and

(c) foreign exchange losses (or gains) in profit or loss arising on US$ (or other non VEF) denominated balances in Venezuela. 

Primary accounting issues

10. On the basis of the concerns raised, the accounting issue primarily stems from the closing rate used on the application of IAS 21 on translation of the net investment in the foreign operation, because there are (i) several different exchange rates and (ii) control restrictions over both the exchange rate and the amount of local cash that can be exchanged. 

11. The primary issues identified by the Interpretations Committee are therefore:

(a) Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates? 

(b) Issue 2: what rate should be used when there is a longer-term lack of exchangeability?

Tentative conclusions reached by the Interpretations Committee

12. When assessing the accounting issues identified above, the Interpretations Committee considered:

(a) the results of outreach from securities regulators, members of the International Forum of Accounting Standard Setters and the IFRS technical teams of the international networks of large accounting firms; and 

(b) the agenda criteria of the Interpretations Committee described in paragraphs 5.16–5.17 of the IFRS Foundation Due Process Handbook. 

Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?

13. Issue 1 arises because there is no specific guidance in IAS 21 regarding which exchange rate, out of multiple rates, to select for the purposes of translating an entity’s net investment in the foreign operation. However paragraph 26 of IAS 21 does give guidance on which of multiple exchange rates to use when reporting foreign currency transactions in the functional currency in the local entity’s 
financial statements.

14. The Interpretations Committee tentatively decided not to take Issue 1 onto its agenda, as outreach indicated little diversity in practice regarding the principle to use when determining which of multiple rates should be used to translate an entity’s net investment in a foreign operation. It observed that general practice is to use the exchange rate at which the entity will be able to remit funds from its foreign operations (ie the rate at which future cash flows could be settled when viewing the net investment as a whole), which is consistent with the principle in paragraph 26 of IAS 21.

Issue 2: what rate should be used when there is a longer-term lack of exchangeability?

15. Issue 2 arises because of the longer-term lack of exchangeability of the local currency, which the Interpretations Committee observed to be:

(a) widespread;

(b) leading to some diversity in practice; and 

(c) not addressed by the requirements in IAS 21, so that it is not entirely clear how IAS 21 applies in such circumstances. 

16. Outreach indicated that the concerns raised due to foreign exchange restrictions faced by foreign operations in Venezuela are valid. However, the Interpretations Committee noted that Issue 2 could not be addressed through an interpretation of the Standard or an Annual Improvement, as to do so would require an exception to the definition of ‘closing rate’ in IAS 21. 

17. The Interpretations Committee considered whether to take the issue onto its agenda with a view to developing a recommendation for an amendment to IAS 21 for the IASB’s consideration, after consulting the IASB. Staff highlighted that developing such a solution might be difficult in practice because it would require a new or different principle from that currently in IAS 21 and could lead to 
questions about the basis for all foreign currency translations under IAS 21. Furthermore, this issue cuts across other issues that have been raised to the IASB with respect to IAS 21, which potentially could impact the scope of any proposed solution to the issues raised. 

18. Consequently, the Interpretations Committee tentatively decided not to take the issue onto its agenda, but to highlight the issue to the IASB. The IASB’s current agenda includes research projects on foreign currency translation and inflation, with the aim of considering whether there are issues that the IASB should address and, if so, what the scope of such a project should be. Therefore this issue might be more appropriately considered as part of that assessment. 

19. The Interpretations Committee also decided to highlight in its tentative agenda decision that some of the existing disclosure requirements in IFRSs apply in such circumstances, as noted in the extract from the IFRIC Update for July 2014 in Appendix A.

Next steps

20. The Interpretations Committee will consider any comments received on its tentative agenda decision at its meeting in November 2014. 

21. In addition, a preliminary paper on the IASB’s research project on foreign currency translation will be discussed by the IASB by the end of 2014.

Appendix A—Extract from IFRIC Update for July 2014

Interpretations Committee tentative agenda decisions
IAS 21 The Effect of Changes in Foreign Exchange Rates—Foreign exchange 
restrictions and hyperinflation (Agenda Paper 16)

The Interpretations Committee received a request for guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela. The issue arises because of strict foreign exchange controls in Venezuela. This includes the existence of several official exchange rates that may not fully reflect the local rate of hyperinflation and of restrictions over the amount of local currency that can be exchanged. Concerns were raised that using an official exchange rate to translate an entity’s net investment in a foreign operation in Venezuela appeared not to appropriately reflect the financial performance and position of the foreign operation in the group’s consolidated financial statements.

The Interpretations Committee identified two primary accounting issues:

(a) which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?

(b) what rate should be used when there is a longer-term lack of exchangeability?

With respect to the first issue, the Interpretations Committee observed very little diversity in practice regarding the principle to use when determining which of multiple rates should be used to translate an entity’s net investment in a foreign operation. The Interpretations Committee noted that predominant practice is to apply by extension the principle in paragraph 26 of IAS 21, which gives guidance on which exchange rate to use when reporting foreign currency transactions in the functional currency when several exchange rates are available. 

Hence, despite the widespread applicability, the Interpretations Committee [decided] not to take the first issue onto its agenda.

With respect to the second issue, the Interpretations Committee observed that this issue is widespread and has led to some diversity in practice. A longer-term lack of exchangeability is not addressed by the requirements in IAS 21, and so it is not entirely clear how IAS 21 applies in such situations. However, the Interpretations Committee thought that addressing this issue is a broader-scope project than it could address (because of related cross-cutting issues). Accordingly the Interpretations Committee [decided] not to take this issue onto its agenda. 

However, the Interpretations Committee noted that several existing disclosure requirements in IFRS would apply when the impact of foreign exchange controls is material to understanding the entity’s financial performance and position. 

Relevant disclosure requirements in IFRS include:

(a) disclosure of significant accounting policies and significant judgements in applying those policies (paragraphs 117–124 of IAS 1);

(b) disclosure of sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, which may include a sensitivity analysis (paragraphs 125–133 of IAS 1); and

(c) disclosure about the nature and extent of significant restrictions on an entity’s ability to access or use assets and settle the liabilities of the group, or its joint ventures or associates (paragraphs 10, 13, 20 and 22 of IFRS 12)."

Copyright 2014 IFRS Foundation

The IFRS Foundation has copyright over the above IASB Staff paper.


Saturday, 13 September 2014

What is bitcoin? Get rich quick or exiting new technology?

Bitcoin at USD 8 billion market cap is almost nothing compared to the hundreds of Trillions in fiat transactions. Bitcoin has - as of now (2014) - done nothing to the status quo in the credit card hegemony (scam/rip-off), for example.
Bitcoin - as an ever-increasing-in-real-value investment destroys its chances to be a real currency.
As a real currency (real money) bitcoin has to be perfectly or at least relatively stable in real value which is the absolute last thing bitcoin enthusiats want (in their natural, human unlimited greed). Greed is good: Gecko :-)
There is absolutely nothing wrong with bitcoin being the greatest niche value-transfer medium of exchange ever. What would be wrong with that?
As a medium of exchange bitcoin could be valued at 1 cent or even 0.0001 cent too. It would work perfectly well at any value - with very efficient (nano-second) medium of exchange technology. As a medium of exchange you want to (eventually) go into and out of bitcoin in a nano second.
That is bitcoin´s unique selling point, and not its potential to have an exponential increase in real value over time.
Bitcoin´s best value to the world economy would be the ability to absolutely securely and instantly transfer real value at almost no cost to anywhere else in the world - outside the traditional banking system. Governments are still going to regulated it to protect consumers.
Just as it was very difficult to make money from the internet in the beginning, so it should be very difficult to make money from using bitcoin as a medium of instant exchange in the beginning until clever minds monetize free bitcoin exchange in a profitable way - similar to monetization of successful internet businesses.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Thursday, 11 September 2014

Single centralized bitcoin block chain ledger versus hundreds of millions of decentralized fiat ledgers

All bitcoins exist only in the one, single, unique, completely centralized, public  block chain ledger. They never leave this single block chain ledger. Bitcoins are moved from one original key owner to another original key owner only inside this single block chain ledger. 

This aspect of the bitcoin technology - everybody agrees - is completely centralised in the one, single, unique, public bitcoin block chain ledger.

Trillions of fiat monetary units, on the other hand,  are debited and credited in any amount from 0,01 cent to hundreds of trillions of Dollars, for example, in any of hundreds of millions of completely decentralized company and other entities´ bank accounts in their hundreds of millions of completely decentralized private and public company ledgers all over the world. 

Satoshi Nakamoto could only solve the problem of preventing the double (or more) spending of the same bitcoin (by simply copying it digitally), via the age-old double-entry accounting ledger. 

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Wednesday, 10 September 2014

Scotland: If yes wins, then yes for own currency too


If Scotland were to leave the UK, then it should have its own currency too. 

Scotland should not join the EMU while the latter does not function with a federal central bank. If Scotland were to join the EMU it would simply be another German monetary colony like all the others in the EMU. 

If Scotland were to leave the UK and keep the Pound with the Bank of England as bank of last resort, it would be a UK monetary colony. 

So too if Scotland were to leave and keep the Pound without the BOE as bank of last resort. It would be an even weaker UK monetary colony. 

If Scotland votes to leave the UK , then 

1. it should immediately have its own currency.

2. Next Scotland should abandon Historical Cost Accounting and change over to Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI. That would stabilize the constant real value non-monetary item economy (including salaries, wages, rents, taxes, capital, all profit and loss account items, trade debtors, trade creditors, provisions, etc.). It would keep the real value of all constant real value non-monetary items perfectly stable in all entities that at least break even in real value - ceteris paribus - at all levels of inflation or deflation for an indefinite period of time. 

3. Lastly it should inflation-index its entire money supply on a daily basis in terms of the Daily CPI. That would only remove the effect of inflation or deflation from the monetary economy. It would do nothing to actual inflation or deflation. That depends on the central bank. However, the economy would function as if there were no inflation or deflation. 


Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Monday, 8 September 2014

The IASB could help Venezuela, but would never do that.

If the International Accounting Standards Board were to revise IAS 29 Financial Reporting in Hyperinflationary Economies (which listed companies in Venezuela have been implementing since 2009) to require daily indexing in terms of the Daily CPI, it would help to solve the "massive distortions to relative prices" in Venezuela without the involvement of the Maduro government. 

All constant real value non-monetary items, e.g., issued share capital, all other items in shareholders´equity, all items in the profit and loss account, provisions, trade creditors, trade debtors, all other non-monetary payables, all other non-monetary receivables, all taxes, salaries, wages, rents, pensions, etc. would be maintained constant in real value by virtue of them being required in a revised IAS 29 to be measured in terms of units of constant purchasing power in terms of the Daily CPI. 

Daily indexing - if it were to be required - in IAS 29 "is the key to restoring Venezuela´s macroeconomic health."

IAS 29 requires the use of the monthly published CPI. It had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy. It had no positive effect in Venezuela from 2009 till now. 

The IASB refuse to admit that IAS 29 had no positive effect in Zimbabwe´s hyperinflationary economy. 

The IASB stated that "financial reporting has no effect on the economy", which is one of the silliest statements ever made regarding accounting. Yes, the IASB stated that in January 2013. 

A possible review of IAS 29 had been placed in the very long term future by the IASB: that means possibly never.

How the IASB can carry on - year after year - knowingly ignoring the fact (strongly brought to their attention various times) that a standard they have supported for the last 25 years has absolutely no positive effect in a hyperinflationary economy, is beyond human understanding. 

Power corrupts and absolute power corrupts absolutely. The IASB has absolute power regarding matters relating to IFRS. They are absolutely incorrect in their abuse of their absolute power to refuse to revise IAS 29. 

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Saturday, 6 September 2014

What is bitcoin: money or property?

Every institution in our society/economy operates in terms of its specific laws, regulations and generally accepted concepts.
For example: Judges: They interpret the law. That´s it. Nothing more. When the US IRS code states 23 times that money is a property then – for US judges interpreting US IRS laws – bitcoin is money. Finish and klaar. Ponto final. Very simple. They interpret the law. However, judges are not required to define economic concepts. They just interpret the law.
Another institute: Tax authorities: for them money is something that is, inter alia, legal tender. For them bitcoin is not money. For them bitcoin is a property.
Economists: An item has to have all three attributes of money to be money. Bitcoin is not and will never be a relatively stable in real value unit of measure for accounting purposes. Bitcoin thus is not and never will be money for economists and the accounting and auditing profession.
Consumers: Anything (cigarettes in a prison) that is widely accepted as a medium of exchange which overcomes the double coincidence of wants problem, is money. For consumers bitcoin is money.
In the end the market (consumers/users) will win the battle.
Example of what was not suppose to happen, but users simply ignored the rules: Money was/is suppose to be perfectly stable in real value as from the beginning of money. Dishonest kings (monetary authorities) debased money and it never was or is perfectly stable in real value on a sustainable basis. With fiat money, inflation and deflation do the destabilizing bit.
What did users do? They (economists, accountants, auditors, business people, people in general) simply ASSUMED money is PERFECTLY STABLE as from the beginning of money  - till today. Today the traditional, globally implemented, generally accepted accounting model used by all companies is the Historical Cost Accounting model under which the STABLE MEASURING UNIT ASSUMPTION is implemented for the valuation of many (not all) items in the economy; e.g. capital, salaries, wages, rent, trade debtors, trade creditors, etc. These items are ASSUMED to be perfectly stable in real value. For their valuation, money is ASSUMED to be PERFECTLY STABLE, although everyone knows money is NEVER perfectly stable on a sustainable basis.
So, the above is a perfect example of what will most probably happen with bitcoin: users will simply ASSUME it is money although it is impossible for bitcoin to ever be money because it is not relatively stable in real value and will never even be  ASSUMED to be perfectly stable in real value like real money is for accounting purposes.
You can´t beat the market/users.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Tuesday, 2 September 2014

Two of the three parts of the post-HC economy would be stable in real value


Two of the three parts of the post-HC economy would be stable in real value

The economy consists of economic entities and economic items. There are three fundamentally different economic items in the economy:

1. Monetary items
2. Variable real value non-monetary items
3. Constant real value non-monetary items

1. MONETARY ITEMS

DEFINITION   Monetary items constitute the money supply.

Only when an item is part of the money supply in a non-dollarized economy is it a monetary item within the economy where the units of money are created. Otherwise it is a non-monetary item.

Money, i.e., any item that is 

(i) a medium of exchange (which eliminates the double coincidence of wants)

(ii) a relatively stable store of real value

(iii) a relatively stable real value unit of measure (for accounting purposes) and 

(iv) legal tender (for the settlements of debts)

is an essential component of a modern economy.

NON-MONETARY ITEMS

DEFINITION   Non-monetary items are all items that are not monetary items. 

Non-monetary items are subdivided in:

(a) Variable real value non-monetary items
(b) Constant real value non-monetary items

2. VARIABLE REAL VALUE NON-MONETARY ITEMS

Examples include property, plant, equipment, inventories, listed and unlisted shares, foreign exchange, raw materials, finished goods, patents, bitcoins, other crypto-currencies, etc. are generally not perfectly stable in real value in an open and free economy. 

Measurement
Their variable non-monetary real values are generally determined by supply and demand in free and open markets in terms of fair value.

3. CONSTANT REAL VALUE NON-MONETARY ITEMS

Examples include issued share capital, all other items in shareholders´ equity, all items in the profit and loss account, provisions, salaries, wages, rents, taxes, pensions, interest received/paid, bank charges, trade debtors, trade creditors, all other non-monetary debtors, all other non-monetary creditors, etc. 

Measurement
Constant real value non-monetary items are measured in units of constant purchasing power in terms of the Daily CPI under the Capital Maintenance in Units of Constant Purchasing Power accounting model.

TWO STABLE PARTS OF THE POST-HC ECONOMY

I. Constant real value non-monetary item economy

The constant real value non-monetary item economy is the first part of the economy that would be maintained stable in real value via measurement in units of constant purchasing power (under the UCPP paradigm) under CMUCPP in terms of the Daily CPI.

See examples above.

II. Monetary item economy

The second and final step is the daily inflation-indexing of all monetary items in terms of the Daily CPI with complete coordination. That would stabilize the real value of all monetary items thus inflation-indexed daily in terms of the Daily CPI. 

This would do nothing to actual inflation or deflation. That depends on the actions of the central bank. Daily inflation- or deflation-indexing only eliminates the effect of inflation or deflation.

Current examples of perfectly stable in real value monetary item markets/areas

1. The global USD 3 Trillion plus market in government and commercial inflation-indexed bonds. Examples are US Treasury Inflation-Protected Securities (TIPS). 

2. 25% plus of Chile´s money supply is inflation-indexed daily.

3. All mortgages in Colombia are inflation-indexed daily.

ONE UNSTABLE PART OF THE ECONOMY

Only the variable real value non-monetary item part of the economy would not be (is not) stable in real value because these values change and would normally change minute by minute in their respective markets, e.g., forex markets, stock exchanges, money markets, capital markets, commodity markets, etc. See examples above of variable real value non-monetary items.

Sine qua non

The above orchestrated/implemented stability in real value (purchasing power) is only possible with the implementation of daily updating (daily inflation-indexing in the case of monetary items) in terms of the Daily CPI: actually, in terms of all changes in the general price level which can change more than once per day during severe hyperinflation. 

The CPI was institutionalized by the International Labour Organization in 1927.

In summary: The above stability in real value requires the rejection of the stable measuring unit assumption, i.e., the rejection of Historical Cost Accounting.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Sunday, 31 August 2014

The post-Historical Cost economy

The post-Historical Cost economy

The post-HC economy would be an economy in which the stable measuring unit assumption would be replaced with the Units of Constant Purchasing Power (UCPP) paradigm. The HC paradigm would be abandoned and no-one would ever assume money is perfectly stable during low and high inflation and deflation for the purpose of valuing some (not all) items in the economy as all economists, accountants and business people do during non-hyperinflationary periods in the current HC era. 

HCA would be replaced with the Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI model in the post-HC economy.

CMUCPP was authorized in IFRS as an alternative to HCA during all levels of inflation and deflation in the original Framework (1989), Par. 104 (a) which stated: 

"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

The above wording is maintained intact in International Financial Reporting Standards in the current Conceptual Framework (2010), Par. 4.59 (a).

The accounting model for the post-HC economy was thus authorized in 1989 in IFRS. It was also authorized in US GAAP and other national accounting standards during that time.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Tuesday, 26 August 2014

Hayek: Stability in value would prove to be the decisive factor

On 11 August I blogged: Is Bitcoin fatally flawed? in which I stated:

"The fact that bitcoin has a fixed supply limit - 21 million - may mean it may be fatally flawed in its attempt to be money (a monetary item possessing the three attributes of money) because the limit in supply may result in it never being able to be relatively stable in real value: an essential requirement for money."

Friedrich Hayek had the same view regarding the fact that a relatively stable real value is essential for an item to be accepted as money.

"Hayek stated that “Stability in Value” would prove to be the decisive factor in assessing the level of acceptance" (of a currency).

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Monday, 25 August 2014

Ecuador´s (possibly [hyper]inflationary?) virtual IOU´s

Ecuador was reported to be studying the creation of its own virtual currency. 

See: Ecuador Cryptocurrency

Now the Wall Street Journal states: 

"Implying that this is a "virtual" currency is an attempt to lend Bitcoin-like cachet to what will essentially be IOUs issued by a country with a rather dodgy credit history."

 Ecuador´s phony bitcoin ploy - Wall Street Journal


Sunday, 24 August 2014

The value of money


"Growth


Credit


If money is a means for growth and not the end, a lack of money is not sufficient a reason for the augmentation of money to fail to happen. With the availability of credit money, banks and fractional reserve banking it is evident that this is the case. Just because some company did not earn enough money yet to invest in a new plant, that does not mean it cannot – it would apply for a loan from a bank. That bank in the last instance may have borrowed that money from the central bank which created it ‘out of thin air’. However, assume, for the sake of argument, that these things did not exist. Even then, at any given moment, companies (or parts thereof) are necessarily in different stages of their accumulation cycles: some are just starting to sell a large stock of goods while others are looking to buy machines and hire workers. Some companies have money which they cannot spend yet while other companies need money to spend now. Hence, both the need and means for credit appear. If some company A expects to make, say, 110 BTC from a 100 BTC investment but only has 70 BTC in its accounts, it could take a loan of 30 BTC from some company B with 10% interest rate and still make 10 - 3 = 7 BTC of profit. For the company B which lends A 30 BTC, this business – if successful – is also better than just sitting on those 30 BTC which earn exactly nothing. If growth is demanded, having money sitting idly in one’s vaults while someone else could invest and augment it is a poor business decision.29 This simple form of credit hence develops spontaneously under free market conditions.30 The consequences of this fact are not lost on Bitcoin adherents. As of writing, there are several attempts to form credit unions: attempts to bundle up the money people have in their wallets in order to lend it out to others – for interest, of course.

Growth guarantees money


Central banks



The full article is available following any link above.