Tuesday, 5 January 2010

Sir David Tweedie does not understand the basic problem with IAS 29

A modified IAS 29 can, in fact, be used to stop this hyper-destruction by accountants´ choice of the HCA model of the real values of constant items never maintained during hyperinflation. Hyperinflation per se destroys the real value of the monetary unit directly, for example, the Zimbabwe Dollar in the recent past. There is no Zimbabwe Dollar today: the Reserve Bank of Zimbabwe over-printed it to oblivion. The Zimbabwean people en masse believed very strongly in the fallacy that printing money creates wealth. Hyperinflation did not and can not destroy the real value of any non-monetary item (constant or variable real value non-monetary item) in the Zimbabwean economy or any other economy.

The real values of some, mostly consumer, non-monetary items were maintained by the fact that their selling prices were adjusted every time the black market or parallel rate changed in Zimbabwe. These changes sometimes occurred twice or more often per day. Their real values were maintained, not by applying the CPI as officially required by the IASB in terms of IFRS, but, the daily parallel rate of exchange for the US Dollar to the ZimDollar. That was the real rate of exchange and real value rate in Zimbabwe. That is always the case in all hyperinflationary economies. Not the CPI that was announced a month after the month to which it related. The CPI that could be announced two months after the date of a transaction is useless as a real value index in a hyperinflationary economy when prices change every few hours.

This is the basic reason for IAS 29´s failure in hyperinflationary economies: requiring the CPI to be applied at the end of the year instead of the daily parallel rate to be applied daily. Sir David Tweedie, the Chairman of the IASB, never worked or lived in a hyperinflationary economy. If he had, he would understand the basic problem with IAS29. Obviously I agree that we cannot expect the Chairman of the IASB to experience every accounting problem personally. Sir David has a very busy schedule. He spends his time flying all over the world on IASB business (refining IASB approved accounting fallacies – I suppose) and did not have time to read my “voluminous manuscript” in the past. So he asked Geoffrey Whittington to inform me. (I do not actually expect Sir David to read my manuscripts. I thought the IASB had a basic research section.)

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