Friday, 16 December 2011

IAS 29 does not affect the operations of a company during hyperinflation

IAS 29 does not affect the operations of a company during hyperinflation

          IAS 29´s ineffectiveness during hyperinflation was undeniably demonstrated during the last 6 years of hyperinflation in Zimbabwe. IAS 29 was required for Zimbabwean companies listed on the Zimbabwean Stock Exchange as from 2002. IAS 29 made absolutely no difference to hyperinflation in Zimbabwe from 2002 till the end of hyperinflation on 20th November, 2008.

         IAS 29´s ineffectiveness was very well summarized by Michael Madsen, the Group CFO of The East Asiatic Company Ltd., the Danish company with a subsidiary in Venezuela´s hyperinflationary economy in this Euroinvestor article:

       Accounting adjustment due to Venezuela now considered a hyperinflation economy. Irrespective of the devaluation, but due to the recent years' increased inflation in Venezuela the country should for accounting purposes be considered a hyperinflationary economy as of 31 December 2009. Under the International Financial Reporting Standards (IFRS) this requires the application of IAS 29, "Reporting in hyperinflationary economies" for 2009 and subsequent years.

        The application of the standard affects the accounting presentation, but does not affect the operation or the cash flow.

       How is it possible that the implementation of IAS 29 in a hyperinflationary economy does not affect the operation of a company?
        IAS 29 is ineffective because simple restatement of Historical Cost or Current Cost financial reports in terms of the period-end Consumer Price Index does not make any difference during hyperinflation as stated by Mr. Madsen and very well proven in Zimbabwe.
        IAS 29´s very clear ineffectiveness during hyperinflation as well as IAS 29 restated financial reports available on the internet with unbelievable and thus irrelevant ratios also damage the otherwise very excellent and highly respected reputation of the IASB and the image of IFRSs.

Nicolaas Smith

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