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Thursday, 12 January 2012

Attributes of CIPPA - Part 2 of 3:  Variable items updated daily

[Attributes of CIPPA - Part 1 of 3: Monetary items inflation-adjusted daily]

Variable items are valued and accounted and variable item revaluation losses and gains are treated in terms of IFRS under CIPPA. Variable items –when not valued daily in terms of IFRS – are updated daily in terms of a DCPI or a monetized daily indexed unit of account during low and high inflation and deflation and in terms of a daily hard currency parallel rate or daily Brazilian-style index rate during hyperinflation because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation (CIPPA).

Selling prices of variable items in shops and restaurants, etc. are not updated on a daily basis during low inflation and deflation. They are set in a free market.  Keeping them the same during a period is a marketing strategy. Selling prices depend on demand and supply. McDonalds´ prices would not be updated daily in terms of a DCPI or a monetized daily indexed unit of account during low inflation and deflation under CIPPA.

They would be updated daily under financial capital maintenance in units of constant purchasing power during hyperinflation which requires daily updating of all non–monetary items (variable and constant items) in terms of a daily parallel rate (normally the daily US Dollar parallel rate), a Brazilian–style URV daily index or a monetized daily indexed unit of account like the UF in Chile. That happened at McDonalds in Harare, Zimbabwe; i.e. the daily updating in terms of the US Dollar parallel rate, not the implementation of financial capital maintenance in units of constant purchasing power during hyperinflation. Implementing IAS 29 did not result in financial capital maintenance in units of constant purchasing power during hyperinflation in Zimbabwe.

IAS 29 simply requires the restatement of period–end HC or CC financial statements in terms of the period–end monthly published CPI to supposedly make these statements more useful during hyperinflation. The implementation of IAS 29 had no effect on the economic collapse in Zimbabwe. IAS 29 could not stop the economic collapse of the non–monetary or real economy during hyperinflation in Zimbabwe. IAS 29 could not and the 2011 version cannot do what Brazil did during 30 years of very high inflation and hyperinflation of up to 2000 per cent per annum.

Hyperinflation destroyed the Zimbabwe Dollar. The implementation of the HCA model and the stable measuring unit assumption during hyperinflation destroyed the Zimbabwean non–monetary economy. That did not happen during 30 years of very high inflation and hyperinflation in Brazil.

Daily updating of non–monetary items in terms of a daily non–monetary index supplied by different Brazilian governments during 30 years of very high and hyperinflation resulted in a relatively stable real economy with periods of economic growth in GDP – during hyperinflation. Daily updating of non–monetary items in terms of a daily index almost entirely based on the daily US Dollar exchange rate that was completely ignored by the IASB in the formulation of IAS 29 in 1989. Brazil indexed non–monetary items on a daily basis during 30 years from 1964 to 1994. IAS 29 was authorized in 1989.

[Attributes of CIPPA - Part 1: Monetary items inflation-adjusted daily]

Nicolaas Smith

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