Submitter Organization
Date
Nicolaas Smith Constant Item Purchasing Power
Accounting 26 January 2012
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Dear Mr Hoogervorst,
I wish to thank the IASB
and the Special Commission created by the Federación
Argentina de Consejos Profesionales de Ciencias Económicas for giving me access to the Commission´s Research Paper: Inflation.
I would kindly like to
make the following comments regarding this excellent research paper.
The Argentinean Federation states that:
The
proposal is for International Financial Reporting Standards to be ‘in a
position to provide an adequate answer to the effects of inflation on financial
reporting;’
‘An inflation rate of
100% over three years (the limit currently included in IAS 29) equals 26% per
year, but much lower rates are sufficient to distort financial statements, if
inflation effects are not properly recognized,’ and
‘The main effects of
inflation on financial statements’ relate to items such as capital contributed
and comprehensive income.
The Federation indicates in the Basis
for Conclusions, Effects
of the omission of inflation restatements that
inflation affects revenues, expenses, inventories, property, plant, equipment,
intangible assets, investment properties, goodwill, dividends and interest.
It is noted that:
‘Inflation is always and everywhere a monetary phenomenon,’ per Milton
Friedman.
‘Purchasing power of non monetary items does not change in spite of
variation in national currency value.’
Gucenme, U. and Arsoy, A. P.
(2005). Changes in financial reporting in Turkey, Historical Development
of Inflation Accounting 1960 – 2005. Special Issue Accounting for the Global and
the Local: The Case of Turkey. Critical Perspectives on Accounting, Volume
20, Issue 5, July 2009, p. 568–590.
Inflation and
deflation have no effect on the real value of non-monetary items.
Comprehensive income, revenues, expenses,
contributions from and distributions to owners and interest, for example, are constant real value
non-monetary items. Inventories, property, plant, equipment, intangible assets, investment
properties and goodwill are variable real value non-monetary items. IAS 29 defines them as
non-monetary items. The definition of a constant real value non-monetary item
is derived in IFRS.
It is not inflation
and deflation affecting the real value of constant real value non-monetary
items not maintained constant over time. It is the implementation of the stable
measuring unit assumption as part of the traditional Historical Cost Accounting
model during inflation and deflation.
Inflation erodes
the real value of only monetary items not inflation-adjusted in terms of a
Daily Consumer Price Index. Deflation creates real value in only monetary items
not deflation-adjusted in terms of a Daily Consumer Price Index. It is
currently (2012) impossible to inflation-adjust or deflation-adjust bank notes
and coins. Their real values are always affected by inflation and deflation.
Inflation in
many different countries has no effect on the real value of monetary items inflation-adjusted
in terms of a Daily CPI, for example the more than 2.68 trillion US Dollars
(2009)1 of government inflation-indexed bonds currently inflation-adjusted
daily in the world economy in terms of a Daily CPI which is a lagged, daily interpolation
of the monthly published CPI.
1 (Standard
Life Investments. (2012). An Investor´s Guide to Inflation–Linked Bonds.
Retrieved 7 January 2012, from Standard Life Investments’s Web site.)
According to the Banco Central de Chile, 20 to 25 per
cent of the broad M3 money supply in Chile is currently inflation-adjusted daily
in terms of the Unidad de Fomento (Written
communication. (2011)) which is a monetized daily indexed unit of account started in 1967 and
published daily by the Banco Central de
Chile since 1990.
The above are all
monetary items that exist in a zero cost of inflation (not zero inflation)
space. They are all monetary items, but, their real values are not affected by
inflation. Inflation-adjusting the entire money supply (excluding bank notes
and coins of the fiat functional currency created by means of fractional
reserve banking within an economy) under complete co-ordination would result in
zero cost of inflation (not zero inflation) in only the complete money supply
(as qualified) in an economy.
The requirement in IAS
29, Par. 9 that ‘the
gain or loss on the net monetary position shall be included in profit or loss and separately disclosed,’ deals with the ‘effects of inflation’ on only monetary items not inflation-adjusted in terms
of a Daily CPI only during hyperinflation.
However, the
definitions of monetary items in IAS 29, Par. 12 and IAS 21, Par. 8 need to be
improved because non-monetary items are all items that are not monetary items.
The definition of monetary items thus determines which items are non-monetary
items per IFRS. When the definition of monetary items is incorrect then the
division of monetary and non-monetary items is incorrect as it currently is in
terms of IFRS.
IAS 29 is ineffective2
regarding the effect of the stable measuring unit assumption (not the ‘effects
of inflation’) on constant real value non-monetary items, e.g. capital
contributed and comprehensive income, not maintained constant during
hyperinflation.
A monetary item is one
of the three basic economic items:
(a) Monetary items
(b) Variable real value non-monetary items
(c) Constant real value non-monetary items
Definition
Monetary items are units of money held and items with
an underlying monetary nature which are substitutes for units of money held.
Examples of units of money
held are bank notes and coins of the fiat currency created within an economy by
means of fractional reserve banking. Examples of items with an underlying
monetary nature which are substitutes for money held include the capital amount
of: bank loans, bank savings, credit card loans, car loans, home loans, student
loans, consumer loans, commercial and government bonds, Treasury Bills, all
capital and money market investments, notes payable, notes receivable, etc.
when these items are not in the form of money held.
The concept of a constant real value non-monetary item
is derived in IFRS
IFRS are principles
based standards. The definition of a constant real value non-monetary item is
derived from the authorization of financial capital maintenance in units of
constant purchasing power as the third capital maintenance concept at all
levels of inflation and deflation in IFRS in the original Framework (1989),
Par. 104 (a), (now the Conceptual Framework (2010), Par. 4.59 (a)) which
states:
‘Financial capital maintenance can be measured in
either nominal monetary units or units of
constant purchasing power.’
When financial capital
maintenance is measured in units of constant purchasing power it means, in
principle, that capital (all items in shareholders´ equity) is a constant real
value non-monetary item and that the real value of capital is equal to the real
value of net assets.
Definition
A constant real value non-monetary item is a
non-monetary item with a constant real value over time whose value within an
entity is not generally determined in a market on a daily basis.
Examples include borrowing
costs, comprehensive income, interest paid, interest received, bank charges,
royalties, fees, short term employee benefits, pensions, salaries, wages, rentals, all other income
statement items, issued share capital, share premium accounts, share discount
accounts, retained earnings, retained losses, capital reserves, revaluation
surpluses, all
accounted profits and losses, all other items in shareholders´ equity, trade debtors, trade creditors,
dividends payable, dividends receivable, deferred tax assets, deferred tax
liabilities, all taxes payable, all taxes receivable, all other non-monetary
payables, all other non-monetary receivables, provisions, etc.
On the other hand: a non–monetary
item which is not a constant real value non–monetary item is a variable real
value non–monetary item.
Examples include quoted
and unquoted shares, property, plant, equipment, inventory, intellectual
property, goodwill, foreign exchange, finished goods, raw material, etc.
Definition
A variable real value non-monetary item is a
non-monetary item with a variable real value over time.
The Argentinean
Federation states:
‘It is also a basic principle, an implicit but an
obvious one, that the measurement unit, i.e. the currency, must have a constant
value over time.’
‘It is not acceptable either that accounting uses as
the common denominator a measurement unit whose value is variable.’
‘The use of different currencies in different times or
circumstances during a period would be unreasonable. However, the current IFRSs
allow preparing the financial statements by using a currency that may have a
very different value at the beginning and the end of the period.’
All functional currencies
within free and open internal economies, with no governmental interference in
monetary policy, generally do not have a constant real value over time for more
than a month or two. A functional currency is generally unstable in real value
over time within a free and open internal economy.
One of the underlying
principles of the globally implemented, generally accepted, traditional Historical
Cost Accounting model is the stable measuring unit assumption whereby it is
assumed that changes in the purchasing power of money are not sufficiently
important to require financial capital maintenance in units of constant
purchasing power during inflation and deflation. HCA was originally authorized in
IFRS in the Framework (1989), Par. 104 (a) as an optional accounting model. The
other option authorized in Par. 104 (a) in 1989 was financial capital
maintenance in units of constant purchasing power at all levels of inflation
and deflation under which there is no stable measuring unit assumption.
Financial capital maintenance in units of constant purchasing power is
fundamentally different from financial capital maintenance in nominal monetary
units (HCA).
‘In the opinion of the Commission, the application of
the proposed standard will significantly improve the financial reporting by
requiring that all the components in
a set of financial statements be expressed in the same
unit of measurement.’ Covering letter, p. 8
The Argentinean
Federation thus requires financial capital maintenance in units of constant
purchasing power in the application of the proposed standard. I agree with the
Federation´s choice.
‘The financial statements from the application of the
mechanism proposed will recognize both gains and losses produced by the effects
of inflation on monetary items.’ p. 8
The Argentinean
Federation thus recognizes that inflation and deflation only affect the real
value of monetary items not inflation-adjusted and deflation-adjusted daily, respectively, in terms of a Daily Consumer Price Index
and not non-monetary items.
‘The financial statements will recognize losses
produced by impairment losses that remain concealed when financial statements
are not adjusted.’ p. 8
The Argentinean
Federation thus recognizes that there are two totally different processes of
real value erosion involved in an economy during inflation:
(1) One eroding the
real value of only monetary items not inflation-adjusted daily in terms of a
Daily CPI, namely, the economic process of inflation and
(2) A totally different
one eroding only the real value of constant real value non-monetary items not
maintained constant daily, namely, the implementation of the Generally Accepted
Accounting Practice of applying the stable measuring unit assumption during
inflation under HCA as authorized in IFRS in 1989.
Everybody who
implements IFRS has to choose a capital concept which will indicate the capital
maintenance concept as well as the measurement bases which determine the
accounting model to be used. There are three capital and capital maintenance
concepts authorized in IFRS:
(a) Three concepts of capital
The concepts of
capital in the Conceptual Framework (2010), paragraph 4.57 give rise to the
following three fundamentally different concepts of capital during inflation
and deflation:
(i) Physical capital.
See Par. 4.57 & 4.58.
(ii) Nominal financial
capital. See Par. 4.59 (a).
(iii) Constant
purchasing power financial capital. See Par. 4.59 (a).
(b) Three concepts of capital maintenance
The concepts of
capital in Par. 4.57 give rise to the following three fundamentally different concepts
of capital maintenance during inflation and deflation:
(i) Physical capital maintenance. Optional
during inflation and deflation. The Current Cost Accounting model is prescribed
in IFRS when the physical capital maintenance concept is implemented. See Par.
4.61.
(ii) Financial capital maintenance in nominal
monetary units (HCA). Authorized in IFRS but not prescribed—optional during
inflation and deflation. See Par. 4.59 (a).
(iii) Financial capital maintenance in units of
constant purchasing power. Authorized in IFRS but not prescribed—optional
at all levels of inflation and deflation. See Par. 4.59 (a).
It is clear from the Argentinean
Federation´s covering letter that they propose to implement the third capital
maintenance concept authorized in IFRS, namely, financial capital maintenance
in units of constant purchasing
power, in the proposed new IFRS.
Certain rules for
financial capital maintenance in units of constant purchasing power are defined in IAS 29 which makes it a very
important IFRS.
It is clear that the
Argentinean Federation proposes a change of the fundamental accounting model: a
departure from HCA.
‘Restatement of
financial statements’ as required in IAS 29 is not a departure from HCA.
IAS 29 Par. 39 (b)
states:
‘The following disclosures
shall be made:
(b) whether the financial statements are based
on a historical cost approach or
a current cost approach.’
PricewaterhouseCoopers
states:
‘Inflation-adjusted
financial statements are an extension to, not a departure from, historical cost
accounting.’
PricewaterhouseCoopers.
(2006). Financial Reporting in
Hyperinflationary Economies, Understanding IAS 29, p. 3.
It is clearly the
intention of the Argentinean Federation to affect a fundamental change in the
financial capital maintenance concept implemented, namely, from financial
capital maintenance in nominal monetary units (HCA) to financial capital
maintenance in units of constant purchasing power: a departure from what is
done in terms of IAS 29.
Taking all of the above
into account:
When entities implement
a fundamental change in their accounting model, namely, financial capital
maintenance in units of constant purchasing power when annual inflation is equal
to or greater than 10 per cent or cumulative inflation over three years is
equal to or greater than 26 per cent, as the proposed new IFRS would require
them to do, it would, in my opinion, not be reasonable to require them to change
back to a fundamentally different accounting model, namely, financial capital
maintenance in nominal monetary units (HCA) when inflation returns to lower
levels.
(1) Primarily when it
is taken into account that financial capital maintenance in units of constant
purchasing power as proposed by the Argentinean Federation would automatically
maintain the constant purchasing power of shareholder´s equity constant for an
indefinite period of time in all entities that at least break even in real
value at all levels of inflation and deflation – ceteris paribus – whether they
own any revaluable fixed assets or not.
When entities follow
the Argentinean Federation´s proposal and when they then experience and see and
realize in practice for themselves and when the automatic, indefinite-period,
real value maintaining effect of financial capital maintenance in units of constant
purchasing power in terms of a Daily CPI at all levels of inflation and
deflation as qualified above is specifically pointed out to them, then it would
not be reasonable to require them to go back to HCA: to require them to go back
to implementing the very erosive stable measuring unit assumption again.
(2) It also has to be
noted that the Argentinean Federation stated:
‘Most of the Commission members have
considered that such decision would involve a drastic change in the accounting
practices, particularly, for those countries without an inflationary
track-record.’
(3) It would also be
very costly to an entity and to a country´s economy as it has always been in
the past and as it still is today:
Although
nominal financial capital is always equal to nominal net assets measured in
nominal monetary units under financial capital maintenance in nominal monetary
units (HCA) as authorized in IFRS, it is only true in real value during
inflation in the single case where an entity always invests 100 per cent of the original updated real value of all
contributions to shareholders´ equity in revaluable fixed assets (revalued or
not) with
an equivalent updated fair value which is most probably only the case in hotel, hospital and other
property-intensive entities.
In the vast majority
of cases the stable measuring unit assumption (not inflation - as generally
accepted) erodes the real value of that portion of shareholders´ equity (e.g.
total retained earnings) never maintained constant under HCA with sufficient
revaluable fixed assets (revalued or not) currently amounting to vast amounts
of constant item real value eroded in the world´s capital investment base each
and every year for as long as HCA is implemented as the global, traditional
accounting model. (See the ongoing financial crisis).
(4) Financial
capital maintenance in units of constant purchasing power as proposed by the
Argentinean Federation would automatically stop this erosion for an indefinite
period of time in all entities that at least break even in real value at all
levels of inflation and deflation – ceteris paribus – whether they own any
revaluable fixed assets or not, and instead would maintain vast amounts per
annum for an unlimited period of time in constant item real value in the
world´s capital investment base at current levels of world inflation - if it
were to be implemented worldwide.
Prof.
Rachel Baskerville, Associate Professor, School of Accounting and Commercial
Law at the Victoria University in Wellington, New Zealand, changed her
publication 100 Questions (and Answers) about IFRS (question 38) on
the Social Science Research Network to confirm that there are three concepts of
capital maintenance authorized in IFRS after I pointed it out to her. Prof.
Baskerville discussed the change with her colleague Prof. Kevin Simpkins before
changing her article. He is the Chairman of the New Zealand Accounting
Standards Review Board. She then added this conclusion to her article:
‘There is much to be gained
from moving away from reporting on the basis Financial Capital Maintenance in
Nominal Monetary Units.’ (Baskerville, 2010)
The Deutsche Bundesbank
very wisely stated:
‘The benefits of price stability, on the other hand, can
scarcely be overestimated, especially as these are, in principle, unlimited in duration and accrue year
after year.’
Deutsche Bundesbank. (1996). Annual Report, p. 83.
Financial capital
maintenance in units of constant purchasing power as proposed by the
Argentinean Federation would mean automatic complete ‘price stability’ for an
indefinite period of time in the constant purchasing power of an entity´s shareholder´s
equity as qualified above and consequently in that part of a country´s and the
world´s capital investment base if it were to be applied worldwide.
In my opinion entities should be required to carry on
with financial capital maintenance in units of constant purchasing power at all
future levels of inflation and deflation once they have made the fundamental
change from financial capital maintenance in nominal monetary units (HCA) to
financial capital maintenance in units of constant purchasing power.
The understanding of
the very erosive effect (the cost) of the stable measuring unit assumption (not
inflation) on the real value of only constant real value non-monetary items
never maintained constant under HCA during inflation (currently still generally
confused with or seen as the same as the cost of inflation in monetary items
not inflation-adjusted daily in terms of a Daily CPI which is not calculated
and accounted under HCA during low inflation and deflation) as well as the automatic,
indefinite, real value maintaining effect on constant real value non-monetary
items of financial capital maintenance in units of constant purchasing power in
terms of a Daily CPI at all levels of inflation and deflation as qualified
above (authorized in IFRS in 1989) are not
yet generally accepted, but easy to understand.
Entities implementing
the stable measuring unit assumption (HCA) operating in economies with
inflation rates below 10 per cent per annum or below 26 per cent cumulative
inflation over three years should be very strongly encouraged to change over to
financial capital maintenance in units of constant purchasing power as proposed
by the Argentinean Federation. They should then not be required to change back
to HCA at any future rate of inflation or deflation.
Financial capital maintenance in units of constant
purchasing power requires a daily rate
I agree with the
Argentinean Federation that the Consumer Price Index should be used as a
general price level index.
It is noted that:
(1) When it is intended to maintain the real value of
an item, for example, a government inflation-indexed bond, it is immediately
realized that a Daily Consumer Price Index is required since these bonds trade
on a daily basis. Many countries use Daily CPIs to value these bonds on a daily
basis.
(2) During hyperinflation a
daily US Dollar (or other relatively stable foreign currency) parallel rate is always
spontaneously used by the population and in the consumer markets.
(3) Brazil, for example, used government
supplied daily indices from 1964 to 1994 to index non-monetary items on a daily
basis in the entire economy during 30 years of very high inflation and
hyperinflation of up to 2000 per cent per annum.
(4) Chile has been using a
monetized daily indexed unit of account, the Unidad de Fomento, since 1977. Its daily value is calculated and published daily by the Banco Central de Chile since 1990.
(5) Prof. Robert
Shiller stated:
‘Another coordination problem is
that we must decide, and agree, on a way to smooth the CPI. We should not
define prices just in terms of the latest CPI because the CPI is vulnerable to
sudden jumps from month to month. This is particularly true when we are talking
about indexing financial contracts to the CPI. A unit of account like the UF
would smooth out the CPI movements, otherwise there would be important jumps in
deposit balances on the dates of new announcements of the CPI. Thus, the
smoothing of the CPI in producing the UF has also been a fundamental part of
the functioning of the UF as an analogue of money.’
A Daily CPI is thus a fundamental requirement when
implementing financial capital maintenance in units of constant purchasing
power in terms of a daily rate as the basic accounting model in the economy.
Many countries issue government and commercial inflation-indexed
bonds. The
most liquid markets are US Treasury Inflation Protected Securities (TIPS), the
UK Index–linked Gilts and the French OATi/OAT€I market. Japan, Germany, Italy, Canada, Australia, Sweden, Iceland,
Portugal, Greece, Finland, Netherlands, Spain, Saudi Arabia, Qatar, Kuwait,
UAE, South Korea, New Zealand and Hong Kong also issue inflation–indexed government
bonds, as well as a number of Emerging Markets such as Brazil, Turkey, Chile,
Mexico, Colombia, Argentina and South Africa.
The British government began
issuing inflation–linked Gilts in 1981.
Most of these countries use a Daily
CPI to value these bonds on a daily basis. A Daily CPI is a one or two month
lagged, daily interpolation of the monthly published CPI.
A
country which issues inflation–indexed government bonds and uses a one or two
month lagged interpolated Daily CPI to determine the daily prices of these
bonds can use the Daily CPI (already in use in many countries for many years) for
the implementation of financial capital maintenance in units of constant
purchasing power in terms of a daily index at all levels of inflation and
deflation as proposed by the Argentinean Federation.
A
country with no inflation–indexed sovereign bond market can use a Daily CPI
based on the formula used to calculate the Unidad
de Fomento in Chile.
The Central Bank of Chile
translates the Unidad de Fomento on
their website as An Inflation–Indexed Accounting Unit and CPI–Indexed Unit of Account (UF).
The UF´s nominal value in Chilean escudos was originally (1967) updated
every quarter which would be the official rate for the following quarter. The
nominal index was updated monthly from October 1975, with the currency
changeover to pesos, till 1977. Since July 1977 the change in the nominal value
was calculated daily by interpolation between the tenth of each month and the
ninth of the following month, according to the monthly variation of the Indice de Precios al Consumidor (IPC), the Chilean
Consumer Price Index.
The Banco Central de Chile has
calculated and published the UF´s
value daily since 1990. The UF is a
monetized lagged daily interpolation of the monthly published Chilean CPI. The IPC is independently calculated and
published monthly by the Chilean National Statistical Institute.
Using
the CPI published monthly may result in sudden increases or decreases in values
on the date the new monthly CPI is published. A Daily CPI solves this problem:
it smooths the CPI. There are no surprises. The UF is a very successful monetized daily indexed unit of account used
in Chile during the last 45 years (2012) and was copied by Colombia, Ecuador, Mexico, and Uruguay.
A Daily CPI is the daily index
used to calculate the daily price of a government inflation–indexed bond in a
particular country or is based on the formula used to calculate the UF in Chile.
Formula
‘The UF is now a lagged daily
interpolation of the monthly consumer price
index. The formula for computation of
the UF on day t is:
UF
t = UF t–1 × (1+ π) 1/d
where π is the inflation rate for the
calendar month preceding the calendar month in which t falls if t is between day ten and the last day of the
month (and d is the number of
days in the calendar month in which t falls),
and π is the inflation rate for the
second calendar month before the calendar month in which t falls if t is between day one and day nine of the month (and d is the number of days in the
calendar month before the calendar month in which t falls).’ (Shiller, 1998, p.3)
The above formula applies to
the UF in Chile where the CPI for the
current calendar month used to be available on the tenth of the next calendar
month. The general case formula for a UF –
based Daily CPI is stated as follows:
On day t
DI t = DI t–1
X (1 + π) 1/d
where π is the monthly inflation rate for the second calendar
month before the calendar month in which t falls if t is on or between
day one and the day of publication of the CPI of the previous calendar month
(and d
is the
number of days in the calendar month before the calendar month in which t falls), and π is the monthly inflation rate for the calendar month
preceding the calendar month in which t falls if t is on or between
the day the CPI for the previous calendar month is published and the last day
of the month (and d is the number of days in the calendar month in which t falls).
A Daily CPI is very similar
to, but not exactly the same as a monetized daily indexed unit of account, e.g.
the UF in Chile. The UF is monetized; i.e. it is stated in
terms of the Chilean peso. A Daily CPI is not automatically monetized.
A Daily CPI is, like the
monthly CPI on which it is based, a non–monetary general price level index
value. Monetization depends on generally accepted monetary practices in an
economy (see the UF in Chile). A Daily
CPI can be monetized and used as a monetized daily indexed unit of account with
payments being made in the national monetary unit – depending on users in an
economy. Monetization is not a necessity.
A Daily CPI is not a unit of
account just like the CPI is not a unit of account for accounting purposes. The
US Dollar, Euro, Yen, Yuan, etc. are the internal nominally fixed monetary
units of account, unstable in real value, used in their respective countries as
the national unstable monetary unit of account for accounting purposes during
low inflation, high inflation, hyperinflation and deflation. The US, EU,
Japanese and Chinese CPIs are not units of account for accounting purposes.
They are non–monetary general price level indices. So are their Daily CPIs.
Prices are not quoted in CPIs or in Daily CPIs – although they can be.
Conclusion
IFRS are principles based
standards. The Argentinean Federation´s proposed new IFRS should thus state the
principles involved in financial capital maintenance in units of constant
purchasing power in terms of a Daily CPI at all levels of inflation and
deflation.
They include:
1 The real value of capital is
always equal to the real value of net assets.
2 The
capital concept to be implemented: Constant purchasing power capital.
3 The
capital maintenance concept to be implemented: Financial capital maintenance in
units of constant purchasing power in terms of a Daily CPI at all levels of
inflation and deflation.
4 The
stable measuring unit assumption is never implemented under capital maintenance
in units of constant purchasing power in terms of a Daily CPI.
5 Monetary items are units of money held and
items with an underlying monetary nature which are substitutes for units of money
held.
6
Non-monetary items are all items that are not monetary items
7
Non-monetary items are sub-divided in:
(a)
Variable real value non-monetary items and
(b)
Constant real value non-monetary items.
A variable real value
non-monetary item is a non-monetary item with a variable real value over time.
A constant real value
non-monetary item is a non-monetary item with a constant real value over time
whose value within an entity is not generally determined in a market on a daily
basis.
8
Daily measurement is required of all items in terms of:
(a) a
Daily Consumer Price Index or monetized daily indexed unit of account, e.g. the
Unidad de Fomento in Chile, during
low inflation, high inflation and deflation and
(b)
in terms of a relatively stable foreign currency parallel rate (normally the US
Dollar daily parallel rate) or a Brazilian-style Unidade Real de Valor daily index rate during hyperinflation.
Hyperinflation is defined in IAS 29 as cumulative inflation being equal to or
approaching 100 per cent over three years, i.e. 26 per cent annual inflation
for three years in a row.
Measurement
9 Historic
and current period monetary items are required to be inflation-adjusted on a
daily basis as detailed above. When they are not inflation-adjusted on a daily
basis during the current financial period then the net monetary loss or gain as
defined in IAS 29 is required to be calculated and accounted. All monetary
items of the fiat
currency created within an economy by means of fractional reserve banking except actual bank
notes and coins of this currency can be inflation-adjusted on a daily basis
within an economy. This would remove the total cost of inflation (not
inflation) from the entire money supply except from actual bank notes and coins
which generally make up about seven per cent of the money supply in advanced
economies.
10 Current
period variable real value non-monetary items are required to be measured on a
daily basis in terms of IFRS excluding the stable measuring unit assumption and
the cost model in the valuation of property, plant, equipment and investment
property after recognition. When they are not valued on a daily basis in terms
of IFRS as qualified, then they as well as historic variable real value
non-monetary items are required to be updated daily in terms of a Daily CPI as
indicated above. Current period impairment losses in variable real value
non-monetary items are required to be treated in terms of IFRS. They are
constant real value non-monetary items once they are accounted. All accounted
losses and profits are constant real value non-monetary items.
11
Historic and current period constant real value non-monetary items are always
and everywhere required to be measured in units of constant purchasing power in
terms of a Daily CPI as detailed above.
12 The
calculation and accounting of the net constant item loss or gain is required when
constant real value non-monetary items are not measured daily in terms of a
Daily CPI in units of constant purchasing power.
13 Once
an entity has started financial capital maintenance in units of constant
purchasing power in terms of a Daily CPI, it is required to continue with that
model at all future levels of inflation and deflation.
14 Entities
in economies with inflation rates below 10 per cent per annum or cumulative inflation
over three years below 26 per cent should be very strongly encouraged to
implement financial capital maintenance in units of constant purchasing power
as proposed by the Argentinean Federation. Countries should be strongly
encouraged to do this on a national basis.
15 Inflation
and deflation only affect the real value of monetary items not
inflation-adjusted and not deflation-adjusted, respectively, on a daily basis
in terms of a Daily CPI.
16 The
stable measuring unit assumption affects the real value of only constant real
value non-monetary items not maintained constant daily by means of measurement
in units of constant purchasing power in terms of a Daily CPI at all levels of
inflation and deflation.
17 The
terms ‘restatement’, ‘restated’, ‘inflation restatements’ and
‘inflation-adjustment of financial statements’ are not be used in the proposed
new IFRS.
18 The
proposed new IFRS is a departure from Historical Cost Accounting at all levels
of inflation and deflation.
I support the Argentinean
Federation´s excellent proposal as qualified in this comment letter as well as
in the attached appendix in which I suggest some improvements to the
Argentinean Federation´s proposal which would, in my opinion, result in
effective comprehensive financial capital maintenance in units of constant
purchasing power in terms of a Daily CPI at all levels of inflation and
deflation which would automatically maintain the constant real value of
shareholders´ equity constant for an indefinite period of time in all entities
that at least break even in real value at all levels of inflation and deflation
– ceteris paribus – whether they own any revaluable fixed assets or not.
An ideal title for the new IFRS would be
Capital Maintenance in Units of Constant Purchasing Power.
Please
do not hesitate to contact me if you need any further clarifications regarding
the concepts stated or any aspect of this comment letter and appendix.
Yours sincerely,
Nicolaas Smith
I promote financial
capital maintenance in units of constant purchasing power as authorized in the
original Framework (1989), Par. 104 (a) in terms of a Daily Consumer Price
Index at all levels of inflation and deflation.
CIPPA automatically
maintains the constant purchasing power of shareholders´ equity constant for an
indefinite period of time in all entities that at least break even in real
value at all levels of inflation and deflation – ceteris paribus – whether they
own any revaluable fixed assets or not.
Appendix: Suggested improvements to the draft IFRS prepared by the Special Commission created by the Federación Argentina de Consejos
Profesionales de Ciencias Económicas (September 2010) to replace IAS 29 Financial Reporting in Hyperinflationary Economies.
My suggested
improvements are in italics.
Reasons for
issuing the [Preliminary Draft] IFRS
IN2
The International Accounting Standards Board (IASB)
undertook this project for these reasons:
(a) at present, IAS 29 applies only to the financial
statements of an entity whose functional currency is the currency of a
hyperinflationary economy;
(b) in financial
reporting statements:
(i) only monetary items not inflation-adjusted in
terms of a daily index or rate may be materially affected by changing
prices inflation and
(i) only constant
real value non-monetary items not maintained constant by means of capital
maintenance in units of constant purchasing power in terms of a daily index or
rate during inflation may be materially affected by the stable measuring unit
assumption in economies that are inflationary but not
“hyperinflationary”, as this term is characterized in IAS 29;
(c) currently,
there is neither requirement nor encouragement to disclose and to stop the effect of:
(i) (high) inflation on only monetary items not inflation-adjusted in terms of a daily index
or rate and
(ii) the
effect of the stable measuring unit assumption on only constant real value
non-monetary items not maintained constant by means of capital maintenance in units
of constant purchasing power in terms of a daily index or rate during inflation
before an economy becomes hyperinflationary and IAS 29
must be applied;
(d) it is difficult to justify a different accounting treatment when high
inflation but not hyperinflation exists;
(e) Inflation restatements Measures to remedy the effects of:
(i) inflation
on only monetary items not inflation-adjusted in terms of a daily index or rate
and
(ii) the
stable measuring unit assumption on only constant real value non-monetary items
not maintained constant in terms of a daily index or rate during inflation are
already required in some countries where IFRSs are mandatory or are expected to
be mandatory for some issuers of financial statements.
Main features
of the [Preliminary Draft] IFRS
IN3
The main objective of this [Preliminary Draft] IFRS is
to require that, when the inflation rate accumulated in certain periods reaches
certain limits, comprehensive inflation restatements capital maintenance in units of constant purchasing
power in terms of a daily index or rate be performed.
Significant
changes to previous IFRS
IN4
This [Preliminary Draft] IFRS:
(a) requires inflation restatements capital maintenance in units of constant purchasing
power in terms of a daily index or rate in
environments where they are not mandatory according to IAS 29;
(b) explicitly specifies that inflation
restatements are once an entity has
adopted capital maintenance in units of
constant purchasing power in terms of a daily index or rate, a return to capital
maintenance in nominal monetary units is prohibited unless certain
conditions are met.
Benefits and
costs
IN5
The application of this [Preliminary Draft] IFRS in financial reporting will significantly
enhance the usefulness of financial statements maintain the constant purchasing power of shareholder´s equity constant
for an indefinite period of time in all entities that at least break even in
real value at all levels of inflation and deflation – ceteris paribus – and
will initially increase the
accounting costs of each issuer of
financial statements only by a small percentage of its annual total.
Effective
date
IN6
An entity shall apply this [Preliminary Draft] IFRS
for annual periods beginning on or after 1 January 201X. Earlier application is
encouraged. An entity that applies this [Preliminary Draft] IFRS for a period
beginning before 1 January 201X shall disclose this fact.
Invitation to
comment
The IASB invites to make comments on all matters
included in this [Preliminary Draft] IFRS, particularly on the questions set
out below. Comments are most helpful if they:
(a) Refer to the questions as stated;
(b) Indicate the specific paragraph or paragraphs to
which each comment relates;
(c) Contain a clear rationale;
(d) Include any alternative the Board should consider,
if applicable.
Respondents should submit comments in writing for them
to be received no later than [date to be determined by IASB]
Question 1) – [to be developed by IASB]
Question 2) – [to be developed by IASB]
Question …
[Preliminary Draft] International Financial Reporting
Standard X Inflation Capital
Maintenance in Units of Constant Purchasing Power ([Preliminary Draft] IFRS
X) is set out in paragraphs 1-50. All the paragraphs have equal authority.
Paragraphs in bold type state the main principles. Terms defined in Appendix A
are in italics the first time they appear in the [Preliminary Draft] IFRS. Definitions
of other terms are given in the Glossary for International Financial Reporting
Standards. [Preliminary Draft] IFRS X should be read in the context of its Core
Principle and the Basis for Conclusions, the Preface to International Financial
Re-porting Standards and the Conceptual Framework
for the Preparation and Presentation of Financial Statements Reporting. IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors provides a basis for selecting and
applying accounting policies in the absence of explicit guidance.
[PRELIMINARY
DRAFT] INTERNATIONAL FINANCIAL REPORTING STANDARD X INFLATION CAPITAL MAINTENANCE IN UNITS OF CONSTANT
PURCHASING POWER
Core Principles
1
General level of prices may increase (inflation) or
decrease (deflation). For convenience purposes, this [Preliminary Draft] IFRS
refers to inflation effects, but the concepts included below are also applicable
to deflation effects2.
2
An entity shall recognize the effects of inflation of its functional currency on its financial
statements implement capital
maintenance in units of constant purchasing power in terms of a daily index or
rate in financial reporting , if and only if when the conditions described in paragraph 5 are met.
Scope
3
This
[Preliminary Draft] IFRS shall be applied by all entities when preparing
consolidated or separate financial statements for a financial year or an
interim period.
4
This [Preliminary Draft] IFRS does not deal with
translations of measurements made in a functional currency to a different
presentation currency. This issue is covered by IAS 21 The Effects of Changes
in Foreign Exchange Rates.
5
An entity
shall perform comprehensive inflation restatements capital maintenance in units of constant purchasing power in terms of a
daily index or rate when:
(a) The
cumulative inflation rate of its functional currency for the last 12 months is
equal or higher than 10%; or
(b) The
cumulative inflation rate of its functional currency for the last 36 months is
equal or higher than 26%. ; or
Entities in economies with inflation rates below 10 per cent per annum
or cumulative inflation over three years below 26 per cent are strongly
encouraged to implement financial capital maintenance in units of constant
purchasing power in terms of this IFRS.
6
An entity, once it has adopted capital maintenance in
units of constant purchasing power in terms of a daily index or rate as defined
in this IFRS shall not perform any inflation restatement discontinue it when none of the
conditions described in paragraph 5 is subsequently
met.
7
Therefore, the following decision tree should be
considered:
START
|
Is the cumulative inflation rate for the
last | Yes
12 months equal or higher than 10%? |-----------------------|
No
|
|
Is the cumulative inflation
rate for the last | Yes |
36 months equal or higher than 26%? |------------------------|
No
|
|
Were the preceding financial statements | |
prepared in terms of capital maintenance |
Yes |
in units of constant purchasing power in |------------------------|
in terms of this IFRS? | |
No |
|
Entity is strongly encouraged to
implement|
|
capital maintenance in units of
constant |------------------------|
purchasing power in terms of this
IFRS. | |
|
|
|
V
Implement capital maintenance
in units
of constant
purchasing power in terms
of this
IFRS.
Method
Main rule
8
An accounting
measure of an item in a set of financial statements reporting, shall be restated measured in terms of capital maintenance in
units of constant purchasing power in terms of a daily index or rate as defined
in this IFRS by using a coefficient obtained by dividing:
(a) the daily price index or rate (e.g. a relatively
stable foreign currency daily parallel rate during hyperinflation) corresponding
to the current (today´s) date of
for the item or financial statements by
(b) the daily price index or rate corresponding to the date of the purchasing power in which
the measure is stated prior to the restatement process the
current (today´s) date.
Financial
statements should ideally never be printed on hard copy. They should ideally always
be available only in electronic format with automatic daily inflation-adjusting
of monetary items, daily updating of variable items and daily measurement of
constant items in units of constant purchasing power in terms of a daily index
or rate always at the current (today´s) date.
9
The
date of the purchasing power in which a measure is stated prior to the
restatement process measurement in
terms of capital maintenance in units of constant purchasing power in terms of
a daily index or rate may be the date of a transaction, the date of the
last said measurement or the date
of a previous restatement for inflation (i.e. the previous day or the date of the previous financial statements
or, when the restatements said measurements
are computed on a monthly basis, the
end of the previous month) provided that
items in daily accounting entries, accounting records and financial reports are
always measured in terms of the current (today´s) daily index or rate when
accessed or viewed at the current date (today) in any way or form.
10
For the purpose of applying paragraph 8, restatements
daily transactions shall be accounted in
terms of capital maintenance in units of constant purchasing power in terms of
a daily index or rate as defined in this IFRS. Financial reports can be
performed and recorded prepared each month (see [not yet
developed] Appendix B), or they can be performed at the date of the interim or annual financial statements shall be prepared in terms of capital
maintenance in units of constant purchasing power in terms of a daily index or
rate and accessed and viewed on the date of the report in terms of the daily
rate on that day and thereafter always updated at the current (today´s) daily
index or rate. In this last case, transactions shall be generally
grouped by month, and monthly price indexes shall be used. However:
When daily price
indexes related to the grouping periods are not available, they shall be
estimated calculated by averaging, means of a lagged daily interpolation or extrapolation of the monthly published Consumer Price
Index, e.g. based on the formula used to calculate the Unidad de Fomento in
Chile as follows:
On day t
DI t
= DI t–1 X (1 + π) 1/d
where
π is the monthly inflation rate for the second calendar
month before the calendar month in which t falls if t is on or between day one and the day of publication of
the CPI of the previous calendar month (and d is the number of days in the calendar month before the
calendar month in which t falls), and π is
the monthly inflation rate for the calendar month preceding the calendar month
in which t falls if t is on or between the day the CPI for the previous
calendar month is published and the last day of the month (and d is the number
of days in the calendar month in which t falls).
11
Before applying rule 8, financial statements of other
entities used as basis for measurement when using the equity method or the
proportionate consolidation method, shall be prepared according to this
[Preliminary Draft] IFRS.
12
The daily price index or rate
13
The daily price index or rate used to compute the inflation restatements measurements in terms of capital
maintenance in units of constant purchasing power required by this [Preliminary Draft] IFRS
shall:
(a) be the
same for all financial statements reporting
issued in a particular country;
(b) give a
reliable representation of the daily changes
in the purchasing power of the functional currency of the issuer of the
financial statements;
(c) be
prepared on the basis of a broad basket of goods and services;
(d) be
prepared and issued on a regular daily
basis by an entity with recognized independence and seriousness;
(e) be
available daily when it is needed.
14
In some others, a lagged
daily interpolated wholesale price index will be more representative.
A relatively
stable foreign currency daily parallel rate, normally the US Dollar parallel
rate, should be used in hyperinflationary economies where the government does
not make a Brazilian-style Unidade Real de Valor index available to the
population on a daily basis.
15
When the functional currency of the entity is the
legal currency of two or more countries, the daily price index to be used shall represent a weighted average of
the changes in the purchasing power of that currency in all those countries. If
an average daily index is not
available, the daily index to be used
shall be the most representative of the inflation in the nation where the
currency has been issued.
16
The Board suggests that the daily index to be used in each country or region be selected by
each standard setter. When choosing the daily price index, special
consideration should be given to the fact that some consumer price indexes are
affected by governmental price controls.
Application
of the main rule
17
Carrying
amounts measured in terms of the daily
purchasing power of the functional currency at the closing date of the
financial statements shall not be restated remeasured when the financial statements and the related notes are accessed or viewed on that date. Thereafter
they are measured in terms of this IFRS on a daily basis in terms of the
current (today´s) rate.
18
The preceding rule applies usually to accounting
measures of:
(a) cash and cash equivalents (including the closing
balance shown in the statement of cash flows);
(b) assets or liabilities measured at their fair
values, their fair values less costs to sell, their present values or by
applying the effective interest method;
(c) interests in other entities measured by using the
equity method or the proportionate consolidation method, when applied on
amounts stated in terms of the purchasing power of the functional currency at
the closing date of the financial statements or the reporting entity;
(d) assets stated at their recoverable amounts
calculated at the closing date.
19
Accounting
measures stated in terms of the purchasing power of the functional currency at
a previous date shall be restated measured
in terms of this IFRS by applying paragraph 8.
20
The preceding rule applies usually to accounting
measures of:
(a) contributions from (or distributions to) owners;
(b) revenue;
(c) cost of assets;
(d) expenses;
(e) interests in other entities measured by using the
equity method or the proportionate consolidation method, when applied on
amounts stated in terms of the purchasing power of the functional currency at a
date prior to the closing date of the financial statements or the reporting
entity;
(f) comparative information in respect of previous
periods;
(g) the opening balance of cash and cash equivalents
shown in the statement of cash flows;
(h) increases and decreases of cash and cash
equivalents shown in the statement of cash flows.
21
The purchasing power of a previous measure may
correspond to the date of its recording or to a previous date. For example,
the purchasing power of a (non-adjusted) charge to income for the depreciation
of a machine is the purchasing power in which its cost is expressed, regardless
of the period in which the depreciation is recognized as an expense.
[This applies
to Historical Cost Accounting.]
22
When IFRSs are applied for the first time, the
consequences of any partial inflation restatement revaluation
included in any measurement must be eliminated before applying paragraph 8,
unless such inflation restatement measurement
is a component of a deemed cost determined under IFRS 1.
23
When a previous inflation restated measurement in terms of capital maintenance in
units of constant purchasing power in terms of a daily index or rate is
available, the corresponding adjusted figure at the date of the financial
statements may be obtained by restating
measuring the previous accounting
measure from the date of its previous restatement measurement in terms of capital maintenance in units of constant
purchasing power in terms of a daily index or rate to the closing date of the financial
statements when they are accessed or
viewed on the closing date. Thereafter they are always accessed or viewed at
the current (today´s) rate. This is the standard procedure when adjusting
comparative information in respect of previous periods.
24
Accounting
measures resulting from the addition of two or more measures shall be restated
valued as follows:
(a) each
individual measure shall be restated
valued in terms of capital maintenance in units of constant purchasing power in
terms of a daily index or rate by applying paragraph 8;
(b) a new
addition shall be made using the restated measurements obtained in the
previous step.
25
The preceding rule applies principally to accounting
measures that accumulate amounts originated in several periods, such us:
(a) finished goods;
(b) construction in progress;
(c) property, plant and equipment;
(d) contributions from owners;
(e) income;
(f) expenses;
(g) cash flows.
26
When
required, comparisons between carrying amounts and recoverable amounts of
assets shall be made after restating
measuring carrying amounts in accordance with this [Preliminary Draft]
IFRS.
27
Holding gains
and losses shall be computed and
accounted after restating measuring carrying amounts,
respectively, in accordance with this [Preliminary Draft] IFRS.
28
Accounting
measures resulting from the comparison of two or more measures shall be restated
valued as follows:
(a) each
measure compared shall be restated valued
by applying paragraph 8;
(b) a new
comparison shall be made using the restated measurements obtained in the
previous step.
29
The preceding rule applies mainly to accounting
measures of:
(d) inflation losses or gains on cash balances or other net monetary item assets or
net monetary item liabilities not
inflation-adjusted on a daily basis in terms of a daily index or rate (that
have a nil amount in the non-adjusted financial statements);
[There are no
‘non-adjusted’ financial statements under capital maintenance in units of
constant purchasing power. The stable measuring unit assumption is not
implemented under this IFRS. Current period monetary items not
inflation-adjusted daily are stated at their nominal values and the net
monetary gain or loss is calculated. The same is true for constant items not
measured daily in units of constant purchasing power. The constant item loss or
gain is calculated. ]
(j) net
constant real value non-monetary item losses or gains.
30
[Financial
revenues, interest earned, impairment losses, gains or losses from the disposal
of assets, other gains or losses recognized in comprehensive income, gains or
losses from the reclassification of assets to the class of non-current assets
held for sale, reversals of impairment losses, exchange differences and
borrowing costs are not monetary items. They are constant real value
non-monetary items. Inflation has no effect on the real value of non-monetary
items.]
31
32
Presentation
and disclosure
33
All items in a
set of financial statements presented using the functional currency shall be stated
measured in terms of the daily purchasing power of that currency
at the end of the reporting period when
the financial statements are accessed or viewed at the closing date. Thereafter
monetary items shall be inflation-adjusted, variable items shall be updated and
constant items shall be measured in units of constant purchasing power daily in
terms of the current (today´s) daily index or rate.
34
The preceding rule applies to comparative information.
35
Disclosure of non-adjusted amounts of items in the
financial statements and the related notes, with the exception of monetary items not
inflation-adjusted on a daily basis in terms of a daily index or rate during
the current financial period, is prohibited, unless required by a law or
regulation. When such a requirement exists:
(a) the adjusted amount measured in terms of this IFRS of an item shall be disaggregated
between the amount required by the law or regulation and the difference with
the restated amount measured in
terms of this IFRS; or
(b) the amount required by the law or regulation shall
be reported using brackets.
36
37
When an entity presents its financial statements using
a currency other than its functional currency, the measures made in terms of
the purchasing power of the functional currency shall be translated to the
presentation currency by applying IAS 21.
38
An entity
that applies the comprehensive method of inflation restatement capital maintenance in units of constant purchasing
power in terms of a daily index or rate shall disclose:
(a) this
fact;
(b) when
financial statements and the related
notes are presented using the functional currency, the fact that all their
items were restated measured in
terms of capital maintenance in units of constant purchasing power in terms of
a daily index or rate for to
reflect the daily changes in the
general purchasing power of the functional currency and, as a result, are
stated in terms of the daily purchasing
power at the end of the reporting period updated
at the current (today´s) rate;
(c) when
financial statements are presented using another currency:
(1) the fact
that all their items were restated measured
in terms of capital maintenance in units of constant purchasing power in terms
of a daily index or rate for to
reflect the daily changes in the
general purchasing power of the functional currency; and
(2) an
explanation of the rules applied to translate the resulting figures to the
presentation currency;
(d) the
identification of the daily price
index or rate used to compute the inflation
restatements measurements in terms of
capital maintenance in units of constant purchasing power in terms of a daily
index or rate as defined in this IFRS and its percent change along all the
periods covered by the financial statements.
39
The disclosures required by this Standard shall make
clear the basis of dealing with the effects of:
(i)
inflation on only monetary items not inflation-adjusted daily in terms of a daily
index or rate and
(ii)
the
stable measuring unit assumption on only the constant real values of constant real
value non-monetary items not measured daily in units of constant purchasing power
in terms of a daily index or rate in terms of this IFRS in
the financial statements.
They are also intended to provide other information
necessary to understand that basis and the resulting amounts.
Effective
date and transition
40
An entity
shall apply this [Preliminary Draft] IFRS to its annual or interim financial
statements for periods beginning on or after 1 January 201X. Earlier application
is permitted. If an entity applies this [Preliminary Draft] IFRS to its
financial statements for a period before 1 January 201X, it shall disclose this
fact.
First
application of this [Preliminary Draft] IFRS
41
An entity
shall perform comprehensive inflation restatements capital maintenance in units of constant purchasing power in terms of a
daily index or rate to as reported in the financial statements of an
annual or interim period in which the conditions described in paragraph 5 are
met, except as permitted by the next paragraph.
42
When preparing interim financial statements, an entity
may depart from the requirement in paragraph 41, if the conditions described in
paragraph 5 are met in the closing month and the timely completion of the
restatements is impracticable. If so, the fact will be disclosed in the
affected financial statements and the following financial statements of the
entity shall be prepared according to this [Preliminary Draft] IFRS.
43
An entity
shall apply this [Preliminary Draft] IFRS retrospectively in accordance with the
requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors, except as permitted by paragraph 46.
44
As required by paragraph 10(f) of IAS 1 Presentation
of Financial Statements, the first financial statements prepared by applying
this [Preliminary Draft] IFRS shall include a statement of financial position
as at the beginning of the earliest period for which it presents comparative
information, which is the date of transition to this [Preliminary
Draft] IFRS.
45
When preparing the statement of financial position at
the date of transition to this [Preliminary Draft] IFRS and the subsequent
statements of financial position, an entity shall:
(a) remeasure deferred tax assets and liabilities
recognized under IAS 12 Income Taxes by comparing (at the closing date of each
period updated at the current (today’s)
rate) the restated carrying amounts measured in terms of this IFRS of assets and liabilities with their
related taxable basis;
(b) assess if comparisons of the restated
carrying amounts of assets measured in
terms of this IFRS with their recoverable values are needed and, if so,
apply IAS 36.
46
When preparing the statement of financial position at
the date of transition to this [Preliminary Draft] IFRS, an entity may:
(a) for inventories, use their replacement cost as
their deemed historical cost restated measured in terms of this IFRS at the date of transition for this
[Preliminary Draft] IFRS, provided that the inflation restatement measurement in terms of this IFRS of the
real historical costs is impracticable;
(b) for items in property, plant and equipment carried
using the cost model in the previous Historical
Cost or Current Cost financial statements, use their fair value as their
deemed historical cost restated measured
in terms of this IFRS at the date of transition, provided that the inflation
restatement measurement in terms of
this IFRS of the real historical costs is impracticable;
(c) for investment property carried using the cost
model in the previous HCA or CC financial
statements, use their fair values as their deemed historical cost restated
measured in terms of this IFRS at the
date of transition, provided that the inflation restatement measurement in terms of this IFRS of the
real historical costs is impracticable;
(d) for cumulative translation differences recognized
in other comprehensive income under IAS 21, assume that their restated
amount is nil apply good judgement in
determining a current amount, provided that its recalculation is
impracticable.
Ceasing and restarting of inflation restatements capital maintenance in units of constant purchasing
power in terms of a daily index or rate
47
An entity that performed comprehensive inflation
restatements capital maintenance in
units of constant purchasing power in terms of a daily index or rate in terms
of this IFRS when preparing the financial statements of the preceding
annual (or part thereof or greater than)
period shall continue that implementation
at all future levels of inflation and deflation. discontinue the
restatements if, at the beginning of the current annual period, the cumulative
inflation rate of its functional currency has been lower than 15% during the
last 36 months.
48 When inflation restatements are discontinued,
the amounts expressed in the measuring unit prevailing at the end of the
previous reporting period shall be used as the basis for the carrying amounts
in its subsequent financial statements.
49
Withdrawal of IAS 29 and IFRIC Interpretation 7
50
This [Preliminary Draft] IFRS supersedes IAS 29
Financial Reporting in Hyperinflationary Economies and IFRIC Interpretation 7
Applying the Restatement Approach under IAS 29 Financial Reporting in
Hyperinflationary Economies.
Appendix A –
Defined terms
This appendix is an integral part of the IFRS.
amortized
cost
The amount at which a financial asset or a financial
liability is measured at initial recognition minus principal repayments, plus
or minus the cumulative amortization using the effective interest method of any
difference between that initial amount and the maturity amount, and minus any
reduction (directly or through the use of an allowance account) for impairment
or uncollectibility.
capital
The real
value of capital is always equal to the real value of net assets.
capital
maintenance in units of constant purchasing power
Maintenance of the constant
purchasing power of capital in units of constant purchasing power in terms of a
daily index or rate at all levels of inflation and deflation which maintains
the constant purchasing power of capital constant for an indefinite period of
time in all entities that at least break even in real value at all levels of
inflation and deflation – ceteris paribus – whether they own any revaluable
fixed assets or not.
carrying
amount
The amount at which an asset or a liability is
measured in the accounting records.
constant purchasing power capital
Capital
measured in units of constant purchasing power in terms of a daily index or
rate.
constant real value
non-monetary item
A non-monetary item with a constant real value over
time whose value within an entity is not generally determined in a market on a
daily basis.
daily consumer price
index
A lagged, daily interpolation of the monthly published
Consumer Price Index.
date of
transition to this [Preliminary Draft] IFRS
The beginning of the earliest period for which an
entity presents full comparative information prepared using this [Preliminary
Draft] IFRS.
deemed
historical cost
An amount used as a surrogate for historical cost or
depreciated historical cost at a given date.
deflation effect
The creation
of real value in only monetary items not deflation-adjusted in terms of a daily
index rate.
effective
interest method
A method of calculating the amortized cost of a financial
asset or a financial liability (or group of financial assets or financial
liabilities) and of allocating the interest income or interest expense over the
relevant period.
fair value
The amount for which an asset could be exchanged or a
liability settled, between knowledgeable, willing parties in an arm’s length
transaction.
fair value
less costs to sell
The amount obtainable from the sale of an asset or
cash-generating unit in an arm’s length transaction between knowledgeable,
willing parties, less the costs of disposal.
functional
currency
The currency of the primary economic environment in
which the entity operates, according to IAS 21.
impracticable
Applying a requirement is impracticable when the
entity cannot apply it after making every reasonable effort to do so.
inflation effect
The erosion
of the real value of only monetary items not inflation-adjusted daily in terms
of a daily index or rate.
inflation
rate
Percentage of increase in the figure of the chosen consumer price index between two dates.
monetary items
Units of money held
and items with an underlying monetary nature which are substitutes for units of
money held.
money held
Bank notes and coins
of the fiat currency created within an economy by means of fractional reserve
banking.
non-monetary items
All items
that are not monetary items.
price index
A number that shows the variations in the prices of a
set of products and services over time.
present value
A current estimate of the present discounted value of
the future net cash flows in the normal course of business.
recoverable
amount
The higherst of an asset’s (or cash-generating
unit’s) fair value less costs to sell and its value in use.
stable measuring unit assumption
Assumes that
changes in the purchasing power of money are not sufficiently important to
require capital maintenance in units of constant purchasing power in terms of a
daily index or rate at all levels of inflation and deflation. The stable
measuring unit assumption is never implemented under capital maintenance in
units of constant purchasing power in terms of a daily index or rate.
value in use
The present value of estimated future cash flows
expected to arise from the continuing use of an asset and from its disposal at
the end of its useful life.
variable real value
non-monetary item
A non-monetary item with a variable real value over
time.
Elaborations on the Defined Terms
cost of inflation
The cost of the erosion of the real value of only
monetary items not inflation-adjusted daily in terms of a daily index or rate.
cost of the stable
measuring unit assumption
The cost of the erosion of the real value of only
constant real value non-monetary items not measured in units of constant
purchasing power in terms of a daily index or rate currently still generally
confused with or seen as the same as the cost of inflation which is not
calculated and accounted under Historical Cost Accounting during low inflation
and deflation.
Daily measurement is required
of all items in terms of
(a) a Daily Consumer Price
Index or monetized daily indexed unit of account, e.g. the Unidad de Fomento in
Chile, during low inflation, high inflation and deflation and
(b) in terms of a relatively
stable foreign currency parallel rate (normally the US Dollar daily parallel
rate) or a Brazilian-style Unidade Real de Valor daily index during
hyperinflation. Hyperinflation is defined in IAS 29 as cumulative inflation
being equal to or approaching 100 per cent over three years, i.e. 26 per cent
annual inflation for three years in a row.
Monetary
items
Examples of units of money held are bank notes and
coins of the fiat currency created within an economy by means of fractional
reserve banking. Examples of items with an underlying monetary nature which are
substitutes of money held include the capital amount of: bank loans, bank
savings, credit card loans, car loans, home loans, student loans, consumer
loans, commercial and government bonds, Treasury Bills, all capital and money
market investments, notes payable, notes receivable, etc. when these items are
not in the form of money held.
Measurement
Historic and current period
monetary items are required to be inflation-adjusted on a daily basis in terms
of a daily index or rate. The net monetary loss or gain as defined in IAS 29 is
required to be calculated and accounted when they are not inflation-adjusted on
a daily basis during the current financial period. Inflation-adjusting the total money supply (excluding bank notes and
coins of the fiat functional currency created by means of fractional reserve
banking within an economy) in terms of a daily index or rate under complete
co-ordination would result in zero cost of inflation (not zero inflation) in
only the entire money supply (as qualified) in an economy.
Variable
real value non-monetary items
Examples include quoted and unquoted shares, property,
plant, equipment, inventory, intellectual property, goodwill, foreign exchange,
finished goods, raw material, etc.
Measurement
Current period variable real value
non-monetary items are required to be measured on a daily basis in terms of
IFRS excluding the stable measuring unit assumption and the cost model in the
valuation of property, plant, equipment and investment property after
recognition. When they are not valued on a daily basis, then they as well as
historic variable real value non-monetary items are required to be updated
daily in terms of a daily rate as indicated above. Current period impairment
losses in variable real value non-monetary items are required to be treated in
terms of IFRS. They are constant real value non-monetary items once they are
accounted. All accounted losses and profits are constant real value
non-monetary items.
Constant
real value non-monetary items
Examples include borrowing costs, comprehensive
income, interest paid, interest received, bank charges, royalties, fees, short
term employee benefits, pensions, salaries, wages,
rentals, all other income statement items, issued share capital, share premium
accounts, share discount accounts, retained earnings, retained losses, capital
reserves, revaluation surpluses, all accounted profits and losses, all other items in
shareholders´ equity, trade debtors, trade creditors, dividends payable,
dividends receivable, deferred tax assets, deferred tax liabilities, all taxes
payable, all taxes receivable, all other non-monetary payables, all other
non-monetary receivables, provisions, etc.
Measurement
Historic and current period
constant real value non-monetary items are always and everywhere required to be
measured in units of constant purchasing power in terms of a daily rate as
indicated above.
[Not yet
developed] Appendix B – Methods to perform restatements capital maintenance in units of constant purchasing
power in terms of a daily index or rate.
[Not yet
developed] Appendix C – Illustrative examples
Appendix D – Modifications
to other IFRSs
This appendix is an integral part of the IFRS.
D1
In IAS 1 Presentation of Financial Statements,
paragraphs 51(d)-(e) are replaced by the following:
(d) the presentation currency, as defined in IAS 21;
(e) whether the financial statements reflect
(i) the inflation effects (cost) of inflation on only monetary items not inflation-adjusted daily
in terms of a daily index or rate
and
(ii) the
effects (cost) of the stable measuring unit assumption on only constant real
value non-monetary items not measured in terms of financial capital maintenance
in units of constant purchasing in terms of a daily index or rate
and, if so, the method used and the other disclosures
required by [Preliminary Draft] IFRS X Inflation Capital Maintenance In Units of Constant Purchasing Power; and
(f) the level of rounding used in presenting amounts
in the financial statements.
D2
In IAS 7 Statement of Cash Flows, the following
paragraphs are added:
10A. When an
entity performs the inflation restatements capital maintenance in units of constant purchasing power in terms of
a daily index or rate described in IFRS X Inflation Capital Maintenance in Units of Constant
Purchasing Power, all the amounts presented in the face of the statement of
cash flows or in the related notes shall be measured in terms of the purchasing
power of the functional currency at the date of the financial statements when they they are accessed or viewed on
that date and thereafter updated at the current date´s (today´s) daily rate.
19A. When an entity performs the inflation
restatements capital maintenance in
units of constant purchasing power in terms of a daily index or rate described
in IFRS X Inflation Capital
Maintenance in Units of Constant Purchasing Power, and the statement of
cash flows is presented using the direct method, the inflation gains and losses
on cash and cash equivalents shall be disclosed separately and assigned to cash
flows of operating activities.
D3
[Borrowing
Costs is not a monetary item. It is a constant real value non-monetary item.
Inflation has no effect on the real value of non-monetary items.]
D4
In the rest of the components of the IFRSs:
(a) references to IAS 29 Financial Reporting in
Hyperinflationary Economies are
3 This appendix was prepared considering the IFRSs
issued up to July 31, 2010.
changed to [Preliminary Draft] IFRS X Inflation
Capital Maintenance in Units of Constant
Purchasing Power;
(b) the word “hyperinflationary” is changed to
“inflationary”;
(c) the word “hyperinflation” is changed to
“inflation”.
D5
In The Conceptual Framework for Financial Reporting
(2010)
Concepts
of capital maintenance and the determination of Profit
Paragraph 4.59, 4.62 and
4.63 are amended as follows:
4.59 Financial capital maintenance can be measured in either nominal
monetary units or units of constant purchasing power.
The concepts of capital in paragraph 4.57 give rise to the following three concepts of capital maintenance:
(a)
Financial capital maintenance in nominal
monetary units
Under this concept a profit is earned only if the financial (or money)
amount of the net assets at the end of the period exceeds the financial (or
money) amount of net assets at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period.
(b)
Financial capital maintenance in units of constant purchasing power
Under this concept a profit is earned only if the
constant purchasing power of the net assets at the end of the period exceeds
the constant purchasing power of net assets at the beginning of the period,
after excluding any distributions to, and contributions from, owners during the
period.
(c)
Physical capital maintenance. Under
this concept a profit is earned only if the physical productive capacity (or
operating capability) of the entity (or the resources or funds needed to
achieve that capacity) at the end of the period exceeds the physical productive
capacity at the beginning of the period, after excluding any distributions to,
and contributions from, owners during the period.
4.62 The principal difference between the three concepts of capital maintenance is the treatment of the
effects of changes in the prices of assets and liabilities of the entity. In
general terms, an entity has maintained the
constant purchasing power of its capital if it has as much constant purchasing power capital at the
end of the period as it had at the beginning of the period. Any amount over and
above that required to maintain the constant
purchasing power of its capital at the beginning of the period is profit.
D6
Paragraph OB2 of the Conceptual Framework for
Financial Reporting is amended as follows:
OB2 The objectives of general
purpose financial reporting* are
(a)
maintaining the constant purchasing power of capital
in units of constant purchasing power in terms of a daily index or rate and
(b) to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the entity. Those
decisions involve buying, selling or holding equity and debt instruments, and
providing or settling loans and other forms of credit.
D7
In the Measurement Chapter in the Conceptual Framework
for Financial Reporting ‘units of constant purchasing power in terms of a Daily
Consumer Price Index’ is added as a fundamental measurement basis.
Appendix E –
Modifications to material accompanying other IFRSs
E1
Paragraph 18 of appendix A to IAS 12 Income Taxes and
the preceding title are amended as follows:
18. Some Assets
and equity accounts are restated measured
by implementing capital maintenance in units of constant purchasing power in
terms of a daily index or rate in terms of the purchasing power of the
functional currency at the date of the financial statements when they are accessed or viewed on that day
and afterwards updated at the current (today´s) rate (see IFRS X Inflation
Capital Maintenance in Units of Constant
Purchasing Power) for accounting purposes but not for tax purposes. (Note:
The Standard requires an entity to account for the tax consequences of
transactions and other events in the same way as it accounts for the
transactions and other events themselves. Thus, for transactions and other
events recognized in profit or loss, any related tax effects are also
recognized in profit or loss. For transactions and other events recognized
outside profit or loss, either in other comprehensive income or directly in
equity, any related tax effects are also recognized outside profit or loss,
either in other comprehensive income or directly in equity, respectively).
E2
In paragraph BC40 of the basis for conclusions of IAS
39 Financial Instruments: Recognition and Measurement, the phrase “(see IAS 29
Financial Reporting in Hyperinflationary Economies)” is deleted.
E3
In the rest of the material accompanying IFRSs:
(a) references to “IAS 29 Financial Reporting in
Hyperinflationary Economies” are changed to “[Preliminary Draft] IFRS X Inflation
Capital Maintenance in Units of Constant
Purchasing Power”;
(b) the word “hyperinflationary” is changed to
“inflationary”;
(c) the word “hyperinflation” is changed to
“inflation”.
***********************************************************************
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