Friday, 20 April 2012

HCA should be banned during hyperinflation

IAS 29 Financial Reporting in Hyperinflationary Economies is not a departure from, but an extension to Historical Cost Accounting.

The only way a country with a hyperinflationary economy can maintain its variable item and constant item economies relatively stable during hyperinflation is by continuously measuring all non–monetary items (variable and constant items) in units of constant purchasing power. The real economy would still be affected by the stable measuring unit assumption in constant items never maintained constant at a rate of real value erosion equal to the annual rate of inflation of the hard currency used for determining the parallel rate, normally the US Dollar.

The real economy can be maintained relatively stable during hyperinflation in the local currency monetary unit not by restating Historical Cost or Current Cost financial statements at the end of the reporting period in terms of the period–end monthly published CPI to make them ‘more useful’ as required by IAS 29, but, by applying the daily parallel US Dollar or other hard currency exchange rate, or – as was done in Brazil during the 30 years of very high and hyperinflation from 1964 to 1994 – with daily indexation.

Daily indexation is, in principle, better than applying the daily US Dollar parallel rate. Daily indexation in terms of a Brazilian-style Unidade Real de Valor daily index would keep the real economy more stable: the erosion of the real value of constant items never maintained constant caused by the stable measuring unit assumption as applied to the US Dollar parallel rate is eliminated in the formulation of the index value when the CPI is included in the formula as it was in the case of the URV.

Nicolaas Smith

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