IFRS and US GAAP authorised CMUCPP maintains the constant purchasing power of constant real value non-monetary items (e.g. capital, all items in shareholders´ equity, provisions, salaries, wages, pensions, taxes, trade debtors/creditors, etc) in terms of a Daily CPI in entities that at least break even in real value during low and high inflation, hyperinflation and deflation - ceteris paribus. European Accounting Assoc: "Capital maintenance is a competing objective of financial reporting."
The stable measuring unit assumption
is applied in the valuation of constant real value non–monetary items, e.g.,
salaries, wages, rentals, equity, trade debtors, trade creditors, taxes
payable, etc. during hyperinflation when these items are not updated at all or
not fully updated during hyperinflation; i.e., when the HCA model is
implemented during hyperinflation as mistakenly approved in IAS 29 and
mistakenly supported by Big Four accounting firms like PricewaterhouseCoopers.
PricewaterhouseCoopers state the following regarding the
use of the HCA model during hyperinflation:
financial statements are an extension to, not a departure from, historic cost accounting. IAS 29 seeks to overcome the limitations of
historic cost financial reporting in hyperinflationary conditions.’
Financial Reporting in Hyperinflationary Economies –
Understanding IAS 29, PricewaterhouseCoopers, 2002, p 5.
IAS 29 states:
‘The financial statements of an entity whose
functional currency is the currency of a hyperinflationary economy, whether
they are based on a historical cost approach or a current cost approach shall
be stated in terms of the measuring unit current at the end of the reporting
IAS 29, Par 8.
is absolutely clear from the above quotes that IFRS approve and
PricewaterhouseCoopers support the implementation of the Historical Cost
Accounting model and the very erosive stable measuring unit assumption during
hyperinflation. That is a fundamental mistake during hyperinflation. HCA should
be banned by law during hyperinflation.
Certain (not all) income statement
items, e.g., salaries, wages, rentals, etc. are measured as a generally
accepted accounting practice in units of constant purchasing power on an annual
basis (they are updated annually – not monthly) as part of the traditional
Historical Cost Accounting model during low inflation. The Frameworkstates that various measurement bases
are used in conjunction in the HCA model during inflation, hyperinflation and
A constant real value non–monetary
item´s legal existence is determined by contract or statute (company law,
commercial law, etc.). However, these constant real value non–monetary items
are – in practice – treated as monetary items (cash) during the period that
they are not measured in units of constant purchasing power in terms of the
daily US Dollar or other daily hard currency parallel rate or a daily index
rate during hyperinflation.
Salaries, wages, rentals, trade
debtors, trade creditors, all other non–monetary payables, all other non–monetary
receivables, etc. are not required in IAS 29 to be valued or measured or
updated at the date of payment in terms of the period–end monthly published
CPI. That is, obviously, not practically possible when the period–end monthly CPI
is normally only available one or two months after the month to which it
relates during hyperinflation. What is required in IAS 29 is that these
constant real value non–monetary items´ nominal Historical Cost or Current Cost
values – after payment or after the liability for the payment have been
accounted – in HC or CC financial statements at the end of the accounting
period be restated in terms of the period–end monthly CPI in order – simply –
to make the HC or CC financial statements more useful during hyperinflation.
The practical implementation of IAS 29 thus does not generally result in
financial capital maintenance in units of constant purchasing power during
hyperinflation. That clearly explains the failure of IAS 29, for example, when
it was implemented during hyperinflation in Zimbabwe. It did not manage to keep
the Zimbabwe real economy
relatively stable like daily updating in terms of the daily index supplied by
various governments during 30 years of very high and hyperinflation in Brazil did. The
complete failure of IAS 29 in Zimbabwe seems to make absolutely no difference
to the IASB´s confidence in this failed standard.
When there is no CPI published as
happened towards the end of severe hyperinflation in Zimbabwe, constant real
value non–monetary item values cannot be determined. It was impossible to implement
IAS 29 during severe hyperinflation in Zimbabwe. See reference below.
However, these constant items´ real legal or contractual values do not
disappear even when they – temporarily – cannot be valued in the local
currency. Their legal or contractual constant real non–monetary values still
exist even after monetary meltdown of only the local currency. Constant real
value non–monetary items are measured at fair value (in nominal monetary units
or units of constant purchasing power depending on whether the entity chooses
the HCA or CIPPA model) in the opening balance sheet after monetary meltdown in
terms of IAS 1.
The IASB authorized an addition to
IAS 1 in
2011 to allow for the fair value valuation of all non–monetary items (constant
and variable items) in the opening balance sheet of companies applying IFRS
after severe hyperinflation and a monetary meltdown. Inflation and
hyperinflation have no effect on the real value of non–monetary items. All
non–monetary items (constant and variable items) were still there to be
fair–valued and included in the opening balance sheet of companies after the
monetary meltdown in Zimbabwe
No exchangeability with all
relatively stable foreign currencies means no exchange rates which means no
hyperinflation (no prices being set in the local currency) and vice versa: no
exchange rate with any relatively stable foreign currency means no
exchangeability which means no hyperinflation (no prices being set in the local
currency). No prices being set in the local currency means monetary meltdown:
the total money supply (all local currency money and other monetary items
stated in the local currency) has no value.
Trade debtors and trade
creditors are constant real value non–monetary items and not monetary items as
incorrectly stated by the US Financial Accounting Standards Board, the
International Accounting Standards Board, PricewaterhouseCoopers and most
others except 180 million Brazilians and 10 million Angolans during
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.