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Monday, 12 November 2012

IFRS will stop hyperinflation in Iran overnight at no cost


IFRS will stop hyperinflation in Iran overnight at no cost

International Financial Reporting Standards consist of

The Conceptual Framework (2010)

IASs (International Accounting Standards),

SICs (IAS Interpertations)

IFRSs (International Financial Reporting Standards)

IFRICs (IFRS Interpretations)

According to the original Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010), Par. 4.59 (a)] “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”

Financial capital maintenance in units of constant purchasing power was thus authorized as an option to the traditional Historical Cost Accounting model in IFRS twenty three years ago. Financial capital maintenance in nominal monetary units is implemented under the HCA model.

The fundamental difference between the two models is that the stable measuring unit assumption is implemented under the HCA model while it is never implemented under financial capital maintenance in units of constant purchasing power.

The mission of the International Accounting Standards Board is that IFRS should be implemented by all countries in the world economy. Most countries do. Political orientation or the fact that a country possesses nuclear weapons or not, or signed the Nuclear Non-Proliferation Treaty or not, or is part of the Nuclear Club or not, does not play a role in IASB policies.

I support the IASB position.

The implementation now by Iran of financial capital maintenance in units of constant purchasing power in terms of a Daily Index or daily rate would stop hyperinflation in Iran overnight at no cost.

This model is currently (2012) an option authorized in IFRS.

It will be required by the IASB in 6 to 8 years´ time. The IASB voted unanimously in May 2012 to submit the replacement of IAS 29 Financial Reporting in Hyperinflationary Economies to research based on the draft IFRS ´X`CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER. Draft IFRS ´X` is based on the core principle that capital maintenance in units of constant purchasing power in terms of a Daily Index or daily rate will be required (not optional) in countries with annual inflation equal to or greater than 10 percent or cumulative inflation equal to or greater than 26 percent over three years.

If Iran would have implemented financial capital maintenance in units of constant purchasing power in terms of a Daily Index or daily rate a few years ago, there would be no effect of hyperinflation or inflation in the Iranian economy today.

There may still be hyperinflation today, but there would be no effect of hyperinflation with daily inflation-indexing of the entire rial money supply and daily measurement of all constant real value non-monetary items in the Iranian constant item economy in terms of a Daily Index or other daily rate under complete co-ordination (everyone doing it).

I propose that Iran implements financial capital maintenance in units of constant purchasing power in terms of a Daily Index or daily rate as soon as possible in order to stop the effect of hyperinflation in the Iranian monetary economy as well as the actual implementation of the stable measuring unit assumption in the Iranian constant item economy.

I am involved in the promotion of this model for a number of years already because I played an active part in its development over the last 16 years, specifically by (1) implementing it in the form of accounting dollarization in the company where I worked in Angola´s hyperinflationary economy in 1996, (2) first identifying that the non-monetary economy is sub-divided in the variable real value non-monetary item economy (variable item economy) and the constant real value non-monetary item economy (constant item economy) in 2005 and (3) identifying in 2011 the fact that daily instead of monthly indexing is required to obtain the full advantage of the model and (4) first identifying at the end of 2011 that daily inflation-indexing the entire money supply under complete co-ordination would remove the entire cost of or gain from (the effect of) low inflation, high inflation, hyperinflation and deflation from the monetary economy (except in actual bank notes and coins).

It is logical that Iran, the country with currently the highest rate of hyperinflation in the world, would be the most interested in an IFRS that would stop the effect of hyperinflation overnight in Iran at no cost.

I tried to propose this model to Argentina (in high inflation with 10 or 20 percent inflation per annum) earlier this year and I also tried to contact the Venezuelan (in hyperinflation) national accounting standard setter for this purpose before I very recently got involved with promoting this model in Iran. I only got involved after Prof. Steve Hanke, a top American economics professor who had already stopped 10 hyperinflations in the past, had suggested two solutions to Iran that would stop hyperinflation overnight. If an American professor - while the United States of America, his government, is leading the implementation of economic sanctions against Iran - can suggest solutions to Iran that would stop hyperinflation overnight, then, surely, I am also allowed to do that.

The difference is that the IFRS solution I suggest comes at no cost and is guaranteed to work when it is implemented correctly under complete co-ordination, since it amounts to Dollarization in constant local currency units – not in US Dollars or via a currency board: Prof. Hanke´s two very costly solutions that would certainly also stop hyperinflation overnight in Iran.

I plan to propose this IFRS model to Ethiopia (20 percent inflation), Mongolia (15.6 percent inflation), Tanzania (15.7 percent inflation), Angola (10% inflation), (Nigeria 11.7 percent inflation) and other countries currently in high inflation, before it will be required in these countries by the IASB in the near future.

Succeeding to stop hyperinflation overnight at no cost in Iran with this IFRS solution would hasten by 10 or 20 years´ its implementation in the United States of America, Israel, the European Union and the rest of the world which would result in these countries and the rest of the world economy operating in constant monetary and constant item economies, i.e., as if there were no low inflation or deflation - at whatever level of inflation or deflation.

So, this is not just about stopping hyperinflation overnight at no cost in Iran. This is about implementing this IFRS in the entire world economy in the near future.

When it will happen on a worldwide basis is not certain now. What is certain is that it will happen: it is an inevitable process. We have always improved in the past. We will not stop improving now.

The IASB does not own the financial capital maintenance in units of constant purchasing power in terms of a Daily Index or daily rate accounting model, just as no one owns the HCA model. Basic accounting models cannot be patented.

If Iran were not currently implementing IFRS, then the process would be even easier.


Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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