Friday, 12 April 2013

Daily indexation has three applications

Daily indexation has three applications

1.      The Daily CPI is used in the form of a 4, 3, 2 or 1 month lagged daily interpolated daily index based on the monthly CPI based on similar formulae used to price government capital inflation-indexed bonds on a daily basis in this USD 3.5 trillion global market. This is done in most countries in the world. Most countries in the world thus already publish a Daily CPI. The US uses the Daily Reference CPI-U.

2.      The  Daily CPI is being suggested to the IASB in IFRS ´X´ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER to be used to correctly implement Capital Maintenance in Units of Constant Purchasing Power as already authorized in IFRS in terms of a Daily CPI in the future replacement of IAS 29 Financial Reporting in Hyperinflationary Economies. This application is the use of the Daily CPI with capital maintenance in units of constant purchasing power to replace the stable measuring unit assumption, i.e., to replace (depart from) Historical Cost Accounting.

3.      Daily indices were used in the form of government supplied daily indices as “correcção monetaria” or monetary correction in mainly Latin American countries during generally very high and hyperinflationary periods from the 1960´s to 2010. Correcção monetary or monetary correction was stopped in Chile in 2010 in order to conform with IFRS which are almost 100 per cent Historical Cost Accounting based. The Brazilian Unidade Real de Valor (URV) was one of these very successful Daily Indices used in Latin America. Others are the currently used Unidad de Fomento in Chile and the currently used Real Value Unit in Colombia. The latter is used to index all mortgages in Colombia on a daily basis. Latin American countries did not see daily indexing as simply an accounting model (which it, in fact, is), but as monetary correction as they inflation-indexed some, not all, monetary items as well as all non-monetary items. This was done very successfully during 30 years in Brazil under different governments and with different daily indices without the implementation of IAS 29. This was not done during 14 years of hyperinflation in Zimbabwe with the last 8 years with full implementation of IAS 29 and the Zimbabwe economy imploded on 20 November 2008 - with full implementation of IAS 29. 

Nicolaas Smith

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