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Tuesday, 23 April 2013

Objective of IAS 29


Objective of IAS 29

IFRS are principles-based standards.

IAS 29 does not specifically state its objective.

Paragraph 2 states:

‘In a hyperinflationary economy, reporting of operating results and financial

position in the local currency without restatement is not useful.’


The closest IAS 29 comes to stating its objective is in Paragraph 7:

‘In a hyperinflationary economy, financial statements, whether they are based on

a historical cost approach or a current cost approach, are useful only if they are

expressed in terms of the measuring unit current at the end of the reporting

period.’

Paragraph 8 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 period.’

 

The reason IAS 29 does not specifically state its objective is because Capital Maintenance in Units of Constant Purchasing Power as originally authorized in the original Framework (1989), Par 104 (a) was not understood at the IASC in 1989 and is still (2013) not understood at the IASB, Big Four accounting companies, national accounting standard setters and by historical cost accountants in general. An important reason for this is the fact that non-monetary items were only split in constant real value non-monetary items and variable real value non-monetary items in the book Real Value Accounting published in 2005.

Which items have to be measured in units of constant purchasing power to maintain the constant purchasing power of capital constant as authorized in Par 104 (a) in 1989? The split is not important to know during hyperinflation because all non-monetary items, variable and constant items, are measured in units of constant purchasing power during hyperinflation. The split is thus not necessary during hyperinflation to achieve capital maintenance in units of constant purchasing power. IAS 29 was also authorized in 1989.

Another reason is the fact that the ineffective “restatement” model was very much in vogue as from the 1970´s and is still the stated model in IAS 29. It is the model most accountants believe will result in making financial statements ‘more meaningful’ during hyperinflation. The term Capital Maintenance in Units of Constant Purchasing Power is not used by the IASB or accountants in general with reference to IAS 29.

The IASB Staff Paper 20 for the IFRIC meeting dated 22-23 January 2013 very surprisingly states:

‘10. Under current IFRS, there is no particular guidance on how to prepare financial statements stated in constant purchasing power units.’ The complete lack of understanding of Capital Maintenance in Units of Constant Purchasing Power at the IASB is very evident in the above statement.

PricewaterhouseCoopers states in Understanding IAS 29 (2006)

Objectives of IAS 29

‘The IAS 29 approach is to restate all balances recorded in the financial statements (including comparative numbers) to the year-end general purchasing power of the functional currency.’

Objective of IAS 29

The objective of IAS 29 is to implement Capital Maintenance in Units of Constant Purchasing Power during hyperinflation as authorized in IFRS in the Conceptual Framework (2010), Par 4.59 (a) as follows: ‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

Unfortunately IAS 29 does not result in Capital Maintenance in Units of Constant Purchasing Power because of the use of the monthly published CPI. There are at least 365 different price levels in a year during hyperinflation.  IAS 29 only recognizes 12. This obviously results in the destruction of part of the real value of current year profits. This is remedied with the use of the generally available Daily CPI. No-one currently (2013) uses the Daily CPI with IAS 29. Because it is not currently widely used, the IASB regards the use of the Daily CPI with IAS 29 as irrelevant. The fact that it was used by every company and every accountant in Brazil for 30 years as well as over more than 45 years in Chile as well as in other Latin American countries for decades is completely ignored by the IASB because of their complete lack of understanding of Capital Maintenance in Units of Constant Purchasing Power and their complete resistance to learn what it is about.

Brazil used daily indices supplied by different governments during the 30 years of very high and hyperinflation from 1964 to 1994 with great success. The best and most successful daily index used in Brazil was the Unidade Real de Valor which was almost entirely based on the daily USD exchange rate with the Brazilian currency (which explains its success during hyperinflation). Because of the complete lack of understanding of Capital Maintenance in Units of Constant Purchasing Power at the IASB and by the global accounting profession, the great success of using daily indices in South American countries was completely ignored by the accounting profession and the IASB and still is.


Nicolaas Smith

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