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Tuesday, 2 April 2013

Understanding IAS 29 per PricewaterhouseCoopers: Correction: Inflation has no effect on the real value of non-monetary items


Understanding IAS 29 per PricewaterhouseCoopers: Correction 2: Inflation has no effect on the real value of non-monetary items

 ‘Financial statements unadjusted for inflation in most countries are prepared on the basis of historical cost without regard to changes in the general level of prices.’ P3

PricewaterhouseCoopers Understanding IAS 29 2006 p3

This should be changed to:

Financial statements with (a) net monetary losses and gains (resulting from inflation – hyperinflation - and deflation) not accounted and (b) constant real value non-monetary items measured in nominal monetary units implementing the very destructive stable measuring unit assumption in most countries are prepared on the basis of historical cost without regard to (i) changes in the general level of prices and without regard to (ii) the fact that constant real value non-monetary items are measured in nominal monetary units during inflation (hyperinflation) and deflation.

Inflation only affects the real value of monetary items. Inflation has no effect on the real value of non-monetary items. It is thus misleading and incorrect to state that financial statements are unadjusted for inflation. Financial statements are never ‘adjusted for inflation’ since monetary items are not ‘adjusted for inflation.’ The net monetary loss or gain in monetary items is calculated and accounted under IAS 29, i.e., under capital maintenance in units of constant purchasing power.

Constant real value non-monetary items cannot be ‘adjusted for inflation’ because inflation has no effect on the real value of non-monetary items. Constant real value non-monetary items are measured in units of constant purchasing power in terms of the monthly published CPI in terms of IAS 29.

Financial statements are not ‘adjusted for inflation’ under IAS 29. (a) The net monetary loss or gain as a result of hyperinflation in only monetary items is calculated and accounted under IAS 29 and (b) constant real value non-monetary items are measured in units of constant purchasing power in terms of the monthly published CPI in terms of IAS 29.

IAS 29 is thus based on capital maintenance in units of constant purchasing power principles. However, implementing IAS 29 in terms of the monthly published CPI does not result in the maintenance of the constant purchasing power of capital during hyperinflation, specifically with respect to the current year´s profit (eventually retained income, i.e., part of capital). A part of current year profits is eroded (destroyed) as a result of the implementation of the monthly CPI (one single price-level change per month) when the price level changes at least 28 to 31 times per month or even more often (sometimes twice a day) generally at above 3000 per cent inflation per annum.

IAS 29 can also have absolutely no positive effect in a hyperinflationary economy. That is what happened in Zimbabwe where IAS 29 was implemented during the last 8 years of hyperinflation. The Zimbabwe economy imploded on 20 November 2008 with full implementation of IAS 29.

Nicolaas Smith

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