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Friday, 5 April 2013

Understanding IAS 29 per PricewaterhouseCoopers: Correction 7: PricewaterhouseCoopers does not understand IAS 29


Understanding IAS 29 per PricewaterhouseCoopers: Correction 7: PricewaterhouseCoopers does not understand IAS 29

Because IAS 29 incorrectly and misleadingly states in Par 2 that

‘Money loses purchasing power at such a rate that comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading.’

PricewaterhouseCoopers misleadingly and incorrectly states

Significant changes in the purchasing power of money mean that financial statements unadjusted for inflation are likely to be misleading. Amounts are not comparable between periods, and the gain or loss in general purchasing power that arises in the reporting period is not recorded. Financial statements unadjusted for inflation do not properly reflect the company’s position at the balance sheet date, the results of its operations or cash flows.

PricewaterhouseCoopers Understanding IAS 29 2006 p3

Neither the IASB nor PricewaterhouseCoopers understands IAS 29.

 Implementing Historical Cost Accounting during hyperinflation is suicidal for a company and a country (see Zimbabwe in 2008 and Yugoslavia before that), not because financial statements are misleading, but because

1.      The real value of only monetary items are hyper-destroyed by hyperinflation (hyper-inflate your economy long enough and you can wipe out the real value of your entire money supply: see Zimbabwe on 20 November 2008 and Yugoslavia three times during four months before that) and

2.      The constant real non-monetary value of only constant real value non-monetary items never maintained constant in terms of units of constant purchasing power in terms of the Daily CPI or daily USD (or other relatively stable foreign currency) parallel rate are hyper-destroyed by, not inflation as the IASB, PricewaterhouseCoopers, other Big Four audit firms, the Argentinian Accounting Federation, the Brazilian accounting authorities, the Chilean Accounting Authorities and most Historical Cost accountants believe, but, by the implementation of the stable measuring unit assumption, i.e., by the implementation of HCA during hyperinflation.

What is stated in the 1 and 2 above is what happens during hyperinflation and what IAS 29 is unsuccessfully trying to stop with the incomplete IASB guidelines to the implementation of Capital Maintenance in Units of Constant Purchasing Power.

Yes, PricewaterhouseCoopers is correct when the firm states

‘Amounts are not comparable between periods, and the gain or loss in general purchasing power that arises in the reporting period is not recorded.’

But, that is not what it is about during hyperinflation: What is stated in 1 and 2 above is what it is about during hyperinflation.

IAS 29 is not implemented simply to (i) make amounts comparable between periods and (ii) to record the gain or loss in general purchasing power that arises in the reporting period.

IAS 29 is supposed to implement Capital Maintenance in Units of Constant Purchasing Power during hyperinflation - a form of which was very successfully done during 30 years in Brazil from 1964 to 1994 (IAS 29 was authorized in 1989) when that country inflation-adjusted, not all, but some monetary items daily and measured most non-monetary items – variable real value non-monetary items and constant real value non-monetary items – in units of constant purchasing power in terms of a government supplied daily index.

Unfortunately IAS 29 does not result in Capital Maintenance in Units of Constant Purchasing Power because the monthly and not the Daily CPI is used in the implementation of IAS 29.


Nicolaas Smith

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