IFRS and US GAAP authorised CMUCPP maintains the constant purchasing power of constant real value non-monetary items (e.g. capital, all items in shareholders´ equity, provisions, salaries, wages, pensions, taxes, trade debtors/creditors, etc) in terms of a Daily CPI in entities that at least break even in real value during low and high inflation, hyperinflation and deflation - ceteris paribus. European Accounting Assoc: "Capital maintenance is a competing objective of financial reporting."
Reporting period financial statements are never
inflation-adjusted. Only monetary items can be inflation-adjusted. Monetary
items are never inflation-adjusted in reporting period financial statements.
What happens under IAS 29 is that the net monetary loss or gain is recorded and
non-monetary items are measured in units of constant purchasing power in terms
of the monthly CPI. Reporting period financial statements are never
inflation-adjusted under IAS 29 – no matter what PricewaterhouseCoopers states.
What PricewaterhouseCoopers wanted to state is the
statements ‘restated’ in terms of IAS 29 are an extension to, not a departure
from, historical cost accounting.
PricewaterhouseCoopers is correct - when the firm´s
statement above is corrected – as far as the way in which IAS 29 is being implemented
under the guidance of Big Four audit firms. Companies implementing IAS 29 –
under their guidance – carry on implementing the Historical Cost Accounting model
during hyperinflation as required by IAS 29: IAS 29 states that either
Historical Cost or Current Cost financial statements have to be ‘restated’ in
terms of the guidelines in IAS 29.
This is what
is supposed to happen under IAS 29 when it is implemented correctly (no-one is
doing it this way - at the moment).
The first year that IAS 29 is being implemented, a
company is obviously implementing HCA or CCA. IAS 29 requires the company to
implement the measures guide-lined in the Standard as from the start of the
year in which it detects hyperinflation in the economy. The company departs
from HCA when it starts implementing IAS 29: it changes its capital maintenance
concept from financial capital maintenance in nominal monetary units (HCA) to
financial capital maintenance in units of constant purchasing power. It stops
doing HCA. It stops implementing the stable measuring unit assumption.
However, it has a problem: IAS 29 and all IFRS are
seen by the IASB, Big Four audit firms, national accounting standard and other
accounting authorities and most Historical Cost accountants as the Ten
Commandments of Accounting: The letter of IAS 29 has to be followed. So, IAS 29
requires Historical Cost or Current Cost financial statements to be ‘restated’
in terms of the measuring unit current at the end of the reporting period.
A company implementing IAS 29 has however departed
from HCA the moment it started implementing IAS 29. Now what? From the second
year on, it is not complying with IAS 29, because it has departed from HCA: it
does not implement HCA anymore.
Fortunately, this problem is very easy to overcome:
All accounting items are recorded at their original or historical values
(costs). So, it is very easy to satisfy the requirement of IAS 29 to ‘restate’
Historical Cost financial statements: simply run a set of HC financial
statements from the original data and IAS 29 is complied with. A company can
always print a set of HC financial statements for the sole reason of complying
with IAS 29. The HC financial statements would serve no other purpose: they are
completely meaningless during hyperinflation, but, IAS 29 requires them. So,
they are printed simply to satisfy the requirement in IAS 29.
A company, in fact, departed from HCA in
the first year it adopted IAS 29.
Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.