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Saturday, 6 April 2013

Understanding IAS 29 per PricewaterhouseCoopers: Correction 8: Companies implementing IAS 29 have departed from Historical Cost Accounting


Understanding IAS 29 per PricewaterhouseCoopers: Correction 8: Companies implementing IAS 29 have departed from Historical Cost Accounting

‘Inflation-adjusted financial statements are an extension to, not a departure from, historical cost accounting.’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

Correction

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 following:

Financial 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.

Nicolaas Smith

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