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Monday, 8 April 2013

Understanding IAS 29 per PricewaterhouseCoopers: Correction 9: IAS 29 aims to implement Capital Maintenance in Units of Constant Purchasing Power


Understanding IAS 29 per PricewaterhouseCoopers: Correction 9: IAS 29 aims to implement Capital Maintenance in Units of Constant Purchasing Power

‘IAS 29 aims to overcome the limitations of historical cost financial reporting in hyperinflationary environments.’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

Correction

IAS 29 does not aim to overcome the limitations of historical cost financial reporting in hyperinflationary environments. IAS 29 aims to replace financial capital maintenance in nominal monetary units (HCA) during hyperinflation with capital maintenance in units of constant purchasing power during hyperinflation.

IAS 29 unfortunately does not succeed in this aim because it is generally implemented in terms of the monthly published CPI. The price level changes at least from 28 to 31 times per month (or even more often, generally above 3000 per cent inflation per annum). However, IAS 29 is currently being implemented using one single price level change: the month end CPI.

This means that a part of the real value of current year profits and a part of the real value of non-monetary receivables treated as monetary items are eroded (destroyed) in this fashion under IAS 29.

IAS 29 can also have absolutely no positive effect in an economy during hyperinflation. IAS 29 had absolutely no positive effect during the last eight years in Zimbabwe´s hyperinflation. Zimbabwe´s economy imploded on 20 November 2008 with the full implementation of IAS 29.

It is quite easy to stop this from happening: simply copy what Brazil did during 30 years from 1964 to 1994. Brazil updated some monetary items and all non-monetary items daily in terms of a government supplied daily index during those 30 years of very high and hyperinflation.


Nicolaas Smith

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