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Thursday, 23 May 2013

Only Daily CPI maintains equity as well as current year results


Only Daily CPI maintains equity as well as current year results

IAS 29 requires entities in hyperinflationary economies to restate HC or CC financial statements in terms of the measuring unit current at the end of the reporting period. IAS 29 does not prescribe the use of the monthly published CPI for this purpose. It simply requires restatement in terms of a general price index. The Daily CPI is based on the monthly published CPI, i.e., the general price index. IAS 29 has, however, been implemented since its authorization in 1989 in terms of the monthly published CPI. In this way IAS 29 has been implementing an imperfect form of Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) since current year results are not fully maintained when the monthly published CPI is used. IAS 29 in terms of the monthly CPI can also have absolutely no effect in a hyperinflationary country. That is what happened in Zimbabwe where IAS 29 was implemented for the last 8 years of hyperinflation with no positive effect at all.

Brazil implemented CMUCPP in the form of indexation (monetary correction) in terms of a government supplied daily index from 1964 till 1994. Price-level restatement in terms of a daily index was widely used in Latin America during that period. Brazil did not use IAS 29. Zimbabwe used IAS 29. The result during hyperinflation in the two countries are very well known. Only the IASB refuses to admit that IAS 29 had no positive effect in Zimbabwe. Everyone else has the common sense to realize it. The IASB claims that they first have to have a formal review about what happened before they can form an opinion about the effect of IAS 29 in Zimbabwe.

The IASB does not understand the effect of CMUCPP in terms of a daily index. Basically, the IASB does not understand CMUCPP as implied in IAS 29. In January 2013 an IASB staff paper stated:

"10. Under current IFRS, there is no particular guidance on how to prepare financial statements stated in constant purchasing power units."

IAS 29 prescribes how to restate HC or CC financial statements in terms of the measuring unit current at the end of the reporting period.

Only the IASB does not understand that as stated above. PricewaterhouseCoopers, the World Bank and other Big Four audit companies published papers on how IAS 29 gives guidance on how to restate financial statements in terms of the measuring unit current at the end of the reporting period.


Nicolaas Smith

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