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Friday, 30 August 2013

Brazil should go back to banning Historical Cost Accounting

Brazil should go back to banning Historical Cost Accounting is the same as stating that Brazil should go back to Capital Maintenance in Units of Constant Purchasing Power or price-level restatement or indexation or monetary correction in terms of a daily index. It would have a very positive effect on Brazil´s currency. See "Can Brazil´s currency be saved."

Brazil effectively banned Historical Cost Accounting from 1964 till March 1994 and instead implemented CMUCPP in terms of a daily index when it used daily indexation or monetary correction in terms of a daily index during the above thirty years of very high inflation and hyperinflation. Brazil unnecessarily re-introduced HCA with the adoption of the Real after it very successfully stopped hyperinflation with daily indexation (the Unidade Real de Valor) and the Real Plan in 1994.

Most Latin American countries used CMUCPP in terms of a daily index during that period as well as afterwards. Chile only stopped in 2008 in order to "comply with" IFRS. Chile did not realise that CMUCPP in terms of a daily index at all levels of inflation and deflation (including during low inflation) had originally been authorised in IFRS in the Framework (1989), Par. 104 (a) - now the Conceptual Framework (2010), Par. 4.59 (a), which states "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

Re-introducing CMUCPP in terms of a daily index with its current "monetary stability" upper limit of 6.5% inflation would stabilise Brazil´s constant real value non-monetary item economy currently during low inflation, like it stabilised its entire non-monetary economy (both its variable real value non-monetary item economy and its constant item economy) and some of its monetary economy during those 30 years of high and hyperinflation from 1964 to 1994.

Brazil is a co-author of a 2010 proposal to the IASB under the chairmanship of the Argentinean Accounting Federation for the requirement of Capital Maintenance in Units of Constant Purchasing Power or price-level restatement at annual inflation of 10% or cumulative inflation of 26% over three years.

I suggest Brazil implements CMUCPP in terms of a daily index now at their 6.5% "price stability" level. It would stabilise its constant item economy over a short period of time. Brazil has 30 years of experience of daily indexation.

Inflation-indexing its entire money supply on a daily basis - as Chile has been doing for some time to at least 25% of its money supply - would eliminate the cost of and gain from low inflation of up to 6.5% inflation (or whatever other higher rate) from the entire Brazilian money supply. It would not eliminate inflation, but it would be inflation with no cost or gain.

Brazil (as well as Argentina, Chile and Mexico) already agreed to Capital Maintenance in Units of Constant Purchasing Power (price-level restatement) at 10% annual inflation or 26% cumulative inflation over three years.

Starting now at 6.5% inflation would benefit the Brazilian economy - and consequently its currency - greatly.

Nicolaas Smith Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.