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."
I lived and worked as financial director in Angola´s hyperinflationary economy from Oct 1994 till Feb 1997. I stopped the EFFECT of THE STABLE MEASURING UNIT ASSUMPTION (not the monetary effect of hyperinflation in the Kwanza, the local currency) in our company´s [Auto-Sueco Angola (the Volvo agent in Angola)] CONSTANT REAL VALUE NON-MONETARY ITEMS (e.g. salaries, wages, trade debtors, trade creditors, issued share capital, etc.) after 15 months of personally experiencing how everyone priced consumer products and property, cars, trucks, etc. EVERY DAY in terms of the DAILY US Dollar parallel rate.
I followed hyperinflation day by day during 2007 till Nov 2008 in Zimbabwe on an online discussion forum on the internet. Zimbabwe did the same as far as pricing of consumer products, property, cars, trucks, etc. daily in terms of the daily US Dollar parallel rate was concerned, BUT Zimbabwe did not measure salaries, wages, trade debtors, etc. DAILY in terms of the daily US Dollar parallel rate as I did in our company in Angola and as Brazil did in terms of various Daily Indices during the 30 years of their hyperinflation from 1964 till 1994. Zimbabwe measured these items mainly in fixed nominal Historical Cost Terms. They updated them only now and then during hyperinflation of billions percent per annum. That is why the Zimbabwean economy imploded on 20 November 2008. Their economy spontaneously dollarized.
After my experience in Angola, I studied, for example, how Brazil indexed its economy very successfully in terms of a DAILY INDEX – they called it monetary correction – during 30 years from 1964 to 1994. Other Latin American countries did the same during that period. Chile and Colombia use it till today.
Daily indexing stabilises non-monetary items´ REAL VALUES (not their NOMINAL monetary values – these still increase daily in terms of the Daily Index ) in the NON-MONETARY ECONOMY. Daily indexing (or daily monetary correction or daily price level accounting) DOES NOT stabilise the monetary economy. While a Central Bank prints too much local currency, there will always be hyperinflation, BUT daily indexing of NON-MONETARY ITEMS (selling prices, salaries, wages, trade debtors, trade creditors, issued share capital, capital reserves, provisions, etc.) stabilises the NON-MONETARY ECONOMY in REAL VALUES.
It stabilises the NON-MONETARY ECONOMY as follows:
1. The first step is to update selling prices DAILY. The selling price includes the profit margin. This is currently being done in Venezuela with the products that are priced in terms of the parallel market rate.
2. The second step is to update trade debtors and trade creditors DAILY. They are not monetary items. They are constant real value non-monetary items. When it is a sale on credit, then the trade debtor is also updated DAILY, so, the profit margin is LOCKED IN. So too in the case of trade creditors. No loss because of the use of the stable measuring unit assumption as it is used today in Venezuela where companies use the Historical Cost Accounting model, i.e., your accountants assume the Bolivar is perfectly stable as far as the value of trade debtors, trade creditors, etc. is concerned.
3. Thirdly, salaries, wages, rents, etc. are to be updated DAILY in terms of the Daily Index. How can a business do that? Because the profits are locked in, in the daily updated selling prices and the daily updated trade debtors. No loss anywhere. So, they have the money to update salaries and wages daily in terms of the Daily Index – as was done for 30 years in Brazil and other LA countries. This is not something new. I am not simply imagining these things. I am simply saying to Venezuela: copy Brazil.
Brazil still had hyperinflation in its monetary economy, but they had a relatively stable non-monetary economy with positive economic (GDP) growth during those 30 years.
4. Of course you cannot keep Bolivars overnight. You have to either pay your creditors, buy non-monetary items (anything you can later sell at the daily updated price) to lock in real value, or buy US Dollars or Colombian money – or buy the shares of international companies quoted on the Caracas stock exchange. I don´t know whether there are any quoted on the Caracas Exchange.
This process stabilises the non-monetary economy. Not the monetary economy.
You would state that using the US Dollar parallel rate is illegal in Venezuela. I know that.
Using the Consumer Price Index is not illegal in Venezuela. Your companies are using the monthly published CPI to implement IAS 29 Financial Reporting in Hyperinflationary Economies since 2009. The Daily CPI is also a Consumer Price Index. The Daily CPI is a daily interpolation of the monthly published CPI. The Venezuelan government uses the Venezuelan Daily CPI to price the Venezuelan government capital inflation-indexed Bolivar bonds on a daily basis. These bonds – Miguel Octavio informed me that they are issued by the Venezuelan government – CAN trade on a daily basis. I am not saying they do trade on a daily basis. According to Miguel, they are tightly held by the major banks in Venezuela. But, they CAN trade on a DAILY basis. So, they are being priced DAILY by the Venezuelan government in terms of the Venezuelan Daily CPI. The Venezuelan Daily CPI already exists.
This already existing Venezuelan Daily CPI can be used – LEGALLY – as the Daily Index in Venezuela. It already exists.
So, Daily Indexing can be implemented right now in Venezuela by implementing IAS 29 in terms of the already existing Venezuelan Daily CPI. No-one will do that because it is NOT REQUIRED in IAS 29. IAS 29 has been implemented incorrectly in terms of the monthly published CPI since its inception in 1990.
So, when IAS 29 is changed to REQUIRE the use of the Daily CPI, Venezuelan companies will be forced to update salaries, wages, rents, trade debtors, trade creditors, capital, etc DAILY in terms of the Daily CPI – without the involvement of the Venezuelan government. This would stabilise the Venezuelan non-monetary economy (as it happened in Brazil from 1964 till 1994) – not the monetary economy – over a short period of time.
“How’s that going to control the economy when we are facing severe shortages?”
Stabilising the Venezuelan non-monetary economy would result in a huge improvement of normal economic activity which would in turn result in the reduction of severe shortages.
“Does this supply dollars to the market because without them we will continue to have severe inflation?”
Daily Indexing or daily monetary correction would do nothing to severe inflation: as long as the Central Bank of Venezuela increases the Bolivar money supply at 65% per annum then hyperinflation will always have the possibility of getting to 65% per annum. Daily indexing of the entire non-monetary economy – as I described above – makes the level of hyperinflation irrelevant. When you index the entire non-monetary economy daily in terms of a Daily Index that follows the change in the general price level closely, then the non-monetary economy will be stabilised no matter what the level of hyperinflation: see Brazil from 1964 to 1994.
“What will this do to the black market which jumped another 8% today?”
It will do nothing to the black market rate. The black market rate will continue rising by up to 65% per annum as long as the Central Bank of Venezuela increases the Bolivar money supply by 65% per annum.
Daily indexing of the entire non-monetary economy in Venezuela via the Daily CPI being REQUIRED in IAS 29 (without the intervention of the Venezuelan government) would stabilise only the Venezuelan non-monetary economy as it did in Brazil from 1964 to 1994.
Venezuela´s non-monetary economy can be stabilised without the intervention of the Venezuelan government.
I know that the situation in Venezuela is not the same as in Brazil from 1964 to 1994.
Brazil did not have an illegal US Dollar parallel rate like Venezuela has today. The different governments during those 30 years supplied the Daily Index to the whole Brazilian economy daily using different daily indices. The final Unidad Real de Valor Daily Index was based almost entirely on the official daily US Dollar exchange rate.
The parallel rate is currently illegal in Venezuela. That is normal in hyperinflationary economies. It was like that in Angola and Zimbabwe too.
That is why the already existing Venezuelan Daily CPI can be used - LEGALLY - as the Daily Index.
I know many products have their prices fixed at very low levels by the government in Venezuela. I know the profit on these products are being made in the illegal arbitrage market mainly in Colombia.
However, daily indexing stabilised the non-monetary and part of the monetary economy in Brazil during hyperinflation from 1964 to 1994. That is a historical fact. It cannot be denied. Now (2013) daily indexing can be forced onto the Venezuelan economy via it being REQUIRED in IAS 29 - without the intervention of the Venezuelan government.
Unfortunately Daily Indexing is not yet REQUIRED in IAS 29. I am working on that via my communication with Mr. Hans Hoogervorst, the chairman of the IASB. I copied Dr. Rafael Rodriguez Ramos, the President of the Venezuelan Institute of Chartered Accountants.
Nevertheless, it is important that people in Venezuela are made aware of the advantages of daily indexing and its success in the past in Brazil and other Latin American countries.
Once there is a momentum to have it implemented in Venezuela under current conditions, then the ways of getting it done will become evident to people in Venezuela involved in the country´s hyperinflationary economy day by day.
Changing IAS 29 to REQUIRE daily indexing is essential in this process. Whether that is possible in the short term is difficult to judge. It all depends on Mr. Hoogervorst´s reaction to my communication.
Notwithstanding all the above problems, it is important that people in Venezuela are made aware that the answer to stabilising their non-monetary economy during hyperinflation lies in implementing Daily Indexing via IAS 29 - without the intervention of the Venezuelan government.
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