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Monday, 16 September 2013

Huge lack of understanding of units of constant purchasing power at the IASB

Huge lack of understanding of units of constant purchasing power at the IASB

Oscar Wilde
“He is fond of being misunderstood. It gives him a post of vantage."
― from the stage directions describing Lord Goring, "An Ideal Husband"

There is a huge lack of understanding at the IASB regarding financial capital maintenance defined in terms of units of constant purchasing power.

On 2 January 2013, Kenichi Yoshimura, the author of Agenda Ref 20, Applicability of IAS 29 to financial statements prepared under the concept of financial capital maintenance in constant purchasing power units, stated the following in an email to me while I was still working with the IASB on the above Agenda item:

"Unfortunately, I could not complete the numbers under CMUCPP model (shaded with yellow). This is, I think, due to lack of my understanding of the CMUCPP model."

On 8 January 2013, Michael Stewart, the Director of Implementation Activities at the IASB, very firmly indicated that the IASB is satisfied with the implementation of the failed IAS 29 Financial Reporting in Hyperinflationary Economies which had no positive effect during 8 years of implementation during hyperinflation in Zimbabwe.



Kenichi Yoshimura clearly demonstrated that lack of understanding when he stated the following in Agenda Ref 20 for the IFRIC Interpretations Committee Meeting on 22-23 January, 2013, in Par 10: 

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

That was a completely wrong statement by Kenichi Yoshimura (who was working under the direct guidance of Michael Stewart) as acknowledged by the IASB by now.


In April 2013 the IASB issued a Draft Discussion Paper: Capital Maintenance in which the IASB stated:


Par. "9.48 The concepts of capital maintenance are used in IAS 29 Financial Reporting in Hyperinflationary Economies."


The IASB did not indicate which concept(s??) of capital maintenance are used in IAS 29.


On 3 September 2013 the IASB finally correctly confirmed that financial capital maintenance in units of constant purchasing power is required in IAS 29, 24 years after its authorization in 1989.

Now the IASB is adding yet another contradiction to IFRS by stating that

"The answer to the submitter’s question is that it is not permitted to use the financial capital maintenance concept" (defined in terms of constant purchasing power units as proposed in IFRS "X" INFLATION ) "when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29."

This is in contradiction to 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.

US GAAP states:


"Two major concepts of capital maintenance exist, both of which can be measured in units of either money or constant purchasing power: the financial capital concept and the physical capital concept."


US GAAP Concepts Statement Nº 6, Par. 71

Measurement in units of constant purchasing power is used by all accountants worldwide in the updating of salaries, wages, rents, etc. on an annual basis.

The lack of understanding of the above concepts at the IASB is abundantly clear in the contradictory statements by the IASB as indicated above.

The two persons, Michael Stewart and Kenichi Yoshimura, who clearly stated and indicated their lack of understanding of financial capital maintenance in units of constant purchasing power are the authors and driving force behind the statement:

"The answer to the submitter’s question is that it is not permitted to use the financial capital maintenance concept" (defined in terms of constant purchasing power units as proposed in IFRS "X" INFLATION ) "when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29."

Micheal Stewart having gone so far as to state that financial reporting has no effect in the economy in explaining the IASB´s full support of the use of financial capital maintenance in units of constant purchasing power in terms of the monthly published CPI (IAS 29) which had absolutely no positive effect during hyperinflation in Zimbabwe. The IASB refuses to admit - according to Michael Stewart - that IAS 29 had no positive effect in Zimbabwe although all accountants in the world, except those at the IASB, have the common sense to realise that the implementation of IAS 29 was a complete failure in Zimbabwe.

IAS 29 in terms of the monthly published CPI is currently a complete failure in Venezuela and Belarus.

Financial capital maintenance in units of constant purchasing power in terms of a Daily Index - what the IASB fails to understand - was a huge success in Brazil from 1964 till 1994, something steadfastly ignored by the IASB.

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

Arthur Schopenhauer, German philosopher (1788 – 1860)


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