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Sunday, 8 September 2013

IASB for the FIRST TIME officially confirms that IAS 29 implements capital maintenance in units of constant purchasing power

IASB for the FIRST TIME officially confirms that IAS 29 implements capital maintenance in units of constant purchasing power


Both the Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) model and IAS 29 implement financial capital maintenance in units of constant purchasing power as authorised in the Conceptual Framework, Par. 4.59 (a) which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.

ON 3 September 2013, View 3 as stated in Par. 16 and 17 in Agenda Ref 12 correctly confirms for the first time that IAS 29 implements financial capital maintenance in units of constant purchasing power.

"View 3: The Conceptual Framework permits an entity to select the financial capital maintenance concept defined in constant purchasing power units if certain conditions are met, but should apply IAS 29 by analogy


16. Those who support this view also think that the Conceptual Framework permits an entity to select the financial capital maintenance concept that is defined in constant purchasing power units if such a capital maintenance concept best meets the needs of users. However, they think that the entity should use the accounting model described in IAS 29, by analogy, in accordance with paragraph 11 of IAS 8. They note that although the requirements in IAS 29 are only mandatory for entities reporting in a hyperinflationary currency, in their view, IAS 29 deals with a similar condition.


17. Accordingly they think that if a financial capital maintenance model defined in a measuring unit current at the reporting date is applied when preparing IFRS financial statements, that model should be the one described in IAS 29."


This is specifically stated for the first time at the IASB since the authorisation of IAS 29 in 1989 (24 years ago). It was something I also only realised in early 2013 after my collaboration with the IASB on this issue after I had submitted this IFRIC POTENTIAL AGENDA ITEM REQUEST to the IASB in Sept 2012.

Timeline

1 April 1989 IAS 29 authorised requiring the restatement of HC or CC financial statements in terms of the measuring unit current at the end of the reporting period during hyperinflation.

On 16 January 2013 the IASB staff stated:

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


On 21 January 2013 is sent an email to Hans Hoogervorst, the Chairman of the IASB in which I responded to Par. 10 above as follows:

[7] Incorrect: IAS 29 contains guidance on how to prepare financial statements in constant purchasing power units: many paragraphs in IAS 29 contain that guidance: they state which are monetary and non-monetary items, according to IAS 29, and how to measure items in units of constant purchasing power at the measuring unit current at the period-end date, but, IAS 29 does not result in “Financial capital maintenance ... in units of constant purchasing power” as defined in the CF, Par. 4.59 (a) because it is only possible to maintain a constant item constant when its constant real value is updated every time the URV-based Daily Index (or USD daily free-market rate) changes during hyperinflation. Values under IAS 29 are not continuously updated every time the URV-based Daily Index changes. The time variable (interval) should be: every time the URV-based Daily Index changes and not every time the monthly CPI changes. If IAS 29 were to be changed as such it would become “Financial capital maintenance ... in units of constant purchasing power” as defined in the Conceptual Framework, Par. 4.59 (a).


So, I informed the IASB for the first time on 21 January 2013. 

In April 2013 the IASB issued a Draft Discussion Paper: Capital Maintenance (not available online anymore) 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 in April 2013 which concept(s??) of capital maintenance are used in IAS 29. 

On 7 June 2013 in my response to the Draft Discussion Paper: Capital Maintenance I informed the IASB again:

"Restatement of HC or CC financial statements in terms of the measuring unit current at the end of the reporting period as prescribed in IAS 29 and implemented in terms of the monthly published CPI is a form of financial capital maintenance in units of constant purchasing power."

Finally, on 3 September the IASB correctly confirmed that financial capital maintenance in units of constant purchasing power is required in IAS 29, 24 years after its authorization on 1 April, 1989.


The Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) model implements financial capital maintenance in units of constant purchasing power in terms of a Daily Index (recognising at least the 365 daily changes in the general price level) which results in automatically maintaining the constant purchasing power (real value) of capital constant in all entities that at least break even in real value - ceteris paribus - for an indefinite period of time at all levels of inflation and deflation.

IAS 29 has been applied since 1990 implementing financial capital maintenance in units of constant purchasing power in terms of the 12 monthly published CPIs which ignores the at least 355 non-month-end daily changes in the general price level during hyperinflation (the general price level can change more than once a day during hyperinflation - (Shiller 1998)). This resulted over the last 24 years and currently results (e.g., in Venezuela and Belarus) in the destruction of the constant purchasing power (real value) - at the rate of hyperinflation - of that part of current year results (current profits and losses) and especially in trade debtors, trade creditors, other non-monetary receivables and payables that are not maintained constant as a result of the mistaken use of the monthly published CPI.

This was very evident during the last 8 years of Zimbabwe´s hyperinflation - something the IASB steadfastly refuses to admit although it is very clear to all accountants worldwide (except at the IASB) that IAS 29 had absolutely no positive effect in Zimbabwe. IAS 29 was implemented in terms of the monthly published CPI during those 8 years with absolutely no positive effect: the Zimbabwean economy nevertheless imploded on 20 November 2008. If IAS 29 were to have been implemented in terms of a Daily Index, e.g., the Daily US Dollar parallel rate, or the Old Mutual Implied Rate that was available till 19 November 2008 during those 8 years, then the Zimbabwean economy would never have imploded. Various Latin American countries implemented daily indexing or daily monetary correction or daily price level restatement which are all forms of financial capital maintenance in units of constant purchasing power in terms of a Daily Index with great success from 1964 till 1994. Brazil used their daily Unidade Real de Valo
combined with their Real Plan to stop hyperinflation in April 1994. Brazil used daily indexation for 30 years from 1964 till 1994. This great Latin American success with daily indexation was ignored with the formulation of IAS 29 in 1989.


Changing IAS 29 as soon as possible to REQUIRE the use of a Daily Index would stabilise, for example, the Venezuelan constant real value non-monetary item economy over a short period of time.


Nicolaas Smith 

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