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."
“Because the problem is excess demand for foreign currency, generated in part by the artificial creation of money, while maintaining the official exchange rate constant.” Miguel Octavio
The problem with the parallel rate – not the economy as a whole – is twofold:
1. The one issue is International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies which is being implemented in Venezuela in terms of the month-end CPI since 2009.
Just like the US Dollar parallel rate changes DAILY (and can change more than once a day in the future at much higher rates of hyperinflation) so the CPI also changes DAILY. Venezuela has a Daily CPI. It is the DAILY INDEX used by the Venezuelan government to price Venezuela’s government capital inflation-indexed bonds issued in Bolivars DAILY. They can trade on a daily basis. This Venezuelan Daily CPI is available in Venezuela.
Implementing IAS 29 in terms of the month-end CPI destroys a part of current year results because the 355 non-month-end Daily CPI´s are being ignored. Only the 12 month-end CPI´s are being used under IAS 29. (I can supply an example if anyone is interested.)
What actually happens is that Venezuelan companies use Historical Cost Accounting for the 355 non-month-end transactions. Imagine using Historical Cost Accounting during hyperinflation! Very unfortunately the International Accounting Standards Board very mistakenly REQUIRES the use of HCA during hyperinflation. Under HCA it is ASSUMED that the Bolivar is PERFECTLY stable during those 355 non-month-end days. Imagine assuming the Bolivar is PERFECTLY stable during hyperinflation! Every company in Venezuela is doing that as far as transactions on the 355 non-month-end days are concerned!
When IAS 29 is implemented in terms of the Daily CPI, then the Venezuelan constant real value non-monetary item economy would stabilise over a very short period of time. For example, salaries, wages, rents, transport prices, all items in the income statement, capital, reserves, all items in shareholders equity, provisions, etc. would be measured in units of constant purchasing power in terms of the Daily CPI.
Variable real value non-monetary items, e.g., property, plant, equipment, inventory, stock, finished goods, consumer products, listed and unlisted shares, etc. would be measured in terms of International Financial Reporting Standards (at, e.g., fair value – market price) and then historical values would be updated DAILY in terms of the Daily CPI till they are again measured in terms of IFRS (e.g. market price).
This would stabilise the constant item economy over a very short period of time.
2. Secondly the Venezuelan Central Bank should issue a decree that ALL monetary items should be inflation-adjusted on a daily basis in terms of the Daily CPI. Chile is doing this with 25% of its broad M3 money supply for years already.
There would still be hyperinflation in Venezuela if the Central Bank keeps printing too many Bolivars. But, there would be no cost of or gain from hyperinflation when ALL monetary items are inflation-indexed daily in terms of the Daily CPI.
It would be a real revolution if Venezuela were to do this.
The above revolution in the constant real value non-monetary item economy (1) can be brought about by the IASB by a simple change in IAS 29 from using the month-end CPI to using the Daily CPI as was done in Brazil and other Latin American countries with daily indexation or daily monetary correction or daily price-level restatement from 1964 till 1994. Unfortunately the IASB knows very little about capital maintenance in units of constant purchasing power in terms of a daily index. Currently the IASB staff is attempting to ban its use during low and high inflation. Unbelievable, but true.
The IASB unfortunately does not understand capital maintenance in units of constant purchasing power in terms of a daily index although it was widely used in Latin America in the recent past. The IASB refuses point blank to acknowledge that IAS 29 in terms of the month-end CPI had absolutely no positive effect during 8 years of full implementation in Zimbabwe’s economy even though all accountants in the world – except at the IASB – have the common sense to see that it had no effect at all. The IASB only very recently very vaguely acknowledged that Capital Maintenance in Units of Constant Purchasing Power is being implemented in IAS 29 after I pointed it out to them. IAS 29 was authorized 24 years ago in 1989. The IASB does not yet understand the automatic constant purchasing power capital maintenance effect of using the Daily CPI instead of the monthly published CPI in IAS 29. They are slow learners. They are intoxicated with HCA and the stable measuring unit assumption.
The daily indexation of ALL monetary items (100%) is another revolutionary step not yet taken by any country although Chile has been doing it to 25% of its money supply for years as confirmed to me by the Central Bank of Chile.
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