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Sunday, 5 January 2014

IAS 29´s complete failure is of very little importance to the accounting profession

IAS 29´s complete failure is of very little importance to the accounting profession

IAS 29 Financial Reporting in Hyperinflationary Economies requires capital maintenance in units of constant purchasing power in terms of the measuring unit current at the end of the reporting period. This does not result in actual capital maintenance in units of constant purchasing power which can only be achieved in terms of an index that follows all - at least daily - changes in the general price level during hyperinflation, low inflation, high inflation and deflation. IAS 29 requires capital maintenance in units of constant purchasing power in terms of the measuring unit current at the end of the reporting period, i.e., in terms of the monthly published CPI and not the Daily CPI or the daily parallel rate, normally the Daily US Dollar parallel rate.

IAS 29 had absolutely no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy. 

The fact that IAS 29 had no positive effect in Zimbabwe is not widely known or widely acknowledged ("widely-used") because Zimbabwe´s economy is so small (GDP of USD 5 billion in 2008) that whatever happened there is of absolutely no importance to the accounting profession outside Zimbabwe and especially not to the IASB. 

Michael Stewart, the IASB´s Director of Implementation Activities, stated in January, 2013 that the IASB had no view on whether IAS 29 had or did not have a positive effect in Zimbabwe because the IASB had not yet ordered a special review of IAS 29´s implementation in Zimbabwe. He further stated that "financial reporting has no effect on the economy" when he referred to the implementation of IAS 29 in Zimbabwe, which is obviously a completely wrong statement. 

The fact that Zimbabwe´s economy imploded after 8 years of the full implementation of IAS 29 is not sufficient for the IASB to realise that IAS 29 had no positive effect in Zimbabwe. The IASB is only capable of making such an evaluation after a special review - according to Michael Stewart. 

It thus appears that the IASB as an international accounting standard-setter does not have the common sense and judgement necessary to realise that IAS 29 had no positive effect in Zimbabwe. In my opinion it is much more likely that the IASB does not have the humility to admit that IAS 29 is seriously flawed since it had absolutely no positive effect in Zimbabwe or Venezuela or Belarus. 

The IASB will never have to admit that IAS 29 is fundamentally flawed because it is normally implemented in small, unimportant and insignificant economies. After the 2008 financial crisis the IASB quickly had a special task force to deal with fair value because it affected the major world economies. There will never be a special task force at the IASB to fix IAS 29 because it is a matter of almost no importance in the world economy. IAS 29 will most probably never be changed to require capital maintenance in units of constant purchasing power in terms of an index that follows all - at least daily - changes in the general price level because economies like Venezuela and Belarus are of absolutely no importance to the IASB and to the accounting profession in general.

The IASB very much works like a book editor: The Board collects information about what is "widely-accepted" in the accounting profession and then reverse-engineers items to arrive at IFRS that "fit into" what is currently "widely-accepted" with little attempt to arrive at the fundamental concepts behind general purpose accounting and financial reporting. 

The fact that IAS 29 had no positive effect in Zimbabwe is thus of almost no consequence at the IASB since it is in general not "widely-accepted" as being of any importance as a result of the insignificance of very small economies like Zimbabwe.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.