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Tuesday, 5 May 2015

IASB bluntly rejects Latin America´s request for Capital Maintenance in Units of Constant Purchasing Power during low inflation.

"IASB Update 


The IASB met in public from 27-29 April 2015 at the IASB offices in London, UK.

One of the topics for discussion was High Inflation.  


High Inflation (Agenda Paper 14)

The IASB discussed high inflation, a project in the research program. The purpose of this project is to consider the requests made by the Federación Argentina de Consejos Profesionales de Ciencias Económicas, the Argentinian standard-setter, and the Group of Latin American Standard Setters (GLASS) to: 

  • eliminate or reduce the cumulative inflation rate threshold currently included in IAS 29 Financial reporting in Hyperinflationary Economies to identify when hyperinflation exists; and
  • to modify the procedures for reporting the adjustments resulting from restating the financial statements.
The IASB tentatively decided that it would not propose lowering the inflation threshold in IAS 29 and nor would it do any work on developing an alternative to IAS 29 or a Standard that addresses inflation more generally. The project will therefore be designated as having a low priority but will remain on the research programme to enable interested parties to comment on these decisions in the Agenda Consultation. The 13 IASB members present supported this decision.

In addition, the IASB plans to ask its Emerging Economies Group to examine whether there could be merit in developing disclosure requirements for entities in jurisdictions suffering from high inflation."

Copyright (c) International Financial Reporting Standards Foundation

The above is a verbatim copy of the email to subscribers. IASB Update April 2015 is available here

Comment

The fact that Latin American standard setters requested the IASB to ELIMINATE the cumulative inflation rate threshold for the implementation of financial capital maintenance in units of constant purchasing power (the IASB-termed "restatement" approach) for which IASB guidance has been supplied since April 1989 in IAS 29 Financial Reporting in Hyperinflationary Economies, means that they basically requested authorization for Capital Maintenance in Units of Constant Purchasing Power at any inflation rate, even at 2% annual inflation. If it were done in terms of the Daily CPI it would certainly solve Latin America´s financial stability problems.

Since not a single IASB board member is able to explain to anyone that only daily inflation indexing of all constant real value non-monetary items - as so successfully implemented for 30 years from 1964 till 1994 in Brazil - would give Latin America what they requested, the above rejection of the request is thus not a surprise. IASB board members do not understand that only Daily Indexing as described above, could solve the problem. 

Not a single IASB board member knows that Brazil implemented financial capital maintenance in units of constant purchasing power as authorized in the Conceptual Framework, Par. 4.59 (a) under the name of "correcção monetária" or monetary correction. Not a single IASB board member even knows of the existence of the Brazilian Unidade Real de Valor (URV) daily index used in 1994.  Not a single IASB board member would be able to explain the most basic concepts of financial capital maintenance in units of constant purchasing power originally authorized in IAS 29 in April 1989. The IASB until a year ago stated on the IFRS website that IFRS provide no guidance for financial capital maintenance in units of constant purchasing power. I had to point out to them that the guidance is there in IAS 29 since 1989. For 24 years the IASB did not realize it! How can you expect the current IASB board members to agree to urgent research - as requested by Latin America - when they are completely clueless about financial capital maintenance in units of constant purchasing power even though they have published various of my comment letters regarding the matter over the last few years?

They are ignorant about the subject. Naturally they will reject a request for research. 

Nicolaas Smith

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