The high inflation 1970´s

The high inflation 1970´s


During the period of high inflation in the 1970´s various inflation accounting models were tried in an attempt to reflect in company financial reports the effect of high inflation on monetary and – mistakenly – non–monetary items too. Inflation has no effect on the real value of non–monetary items. It was not realized that it was simply the free choice of implementing the stable measuring unit assumption that was eroding the real value of existing constant real value non–monetary items never maintained constant as a result of insufficient revaluable fixed assets (revalued or not) during low inflation. The US FASB did mention the stable measuring unit assumption in FAS 89. The IASB never mentioned it in either IAS 6 or IAS 15. Everybody blamed inflation. “The erosion of business profits and invested capital caused by inflation” was clearly stated in FAS 33 and “the erosive impact of inflation on profits and capital” was stated in both FAS 33 and FAS 89.

“Relative to most changes in financial reporting, the changes required by Statement 33 were monumental. Because most accountants and users of financial statements have been inculcated with a model of financial reporting that assumes stability of the monetary unit, accepting a change of this consequence would take a lengthy period of time under the best of circumstances.” FAS 89, 1986, p 6.

The implementation of these changes was eventually made voluntary in FAS 89 and the “monumental” changes only materialized as far as the valuation of variable real value non–monetary items in terms of the requirements stipulated in International Financial Reporting Standards and US GAAP were concerned. These changes were developed and implemented by the IASB in the form of IAS and IFRS relating to the valuing of variable real value non–monetary items in the years that followed. The “monumental” changes envisaged in FAS 33 with regard to the valuation of existing constant real value non–monetary items never happened although they were authorized in IFRS in the Framework (1989), Par 104 (a). They were attempted in IAS 29 but with very little success to date. See the implementation of IAS 29 in Zimbabwe.

During the high inflation 1970´s inflation accounting described a range of accounting models designed to reflect the effect of changing prices on financial reporting. Changing prices included changes in specific prices (of variable real value non–monetary items) as well as changes in the general price level (CPI), - i.e., inflation - which ONLY resulted in the erosion of the purchasing power of monetary items (money and other monetary items) and nothing else. It was and still is generally accepted that inflation affects the real value of non–monetary items. That is not true. Inflation has no effect on the real value of non–monetary items. Inflation is a uniquely monetary phenomenon as so famously stated by Milton Friedman. It is not inflation, but, the selection of the HCA model which includes the implementation of the very erosive stable measuring unit assumption and financial capital maintenance in nominal monetary units (the first based on the fallacy that money is perfectly stable and the second based on the very popular IFRS–approved accounting fallacy that financial capital maintenance can be measured in nominal monetary units which is impossible per se during inflation and deflation) which unknowingly, unintentionally and unnecessarily erodes the real value of existing constant real value non–monetary items never maintained constant during low inflationary periods in the world´s constant real value non–monetary item economy. One of the inflation accounting models that was tried unsuccessfully in the 1970´s and 1980´s was Constant Purchasing Power Accounting (CPPA) under which all non-monetary items (variable and constant items) were measured in units of constant purchasing power by applying the period end CPI during high inflation.

The Financial Accounting Standards Board issued an exposure draft in the United States in January, 1975, that required supplemental financial reports on a Constant Purchasing Power Accounting inflation accounting price–level basis. The Securities and Exchange Commission in the USA proposed in 1976 the disclosure of the current replacement cost of amortizable, depletable and depreciable assets used for production as well as most inventories at the financial year–end. It also proposed the disclosure of the approximate value of amortization, depletion and depreciation as well as the approximate value of cost of sales that would have been accounted in terms of the current replacement cost of productive capacity and inventories.

Both supplemental Constant Purchasing Power Accounting inflation accounting financial statements and value accounting were experimented with in Canada. Australia tried both replacement–cost inflation accounting and CPP price–level inflation accounting. Netherland companies experimented with value accounting. Replacement–cost disclosures for equity capital financed items were considered in Germany. CPP inflation accounting supplemental financial statements were tried in Argentina. Brazil successfully used daily non–monetary indexes during high and hyperinflation to update constant real value non–monetary items and variable real value non–monetary items for the 30 years from 1964 to 1994. In the United Kingdom an original proposal of supplementary CPP financial accounting financial reports was replaced by the Sandilands Committee proposal for a value accounting approach for inventories, marketable securities and productive property. South Africa had published a discussion paper on value accounting at the time.

The FASB issued FAS 33 Financial Reporting and Changing Prices in 1979. It only applied to certain large, publicly held enterprises. No changes were to be made in the primary financial statements; the information required by FAS 33 was to be presented as supplementary information in published annual reports.

These companies were required to calculate and report:

a. Income from continuing operations reflecting the effects of general inflation

b. The purchasing power loss or gain on net monetary items.

c. Calculate income from continuing operations on a current cost basis

d. Calculate the current cost amounts of property, plant, equipment and inventory at the end of the fiscal year

e. Report increases or decreases in current cost amounts of property, plant, equipment and inventory, net of inflation.

FAS 89 Financial Reporting and Changing Prices superseded FASB Statement No. 33 in 1986 and made voluntary the supplementary disclosure of constant purchasing power/current cost information.


Nicolaas Smith

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