IAS 29 is fundamentally flawed

IAS 29 is fundamentally flawed

Inflation accounting describes financial capital maintenance in units of constant purchasing power as applied only during hyperinflation where under all non-monetary items (variable and constant real value non-monetary items) are updated daily in terms of a daily non-monetary index or in terms of a daily official or unofficial parallel rate, normally the US Dollar parallel rate. The Constant Item Purchasing Power Accounting model under which only constant items (not variable items) are measured in units of constant purchasing power by applying the monthly Consumer Price index ONLY during LOW inflation and deflation. CIPPA is not an inflation accounting model.


Hyperinflation, as defined in IFRS, is cumulative inflation approaching or equal to 100% over three years; i.e., 26% annual inflation for three years in a row. Inflation accounting is implemented in order to stop the erosion of real value in all non-monetary items (both variable and constant real value non-monetary items) caused by the implementation of the very erosive stable measuring unit assumption during hyperinflation.

Under the stable measuring unit assumption it is considered that changes in the purchasing power of money are not sufficiently important to require financial capital maintenance in units of constant purchasing power – normally during low inflation and deflation.

Most entities in low inflationary and deflationary economies implement the Historical Cost Accounting model that is based on the stable measuring unit assumption. This means that all balance sheet constant real value non-monetary items (e.g. shareholders´ equity, trade debtors, trade creditors, provisions, other non-monetary payables, other non-monetary receivables, etc.) and most (not all) income statement items are measured at their historical cost, i.e. financial capital maintenance is measured in nominal monetary units as authorized in IFRS. Some income statement items, e.g. salaries, wages, rentals, etc. are updated annually in terms of the CPI, but, are then paid on a monthly basis implementing the stable measuring unit assumption under HCA. It is impossible to maintain the real value of financial capital constant with financial capital maintenance in nominal monetary units per se during inflation, deflation and hyperinflation. Financial capital maintenance in nominal monetary units during inflation and deflation, although authorized in IFRS, is still a popular accounting fallacy not yet extinct.

Complete inflation accounting, i.e. the use of an accounting model to automatically stop the erosion of real value in all non-monetary items (variable and constant items) in all entities that at least break even, is only possible with financial capital maintenance in units of constant purchasing power by applying a daily non-monetary index or relatively stable daily parallel rate (please note NOT the monthly CPI) to the valuation of (please note NOT the “restatement of” Historical Cost or Current Cost period-end financial statements) all non-monetary items during hyperinflation.

This can be stated differently as follows: Only inflation accounting based on daily updating of all non-monetary items in terms of a daily index or daily parallel rate automatically maintains the real value of all non-monetary items in all entities that at least break even during hyperinflation; i.e. maintains the real of non-monetary economy stable during hyperinflation in the monetary unit / economy.

The best example of successful inflation accounting was the use in Brazil of a daily government-supplied non-monetary index to update all non-monetary items daily during the 30 years of very high and hyperinflation in that country from 1964 to 1994.

The IFRS response to the erosion of real value in non-monetary items caused by the implementation of the HCA model, i.e. the implementation of the stable measuring unit assumption, during hyperinflation is stated in IAS 29 Financial Reporting in Hyperinflationary Economies. IAS 29 requires entities operating in hyperinflationary economies, NOT to value or measure all non-monetary items in terms of a daily non-monetary index or a daily parallel rate, but, to simply restate HISTORICAL COST or Current Cost period-end financial statements in terms of the period-end CPI.



The financial statements of an entity whose functional currency is the currency


of a hyperinflationary economy, whether they are based on a historical cost


approach or a current cost approach, shall be stated in terms of the measuring


unit current at the end of the reporting period. IAS 29 Par 8



PricewaterhouseCoopers state the following regarding the use of the HCA model during hyperinflation:

"Inflation–adjusted financial statements are an extension to, not a departure from, historic cost accounting."

Financial Reporting in Hyperinflationary Economies – Understanding IAS 29, PricewaterhouseCoopers, May 2006, p 5.



The best example of the failure of the implementation of IAS 29 to have any effect at all on a hyperinflationary economy was its application, as duely required by the Zimbabwean Stock Exchange, by listed companies on the ZSE. The Zimbabwean real or non-monetary economy imploded in tandem with Zimbabwe´s monetary unit and monetary economy despite the implementation of IAS 29. The IASB actually officially admitted / agreed that it was impossible to implement IAS 29 during severe hyperinflation in Zimbabwe.

On the other hand, a daily parallel rate was available till the last day of hyperinflation in Zimbabwe, which officially ended on 20th November, 2008, when Gideon Gono, the governor of the Reserve Bank of Zimbabwe issued regulations that closed down the ZSE which stopped the daily Old Mutual Implied Rate (OMIR) being available in Zimbabwe. The (normally unofficial) parallel rate – usually the US Dollar parallel rate, is an excellent, not a perfect, substitute for a daily non-monetary index in a hyperinflationary economy (currently Venezuela). The US Dollar parallel rate was available 24/7, 365 days a year during Zimbabwe´s hyperinflation. Right at the end, during severe hyperinflation when the CPI was not being published any more, the OMIR was still available on a daily basis.

IAS 29 is fundamentally flawed by simply requiring the restatement of HC or CC period-end financial statements in terms of the period-end CPI instead of daily valuation / measurement of all non-monetary items in terms of a daily Brazilian-style index or parallel rate.

Many people are requesting a fundamental review of IAS 29.


Nicolaas Smith

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