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."
Hyperinflation has no effect on the real value of non–monetary items
no effect on the real value of non–monetary items
only erodes the real value of the monetary unit extremely rapidly.
Hyperinflation has no effect on the real value of non–monetary items. All
non–monetary items (variable and constant real value non–monetary items) maintain
their real values during hyperinflation when they are measured in units of
constant purchasing power daily in terms of a daily parallel rate (a black
market or street rate) normally the daily official or unofficial US Dollar or
other unofficial hard currency parallel exchange rate or an official
Brazilian–style daily URV non–monetary
index normally almost totally based on the daily US Dollar exchange rate as
Brazil did during 30 years of very high and hyperinflation.
stable measuring unit assumption (HCA) – not hyperinflation – unknowingly,
unnecessarily and unintentionally erodes the real value of constant real value
non–monetary items not maintained constant as fast as hyperinflation erodes the
real value of the local currency and other monetary items, e.g., loans stated
in the local currency, because all economic items (monetary, variable and
constant items) in the hyperinflationary economy are measured in terms of the
hyperinflationary monetary unit. A monetary meltdown erodes all real value only
in the monetary economy; i.e., in the local currency money supply.
is not always stopped with first a period of severe hyperinflation in the final
stage and then a complete monetary meltdown. Hyperinflation was successfully
overcome by various countries, e.g., Turkey,
Brazil and Angola, without dollarization or a
actually grew their non–monetary economy in real value during 30 years of very
high and hyperinflation of up to 2000 per cent per annum from 1964 to 1994 and
never had severe hyperinflation followed by a complete monetary meltdown at the
stopped its hyperinflation with the Real Plan in
1994. Brazil managed to have years of positive Gross Domestic Product growth
during those 30 years of very high and hyperinflation because the various
governments during those three decades supplied the population with a daily
non–monetary index based almost entirely on the daily US Dollar exchange rate
with their monetary unit. It was used to update most non–monetary items
(variable and constant real value non–monetary items), e.g., goods, services,
equity, trade debtors, trade creditors, salaries payable, wages payable, taxes
payable, etc., in the hyperinflationary economy daily.
not have been able to maintain its non–monetary or real economy relatively
stable with actual real GDP growth during hyperinflation if it had applied
restatement of HC or CC financial statements in terms of the period–end monthly
published CPI as required in IAS 29 Financial Reporting in Hyperinflationary
Economiesduring that period. IAS 29
does not require continuous daily measurement of all non–monetary items in
terms of a daily index during hyperinflation. IAS 29 does not require
continuous daily updating of all non-monetary items in terms of the US Dollar
parallel rate or a Brazilian–style URV
daily index rate. IAS 29 simply requires restatement of Historical Cost and
Current Cost financial statements during hyperinflation applying the monthly
Consumer Price Index at the end of the reporting period (monthly, quarterly,
six monthly or annual) – generally available a month or two months after the
current month – to make these financial statements more useful. It is not the
intention of IAS 29 to, and in its current form it cannot, stop the continuous
daily rapid erosion of the real value of constant real value non–monetary items
never maintained constant as Brazil did for 30 years of high and hyperinflation
generating positive economic growth.
daily very rapid erosion of constant real value non-monetary items never
maintained constant is caused, not by hyperinflation, but, by the implementation
of the stable measuring unit assumption (HCA) during hyperinflation. Applying
the monthly CPI a month or two months after the current month is very
ineffective during hyperinflation as far as the constant real non–monetary
value of salaries, wages, rentals, equity, trade debtors, trade creditors,
etc., positive economic growth, economic stability in the real or non–monetary
economy, the maintenance of internal demand and the continuous daily
maintenance of the real value of all non–monetary items during hyperinflation
are concerned. All non–monetary items (variable and constant items) have to be
updated daily in terms of the parallel US Dollar rate or a Brazilian–style URV daily index rate in order to
maintain the real economy relatively stable during hyperinflation in the local
currency monetary unit. That would be financial capital maintenance in units of
constant purchasing power (CIPPA) during hyperinflation.
the stable measuring unit assumption is implemented under HCA or financial capital
maintenance in nominal monetary units also originally authorized in IFRS in the
Framework (1989), Par. 104 (a), it is assumed, in practice, that there was, is
and never ever will be inflation, deflation or hyperinflation as far as the
valuation of constant real value non–monetary items are concerned. It is assumed,
in principle, that money was, is and will always in the future be perfectly
stable at all levels of inflation, hyperinflation and deflation.
Neither IFRS 29 nor
FAS 89 is complete in the sense of a single authoritative standard.
hyperinflation is defined by the IASB as a period at the end of completely
uncontrolled hyperinflation when exchangeability between the hyperinflationary
monetary unit and most relatively stable foreign currencies does not exist. The
wording of the IASB definition thus confirms that at least one exchangeability
has to exist for prices to be established in the hyperinflationary monetary
unit; i.e., for severe hyperinflation to exist. Severe hyperinflation is only
present when there is still exchangeability with at least one relatively stable
foreign currency in order for prices to continue to be set in the
hyperinflationary monetary unit in terms of this final exchangeability. The one
exchange rate that lasted till the end of severe hyperinflation in Zimbabwe
was the Old Mutual Implied Rate (OMIR).
The ratio of the
Old Mutual share price in Harare to that in London equals the Zimbabwe dollar/sterling exchange
Hanke and Kwok 2009: 8
(severe or not) stops the moment exchangeability between the local
hyperinflationary currency and all foreign currencies does not exist.
hyperinflation came to an abrupt halt. The trigger was an intervention by the
Reserve Bank of Zimbabwe.
On November 20, 2008, the Reserve Bank’s governor, Dr. Gideon Gono, stated that
the entire economy was “being priced via the Old Mutual rate whose share price
movements had no relationship with economic fundamentals, let alone actual
corporate performance of Old Mutual itself” (Gono 2008: 7–8). In consequence,
the Reserve Bank issued regulations that forced the Zimbabwe Stock Exchange to
shut down. This event rapidly cascaded into a termination of all forms of
non–cash foreign exchange trading and an accelerated death spiral for the Zimbabwe
dollar. Within weeks the entire economy spontaneously “dollarized” and prices stabilized.
Hanke and Kwok 2009: 9–10
was severe hyperinflation in Zimbabwe
while there was exchangeability (prices could still be set in the ZimDollar)
with at least one relatively stable foreign currency – the British Pound in
this case as it was made possible via the OMIR. When this last exchangeability
stopped it was not possible to set prices in the ZimDollar anymore and severe
hyperinflation stopped: no exchangeability means no hyperinflation. That was a
monetary meltdown. The entire ZimDollar money supply had no value as from that
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.