Financial capital maintenance in units of constant purchasing power during hyperinflation is authorized in current IFRS
Under IAS 29 Financial Reporting in
Hyperinflationary Economies, financial capital maintenance in nominal monetary units is
implemented; i.e., the Historical Cost Accounting model which includes the
application of the stable measuring unit assumption during hyperinflation.
‘‘Inflation-adjusted
financial statements are an extension to, not a departure from,
historical cost accounting.’
PricewaterhouseCoopers, Understanding IAS 29, 2006, Page 5.
IAS 29 was implemented during the last six
years of hyperinflation in Zimbabwe with no
effect at all.
IAS 29 is only required for the restatement
of Historical Cost or Current Cost financial statements during hyperinflation.
IAS 29, Par. 8 states:
‘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 is thus not required when an entity implements financial capital
maintenance in units of constant purchasing power during hyperinflation as
authorized at all levels of inflation and deflation, including hyperinflation,
in current IFRS in The Conceptual Framework (2010), Par. 4.59 (a) which states:
‘Financial capital maintenance can be
measured in either nominal monetary units or units of constant purchasing
power.’
Financial capital maintenance in units of
constant purchasing power during
hyperinflation is thus authorized in terms of current
IFRS.
The stable measuring unit assumption is, in
principle, never implemented under financial capital maintenance in units of
constant purchasing power. When it is implemented in practice, e.g., with the
measurement of monetary items in nominal monetary units, then the net monetary
loss or gain is calculated and accounted under financial capital maintenance in
units of constant purchasing power accounting.
Financial capital maintenance in units of
constant purchasing power is not Constant Purchasing Power Accounting, i.e., it
is not the restatement of non-monetary items in Historical Cost or Current Cost
financial statements.
Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or
€2.68
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Hi I like your article regarding Financial capital maintenance in units of constant purchasing power during hyperinflation is authorized in current IFRS
ReplyDeletebut I will love if you write about Managerial accounting too.
Hi Saleem,
ReplyDeleteThank you for the visit and comment.
Financial capital maintenance in units of constant purchasing power is the same as Constant Item Purchasing Power Accounting at all levels of inflation and deflation, including durin hyperinflation.
It is a departure from Historical Cost Accounting. The fundamental difference is that the stable measuring unit is never implemented under financial capital maintenance in units of constant purchasing power. Everything is done at real value: in Managerial Accounting too. I take it you equat Managerial Accounting to Cost and Management Accounting.
Simply take any item in Managerial Accounting and update it to its current real value, i.e. it´s value today at today´s Daily CPI.
First you will have to find the Daily CPI for your country. If your government issues government capital inflation-indexed bonds, then you already have a Daily CPI in your country. The Daily CPI for your country is the one or two month lagged daily interpolated index that is used in your country to price your government inflation-indexed bonds on a daily basis: these bonds are bought and sold on a daily basis in your country´s capital markets.
All you do then is multiply any item in your Managerial Accounts by the update factor you derive from dividing the value of your Daily CPI today, with the value of the Daily CPI on the date the item was purchased / came about / was contributed / etc. Then you have its real value today.
Since the Daily CPI changes daily, all your Managerial Accounts values change daily in terms of the daily changing Daily CPI.
There you have it.
Obviously you have to abandon the Historical Cost Accounting model and change over to the Financial Capital Maintenance in Units of Constant Purchasing Power model (which is the same as Constant Item Purchasing Power Accounting) in your financial accounting.
This is authorized at all levels of inflation and deflation, including during hyperinflation, in The Conceptual Framework (2010), Par. 4.59 (a).
Financial Capital Maintenance in Units of Constant Purchasing Power is the same as Constant Item Purchasing Power Accounting. Why don´t you buy the book? It is only USD 2,99.
Kind regards,
Nicolaas Smith