IAS 29 guarantees the erosion of the internal economy during hyperinflation

IAS 29 guarantees the erosion of the internal economy during hyperinflation

 

The implementation of IAS 29 Financial Reporting in Hyperinflationary Economies automatically causes the internal economy in a hyperinflationary economy to contract as a result of the fact that it requires the use of the monthly CPI to measure items that are valued at a daily changing price level. See Hyperinflation examplecomparing IAS 29 and Capital Maintenance in Units of Constant Purchasing Powerwith Zimbabwe data as presented to the IASB on 8 January 2013.

 

Balance sheet non-monetary assets and liabilities can be measured at any time at their fair values. During inflation and hyperinflation, price setters in the free market automatically adjust variable items´ prices to account for the lower value of the monetary unit of account.  The free market price of a  building would automatically be adjusted in the free market to reflect the change in the real value of the monetary unit of account over time.

 

The stable measuring unit assumption, causing the cost of inflation and the cost of hyperinflation,  effects the real value of monetary items over time. It also effects the real value of constant real value non-monetary items. Inflation and hyperinflation would have no cost without the implementation of the stable measuring unit assumption; i.e., without the implementation of Historical Cost Accounting. Capital Maintenance in Units of Constant Purchasing Power was authorised in IFRS in 1989 as an alternative to HCA at all levels of inflation and deflation, including during hyperinflation. The failed IAS 29 is not required during hyperinflation when an entity implements CMUCPP because the latter is not a HCA model and only HC and CC financial statements can be restated in terms of the failed IAS 29.

 

The real value of variable real value non-monetary items are thus continuously adjusted to reflect (1) the change in demand and supply for the item and (2) the change in the real value of the monetary unit of account; i.e., every time the general price level changes. When the general price level changes daily, the price level component of the price is adjusted daily; i.e., every time the general price level changes which may be more than once a day during severe hyperinflation.

 

This price level adjustment for a variable item´s real value does not have to accompany every change of the general price level as long as the item is not being exchanged. The moment it is valued in a period end financial report, the item´s real value can be stated, it can be fair valued, at the measuring unit current at the end of the financial period. The fact that it has not been fair valued during the entire financial year before the period end date (or during a very long period before), does not effect its real value: the stable measuring unit assumption has no effect on the real value of non-monetary items.

 

This is true for balance sheet constant real value non-monetary items too. For example, capital can be measured at the measuring unit current at the balance sheet date. Capital is equal the real value of net assets.

 

This happens naturally in a free market for variable real value non-monetary items where their prices are determined by supply and demand for an item. See the free market price for quoted shares, commodities and most variable items in the world economy. For example, the change in the price of oil is indicated by its daily quotation in the free market.

 

During hyperinflation the general price level changes daily at a rate as indicated by the daily US Dollar free-market exchange rate or a URV based Daily Index. Where a government in a hyperinflationary economy fixes the country´s exchange rate with the US Dollar, this daily change in the general price level is indicated by the US Dollar daily parallel or black market rate.

 

The internal economy, internal demand is mostly automatically eroded by the fact that salaries, wages, rentals, etc. are paid during hyperinflation at a price level generally behind the actual price level at the time of payment when the monthly published CPI is used as required by IAS 29. See hyperinflation example above. The monthly CPI is normally not available at month end. It only becomes available, generally at the earliest, by the 7th of the following month.

 

The implementation of IAS 29 thus guarantees the erosion of the internal economy in this manner. This can not be stopped under IAS 29 with the use of the monthly published CPI.

 

IAS 29 is an inappropriate accounting model.

 

Capital Maintenance in Units of Constant Purchasing Power in terms of a daily index as authorised in IFRS in 1989 at all levels of inflation and deflation, including during hyperinflation, would automatically maintain the constant purchasing power of capital (equity) constant for an indefinite period of time in all entities that at least break even in real value – all else being equal.

 

It would also stabilise the constant item economy at all levels of inflation and deflation, including during hyperinflation.

 

Inflation-indexing the entire money suppply on a daily basis with complete co-ordination would eliminate the total cost of inflation or cost of hyperinflation (not actual inflation and hyperinflation) from the monetary economy.

 

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Nicolaas Smith

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