Thursday, 10 January 2013

In my opinion the IASB has a very irresponsible attitude to the failure of IAS 29

In my opinion the IASB has a very irresponsible attitude to the failure of IAS 29


In my opinion the IASB is failing its responsibility to authorise International Financial Reporting Standards that comply with its own stated objective of general purpose financial reporting:


The provision of decision-useful financial information about the reporting entity to capital providers and other users.


After I presented an example (available here) to the IASB that in my opinion clearly illustrates the fact that financial reports prepared under the failed IAS 29 during hyperinflation are (1) not timely, (2) cannot be compared to prior year financial statements, (3) are not understandable and (4) always provide a different accounting result than under Capital Maintenance in Units of Constant Purchasing Power, Michael Stewart, the Director of Implementation Activities at the IASB, very firmly indicated that the IASB is satisfied with the implementation of the - in my opinion -  failed IAS 29 Financial Reporting in Hyperinflationary Economies which had no positive effect during 8 years of implementation during hyperinflation in Zimbabwe.


When I asked him in a teleconference on 8 January 2013 what the IASB´s response is to the fact that the implementation of the - in my opinion - failed IAS 29 had - in my opinion - no positive effect during 8 years of implementation during hyperinflation in Zimbabwe, he indicated very firmly that financial reporting (accounting) has no effect on the economy – an indication that is - in my opinion - clearly totally wrong. It is very strange and very worrying - in my opinion - that a senior director at the IASB makes such an indication. According to him it is what users do with the information in financial reports that affects the economy, not the actual measurement activities happening during financial reporting.

Update from Michael Stewart: "In response to comments you made about how you think that CMUCPP would have solved Zimbabwe's hyperinflation problem, I expressed a view about the effect of financial reporting on the economy. As you noted in your blog of 10 January 2013 I expressed a view that it is the actions that people take and the way that they use the information contained in financial reporting that I think can affect an economy, rather than just the financial reporting itself (in retrospect I accept that the language I used could have been more specific to the matter we were discussing, which was about how financial reporting could have solved Zimbabwe's hyperinflation problem)."


When I pointed out to him that the traditional Historical Cost Accounting model employs various measurement bases, including the measurement of, for example, salaries, wages and rentals on an annual basis in units of constant purchasing power, that this is generally done by accountants worldwide for many decades now and that this certainly affects the economy, my statement was simply ignored by Michael Stewart, representing the IASB during the teleconference. He did not specifically indicate whether or not he understood what I stated. I assumed he understood what I stated.


In my opinion the IASB finds it difficult to understand the principles, workings, implementation and effect of IFRS-authorised Capital Maintenance in Units of Constant Purchasing Power in terms of a URV-based daily index - authorised in IFRS since 1989. In my opinion the IASB has difficulty in understanding IFRS-authorised CMUCPP as this was - in my opinion - very evident during my presentation of a detailed example to the IASB.

The staff member working with the IASB´s original very simple example,  e-mailed me that he could not balance his simple balance sheet “due to lack of my understanding of the CMUCPP model”. I previously answered all his questions regarding the balancing of his low inflation balance sheet. In my opinion, he did not learn even the most basic principles of IFRS-authorised CMUCPP - in my opinion - proven by the fact that he could not even balance his own simple 10 line balance sheet (shown here) implementing IFRS-authorised CMUCPP with his chosen 100% inflation from one year to the next. He sent me his unbalanced balance sheet. I sent him my detailed balanced example with 231 209 127.83 percent actual annual Zimbabwe hyperinflation from annual inflation data supplied by Prof. Steve Hanke in his article On Measuring Zimbabwe´s Hyperinflation.


In my opinion, I should have realized the difficulty for IASB staff members to understand the principles of CMUCPP as authorised in IFRS when I received the first example balance sheet from the IASB staff member stating that the example compares both cases: IAS 29 and CMUCPP. There was only an IAS 29 balance sheet in the example – as can be seen in the IASB example. There was no IFRS-authorised CMUCPP balance sheet. That was the IASB example of “both cases”. Here is the original example comparing “both cases” I received from the IASB. There is only an IAS 29 balance sheet in the example. Being very pleased and honoured to work with the IASB on the issue, I said nothing at the time.


Michael Stewart also simply indicated that I better understand this model. In my opinion, that was his way of dismissing the problem of them - in my opinion - not being able to understand IFRS-authorised CMUCPP and - in my opinion - not being responsible enough to learn the principles involved. The IASB staff members involved in this issue - in my opinion - were unable to learn the principles of IFRS-authorised CMUCPP and the effect on the economy of implementing those principles. They could not balance their own simple 10 line balance sheet implementing the basic principles of IFRS-authorised CMUCPP and their chosen 100% annual inflation.


In my opinion, this is a very worrying state of affairs when we take into that countries like Belarus, Venezuela and Iran are currently in hyperinflation and could stabilise their economies with the implementation of CMUCPP in terms of a URV-based Daily Index. Belarus and Venezuela now also implement IAS 29 for a number of years with no positive effect in their economies.


The implementation of Capital Maintenance in Units of Constant Purchasing in terms of a URV-based Daily Index 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 – at all levels of inflation and deflation, including during hyperinflation.


Implementing IFRS-authorised CMUCPP would stabilise the constant real value non-monetary economy in a hyperinflationary economy just as it would in all other economies operating at all other levels of inflation and deflation.


Daily inflation-indexing of the entire money supply would eliminate the cost of inflation and the cost of hyperinflation, not actual low inflation and actual hyperinflation, from the economy.


In my opinion, it appears that IASB staff members find difficulty in learning about the advantages of IFRS-authorised CMUCPP and - in my opinion - refuse to acknowledge or - in my opinion - even discuss the specific advantages and differences when they are presented to them in a detailed example. In my opinion, the IASB staff members simply ignore the advantages of CMUCPP just as the IASB - in my opinion - simply ignores the well proven fact that the failed IAS 29 had no positive effect during its implementation in Zimbabwe´s hyperinflationary economy and that it has no positive effect where it is currently implemented in Belarus and Venezuela.


In my opinion, this is a very irresponsible attitude from the IASB taking into account, in particular, the hardships that are currently being endured by the populations in hyperinflationary countries and that it can be avoided by the implementation of Capital Maintenance in Units of Constant Purchasing Power as authorised in IFRS in 1989.

The term IASB is used in this blogpost as a general term for generally everyone involved in international standard setting activities at the "IASB". I do know and acknowledge that only actual IFRS authorised by the actual International Accounting Standards Board are actual pronouncements of the actual Board.

The opinions stated in this blogpost and all blogposts on this blog are my private opinions. Blogs are generally regarded as expressions of private opinions.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

No comments:

Post a Comment