The failed IAS 29: the IASB´s
greatest failure
The
failed IAS 29 Financial Reporting in
Hyperinflationary Economies is the IASB´s greatest failure. Here is just
one example why: it was implemented during the last 8 years of hyperinflation
in Zimbabwe – which ended in 2008 - with no
positive effect in the economy. The implementation of the failed IAS 29
resulted in maintaining the very
negative effect of implementing HCA during hyperinflation in Zimbabwe,
because “Inflation-adjustment of
financial statements is an extension to, not a departure from historical cost
accounting,” as stated by PricewaterhouseCoopers in their publication Understanding IAS 29 (2006). The
implementation of the failed IAS 29 thus did
affect the Zimbabwean economy: very negatively. It affected the Zimbabwean hyperinflationary economy very negatively
because it resulted in maintaining HCA during hyperinflation.
When
the failed IAS 29 has no positive effect
during hyperinflation, why is the failed IAS 29 still an IFRS in 2013? The failed
IAS 29 restatement model in terms of the monthly published CPI (when the
general price level generally changes daily during hyperinflation) is still an
IFRS in 2013 because the IASB is satisfied with the failed IAS 29 since financial reporting has no effect in the
economy, according to Michael Stewart, Director of Implementation
Activities at the IASB, as very firmly indicated by him during a teleconference
on 8 January 2013.
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)."
The
above very firm indication by Michael Stewart is completely wrong: financial reporting does affect the
economy. The fact that financial reporting affects the economy is one of the fundamental – basic -
reasons why International Financial Reporting Standards are authorised by the
International Accounting Standards Board. It is one of the fundamental reasons
why the IASB exists.
Implementing
Historical Cost Accounting during hyperinflation has a very negative effect in a hyperinflationary economy which is
one of many proofs that financial
reporting does affect the economy.
The
implementation of the failed IAS 29 during the last 8 years of hyperinflation
in Zimbabwe had no positive effect
because “Inflation-adjustment of
financial statements is an extension to, not a departure from historical cost
accounting,” per PricewaterhouseCoopers in their publication Understanding IAS 29. Zimbabwean
entities implemented HCA during hyperinflation before the failed IAS 29 was
implemented in the country. The implementation of HCA during hyperinflation affected the Zimbabwean economy
very negatively. When the failed IAS 29
was implemented in Zimbabwe during hyperinflation, Zimbabwean companies simply
carried on with HCA during the financial year during hyperinflation because the failed IAS 29 requires the restatement of Historical Cost and Current Cost
financial statements during hyperinflation. This continued to affect the Zimbabwean
hyperinflationary economy very
negatively: see its final collapse in 2008.
It
is thus very strange and very worrying that Michael Stewart, a senior director
at the IASB, very firmly indicates that financial
reporting has no effect in the economy.
All views regarding the failed IAS 29 and all other aspects of financial
reporting are welcome and are treated with respect. This is part of the
scientific process. Very wrong indications (I made a few in the past - and learnt
a lot from correcting them) – from whoever - should be quickly acknowledged as
such and corrected. This is for the benefit of advancing with the long-lasting endeavour
of finding the correct solution to
(1) the very negative effects of the Generally Accepted Accounting Practice
of implementing the stable measuring
unit assumption in the measurement of constant real value non-monetary items
in the constant item economy during inflation, deflation and hyperinflation and
(2) the very negative effects of the Generally Accepted Accounting Practice
of implementing the stable measuring
unit assumption in the measurment of monetary items in the monetary economy
during inflation, deflation and hyperinflation.
In this respect, it is to be noted that Capital Maintenance in Units of
Constant Purchasing Power in terms of a Daily Index as authorised in IFRS in 1989 automatically maintains the constant purchasing power of
equity constant for an indefinite period of time at all levels of inflation and
deflation (including during hyperinflation) in all entities that at least break
even in real value – all else being equal. The
stable measuring unit assumption is never implemented under Capital Maintenance in Units of Constant
Purchasing Power.
Defending IAS 29 is defending a failed IFRS: see its implementation in
Zimbabwe.
I strongly support open discussion of all aspects of financial reporting.
I actively promote 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.
Opinions expressed on this blog are my personal opinions.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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