Understanding IAS 29 per PricewaterhouseCoopers: Correction 5: The stable measuring unit assumption erodes real value during low inflation too

Understanding IAS 29 per PricewaterhouseCoopers: Correction 5: The stable measuring unit assumption erodes real value during low inflation too

 ‘This produces a meaningful result provided that there are no dramatic changes in the purchasing power of money.’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

The generally accepted, globally implemented, traditional Historical Cost Accounting model, i.e., financial capital maintenance in nominal monetary units, does not result in maintaining the real value of capital constant during inflation and deflation since this is impossible, per se.

‘Dramatic changes’ are considered by PricewaterhouseCoopers and all Historical Cost accountants to be 26 per cent inflation for three years in a row, i.e., 100 per cent cumulative inflation over three years, the generally accepted definition of hyperinflation by millions of accountants worldwide who follow the IASB´s definition of hyperinflation.  A few academics, particularly Prof Steve Hanke, very unscientifically do not recognize the IASB´s generally accepted definition of hyperinflation. These few academics follow Cagan´s definition of 50 per cent inflation per month.

Thus PricewaterhouseCoopers, the IASB and all Historical Cost accountants consider inflation of 15 or 20 per cent per annum as not dramatic and would not require the implementation of IAS 29. This is obviously a mistake. This is in the process of being corrected by the IASB. This however takes a very long time via the IFRS process. The Argentinian Accounting Federation submitted a proposal, entitled ‘IFRS X INFLATION’ to the IASB in 2010 which proposes changes to the accounting model at inflation of 10 per annum or cumulative inflation of 26 per cent over three years. I amended the Argentinian Federation´s proposal in January 2012 to ‘IFRS X CAPITALMAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER’. The IASB voted unanimously in May 2012 to make the replacement of IAS 29 a research project in the future. This research project has not jet started at the IASB.

The implementation of the very destructive stable measuring unit assumption, even at 2 per cent inflation per annum, results in the erosion (destruction) of hundreds of billions of US Dollars in the real value of constant real value non-monetary items per annum in the world economy. PricewaterhouseCoopers, the IASB and most HC accountants do not understand this.

Nicolaas Smith

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