Understanding IAS 29 per PricewaterhouseCoopers: Correction 6: Reporting year financial statements are never adjusted for inflation under IAS 29

Understanding IAS 29 per PricewaterhouseCoopers: Correction 6: Reporting year financial statements are never adjusted for inflation under IAS 29

 ‘Significant changes in the purchasing power of money mean that financial statements unadjusted for inflation are likely to be misleading.’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

It is impossible to adjust reporting year financial statements for inflation under IAS 29. Reporting year financial statements are never adjusted for inflation under IAS 29.

Inflation only affects the real value of monetary items. It is impossible to adjust non-monetary items for inflation. Thus only monetary items can be adjusted for inflation. This happens in the case of, for example, daily inflation-adjusted government bonds (TIPS in the US) on an almost worldwide basis ; all mortgages in Colombia are inflation-adjusted daily in terms of the Colombian Real Value Unit; all 90-day deposits and many other items (25 per cent of the broad M3 money supply) are inflation-adjusted daily in Chile in terms of the Unidad da Fomento (UF), etc.

Actual monetary items values in reporting year financial statements are never adjusted for inflation under IAS 29. What is done is the net monetary loss or gain on monetary items are calculated and accounted under IAS 29 and under Capital Maintenance in Units of Constant Purchasing Power. That is the case with monetary items.

It is impossible to adjust constant real value non-monetary items for inflation in current year financial statements or anywhere else because inflation has no effect on the real value of non-monetary items. What happens is that constant real value non-monetary items are measured in units of constant purchasing power as authorized in the Conceptual Framework (2010), Par 4.59 (a) and guide-lined in IAS 29.

The PricewaterhouseCooper´s statement that

‘Significant changes in the purchasing power of money mean that financial statements unadjusted for inflation are likely to be misleading.’

should thus be corrected to state:

Significant changes in the purchasing power of money mean that financial statements prepared under the Historical Cost principle are likely to be misleading because the net monetary item loss or gain is not accounted.

The implementation of the stable measuring unit assumption means that Historical Cost financial statements are likely to be misleading because constant real value non-monetary items are measured in nominal monetary units during inflation, hyperinflation and deflation and result in the unnecessary erosion (destruction) of real value in constant real value non-monetary items never maintained constant under this model during inflation and hyperinflation.

Nicolaas Smith

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