Applicability of IAS 29 No 3
The many emails between Kenichi Yoshimura from the IASB and me regarding the Potential Agenda Item Request
7 January 2013
Dear Nicolaas,
Thank you so much for providing us with the revised example and your
observations on the outreach activities.
Please let us study them prior to the call.
Looking forward to talking to you tomorrow from 11:00 am.
Kind regards,
Ken
From: Nicolaas
Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 07 January 2013 11:42
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
Thank you for last
mail.
Attached please
find the latest update of the example before the meeting.
I changed the
start dates of items to show the effect of accounting items transacted at a
different daily rate in terms of always the month-end CPI under IAS 29 while
they are accounted at the actual daily rate under CMUCPP (not a HCA model). I
included hyperinflation in the prior year to show that effect too. The Long
Term Debt for $ 15 657.89 would of necessity be accounted incorrectly
through-out its lifetime as $5 000 under IAS 29 – there is no other way to do
it under IAS 29: IAS 29 is an inappropriate model. I showed the Other Expenses
accounts under the two models on the day of 29-2-08 in order to show the effect
of using different rates for the same transactions under the two models. It is
assumed we look at those accounts on 29-2-08 which is only possible in practice
under CMUCPP.
The only time
non-monetary items would be the same under the two models would be transactions
on the year-end date (during that single day with no price level change on that
day) when the BS is prepared on that day under both models. This could be done
for the CMUCPP BS but not for the IAS 29 BS. Non-monetary items would thus
never be the same.
Monetary items -
cash and other monetary items that are included in the money supply
(non-monetary Receivables and Payables never being included in the money
supply) - would be the same in the actual ledger accounts during the financial
year but never in any historical financial statements under the
two models – non-historical financial statements not being able
to be prepared under the two models.
Conclusions:
- Nothing is ever the same
in financial statements prepared under the two models.
- IAS 29 is an
inappropriate accounting model.
Your outreach
activities
I think you will
find that national accounting-standard setters with experience of hyperinflation
would know about the advantages of CMUCPP, but that they do (did) not see it as
an IFRS authorised accounting model that automatically maintains the
non-monetary economy stable (and can maintain the monetary economy stable too):
they understand (understood) it in other – maybe macro-economic - terms.
Brazil
instinctively understood the advantages of CMUCPP (daily measurement – in the
case of Brazil - of some monetary and most non-monetary items in units of
constant purchasing power) during 30 years of very high and hyperinflation from
1964 to 1994, but they did not see it as CMUCPP: an accounting model.Their
Central Bank (and Central Banks generally) looked for solutions to stop the
effects of hyperinflation: they never realised that the effect (cost) of
hyperinflation is caused by the implementation of the stable measuring unit
assumption in HC accounting. Daily indexing is the opposite of the stable
measuring unit assumption; it accompanies the daily changes in
the price level.
Daily indexing was
also totally ignored by the International Accounting Standards Committee, the
IASB´s predecessor body, in the formulation of IAS 29 in 1989.
Other Latin
American countries also instinctively understood the advantages of CMUCPP, but
they also did not see it as such, e.g., Chile that stopped “correcção
monetária” in 2010 or 11 to “conform with” IFRS and adopted HCA – not
realizing:
(a) that they had
been implementing a form of CMUCPP since 1967 and that
(b) it was
authorized in IFRS since 1989 and that it was totally unnecessary and a big
mistake to have stopped it “to conform with” IFRS.
The implementation
of aspects (parts) of CMUCPP developed naturally in high inflationary and
hyperinflationary LA countries in the past without them seeing it as part of a
complete alternative accounting model – alternative to HCA - (authorised in
IFRS) and that it that should simply be carried on with after high or
hyperinflation; i.e., during low inflation.
The reason was
that non-monetary items were not split in constant real value non-monetary
items and variable real value non-monetary items: the split only being
identified in 2005. They did not know which items to measure in units of
constant purchasing power during low inflation because during
hyperinflation it is necessary – in practice - to measure all non-monetary
items – irrespective of being variable or constant items – in units of constant
purchasing power. In practice – in the desparate fight against hyperinflation
(in fact, the fight against the stable measuring unit assumption,
i.e., HCA) – it is not necessary to know the difference between constant and
variable items - during hyperinflation: they all have to be measured in units
of constant purchasing power in terms of a daily index: the daily URV (and
other daily indices before it) in Brazil.
A lot of education
about CMUCPP is needed. Its practical implementation since 1977 in terms of daily
indices in LA is there for all to see and examine.
Kind regards,
Nicolaas
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Friday, January 4, 2013 3:24 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
Thank you so much for revising the example. The
conclusion in the example is in line with our understanding of the CMUCPP.
And please accept my apology for the delay in
rescheduling the call but can we have a chat on Tuesday 8th
January from 11:00 am?
If it does not work for you, please just let me
know.
With regard to our outreach, we are now trying
to cover jurisdictions that have experiences of hyperinflation using our own
channels and hope we can summarise the result of our outreach by the time of
the call. Now we are currently forming our views on this issue on the basis of
the information provided by you including the illustrative example. I think we
can discuss our view in the call.
Thank you again for your help,
Kind regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 04 January 2013 13:45
To: Yoshimura Kenichi
Subject: Fw: IAS 29 Agenda proposal
Dear Ken,
Attached please find the
latest updated version of the hyperinflation example.
It now shows clearly that IAS
29 is not an appropriate accounting model during hyperinflation as explained on
the spreadsheet.
I misspelt Prof. Pareja´s name
in my previous email.
Kind regards
Nicolaas
----- Forwarded
Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: Yoshimura Kenichi <kyoshimura@ifrs.org>
Sent: Thursday, January 3, 2013 5:10 PM
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
Thank you for changing to the
more elaborate example. I still need to improve it.
I really hope you are
contacting national standard-setters in hyperinflationary countries and
countries that have relatively recent experience of hyperinflation. I doubt
whether these national standard-setters would have the same grasp or view as I
have because I look at the issue from the viewpoint that I feel I can run any
company or country in hyperinflation in real values with CMUCPP as I did in
Auto-Sueco(Angola) in 1996. I confidently state that I would be able to stop
hyperinflation overnight at no cost with an IFRS: CF, Par 4.59 (a). It
authorises CMUCPP at all levels of inflation and deflation - including during
hyperinflation. I feel that I would be able to show any national
standard-setter how to stabilise their economy by them authorising a national
accounting standard based on IFRS ´X`, now with a URV base Daily Index
(not a UF based Daily Index as currently stated in Par. 10).
I hope you contact the national
accounting standard-setters in Belarus, Venezuela, Iran, Ethiopia and Brazil
(30 years of very high and hyperinflation: 1960-1964.
Please contact Dr Cemal Kucuksozen, the
Head of the Accounting Standards Department at the Capital Markets Board of
Turkey in 2007. He knows a lot about hyperinflation in Turkey. I have not
informed him that I have suggested to you to contact him. He stated to me in
2005 that Turkey was prepared to implement CMUCPP after he read the manuscript
of the first book I wrote about the issue. Then I called it Real Value
Accounting. He is still connected to the Capital Markets Board.
You should ideally consult
with people who has or who had experience of hyperinflation. It is a very
different economic environment. They will more easily understand what you are
asking them.
Hardly anyone would know
anything about the implementation CMUCPP.
But, they would be able to
give you good input about what would work and what would not work in
hyperinflation.
Hardly anyone understands the
ability of CMUCPP to stabilise a constant real value non-monetary item economy.
Accountants would all agree once it is explained to them. Hardly anyone would
believe that you could eliminate the effect of inflation (not actual inflation)
from an entire economy by simply inflation-indexing the entire money supply
daily. This would have to be attempted - as a second phase - after implementing
CMUCPP at 10% annual inflation as per the Argentinean proposal. That would help
countries to stabilise their constant item economies. Then the monetary economy
side has to be attempted.
I was just informed by Prof.
Pajera from Colombia that they use their Real Value Unit to inflation-index all
mortgages in the country on a daily basis. Chile currently inflation-indexes
25% of its entire broad M3 money supply.
Not knowing
exactly what your "next" means, I am available on Monday the 7th,
Tuesday the 8th, Monday the 14th and Tuesday the 15 as follow:
8 am till 6 pm
Kind regards
Nicolaas
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, January 3, 2013 4:06 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
Thank you for your feedback. I certainly
understood that my example would not depict the major differences between the
two models effectively and we will use the example prepared by you going
forward instead of my example.
I thought
that the new language of agenda request “IAS 29 is not required during
hyperinflation when an entity implements CMUCPP because this model is not a HCA
model and only HC or CC financial statements can be restated as required in IAS
29” really summarises that point. Let’s discuss the differences in the call
along with the point on how we can proceed with this issue.
With regard to that call scheduled tomorrow, I
would like to postpone the call sometime early next week if it still works for
you because until today we have not received enough responses to our outreach
request from national standards-setters. Could you provide me with your
availability for the next Monday and Tuesday if you could accept my
offer to put off the call to the next week. My apology is asking for the change
in such a short notice.
Best regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 03 January 2013 14:13
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
Thank you for your mail.
Your example is not a valid
example demonstrating the differences between IAS 29 and CMUCPP.
A. If we assume that the date
on which you publish your financial results is 31/12/x1 then you can only
publish the CMUCCP results. You cannot prepare your IAS 29 financial statements
because you do not have the CPI for 31/12/x1 on that day. It only becomes
available by the earliest on 10/01/x2. Thus you cannot compare IAS 29 with
CMUCPP on 31/12/x1 as you do in your example. Your example is thus not a valid
example.
B. If we assume that the date
on which you publish your financial results is 10/01/x2 you would certainly
have the CPI for 31/12/x1 and you could publish your IAS 29 results for the
year ended 31/12/x1 - preparing them on 10/01/x2. If you wish to compare those
financial statements to CMUCPP financial statements for the year ended 31/12/x1
then you would have to do the CMUCPP results for that year-end and then update
them to the Daily Index on 10/01/x2 because the stable measuring unit
assumption is never implemented under CMUCPP. The two sets of results
would thus never be the same.
You do not do that in your
example. You could change your example to one representing the differences
between the two models as explained above.
When you have changed your
example to show the totally different results at 10/01/x2, you would still not
demonstrate some of the most important real differences between the two models
besides the fact that IAS 29 results (always prepared after the year-end date)
are fixed at the year-end date while CMUCPP results change daily to the current
(today´s) - the 10/01/x2 - Daily Index value.
What are the differences
between the two models beside the fact that IAS 29 results are fixed at the
year-end date and that the CMUCPP values change ever day for ever after?
One reason for real
differences between the two models result from the fact that under CMUCPP
constant real value non-monetary items in the income statement are measured in
units of constant purchasing power in terms of the Daily Index relating to the
day of the transaction maintaining their real values constant during
hyperinflation, e.g., salaries, wages, rentals and all similar items and that
this is not done under IAS 29 - the monthly CPI for that date not even being
available on month-end under IAS 29 necessitating the use of the previous
month´s CPI which destroys even more real value. The reason why all constant
real value non-monetary item real values under CMUCPP are maintained constant
for an indefinite period of time is the fact that the stable measuring
unit assumption is never implemented under CMUCPP while it is
implemented in the income statement under IAS 29 as clearly shown in the USD
included Hyperinflation example.
You could change your example
to show these real differences in the income statement copying the examples in
the USD included Hyperinflation example.
You could also change your
example to show the real differences resulting from using the monthly CPI to
value, for example, Other Expenses incurred on two different days in the same
month and then valued incorrectly at the same monthly CPI under IAS 29 while
they are correctly valued at their correct daily values in terms of the Daily Index
(which is almost entirely based on the daily USD freemarket rate) or in terms
of the actual USD daily parallel rate under CMUCPP. You could again do this
copying the example in the USD included Hyperinflation example.
You could change your example
to show all these real differences between the two models - copying what is in
the USD included Hyperinflation example - besides the real differences in net
monetary losses or gains and net constant item losses or gains.
Or you could simply use the USD
included Hyperinflationary example that alread include all these
examples correctly accounted and balanced.
I suggest we do that.~
Your example is not a valid
example showing the differences between the two models for the various reasons
explained above.
Kind regards
Nicolaas
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, January 3, 2013 1:16 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
Thank you for sending me the revised
spreadsheet.
With regard to my example, I should have added
the following languages but I missed them in the example I just sent yesterday.
Please allow me to add those languages in the next round.
Just for the simplicity, this example is
prepared on the basis of the assumption that all the transactions in previous
years occurred at the end of X0. In addition, restatements of prior year
financial statements are disregarded for the purpose of this exercise.
Thank you very much for your understanding and
co-operation.
Kind regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 03 January 2013 10:15
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
Thank you for your reply.
This is just a mail to send
you the updated USD included Hyperinflation example.
I will respond to your actual
mail a little later.
Kind regards
Nicolaas
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Wednesday, January 2, 2013 9:31 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
At first, please accept my apology for the delay in updating my example using a
hyperinflation rate. And I really appreciate that you kindly prepared your
example for me to better understand the differences between IAS 29 model and
CMUCPP model.
Even though it might be too late to update my spreadsheet, please let me send
you the revised spreadsheet for your review. Unfortunately, I could not
complete the numbers under CMUCPP model (shaded with yellow). This is, I think,
due to lack of my understanding of the CMUCPP model. If you could help me out
with filling the missing parts in the example, it would be really appreciated.
And please note that I used 100% inflation rate per annum instead of a few
million per cent as advised in your previous email. This is just because I
wanted to avoid to make numbers too large to fit in a cell of MS Excel for the
sake of reviewers within my organisation including Michael. We understand that
normal situations we saw in hyperinflation economy are not like 100% inflation
rate.
With regard to your example, please give me a bit more time to fully analyse
all the numbers. I will send another email with my questions, if any.
Finally, I also wish you for a wonderful new year.
Kind regards,
Ken
________________________________
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: Wed 02/01/2013 17:44
To: Yoshimura Kenichi
Subject: Fw: IAS 29 Agenda proposal
Dear Ken,
I wish you a very successful and prosperous 2013.
Some notes about the IAS 29 issue:
IAS 29 is an extension to HCA while CMUCPP is not based on HCA.
'Inflation-adjusted financial statements are an extension to, not a departure
from, historical cost accounting.'
PricewaterhouseCoopers Understanding IAS 29 2006:5
The stable measuring unit assumption is never implemented under CMUCPP while it
is implemented under IAS 29: in a month of 31 days the transactions of 31 days
that occurred or were performed at 31 different USD daily parallel rates, are
all measured at the same - the month end - CPI under IAS 29 implementing the
stable measuring unit assumption, i.e., assuming that the local currency is
perfectly stable during the month during hyperinflation of, for example, 240%
per month.
Only HC and CC financial statements can be restated in terms of IAS 29. CMUCPP
financial statements are always stated at the measuring unit current at the end
of the financial period in terms of the current (today´s) URV based Daily CPI
or USD parallel rate during hyperinflation. They cannot be restated. They never
use the same index values as IAS 29 statements. The values in the two models
are thus never the same and the accounting result is always different.
I have prepared an example (the attached file USD included Hyperinflation
example with Hanke Zimbabwe rates) based on your example using the
hyperinflationary rates for Zimbabwe as reported by Prof. Steve Hanke in his
paper: 'On the Measurement of Zimbabwe´s Hyperinflation.' <http://www.cato.org/sites/cato.org/files/serials/files/cato-journal/2009/5/cj29n2-8.pdf>
Pdf copy attached.
Some of the assumptions are:
For both IAS 29 and CMUCPP
The BS date is 29 Feb 2008 and the accounts are presented on the actual day of
31 July 2008. The day you look at the financial statements is 31 July 2008.
Facts under IAS 29
Salaries during actual hyperinflation are paid at the monthly CPI available at
month end; i.e., the previous month´s CPI. This erodes internal demand and the
internal economy drastically during hyperinflation in a way that cannot be
stopped under IAS 29. This is part of the explanation of what happened in
Zimbabwe (and in all countries implementing IAS 29) where IAS 29 was
implemented during the last 8 years of hyperinflation with no effect.
Some of the assumptions under IAS 29 in the example
Credit Sales, and Inventory Purchases are at 2 Dec and 30 Dec. Values are at
those day´s daily values, but are accounted under IAS 29 at the Dec month-end
CPI.
Other Expenses are incurred on two different days in the same month. Under IAS
29 the two very different local currency values (representing the same real
value) are restated at the month-end CPI even during monthly inflation of 240%,
as in Dec 2007 in Zimbabwe. The monthly HC nominal local currency value for
Other Expenses is thus different from the CMUCPP updated HC nominal local
currency value for the same expenses. The same would be true for Paid-in
Capital, Long Term Loan, Investment Property, PP&E, Depreciation,
Accumulated Depreciation and Inventory in the example and all similar items
under similar circumstances.
Updated Historical Cost is a measurement basis under CMUCPP. Nominal Historical
Cost is not a measurement basis under CMUCPP because the stable measuring unit
assumption is never implemented under CMUCPP.
Under CMUCPP
The Daily CPI (or daily USD parallel rate) is used. The DCPI based on the
Unidad de Fomento formula is always available: up to one month in advance. The
daily USD parallel rate is always available on the day till the last day of
hyperinflation.
The Daily CPI based on the URV (Unidade Real de Valor used in Brazil till 1994)
becomes available on the actual day, like the daily USD daily parallel
(free-market) rate on which it is almost entirely based.
Conclusions
IAS 29 is about the restatement of financial period-end HC or CC BS values.
1. All values are always different in the two models because the monthly
published CPI and the URV based Daily Index are never the same on the same day.
IAS 29 uses the monthly published CPI and CMUCPP uses (a) the Daily CPI based
on the monthly published CPI during low inflation and (b) the Unidade de Real
Valor based Daily Index during hyperinflation. Henceforth in this issue
regarding hyperinflation, the daily index under CMUCPP during hyperinflation is
always the URV based Daily Index. The monthly published CPI is never the same
as either of these two indices on the same day. All values in the two models
are thus always different. IAS 29 uses the monthly published CPI to value all
transactions that took place on all 28 to 31 different days of the month.
CMUCPP value each transaction in terms of the URV based Daily Index on the day
of the transaction and thereafter in terms of the current (today´s) Daily
Index. All historical BS values are always different under the two models
because:
(i) IAS 29 treats non-monetary receivables and payables as monetary items as a
result of the wrong definition of monetary items under IAS 29. This results in
different calculations of net monetary losses and gains and net constant item
losses and gains and consequently different net income, equity, net asset
value, etc. Under IAS 29, year-end Historical Cost or Current Cost financial
statements are restated in units of constant purchasing power in terms of the
monthly published CPI at the year-end during hyperinflation. These IAS 29 year
end BS values are permanently fixed nominal values at the BS date forever after
- even under severe hyperinflation of hundreds of millions percent per annum
(see the Hanke article). Historical IAS 29 BS values are thus misleading as
stated in IAS 29 Par 2: ´Money loses purchasing power at such a rate that
comparisons of amounts from transactions and other events that have occurred at
different times, even within the same period, is misleading.' Historical IAS 29
values are fixed forever during hyperinflation. In fact, historical IAS 29 BS
values are of little or no use during hyperinflation of hundreds of millions
per cent per annum. Although they are of little use, they do get restated again
at the next year-end and may be of some use the closer to year-end they are
done and the lower the level of hyperinflation, although it is doubtful that
IAS 29 financial statements have any use at all. However, since IAS 29 requires
the use of the monthly CPI when the price level changes every day during
hyperinflation and because non-monetary receivables and payables are mistakenly
treated as monetary items under IAS 29, a large percentage of constant item
real value (receivables, salaries, wages, rentals, all similar items) is
unnecessarily permanently eroded/destroyed (net monetary losses are generally
only tax deductible during a maximum of five years) during the financial year
under IAS 29 (see Zimbabwe during hyperinflation), till the new restatement of
HC nominal values at the year-end - in a way that cannot be stopped under IAS
29. On the other hand, CMUCPP would be done in terms of the URV based Daily
Index or daily USD parallel rate value during the entire financial year. The
real values in the year-end CMUCPP BS are then kept constant forever by
changing their nominal values daily again in terms of the URV based Daily Index
or daily USD parallel rate forever after the BS date. Historical CMUCPP BS
values are never the same from the one day to the next during all levels of
inflation and deflation - all else being equal. All historical period-end
financial statement values under the two models are thus always different.
During the financial year specific nominal cash values under the two models
(HCA compared to CMUCPP) would be the same. However, IAS 29 is about the restatement
of period-end financial statements. No values would ever be the same in any two
sets of historical financial statements at the same date under the two models
taking into account that IAS 29 financial statements cannot be done on the
period-end date.
(ii) It is not possible to prepare the IAS 29 BS on the period end date because
the monthly published CPI is not available on that day. The ECB issues a flash
report, but it is not the official rate. It becomes available at the earliest
10 days later. Historical CMUCPP financial statements are thus always
different: historical CMUCPP accounts always presented at the current
(today´s) URV based Daily Index or daily USD parallel rate. CMUCPP financial
statements can be prepared on the period end date while IAS 29 FS cannot be
done on that day.
2. The accounting result is always different because, for example:
(i) IAS 29 treats non-monetary Receivables and Payables as monetary items
(wrong definition of monetary items under IAS 29).
(ii) The monthly/daily Index and always different indices issues.
(iii) Cash a/c is always different - see example (monthly/daily Index and
always different indices issues).
(iv) Salaries, wages, rentals and similar costs are necessarily paid at the
previous month´s CPI at month-end under IAS 29 while they are paid at the URV
based Daily Index or daily USD rate at the month-end (monthly/daily Index and
always different indices issues).
(v) Net monetary losses and gains always different.
(vi) Constant item losses and gains always different - only during the period
of HC contracts.
Mainly three reasons:
1. Monthly/daily Index issue (periodicity); the use of the stable measuring
unit assumption or not: wrong Index used under IAS 29.
2. Wrong definition of monetary items in IAS 29.
3. Indices used are always different on the same date.
It is impossible to maintain the economy stable / real value stable / the
constant purchasing power of capital stable with a monthly CPI and HCA. It is
only possible with a daily rate and CMUCPP during high and hyperinflation (and
all other levels of inflation and deflation).
The URV based Daily Index is not primarily based on the CPI. This is a very
important factor. It is almost entirely based on the daily USD free-market
rate: either the official daily USD rate as in the case of Brazil in 1994 (and
before) or the unofficial daily USD parallel rate.
Incomprehensibility of financial statements under IAS 29 and CMUCPP done in a
nominal hyperinflationary currency
Under IAS 29 accounts are done in units of constant purchasing power at the BS
date in terms of a monthly CPI with the two mistakes: (a) wrong index used (b)
wrong definition of monetary items. The IAS 29 BS values are nominal after the
BS date during hyperinflation and almost immediately meaningless as stated in
IAS 29 Par. 2, although they are again restated at the new financial period-end
with constant real value non-monetary items suffering unnecessary permanent
real value erosion/destruction as a result of the three reasons mentioned above
- which cannot be fixed under IAS 29.
These mistakes can only be fixed under CMUCPP: a much better model.
Presentation of CMUCPP accounts during hyperinflation in a relatively stable
foreign currency (normally the USD) allows constant value CMUCPP financial
statements: maybe the best option: maybe the best real value / real world
solution. There is nothing better than the free market price: in this case the
daily free market price of the local currency used as the main item in the
Daily Index.
USD CMUCPP accounts are done in a relatively stable (low inflationary) foreign
exchange currency.
Under hyperinflation you cannot grasp what is happening in the entity (economy)
under both IAS 29 and CMUCPP in nominal local currency values because although
CMUCPP is doing your accounting in a constant local currency unit (updating all
values in terms of the URV based Daily Index under CMUCPP) at the current daily
rate, the massive change in daily real value of the local currency is of such a
magnitude that it is not possible for the human mind to grasp the extent of the
daily real value change. All constant items 'constant real values will still be
maintained constant under CMUCPP in nominal local currency values, but it is
not possible to grasp it from the updated CMUCPP financial statements measured
in units of constant purchasing power in terms of the local hyperinflationary
monetary unit and especially impossible from the IAS 29 results after the BS
date during hyperinflation. The only way to make sense of what is happening in
the entity (economy) is by using a relatively stable constant unit of account,
for example, the daily USD rate: official or parallel.
A very important point about doing your accounting (not just translating your
year-end financial statements) in a relatively stable constant unit is the
following:
What I presented in the USD accounts is not "translation" of the
year-end financial statements in USD - as you can clearly see in the Cash
account and P+L in the example. Translation is what is done with the CMUCPP
local currency accounts after BS date - not during the actual financial year).
CMUCPP in terms of the daily USD rate is doing the actual daily accounting for
the entire financial year (not just translating the y/e BS) in terms of the
daily USD rate. It is CMUCPP in terms of a daily rate in a relatively stable
constant unit. It is not translation of year-end FS in a relatively stable
currency.
I think I should change the agenda item request as follows:
IAS 29 is not required during hyperinflation when an entity implements CMUCPP
because this model is not a HCA model and only HC or CC financial statements
can be restated as required in IAS 29.
CMUCPP financial statements cannot be restated because all items in these
financial statements are already (always) at the current level of the URV based
Daily Index or daily USD parallel rate during hyperinflation which are better
indices to use than the monthly published CPI as required in IAS 29.
A Daily Constant Unit calculated in terms of the URV based Daily Index at a
date in the past, e.g., the previous year-end, has the special advantage that
it makes the use of the USD parallel rate unnecessary during hyperinflation.
Some political regimes, for example Iran and North Korea, would prefer the DCU
for that reason. It would be virtually the same as the USD daily rate.
The daily USD parallel rate can be very problematic: it is often banned by the
government for open use during hyperinflation. It all depends on the regime and
the circumstances of the hyperinflation. Towards the very end of the
hyperinflation, the USD parallel rate is progressively more adopted by the
government.
The USD parallel rate (cross rate in the end) could have been used with severe
hyperinflation in Zimbabwe till the last day of the existence of the ZimDollar
which stopped on 20 November 2008 when it lost its last exchange rate: with the
UK Pound via the Old Mutual Implied Rate (OMIR): the Zimbabwe Stock Exchange
activities were stopped by decree and that ended the OMIR rate which ended the
existence of the ZimDollar.
Kind regards,
Nicolaas
----- Forwarded Message -----
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Friday, December 21, 2012 11:32 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
I am very sorry that your observations in the email dated 20 December slipped
my mind for some reason. Please refer to the followings for my responses :
1. It is not a hyperinflation example: 5% and 10% inflation are not
hyperinflation levels. The minimum should be 26% pa. 2000% per annum would be
better.
I never regarded 10% inflation as hyperinflation. I used 10% in this example
just for simplifying the example. Please let me revise the spreadsheet to
change the inflation rate and resend to you until the next call.
2. We have both forgotten to restate the prior year B/S.
I completely agree that I have not considered restatements of prior year BS. I
did not include prior year financials just for simplifying the example. Please
let me include such a language in the example.
3. All items in the prior year B/S should have had different transaction dates
during year x0.
I agree. All items in the previous year BS should have had different original
transaction dates. However, again, I assumed that all transactions occured at
the end of X0 to simplify the example. Please let me include such a language in
the example.
Thank you very much for your co-operation.
Kind regards,
Ken
________________________________
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: Fri 21/12/2012 16:41
To: Yoshimura Kenichi
Subject: Fw: IAS 29 Agenda proposal
Dear Ken,
Please change the 5% and 10% inflation in your example to hyperinflationary
rates.
You, Michael Stewart and everybody at the IASB may regard that as hyperinflation.
It is not hyperinflation to the rest of the world. It is a good example of your
and the IASB´s understanding of what hyperinflation is.
I mentioned it before and you simply ignore it like you ignore many things
regarding hyperinflation and FCMUCPP. I do not accept it that you ignore the
fact that the 5% and 10% inflation are not hyperinflationary rates.
If you do not change the inflation rates in the example to hyperinflationary
rates, then I withdraw all my contributions - only to that example. I am very
upset with myself working on the example for so long and only now realizing
that the rates are totally wrong as far as hyperinflation is concerned. My
eagerness to work with you on this issue blinded my to that fact.
Just as you apparently have very little understanding of hyperinflation in the
same way you apparently have very little understanding of what measurement in
units of constant purchasing power, let alone FCMUCPP and even Dollarization
are all about - especially their effects in a company, in an economy and during
hyperinflation.
If you are not prepared to change the example to one of hyperinflation, then
please blank out all my contributions on the example.
Please do not take this as a negative approach. We will lose a lot of credibility,
I know I will, if we use that example as an example of hyperinflation. We have
to do things correctly.
Regarding the fact that you and the IASB do not understand this issue very
well: it is absolutely normal. This is about changing the HC paradigm, the only
paradigm the world has ever known. It is absolutely normal that everyone, like
you and the IASB, will initially be totally against a change in the status quo.
I am not the first person to make this observation about human resistance to
change. It is absolutely normal. So, I am not surprised or upset about it. To
the contrary, I was expecting it. I have 16 years experience of resitance to a
change of in HCA. That is why I say: this may take another 100 years.
Kind regards
Nicolaas
----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: "kyoshimura@ifrs.org" <kyoshimura@ifrs.org>
Sent: Friday, December 21, 2012 4:08 PM
Subject: Fw: IAS 29 Agenda proposal
Dear Ken,
I confirm 1.30 pm on the 4th January.
Kind regards
Nicolaas
----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: Yoshimura Kenichi <kyoshimura@ifrs.org>
Sent: Friday, December 21, 2012 2:08 PM
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
My response to your email dated 20th:
I sincerely aplogise for using the term "a waste of time". It is a
great honour for me working with you and the IASB. Nothing you and the IASB do
in this issue is or could ever be a "waste of time" with whatever
outcome or result: IFRS `X´or no IFRS `X´. I am really sorry I used that
phrase. Please forgive me. Whatever you and the IASB do on this issue is of
great value - as you will see in the future.
The issue is too important. I have already managed to get Dr Cemal Kucuksozen
<http://www.linkedin.com/profile/view?id=115286406&authType=name&authToken=t4d_&goback=%2Econ>
, the Head of the Accounting Standards Department of the Capital Markets Board
in Turkey in 2007 and Member of the Turkish Accounting Standards Board from
2007 to 2008 , to agree in 2005 - long before I even identified key concepts in
the practical application of FCMUCPP - that Turkey, a country, was ready to
implement FCMUCPP (I then called it Real Value Accounting), not during
hyperinflation, but during low inflation. He authorised me to publish his
statement in the book I wrote about the matter in 2005. Turkey then just
emerged out of hyperinflation and he fully understood the value of FCMUCPP in
hyperinflation and low inflation. Turkey was ready to implement FCMUCPP country
wide during low inflation in 2005. All they needed was a requirement in IFRS.
Everybody only does - and wants to do - only what is in IFRS or what they
mistakenly think is required in IFRS. See Chile unknowingly abandoning FCMUCPP
to "conform with" IFRS (implementing HCA) - not realizing in 2010 or
11 that FCMUCPP was authorized in IFRS in 1989
Dr Kucuksozen would be one of the best people to contact about this matter. His
email is:cemal.kucuksozen@spk.gov.tr <mailto:cemal.kucuksozen@spk.gov.tr>
I am very glad you are contacting Venezuela, Belarus, Iran and Ethiopia - the
countries in hyperinflation.
Dr Rafael Rodriguez Ramos is the President of the FCCPV, the Venezuelan
accounting authority. His email is presidente <mailto:presidente@fccpv.org>
@fccpv.org <mailto:presidente@fccpv.org>
The Ministry of Finance is the accounting authority in Belarus. I am sure you
have their contacts.
The Audit Group is the accounting authority in Iran.
I do not have the contact for Ethiopia, but I am sure you have.
I have only communicated once with Dr Ramos in Venezuela and not specifically
about FCMUCPP.
All these countries will agree with you that they can stop hyperinflation
overnight in their countries with Dollarization. I think all of them would find
the cost in US Dollars prohibitive. Prof. Steve Hanke has already publicly
offered Dollarization and a currency board to Iran. I know these countries
would all be very interested when you tell them you can help them do that
overnight at no cost with an IFRS, namely FCMUCPP as authorised in the CF 4.59
(a): an IFRS that would "dollarize" their constant and monetary economies
with a constant (not nominal) local currency via daily indexation. They would
be very grateful to the IASB for doing that, as you can well imagine.
Especially the Belarus and Iran populations are having tremendous problems.
People are without food in Belarus. They would welcome your help with open arms
and they would be forever grateful to the IASB for that help.
I am convinced that when you ask these countries in actual hyperinflation
whether it would be useful to have a statement that IAS 29 is not required when
they implement FCMUCPP, they would all agree. Their views would be very
valuable. They know what hyperinflation is. Their views are the ones that
really matter: directly related to the matter we are dealing with. Countries
that have never had the experience of hyperinflation would find it difficult to
answer questions in this regard. Hyperinflation is not related to their
economic experience. Hyperinflation is a very different economic experience.
Michael Madsen, the group CFO from East Asiatic Company (Denmark) very kindly
agreed to answer some specific questions about how they have implemented IAS 29
over the last four years in Venezuela where they have been operating a big
subsidiary company in the food processing business over the last 50 years. I previously
communicated with him in 2010 regarding that statement of his in EuroInvest. I
will let you know what his answers are. I don´t know when he will reply. I
told him I would use his answers in my correspondence with you.
My response to your email dated 21 December:
I see I have failed completely in my attempt to explain to you that although
IAS 29 and FCMUCPP financial statements may be exactly the same at the B/S
date, the two models are totally different. I have stated this various times,
but you seem to ignore it completely or my explanations are not capable of
being understood.
During our teleconference I also made a point of stating that the two are
different, not the same at all. You did not understand me as saying that,
although I said the words. You understood me differently. You came back with an
example to show that the two are exactly the same and I think that is all you
want to show in this excercise, no matter how often I said in the
teleconference and how often I write that the two are different. I just cannot
get the message through to you. I am very sorry that that is what is happening,
but that is the case.
FCMUCPP, on the other hand, stabilises an economy. It is very similar to
Dollarization while IAS 29 has no effect on the operations and cashflow as
stated by Michael Madsen in EuroInvest in 2010. You seem to ignore that. You
and the IASB completely ignore the well proven fact that IAS 29 had no effect
in Zimbabwe during 6 years of implementation.
May I then respectfully ask you: what is your and the IASB´s response to the
fact that IAS 29 had no effect during 6 years of implementation in Zimbabwe. Do
I formally have to ask this question to Hans Hoogervorst. I will if I have to
in order to get an answer from the IASB. What is your and the IASB´s response
to Michael Madsen´s statement that IAS 29 has on effect on the operation and
the cash flow during hyperinflation. Do you and the IASB agree with Michael
Madsen? Has the IASB made any public statement to justify the use of IAS 29
during hyperinflation after what happened in Zimbabwe? If the IASB has made
such a statement, I would appreciate it very much if you could send me a copy.
If that question has not been asked before, then I have now asked it from you.
This is more or less what happens under IAS 29:
A company runs its business during the entire first year in a hyperinflationary
country as normal in a low inflation country, implementing HCA. At the year
end, it restates the HCA financial statements in terms of IAS 29. That is all
it does. Nothing changes in its operations or cashflow - as stated by Madsen.
The second year it carries on with HCA, as required by IAS 29. At the year end,
it does nothing to the ledger accounts. It simply restates its financial
statements in terms of IAS 29. It repeats this for 4 years in the case of
Venezuela and 6 years in the case of Zimbabwe and I don´t know for how many
years now in the case of Belarus.
Under FCMUCPP, which is the same as Dollarization, but, in a constant (not
nominal) local currency achieved via daily indexation and with full Central
Bank independent monetary policy capacity and full advantage of seignorage, the
ecomomy stabilises like in Zimbabwe as a Dollarised country. It seems to me
that I cannot get this through to you. You seem not to understand this at all.
I am very sorry this is happening.
FCMUCPP is not the same as during the 14 years of hyperinflation in Zimbabwe.
Zimbabwean companies diligently did everything in HCA during 14 years of
hyperinflation: the first 8 and last 6 years were exactly the same in terms of
doing everyting in terms of HCA. During the last 6 years they diligently
restated their HCA financial statements in terms of IAS 29 to no avail. Nothing
changed. Their economy still imploded in 2008.
I am very sorry, but this is what is happening with our working together on
this issue.
It is also very clear from your statement about "whether the IASB would
accept the method written in the IFRS 'X' " that you seem to have no
understanding of what happens under FCMUCPP. I really explain things very
badly.
As I said, I am very sorry that this is what is transpiring.
Kind regards
Nicolaas
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Friday, December 21, 2012 11:07 AM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
Thank you for your quick attention to my questions.
Looking at ONLY the accounting results, the IAS 29 model and the FCMUCPP would
end up with the same accounting results except for the differences due to the
difference in the scope of monetary items (receivables and payables) even
though you use the terminology of 'net constant item loss' for part of it.
And with regard to the point on whether the IASB would accept the method
written in the IFRS 'X', I would say that it won't be a short period of time to
know if the IASB decides to use that concept. As you know, currently it is just
a research project and therefore it is reasonable to expect the IASB to take a
time to decide if it wants to add the project to the IASB's agenda. After that,
it will decide what kind of model the IASB should explore.
And for the discussion on 4th January, how about starting from 1:30 pm? Please
let me know if it works for you.
Kind regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 20 December 2012 18:39
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
You are right. I should stick to the nominal values. I was trying to get some
inflation
in the example. Net constant item loss included.
Friday 4th will be fine.
Kind regards
Nicolaas Smith
Blog Constant Item Purchasing Power Accounting - CIPPA <http://realvalueaccounting.blogspot.com/> My
Facebook <http://www.facebook.com/#!/profile.php?id=1588417151>
My Twitter <http://twitter.com/NicolaasSmith> My LinkedIn
<http://www.linkedin.com/profile/view?id=4965181&trk=tab_pro>
Lisboa, Portugal
Buy the Kindle e-book CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS at
Amazon.com <http://realvalueaccounting.blogspot.pt/2012/07/buy-ebook-for-299-or-149-or-260.html>
I promote financial capital maintenance in units of constant purchasing power
in terms of a Daily CPI or other daily rate at all levels of inflation and
deflation including hyperinflation as originally authorized in IFRS in the
Framework (1989), Par 104 (a) which states: 'Financial capital maintenance can
be measured in either nominal monetary units or units of constant purchasing
power.'
CIPPA automatically maintains the constant purchasing power of capital constant
for an indefinite period of time in all entities that at least break even in
real value during inflation and deflation including hyperinflation - all else
being equal.
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, December 20, 2012 5:55 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
Thank you for providing me with the revised spreadsheet. I have one more
question with regard to the cell E69 that you just changed.
In calculating the closing balance of cash, cash paid for other expenses are
measured at 100 (nominal value) while cash paid for payables and cash collected
from receivables are measured at 420 and 630 which reflects general price
changes up to 30/6/X1. Could you please elaborate more on why these are treated
differently when arriving at the closing balance of cash as of 31/12/X1?
And with regard to the point "a waste of time", currently we are
doing extensive outreach to national standard-setters around the world to see
if they have a similar issue in their jurisdictions. Even though we wanted to
talk to you anyway right before posting our agenda papers, I think we can
discuss in that talk on whether we should go further on this issue after we
gather responses from them. Do you have a time in the week c/o 31 December
2013, say Friday, 4th of January or next Monday, 7th of January?
Thank you again for your help,
Kind regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 20 December 2012 17:19
To: Yoshimura Kenichi
Subject: Fw: IAS 29 Agenda proposal
Dear Ken,
We are getting there.
Ok, I fixed the example and attached the latest Revised Examples file.
I suppose you think: why are we doing this if no-one is using FCMUCPP
accounting? Colombia may be using it now without having the faintest idea that
they are using a form of FCMUCPP just like Brazil and Chile never realised and
understood that they were doing it. Maybe more LA countries did it in the past
and may be doing it now. I don´t know. Venezuela does not use a daily index.
They are not doing it.
It all depends on whether the IASB will require it in IFRS ´X`. If IFRS ´X`
is not approved to require it at 10% annual inflation or 26% cumulative
inflation over 3 years as the South Americans suggested, then all of this is a
waste of time.
You know more about the status of IFRS `X´ than I do. So you are more in a
position to say if this is a waste of time or not.
I can fix the economies (show them how to implement FCMUCPP as authorised in
IFRS) of Venezuela, Belarus, Ethiopia and all other hyperinflationary and high
inflationary countries. Unfortunately I do not have the means (finance) to go
to these countries and speak to their accounting authorities. I tried in
Venezula and Belarus over the internet without success. I did it in a company
in 1996 without understanding a single concept of what I was doing. I simply
used common sense from living and working in a hyperinflationary economy: I
implemented accounting-dollarization and killed our fear in the company of
hyperinflatio after 15 months of living and working in a hyperinflationary
economy. Now I understand all the concepts involved and I am confident to even
say that I can show Belarus and every hyperinfationary country how to stop
hyperinflation overnight at no cost implementing an IFRS.
But, I don´t know if I will ever have a chance to do it. I will keep on trying
though.
I formed a NGO, Sustainable Development Without Borders <http://sustainabledevelopmentwithoutborders.blogspot.pt/>
with the aim of getting finance from international organizations which would be
pleased to see these economies operating on a stable basis. I have not had any
success with receiving any finance. The NGO was formed on 30 November 2012. So,
nothing is happening except with what you are doing.
So, now you know the full story so far.
Kind regards
Nicolaas
----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: "kyoshimura@ifrs.org" <kyoshimura@ifrs.org>
Sent: Thursday, December 20, 2012 4:45 PM
Subject: Fw: IAS 29 Agenda proposal
Dear Ken,
I agree that I am treating Other Expenses differently from Sales. That is a
mistake. Other Expenses should be 100 at 30/06/x1 (CPI 105) and then measured
in units of constant purchasing power at the B/S CPI of 110 giving a value of
105 like you have in the IAS 29 P+L.
I am going to change the Revised Example and will mail it you.
Kind regards,
Nicolaas
----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: Yoshimura Kenichi <kyoshimura@ifrs.org>
Sent: Thursday, December 20, 2012 2:33 PM
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
Thank you for your reply.
Your first question: Ask any accountant in the world (except me and the people
who read my blog) which IFRS you implement during hyperinflation and they will
all tell you IAS 29.
No-one implements FCMUCPP. 99% of accountants in the world do not even know
that IFRS authorized FCMUCPP twenty-three years ago. 99% of accountants today
will agree with you if you say that inflation erodes companies´ capital and
invested profits. They hardly ever deal with the phrase "stable measuring
unit assumption". Prof. Geoffrey Whittington wrote the best book ever
written about inflation accounting and did not even once mentioned the phrase
"stable measuring unit assumption." FCMUCPP is as dead as a doornail
in world accounting. Although, I may be wrong: I do not know what they are
doing with that Real Value Unit <http://www.banrep.gov.co/statistics/sta_rvu.htm>
in Colombia. They may be implementing a form of FCMUCPP in Colombia and maybe
other LA countries too. I do not know. Yes, if Brazil were still in high and
hyperinflation today and was updating capital, trade debtors, trade creditors
and all non-monetary items and many monetary items daily in terms of the URV
then not a single accountant in Brazil would implement IAS 29 during high or
hyperinflation. But that is not the case. Brazil was one of the accounting
authorities that commented on IFRS `X´INFLATION to the Argentinean Federation.
FCMUCPP is only relevant today because it may be required in IFRS in a few
years time at 10% annual inflation if the amended version of IFRS `X´ is
authorised. If that were not the case, we would not be emailing each other
about this.
If the IASB rejects the amended IFRS ´X` and goes back to the Argentinean
Federation´s version as IFRS ´X`INFLATION, then you and I have been wasting
our time over the last few days and we are wasting our time now.
Your second question: The price level of nominal sales (600) at the transaction
date is 105 as at 30/06/x1. See cell E14. It is then measured in units of
constant purchasing power at the CPI at the B/S date: 600 x (110/105) = 629.
See cell D42. All items in the P+L are correctly measured at the CPI at the B/S
date (110). See cells D42 to D47. This includes Cost of Sales.
You measure the nominal value of Other Expenses 100 (CPI 105) on 30/06/x1
(under the HC paradigm) at the B/S CPI (110) and get to 105 in your P+L. Under
FCMUCPP the Other Expenses item is expended on 30/06/x1 at 105 (CPI 105)
(prices have gone up). This value is then measured in units of constant
purchasing power at the B/S CPI (110) 105 x (110/105) = 110 in the FCMUCPP P+L
under the CMUCPP paradigm. That is how the IAS 29 and FCMUCPP P+Ls are
different in the case of Other Expenses.
Under IAS 29 you implement the HCA model. Sales are nominal and so are Cost of
Sales. At the transaction date of 30/06/x1 they are incurred at nominal value,
which you then correctly stated in the IAS 29 P+L at the B/C CPI and so did I
in the FCMUCPP P+L.
Some observations regarding your example:
1. It is not a hyperinflation example: 5% and 10% inflation are not
hyperinflation levels. The minimum should be 26% pa. 2000% per annum would be
better.
2. We have both forgotten to restate the prior year B/S.
3. All items in the prior year B/S should have had different transaction dates
during year x0.
Note: I corrected the example in cell D19 and E19. See attached file.
Kind regards
Nicolaas
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Wednesday, December 19, 2012 5:22 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
Thank you so much for your dedication to this issue. Your comments and
explanation are really helpful to me.
Having read your comments, can I ask you a few more questions? (I am a person
who always a mistake...)
· Your submission states that 'it is currently generally accepted by
accountants in countries implementing IFRS that IAS 29 is always required
during hyperinflation.' Doesn't this mean that you are told by accountants or have
heard that IAS 29 is required in all cases including financial statements under
the FCMUCPP?
· In the spreadsheet, you mentioned that 'other expenses is a constant real
value non-monetary item in the P+L always measured in units of constant
purchasing power, i.e., stated at the B/S date CPI'. What is the difference
from sales and cost of sales, which are stated at the price level at the
transaction date in the example? Shouldn't sales and cost of sales be stated at
the price level at the BS date like other expenses?
Kind regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 19 December 2012 16:00
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
Thank you for your reply. Please accept my apology for the delay in my
response.
I have made various alterations to the spreadsheet: the calculations, dates and
the notes. Please read all the notes again. You cannot have payments and
receipts "evenly" during the year. You would then have to divide each
payment and receipt in 365 payments and receipts and calculate the net monetary
loss or gain on each on every single day of the year for each item. You cannot
have two different CPI values in the column CPI at B/S date. There is only one
CPI on that date, except maybe during severe hyperinflation - or not even
severe hyperinflation (we had two prices levels on the same day once or twice
in Angola in '95/96.).
The fact that you stated that the CPI at the beginning is 100 for 31/12/x0
"and before", removed the necessity to deal with the hidden gain in
stock, in this case inventory and investment property. It cannot be for
"and before". It can only be on one day. It would have been interesting
doing those calculations - and very informative - to have had the items at
31/12/x0 with historical CPI values.
You mix Net Constant Item Losses and Gains with your Net Monetary Item Losses
and Gains since you treat non-monetary items as monetary items. You have net
constant item losses and gains in the example under IAS 29. Under FCMUCPP all
the constant items are always measured in units of constant purchasing power:
thus, there are no net constant item losses and gains in the example under
FCMUCPP.
This needs further analysis of the mix under IAS 29 because the calculation of
net monetary losses and gains under IAS 29 is a mix of HCA and FCMUCPP
principles in the same calculation.
You state in A:
'Under the CMUCPP the amount of cash could be different from the nominal amount
(200) because the changes in CPI are reflected continuously by using a daily
index.'
'Could' is conditional. That is not the case under FCMUCPP. There is no
conditionality under FCMUCPP.
Opening Balance
31/12/x0
100
100
Collection of Receivables
evenly
105
630
Payment of Payables
evenly
105
-420
Payment for other Expenses
evenly
105
-105
Closing Balance
205
The measurements in the Cash Account under FCMUCPP are the above and only the
above. They 'could' not be any other values. On 31/12/x0 the Daily CPI was 100
and no other value. It could not be any other value. The same is true for the
receipts and payments. The closing balance can only be 205. It could not be any
other value.
I thus do not agree with the statement in A. I am sorry that I cannot offer an
alternative, because I cannot work out what you are trying to say in A.
Trade Creditors and Trade Debtors are not monetary items
Neither are all other constant real value non-monetary items and payables like
salaries payable and receivable, taxes payable and receivable, etc. They are
simply paid in money as the monetary medium of exchange like almost 99 percent
of all items, monetary and non-monetary in the world economy.
We can work together on projects and be absolutely respectful to different
opinions as we both are, but, we have to acknowledge that there are mistakes in
Historical Cost Accounting on a global scale over a very long time, but not on
an absolute scale.
I do admit that this is an item (and there are others) that will have to be
analysed 100 percent.
Other generally accepted mistakes in this category that are already accepted as
total mistakes are the statement that inflation causes the erosion of
companies´ capital and invested profits. It was stated in those word in FAS 33
and FAS 89 by David Mosso, one of the best minds in accounting. Inflation has
no effect on the real value of non-monetary items. He already accepts that it
was a mistake.
The Argentinean Accounting Federation, with the co-operation of the accounting
authorities in Brazil, Mexico and Chile plus two IASB staff members worked from
2009 to 2010 on IFRS ´X` INFLATION. They submitted it in 2010 to the IASB
stating that inflation causes the erosion of the real value of capital,
retained earnings, fixed assets, etc, etc, etc. That was a total mistake. They
have accepted it by now.
In the same way, it is a mistake to treat trade debtors and trade creditors as
monetary items.
They have been treated as non-monetary items and updated daily during 30 years
by all accountants in Brazil from 1964 to 1994. This was completely ignored by
the IASB in the formulation of IAS 29 in 1989.
The same is true for Chile from 1967 to 2010. The same is true for Auto-Sueco
(Angola) in 1995 and 1996 where I corrected it. They are most probably today
being updated daily in Colombia and maybe other LA countries.
I asked Dr Gustavo Franco, the ex-Chairman of the Central Bank of Brazil in
1994 and one of the architects of the Real Plan whether they treated them like
monetary or non-monetary items in Brazil. The URV was the Unidade Real de
Valor, the government supplied daily index they used.
I asked him:
'Were trade debtors and trade creditors treated as monetary items under the URV
and not updated or were they treated as non-monetary items and updated under
the URV?
What are trade debtors and trade creditors in your opinion. Are they monetary
or non-monetary items?'
He replied:
'Two observations are in order. First for spot transactions, the existence of
the URV is immaterial, sums of means of payment are surrendered in exchange for
goods, all delivered and liquidated on spot. Second, the unit of account enters
the picture only when at least one leg of a commercial transaction is deferred.
In this case the URV serves the purpose of defining the price at the day of the
contract. The same quantity of URVs is to be paid at the payment day, though
this should represent larger quantities of whatever means of payment is used.'
Franco 2007
He was replying to my questions regarding trade debtors and trade creditors. It
is clear from his answer that they were updated over time: they were not fixed
in nominal value - they were not monetary items or treated as monetary items.
I am an expert in making mistakes. (I made a mistake in the treatment of Other
Expenses in your example. I have now corrected it.) That is maybe why I was a
little ahead for a very short time in knowledge about FCMUCPP: we learn from
our mistakes. I first identified a number of items in my work by publicly
making mistakes. I found that this is sometimes an essential part of arriving
at the correct answer by publicly stating something and then seeing if it can
be defended or not.
I know that it is generally accepted that trade debtors and trade creditors and
other constant real value non-monetary items are monetary items. I know that it
is stated in FAS, by PricewaterhouseCoopers, in most accounting text books and
treated as such by the IASB. It is a mistake. The same way as it was a mistake
to state that inflation erodes the real value of companies´ capital and
invested profits, for example.
Question 1
Regarding the statement in IAS 15:
"Paragraph 11 of IAS 15, which was withdrawn in 2005, stated 'the general
purchasing power approach involves the restatement of some or all of the items
in the financial statements for changes in the general price level.' "
I agree that there are conflicting interpretations of the above statement and
the concepts stated in it.
One such interpretation is the following:
A) The phrase "general purchasing power approach" always means only
the following:
(1) actual valuation or actual measurement for tax purposes of economic items
on a daily basis in units of constant purchasing power based on changes in the
general price level instead of in nominal monetary units.
(2) "General purchasing power approach" means FCMUCPP: a departure
from the HC paradigm, i.e., the stable measuring unit assumption is never
implemented because it is correctly realized that, in general, it is impossible
to maintain any real value stable in nominal monetary units during inflation.
Under this interpretation the phrase "general purchasing power
approach" does not mean restatement of values in year-end HC or CC
financial statements simply to make them more useful (IAS 29.2) or not
misleading (IAS 29.2).
Under this interpretation, the two phrases "general purchasing power
approach" and "restatement" do not go together in accounting.
Using the two together would thus be a mistake under this interpretation.
B) Another - very generally accepted - interpretation is that the phrase
"general purchasing power approach" simply involves the restatement
of some or all of the items in financial statements for changes in the general
price level to make such financial statements more useful (IAS 29.2) and not
misleading (IAS 29.2).
I agree that there is a generally accepted view with Historical Cost
accountants - outside Latin America - that measurement in units of constant
purchasing power ("the general purchasing power approach") is simply
the restatement of HC financial statements in terms of the measuring unit
current at the end of the reporting period with no effect on the economy. So
much so, that a top accounting country's number one accountant, namely the head
of the number one accounting university in that country - an emeritus professor
of accounting and ex-member of the country's accounting standard setting board
- stated to me in a personal communication that "we can measure items in
units of constant purchasing power or US Dollars or whatever, it won't make any
difference to the economy."!!! I have the email to prove it.
He was right under the view as stated in IAS 15. I only realized years later
how he and - I think - all HC accountants see measurement in units of constant
purchasing power. They see it simply as one of many different ways that HC
financial statements can be measured: everything stays the same: it is simply a
different way of measuring the values only in the financial statements and
nothing else. This is why that emeritus professor of accounting (you may know
who he is) could state that it has no effect on the economy - something that
stunned me because I know that FCMUCPP is the same as dollarization of an
economy in a constant local currency: it stablises the economy. It has a huge
effect on the economy.
He - as well as the accounting authority in that country who stated on their
website (in response to me) that they do not agree with the rejection of the
stable measuring unit assumption - were so sure of themselves (so inculcated
with the HC principle) that they completely forgot that all countries in the
world (including themselves) measure salaries, wages, rentals and thousands of
other items under "the general purchasing power approach" (HCA
implements various measurement bases) on an annual basis and that this makes a
huge difference to the actual economy in all those (180 plus) countries: it
maintains these countries´ internal demand relatively stable: it effects the
economy in a very positive way. To that country´s number one accountant - an
emeritus professor of accounting - this "makes no difference in the
economy". I agree that this generally accepted view is very strongly held
- as proven in IAS 29 over the last 23 years.
I agree that there is no consensus regarding this matter. There are, however,
various positive and negative facts that have to be taken into account:
Positive (supporting) facts for daily measurement of items in terms of the
"general purchasing power approach" (FCMUCPP) as opposed to
restatement of HC financial statements at the measuring unit current at the end
of the reporting period:
1. Brazil implemented financial capital maintenance in unit of constant
purchasing power in terms of a daily index for 30 years under very high and
hyperinflation from 1964 to 1994. They had a relatively stable non-monetary
economy for those 30 years even during hyperinflation.
2. The same was true (the daily measurement, not the high and hyperinflation)
in Chile for the 43 years from 1967 to 2010. They use their Unidad de Fomento
daily index.
3. Colombia is today using a daily index (the Real Value Unit) to implement the
"general purchasing power approach".
4. All low inflation countries (80% of the world economy?) are doing it - in
principle - too: a 2 percent inflation rate means the country is, in principle,
implementing 98% of financial capital maintenance in units of constant
purchasing power in terms of a daily index (the low inflation).
5. Dollarizations and currency boards are direct proofs of the fact that
financial capital maintenance in units of constant purchasing power in terms of
a daily index would stabilize the monetary and constant item economies because
this accounting model is, in principle, the "dollarization" of the
monetary and constant item economies in terms of a constant local currency
unit.
Negative facts for daily measurement of items in terms of the "general
purchasing power approach" (FCMUCPP) not being simple restatement of HC
financial statements.
1. No-one understands it: see Brazil going back to HCA in 1994 and Chile doing
the same in 2010 or 11. Chile went back to HCA to "conform" with IFRS
not realizing that FCMUCPP was authorized during low inflation in IFRS
twenty-three years ago.
2. Everyone initially thinks it is the same as what is done under IAS 29 during
hyperinflation, while it is, in fact, authorized in IFRS in the CF, Par. 4.59
(a) at all levels of inflation and deflation, including during low inflation.
Positive (supporting) facts for "the general purchasing power approach
involves the restatement of some or all of the items in financial statements
for changes in the general price level".
1. It has been going for 23 years.
2. It is an IFRS, namely IAS 29.
3. Very few people understand what it is or what it is suppose to do or not to
do: it thus relies on very little knowledge of accounting concepts for its very
successful survival.
4. Its total failure in Zimbabwe is simply ignored by the IASB and the
accounting profession in general since 2008. This is easily explained by the
fact that Zimbabwe's economy was and is a very, very small economy: USD 5
Billion at the time of implosion in 2008. IAS 29 has had no effect on
Venezuela's USD 380 billion economy either for the last four years. But, I
suppose, people feel Venezuela does not deserve to have a stable economy
because of their political views.
Negative facts for "the general purchasing power approach involves the
restatement of some or all of the items in financial statements for changes in
the general price level".
1. It was implemented during 6 years in Zimbabwe´s hyperinflationary economy
with ZERO effect: the economy imploded nevertheless: IAS 29´s most damaging
achievement. It achieved nothing in Zimbabwe when it could have been used to
stabilize the non-monetary economy.
2. It is currently implemented in Venezuela´s economy over the last 4 years
and I do not know for how long in the Belarus hyperinflationary economy with
ZERO effect. No-one would even think of IAS 29 as a way to stop hyperinflation
or to stabilize an economy while it could be used for that purpose.
3. It is not stated anywhere that the implementation of IAS 29 stopped the
effect of hyperinflation in any country, although it could be use to do that by
someone who understands hyperinflation and the general purchasing power
approach or by proper IFRS guidance - provided daily measurement is used: see
IFRS ´X`.
4. IAS 29 is simply required to make restated financial statement more useful
and not misleading. IAS 29 has no written responsibility to stabilize an
economy under hyperinflation although it could be used to do that by someone
who knows how to use IAS 29 for that purpose or with proper guidance in IFRS as
set out in the amended draft IFRS ´X`. IAS 29 would then simply be used to
implement financial capital maintenance in units of constant purchasing power
with daily measurement in the first year of implementation: IAS 29 or IFRS
currently give no guidance in this respect. The second year, IAS 29 would not
be implemented during hyperinflation because the entity would not have any HC
or CC financial statements to restate in terms of IAS 29 because the entity
would then be operating permanently under financial capital maintenance in
units of constant purchasing power in terms of a daily index as a result of the
first year's changeover to this model under IAS 29. It can very easily be done
with just a few changes in IAS 29. However, the amended draft IFRS `X´ is much
more valuable than IAS 29 because of the very valuable Argentinean (South
American) contribution: the requirement at 10 percent annual inflation instead
of at 26 percent annual inflation for three years in a row (100 percent
cumulative inflation over three years, i.e., hyperinflation). This is the magnum
leap in IFRS that will have a profound effect on the world economy: it will
mark the beginning of the end of the HCA model in accounting. However, this may
take another 100 years to come about as a result of the almost non-existence of
knowledge about FCMUCPP.
IAS 29 is restatement: it is simply the separate restatement of values in a set
of HC or CC financial statements.
FCMUCPP is not restatement. In general terms, it is daily accounting in units
of constant purchasing power - not simply the restatement of month-end or
year-end financial statements based on HC accounts. FCMUCPP is an accounting
model that maintains the constant purchasing power of existing capital (equity)
constant in terms of units of constant purchasing power in terms of a daily index
only when the entity breaks even in real (not nominal) value - all else being
equal, and not only during hyperinflation.
===========
No, I do not agree that "the accounting under IAS 29 is also one of the
approaches to achieve financial capital maintenance in constant purchasing
power units as described in the Conceptual Framework ".
FCMUCPP is only possible with daily measurement of all items in terms of the
requirements of this model and IAS 29 never requires daily measurement.
Question 2
An entity implementing FCMUCPP during hyperinflation would attempt to implement
IAS 29 in terms of IAS 29.1. Then, it would ignore IAS 29, in terms of IAS
29.8, because
(1)IAS 29 is only required - as per IAS 29.8 - for entities preparing their
financial statements based on the HC or CC approach and
(2)All items in the FCMUCPP financial statements would already be stated in
terms of the measuring unit current at the end of the reporting period: it
would find it unnecessary and impossible to implement IAS 29.
The entity consequently would state in its notes to the financial statements
that it prepared its financial statements during hyperinflation based on the
FCMUCPP approach as authorized in IFRS in the CF, Par. 4.59 (a).
FCMUCPP is not being implemented in any hyperinflationary economy. IAS 29 is
being implemented under the HC paradigm with HC financial statements being
restated in all hyperinflationary economies.
Summary of answers to the two questions:
Question 1.
You ask a question with two parts:
1. I agree that there is no uniform, standardized approach agreed upon by
everybody (and no guidance in IFRS) to achieve FCMUCPP as described in the CF
(the description simply being: financial capital maintenance can be measured in
units of constant purchasing power: CF 4.59 (a)).
2. I do not agree that the accounting as required under IAS 29 is also one of
the approaches to implementing FCMUCPP because FCMUCPP is only possible with
daily measurement during the entire financial year and IAS 29 never requires daily
measurement.
Question 2
No, I do not confirm that accountants in jurisdictions implementing IAS 29 are
telling me that an entity in a hyperinflationary economy needs to refer to IAS
29 even if they implement FCMUCPP because this model is not implemented
anywhere in Venezuela, Belarus, Ethiopia or Iran - the countries currently in
hyperinflation. They do their accounts under HCA and then restate their HC
financial statements in terms of IAS 29 with absolutely no known, heard of or
reported effects in these hyperinflationary countries.
FCMUCPP is the core principle of the future possible replacement of IAS 29,
namely the amended draft IFRS ´X` CAPITAL MAINTENANCE IN UNITS OF CONSTANT
PURCHASING POWER.
Kind regards
Nicolaas
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Monday, December 17, 2012 7:07 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
Thank you so much for your review and detailed comments on the spreadsheet and
please accept my apology for the delay in my response.
Your comments and the document you provided are very helpful for me to
understand the CMUCPP.
I did some modifications to the original spreadsheet (please see the
âEUR~revised examplesâEUR(tm) tab of the attached spreadsheet). The cells
modified are shaded with darker blue.
Could you please look through the revised cells and provide me with your
comments, especially on the comments marked A to C?
In addition, from a larger perspective I just wonder if you could provide me
with your thoughts on the following points:
1. I did a small research on how the notion of financial capital maintenance in
constant purchasing power units is explained in some accounting textbooks. The
accounting results in the example I prepared are on the basis of an example
found in an accounting book which explains a way of preparing financial
statements under the financial capital maintenance concept in terms of constant
purchasing power units. Paragraph 11 of IAS 15, which was withdrawn in 2005,
stated âEUR~the general purchasing power approach involves the restatement of
some or all of the items in the financial statements for changes in the general
price level.âEUR(tm) Â I understand that there is no uniform standardised
approach agreed upon by everybody (and no guidance in IFRSs) to achieve the
financial capital maintenance in constant purchasing power units as described
in the Conceptual Framework (not the one as described in the IFRS
âEUR(tm)XâEUR(tm)), and the accounting required under IAS 29 is also one ofÂ
the approach to it. Do you agree with this?
2. In accordance with IAS 8.11, entities need to refer to accounting sources in
the order described in that paragraph in the absence of an IFRS that
specifically applies to a transaction, other event or condition. If the
financial statements are prepared by employing the financial capital
maintenance concept in constant purchasing power units, the entity may conclude
that there is no relevant guidance under current IFRSs for that kind of
financial statements. In that case, in light of the requirements in paragraph
11 of IAS 8, some may argue that the entity in hyperinflation economy needs to
refer to IAS 29 even if they employ the financial capital maintenance concept
in constant purchasing power units. Is this what you are told by
âEUR~accountantsâEUR(tm) in jurisdictions implementing IAS 29 as described in
the submission? Please confirm.
Thank you in advance for your help,
Kind regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 17 December 2012 11:39
To: Yoshimura Kenichi
Subject: Fw: IAS 29 Agenda proposal
Dear Ken,
I hope you had a nice week-end.
I think I sent you an email on Friday. Unfortunately I either deleted the sent
copy in my mailbox or I never sent it. I am sorry for this problem.
So, I am sending you the previous one again and the one I want to send you
today. Please forgive my bad housekeeping.
Here we go: The one dated Friday:
Herewith please find my detailed response to your example. I attached two
files: your Excel file and a short introduction to Capital Maintenance in Units
of Constant Purchasing Power.
I have found 4 more differences between the two models in your example. They
now total 16.
My answers show that the accounting result of the use of financial capital
maintenance in units of constant purchasing power would never result in the
same accounting result as applying IAS 29 requirements.
Thus, entities in a hyperinflationary economy which employ financial capital
maintenance in units of constant purchasing power would not need to apply and
find it impossible to apply IAS 29 because:
(1) The use of financial capital maintenance in units of constant purchasing
power would never result in the same accounting result as applying IAS 29
requirements.
(2) This accounting model employs a fundamentally different financial capital
maintenance concept (namely financial capital maintenance in units of constant
purchasing power in terms of a daily index under which the stable measuring
unit assumption is never implemented) to what is in the ambit of IAS 29 which
is only required for financial statements based on a historical cost approach
(i.e., financial capital maintenance in nominal monetary units under which the
stable measuring unit assumption is always implemented under all levels of
inflation and deflation, i.e., during low inflation, high inflation and
hyperinflation âEUR" even at levels of hundreds of billions percent per
annum, for example) or a current cost approach (IAS 29, Par. 8) âEUR" the
accounting result, consequently, always being different.
(3) The financial statements based on a financial capital maintenance in units
of constant purchasing power approach are, however, always already stated at
the measuring unit current at the end of the reporting period, it thus not
being necessary and impossible to apply restatement in terms of IAS 29: it is
not possible to âEURoerestateâEUR? items that are already stated at the
measuring unit current at the end of the reporting period.
Please read the attached paper âEURoeCapital Maintenance in Units of Constant
Purchasing PowerâEUR? first before you analyse the 16 differences in your
example. By then you would understand what happens under financial capital
maintenance in units of constant purchasing power in terms of a daily index and
it would be much easier to verify and understand the 16 differences.
I will send you an update of your Example file with the IFRS ´X` references.
The one dated today:
Herewith please find your Example with the draft IFRS ´X`references. I also
linked the items and inserted the formulas for the CMUCPP financial statements.
A) In my opinion the reason for IAS 29 not being required during hyperinflation
with CMUCPP is:
All items in CMUCPP financial statements are already stated at the measuring
unit current at the end of the reporting period as required in IAS 29: it is
thus not necessary to apply IAS 29.
In fact, all accounting (daily entries and financial reporting) under CMUCPP is
always only done in real value and only updated at the current, i.e., today´s,
Daily CPI.
It is to be noted that:
Financial statements based on the CMUCPP approach are prepared under the CMUCPP
paradigm [authorized in IFRS in CF 4.59 (a)] that is fundamentally different
from the HC paradigm under which IAS 29 is implemented, always producing a
different accounting result because the erosion of constant items not
maintained constant during inflation by HCA, i.e., by the implementation of the
stable measuring unit assumption (not inflation) - is stopped. The constant
real value of already existing capital (accounting cannot create value out of
nothing - by simply passing some entries) being maintained constant in all
entities that at least break even in real value âEUR" all else being
equal - instead of being eroded by the stable measuring unit assumption, i.e.,
by the HCA model during inflation. The stable measuring unit assumption -
always implemented and the basis of the HC paradigm - is never implemented
under the CMUCPP paradigm.
B) It is also to be noted that the problems IAS 29 tries to overcome under the
HC paradigm during hyperinflation with restatement of HC or CC financial
statements, are not experienced under CMUCPP as a result of the stabilizing
effect of this model on the constant and monetary item economies: Brazil had a
relatively stable non-monetary economy during 30 years of very high and
hyperinflation with positive economic growth during hyperinflation as a result
of the use of various government supplied daily indices to (1) update variable
items daily, (2) measure constant items daily in units of constant purchasing
power and (3) to inflation-adjust some money items daily. Brazil, in principle,
implemented CMUCPP during the 30 years from 1964 to 1994 during very high and
hyperinflation, although they did not understand it as such. So did Chile from
1967 to 2010 also without understanding it as such.
Colombia, like Chile with the daily Unidad de Fomento <http://si3.bcentral.cl/Indicadoressiete/secure/IndicadoresDiarios.aspx?Idioma=en-US>
, also uses a daily index today (for a lot more than pricing their government
capital inflation-indexed bonds, I think), the Real Value Unit <http://www.banrep.gov.co/statistics/sta_rvu.htm>
(both the Chilean and Colombian daily indices published by the Central Bank and
not the statistics authority in the country). I tried to find out what they use
the Real Value Unit for, but I got no reply. According to Prof. Robert Shiller
the UF (because of its success) was copied by various LA countries. (Shiller
2008).
C) The reason why it is now important to state that IAS 29 is not required with
CMUCPP is:
IAS 29´s future replacement (draft IFRS ´X`) is going to require CMUCPP
not only during hyperinflation, but at annual inflation equal to or greater
than 10 percent and cumulative inflation over three years equal to or greater
than 26 percent.
=====
I acknowledge that the question whether IAS 29 has any effect on a company and
economy is not part of this agenda request. It has to do with the choice
between restatement and CMUCPP for the future replacement of IAS 29. It is a
related matter regarding the agenda request.
You may find it strange that I keep on stating that IAS 29 has no effect. In my
opinion the Zimbabwean experience where it was implemented for either 4 or 6
years during hyperinflation is complete proof of my statement. However, here is
another:
Michael Madsen, the group CFO of the East Asiatic Company, the Danish
multinational with a big food processing business in hyperinflationary
Venezuela stated in EuroInvest in 2010:
âEUR~U <http://www.euroinvestor.com/news/2010/01/11/company-announcement-no-1-2010-venezuela-introduces-multi-tiered-exchange-rate-regime/10821702>
nder the International Financial Reporting Standards (IFRS) this requires the
application of IAS 29, "Reporting in hyperinflationary economies" for
2009 and subsequent years. The application of the standard affects the
accounting presentation, but does not affect the operation or the cash
flow.âEUR(tm)
Jensen N H 2010 Company announcement Nº 1/2010 - Venezuela introduces
multi-tiered exchange rate regime <http://www.euroinvestor.com/news/2010/01/11/company-announcement-no-1-2010-venezuela-introduces-multi-tiered-exchange-rate-regime/10821702>
EUROINVESTOR
Your example confirms that IAS 29 has no effect on the cash flow. You however
think it affects the operation. Michael Madsen stated it does not affect the
operation. But, this is another, related, matter.
By the way, I have found my email I thougth I sent to you on Friday: it is
still sitting in my Drafts folder. I´m sorry about this.
Please feel free to contact me any time you want regarding this issue.
Kind regards,
Nicolaas.
----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: Yoshimura Kenichi <kyoshimura@ifrs.org>
Sent: Wednesday, December 12, 2012 2:34 PM
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
Thank you for your kind wishes. I am well thanks, and I hope to hear the same
from you.
I have started to work on the 12 differences in your example between capital
maintenance in units of constant purchasing power (not constant purchasing
power units accounting - as you describe - and see âEUR" it :-) and what
is attempted in IAS 29 âEUR" just in your example.
I hope to give you âEUR" if I may - an introduction to how capital
maintenance in units of constant purchasing power is totally different from
what is done âEUR" or tried to be done - in IAS 29. It is not a short
answer, as you can imagine.
I have never personally implemented IAS 29.
I have, however, developed (in 1995) and implemented (as from 1 January, 1996)
accounting-dollarization in the company (Auto-Sueco âEUR" Angola, the
Volvo agents in that country) where I worked in Angola´s hyperinflationary
economy in Luanda. Accounting-dollarization is capital maintenance in units of
constant purchasing power by using the US Dollar (or any other relatively stable
foreign currency) as the daily unit of account and daily reporting currency
instead of the hyperinflationary local currency during hyperinflation: you do
your daily business and your daily accounting and monthly, quarterly,
semi-annual and annual financial reporting in terms of the daily US Dollar
parallel or black market rate: the free-market or real US Dollar daily rate
during hyperinflation. This allows you to eliminate only the very erosive
effect of the stable measuring unit assumption on only your company´s
constant real value non-monetary items. Keeping no local currency cash from the
one day to the next (over time) allows you to avoid only the effect of
hyperinflation on only the local hyperinflationary currency.
I then took the next 16 years to research the effects of the stable measuring
unit assumption (not inflation - as everyone generally accepts: as they were
taught) on the real value of only constant real value non-monetary items in
companies and the economy; discovering a lot along the way including first
identifying the split of non-monetary items in constant real value non-monetary
items and variable real value non-monetary items (both inferred in IFRS)
âEUR" a critical pre-requisite (sine qua non) for capital maintenance in
units of constant purchasing power: my only actual (real) contribution to the
body of knowledge of accounting in the sense of something completely new and
essential and adding a lot of value.
I have first identified other items, but they are simply first identifications,
for example, that IFRS already authorized three ([1] physical, [2] financial
capital maintenance in nominal monetary units and [3] financial capital
maintenance in units of constant purchasing power) instead of the generally
accepted two (physical and financial) concepts of capital maintenance since
1989: quite a revelation to accountants in general: now already accepted
because it is very evident in the CF.
The split of non-monetary items in constant and variable items is something
very different: without it capital maintenance in units of constant purchasing
power (with its guaranteed stabilising effect) as an alternative to HCA would
not be possible (it would never happen without the split being made and
accepted as it already has in this very short time since I first identified it
in about 2005 âEUR" thanks to the power of the internet): that is why
Constant Purchasing Power Accounting (identifying only monetary and
non-monetary items: no split) as described by the eminent ex-IASB member, Prof.
Geoffrey Whittington, in his excellent benchmark book Inflation Accounting
(however, never mentioning the word âEUR~stable measuring unit
assumptionâEUR(tm) even once in his book: everyone believed it is inflation
doing all the eroding), failed in the high inflation 1970´s and 80´s:
non-monetary items were not split between constant and variable items.
That is why I call capital maintenance in units of constant purchasing power
Constant ITEM Purchasing Power Accounting <http://realvalueaccounting.blogspot.pt/>
(non-monetary items split in two: CONSTANT ITEMS and variable items) to
differentiate it from Constant Purchasing Power Accounting (no split in
non-monetary items âEUR" the reason why it failed and cannot succeed to
implement capital maintenance in units of constant purchasing power).
You and Michael Stewart have also not implemented IAS 29, I think.
I personally think that the Big Four all âEURoedo their own thingâEUR? with
the implementation of IAS 29 âEUR" even differently in every different
country: there is so much confusion and misunderstanding about the
implementation of IAS 29 and what it is and what it isn´t. I could see that
from what the East Asiatic Company was doing in 2010 âEUR" in their
audited annual accounts. I did not attempt to describe my concerns to them at
the time âEUR" it would have been too involved taken into account my
short acquaintance with them then.
The fact that IAS 29 does not actually have any effect on anything in a
particular company or an economy, âEURoedoing your own thingâEUR? is fine
really: it does not affect anything âEUR" see especially what happened in
Zimbabwe where it was implemented for at least the last 4 or 6 years of
hyperinflation in that country: the economy imploded in any case âEUR"
with full implementation of IAS 29: capital maintenance in units of constant
purchasing power, on the other hand, would have kept their non-monetary economy
relatively stable during hyperinflation âEUR" as it happened in Brazil
during 30 years of very high and hyperinflation under daily indexation of most
non-monetary and some monetary items.
This is what this issue is really about: capital maintenance in units of
constant purchasing power does exactly what the name states: it maintains
capital perfectly constant (stable) in real value for an indefinite period of
time in all entities that at least break even in real value âEUR" all
else being equal âEUR" while IAS 29 does nothing: an enormous difference!
This is what I have to be able to convey to you and Michael.
[I feel at ease in expressing my personal opinions âEUR" here and there
(a lot of things have happened over the last 16 years of my research into this
issue âEUR" in different countries âEUR" mostly on the internet -
with different figures (people) in this issue) - to you. Clearly, most of what
I say are not simply my personal opinions: most are facts.]
I hope to send you my detailed answer by the latest by the end of tomorrow.
In my opinion, detailing the 12 differences in your example is not the best way
for you to understand the fundamental difference between IAS 29 and capital
maintenance in units of constant purchasing power in terms of a daily index. In
my opinion, a better approach would be for you to get to understand what
capital maintenance in units of constant purchasing power actually is and what
it does âEUR" automatically âEUR" to a company´s constant items
and monetary items and what it does âEUR" automatically - to a
country´s constant item economy and monetary item economy under low
inflation, high inflation, hyperinflation or deflation.
When I use the term âEUR~automaticallyâEUR(tm) it is used in the same way
that benefits from 2 percent inflation are âEUR~automaticâEUR(tm). Those you
know well.
I will do that in my detailed answer to your example.
Kind regards,
Nicolaas
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Tuesday, December 11, 2012 10:53 AM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
Hope this emails finds you well.
In order to help myself better understand this issue, I prepared a case study
using a simple example as attached.
This illustration is intended to show that the accounting result of the use of
constant purchasing power units would generally result in the same accounting result
of applying IAS 29 requirements. I thought this could support the view that an
entities in hyperinflation economy which employs a capital maintenance concept
in terms of constant purchasing power units would not need to apply IAS 29
requirements because in both cases the entity could achieve the same result.
I would really appreciate it If you could take a look at this file quickly and
advise me on my misunderstandings, if any.
Thank you in advance for your co-operation.
Kind regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 29 November 2012 15:48
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
Yes, you can identify me as the submitter of this issue.
You can contact me as often as you want. It is an honour for me to work with
you and the IASB.
Kind regards,
Nicolaas
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, November 29, 2012 3:20 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
Thank you for your reply and additional information.
Sorry, quickly one more point regarding to the report.
By our policy, we make a submitterâEUR(tm)s name anonymous unless the
submitter agrees with the submitterâEUR(tm)s name being made public. If the
report written by you were made public, your name would be at least indicated
as a submitter of this issue. Then I would like to reconfirm that if you are OK
with your name being identified as a submitter of this issue?
My apology is bothering you again and again.
Kind regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 29 November 2012 15:01
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
A) Yes certainly you can. You can use the revised report in your public website
and/or make it available to your constituents such as other national standard
setters in your process for addressing this issue.
The revised draft IFRS `X´ is also published in my e-book. I asked
permission to publish if from the IASB who then advised me to get permission
from the Argentinean Federation. Dr FermÃÂn del Valle, from the Argentinean
Federation, subsequently gave me that permission to publish it in my e-book.
=====================
B) Some update on the actual draft IFRS ´X`: I have realized by now that it
is not complete. As I stated during the teleconference, I superimposed the core
principle capital maintenance in units of constant purchasing power on the
Argentinean Federation´s draft, trying to change the minimum possible.
What is missing in the draft IFRS ´X` is a paragraph or paragraphs dealing
with first time adoption of capital maintenance in units of constant purchasing
power. I do not agree with the approach adopted in IAS 29 of restating all
equity items (capital) as from the initial date of the entity and I especially
do not agree with the simple deleting of accumulated retained earnings.
Eventually (in many years to come) capital maintenance in units of constant
purchasing power will be required from all companies world wide in low
inflation economies. A company like Exxon Mobil with USD 150 + billion in
retained earnings ( I am referring to the 2005 value - when I last looked at
it) will never agree to eliminate USD 150 Billion in accumulated retained
earnings. Neither would I if I were an Exxon Mobil director or shareholder.
I feel that the deemed cost approach in IFRS 1 is more appropriate and correct.
This is however a complex issue that cannot be treated in this email. I simply
wish to bring this to your attention, namely, that the draft IFRS `X´ is not
complete.
It also needs a one-time treatment of hidden gains in stock at the changeover
from HCA to capital maintenance in units of constant purchasing power.
I just want to bring this to your attention. The first item (the deemed cost
approach) is very important and the one-time adjustment for hidden gains in
stock is less important: it is simply a one-time adjustment account. These
matters will have to be dealt with in the future development of draft IFRS
´X`.
Kind regards
Nicolaas Smith
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, November 29, 2012 2:16 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolass
Thank you for your quick confirmation.
Even though it seems that the revised report is made public, could you please
confirm that I can use your revised report in our public website and/or make it
available to our constituents such as other national standards setters in our
process for addressing this issue?
Kind regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 29 November 2012 13:58
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal
Dear Ken,
Yes it is.
http://realvalueaccounting.blogspot.pt/2012/02/ifrs-x-capital-maintenance-in-units-of.html
Kind regards
Nicolaas Smith
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, November 29, 2012 11:13 AM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,
Thank you for your time to discuss this issue this morning.
I would like to confirm one point quickly. Is the link below the modified
version of the research report issued by Argentina you just referred to in the
call?
http://realvalueaccounting.blogspot.pt/2012/02/ifrs-x-capital-maintenance-in-units-of.html
Thank you again for your help,
Best regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 27 November 2012 15:17
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal
Dear Ken (if I may),
I confirm 29 Thursday from 10 am to 11 am.
Kind regards,
Nicolaas
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Tuesday, November 27, 2012 1:30 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas Smith,
Thank you for your swift attention to my request.
Then can we talk on 29 Thursday from 10 am to 11 am?
I agree that we are in the same time zone.
Could you please confirm the time?
Kind regards,
Ken
From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 27 November 2012 11:54
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal
Dear Kenichi Yoshimura,
Thank you for your email.
I will be available to speak to you by phone as follows:
Wednesday 28 8 am till 6 pm
Thursday 29 8 am till 6 pm
Friday 30 8 am till 10 am and 5 pm till 6 pm
I think Lisbon and London time is the same.
My mobile phone number is + 351 919 471 788
Kind regards,
Nicolaas
Blog Constant Item Purchasing Power Accounting - CIPPA <http://realvalueaccounting.blogspot.com/> My
Facebook <http://www.facebook.com/#!/profile.php?id=1588417151>
My Twitter <http://twitter.com/NicolaasSmith> My LinkedIn
<http://www.linkedin.com/profile/view?id=4965181&trk=tab_pro>
Lisboa, Portugal
Buy the Kindle e-book CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS at
Amazon.com <http://realvalueaccounting.blogspot.pt/2012/07/buy-ebook-for-299-or-149-or-260.html>
I promote financial capital maintenance in units of constant purchasing power
in terms of a Daily CPI or other daily rate at all levels of inflation and
deflation including hyperinflation as originally authorized in IFRS in the
Framework (1989), Par 104 (a) which states: 'Financial capital maintenance can
be measured in either nominal monetary units or units of constant purchasing
power.'
CIPPA automatically maintains the constant purchasing power of capital constant
for an indefinite period of time in all entities that at least break even in
real value during inflation and deflation including hyperinflation - all else
being equal.
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: realvalueaccounting@yahoo.com
Sent: Monday, November 26, 2012 5:09 PM
Subject: Re: IAS 29 Agenda proposal
Dear Nicolaas Smith,
My name is Ken Yoshimura, a staff at the IASB, currently working on your
submission related to IAS 29 Financial Reporting in Hyperinflationary
Economies. In order for us to analyse your submission efficiently and
effectively, we would like to talk to you over a phone to get a better idea on
what your concerns are.
If you are fine with having a call with us, could you please provide me with
your available time slots for the dates from 28th to 30th November?
Thank you again for your submission and I am looking forward to talking to you.
Kind regards,
Ken
------------------------------------------------------------------
Kenichi Yoshimura | Seconded National Standards Fellow
International Accounting Standards Board (IASB)
30 Cannon Street | London EC4M 6XH | UK
