Thursday, 10 October 2013

CMUCPP awards for the silliest statements about accounting for 2013-to-date.

First Prize: IASB STAFF

The CMUCPP award for the silliest statement about accounting for 2013-to-date is hereby awarded to the IASB Staff for the following statement:

23. Consequently, we are of the view that IFRSs PROHIBIT an entity from preparing its financial statements under the concept of financial capital maintenance defined in constant purchasing power units unless the entity falls within the scope of IAS 29.

STAFF PAPER Agenda ref 12 PROJECT IAS 29 Financial Reporting in Hyperinflationary Economies PAPER TOPIC Applicability of the concept of financial capital maintenance defined in constant purchasing power units

IASB Staff members are in a very silly way attempting to ban financial capital maintenance in units of constant purchasing power (DAILY indexing or DAILY measurement in units of constant purchasing power) during low and high inflation and deflation when it is, in fact, authorised at all levels of inflation and deflation in the Conceptual Framework (2010), Par. 4.59 (a) which states: 

"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

The IASB Staff members demonstrate a shocking lack of sound judgement and common sense - two of the most important characteristics required for working at the IASB (although it certainly does not seem like that with Michael Stewart - a senior IASB director - even having gone so far as to state on 8 January 2013 in London that "financial reporting has no effect on the economy").

Financial Capital Maintenance in Units of Constant Purchasing Power (indexing or measurement in units of constant purchasing power) is a generally accepted accounting practice (GAAP) at all levels of inflation and deflation. Also see US FASB Concepts Statement Nº 6. The most common embodiment is the practice of measuring salaries, wages, rentals, etc. in units of constant purchasing power on an annual basis (although these items are then paid on a monthly basis during the financial year again implementing the stable measuring unit assumption: they are paid in fixed nominal monthly payments) as well as inflation-indexing monetary items, e.g., sovereign capital inflation-adjusted bonds (more than USD 2.4 trillion world wide) on a daily basis under Historical Cost Accounting. HCA - which the IASB staff state is the sole target of current IFRS excluding IAS 29 - includes various other measurement bases besides measurement in nominal monetary units (see the Conceptual Framework) which applies the stable measuring unit assumption under which it is mistakenly assumed that the monetary unit of account is perfectly stable over time during low and high inflation and deflation.

Each measurement basis (implemented under HCA) results in a proportional financial capital maintenance (of net equity) in terms of that particular measurement basis: in units of constant purchasing or nominal monetary units or whatever - depending on the measurement basis for that particular (never quantified under HCA) portion of epuity. Current (2013) IASB staff find it very difficult to grasp and understand these type of concepts. Current IASB staff operate on the "monekey see, monkey do" basis: when the words are written in IFRS, then the concept is acceptable; when the words are not written in IFRS, then it is not acceptable: no judgement or common sense required.

While we have inflation and deflation entities will instinctively index some very sensitive items (e.g., salaries, wages, rents, etc.): the invisible hand of self-interest. To try and deny it with a silly IASB staff recommendation to the IASB will eventually prove futile: self-interest will never be eliminated - in the long run. Entities are not blind to the stable measuring unit assumption (in the measurement of constant real value non-monetary items) and inflation/deflation (in the measurement of monetary items) and will - in the long run - not ignore their own self-interest.


Second prize goes to Prof. Steve Hanke for the following statement:

"Hyperinflation begins when a country experiences an inflation rate of greater than 50% percent per month — which comes out to about 13,000% per year."

IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 3 states:

"Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:

(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%."

Prof. Hanke´s definition of hyperinflation is just nonsense.

These awards will only be finalised on 1 January 2014.

Nicolaas Smith Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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