Capital maintenance is rarely used

Capital maintenance is rarely used

In September 2012 I submitted the following request to the IASB:

IFRIC POTENTIAL AGENDA ITEM REQUEST

The Issue:

The Conceptual Framework (2010), Par. 4.59 states:

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

Par. 4.59 (a) does not specifically indicate whether financial capital maintenance in units of constant purchasing power is applicable during low inflation, high inflation, hyperinflation or deflation.

IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 8 states:

‘The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period.’

As a result of the fact that it is currently generally accepted by accountants in countries implementing IFRS that IAS 29 is always required during hyperinflation, please indicate whether the following two statements are valid or not:

1. In terms of The Conceptual Framework (2010), Par. 4.59 (a), financial capital maintenance in units of constant purchasing power is applicable during low inflation, high inflation, hyperinflation and deflation.

2. In terms of IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 8, this standard is only required for the restatement of historical cost and current cost financial statements and not in the case of financial capital maintenance in units of constant purchasing power during hyperinflation since all items in the latter financial statements would already be measured either

(a) in terms of the measuring unit current at the balance sheet date (e.g., the CPI); or
(b) in terms of IFRS-authorized measurement bases current at the end of the reporting period (e.g., fair value, net realizable value, recoverable value, present value, etc.), excluding nominal Historical Cost (updated Historical Cost to be used under financial capital maintenance in units of constant purchasing power), i.e., excluding the stable measuring unit assumption which is never implemented under financial capital maintenance in units of constant purchasing power.

The IASB, having a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework and petty-mindedly refusing to continue working with me on this request after I told Michael Stewart, the IASB´s Director of Implementation Activities, that his statement that "financial reporting has NO EFFECT on the economy" is completely wrong and reminded him that IAS 29 had no positive effect in Zimbabwe after being implemented during the final 8 years of hyperinflation in that country, distorted my request as follows:

"The Interpretations Committee considered the following two questions: 

(a) whether an entity is permitted to use the financial capital maintenance concept defined in terms of constant purchasing power units that is described in the Conceptual Framework when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29 Financial Reporting in Hyperinflationary Economies; and 

(b) if such use is permitted, whether the entity needs to apply IAS 29 to its financial statements prepared under a specific model of that concept of financial capital maintenance when it falls within the scope of IAS 29."

Note that the IASB - clearly demonstrating their lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework - avoided the detail I stated about financial capital maintenance in units of constant purchasing power, by simply referring to it as "a specific model".

The IASB had to rewrite (distort) my request because they are clueless about capital maintenance as now pointed out directly by CPA Australia and The Institute of Chartered Accountants of Australia. They had to change my request to something they understood and could attempt to answer. Kenichi Yoshimura, the author of all three staff papers (the first - Agenda Ref 20 - of which is total junk and was withdrawn (see Agenda Paper 20 here) after I wrote about it to Hans Hoogervorst, the Chairman of the IASB) on this request - under the direction of "financial reporting has NO EFECT on the economy" Michael Stewart - officially informed me by email that he has a lack of understanding about capital maintenance in units of constant purchasing power. Instead of then withdrawing from the project he carried on authoring all three staff papers and is still on the project.

The IASB then contrived the following guidance for their distorted version of my request:


"Consequently the guidance in the Conceptual Framework relating to the use of a particular capital maintenance concept cannot be used to override the requirements of any individual IFRSs. An entity is not permitted to apply a concept of capital maintenance that conflicts with the existing requirements in a particular IFRS, when applying that IFRS." 

I fully agree with CPA Australia and The Institute of Chartered Accountants Australia that the IASB has a lack of understanding about the fundamental 
role a capital maintenance concept has within the accounting framework.

In light of the IASB´s clearly demonstrated lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework, the above guidance from the IASB is thus of almost no importance at all.

Nicolaas Smith 

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