D. Prepare the opening balance sheet under CMUCPP (work in progress ......
Once the company has stopped Historical Cost Accounting in its business and has prepared the final HCA financial reports, the company then has to prepare the first balance sheet under Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of an index that follows all (at least DAILY) changes in the general price level on the day after the final HCA balance sheet.
The broad principles regarding the preparation of the first balance sheet under CMUCPP are set out in IAS 29 Financial Reporting in Hyperinflationary Economies.
By quoting IAS 29 in this blog does under no circumstances mean that I support IAS 29. In my opinion IAS 29 is the worst IFRS ever authorized by the IASB because it does not result in capital maintenance in units of constant purchasing power in a hyperinflationary or high inflationary economy because of the use of the monthly CPI.
IAS 29 had absolutely no positive effect during its 8 years of implementation in the Zimbabwean hyperinflationary economy.
However, most of the general principles regarding preparing the opening balance sheet under CMUCPP are correctly treated in IAS 29. That is why I quote those parts of IAS 29. I do not support IAS 29 at all because it is totally ineffective in a hyperinflationary economy because of the use of the monthly published CPI. Only the use of a DAILY INDEX (actually one that follows all changes in the general price level) can result in actual capital maintenance in units of constant purchasing power during low inflation, high inflation, hyperinflation or deflation.
The IASB uses the term "restatement" because the IASB, since before 1989 when IAS 29 was authorized, has a very great lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework. The IASB´s "restatement" means ´measurement in units of constant purchasing power´ in the case of constant real value non-monetary items.
IAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES
"RESTATEMENT OF FINANCIAL STATEMENTS
Historical cost financial statements
Statement of financial position
11 Statement of financial position amounts not already expressed in terms of the measuring unit current at the end of the reporting period are restated by applying a general price index."
"Restated" means `measured in units of constant purchasing power´.
"12 Monetary items are not restated because they are already expressed in terms of the monetary unit current at the end of the reporting period. Monetary items are money held and items to be received or paid in money."
Monetary items are not ALL "items to be received or paid in money" as the IASB´s definition of monetary items implies. Most items in the world economy are "to be received or paid in money". Most items in the world economy are not monetary items. A house is to be paid in money when you buy it cash. The house is not a monetary item. You use cash (a monetary item) as a medium of exchange to pay its fair value - a variable real value non-monetary item. You can pay the variable real value non-monetary value of the house in gold too or any other medium of exchange acceptable to the seller.
Monetary items constitute the money supply.
If an item were not part the money supply as indicated by the Central Bank then it is not a monetary item. It is a non-monetary item. Trade debtors, trade creditors, salaries payable, wages payable, taxes payable, etc. are not part of the money supply. They are constant real value non-monetary items.
"13 Assets and liabilities linked by agreement to changes in prices, such as index linked bonds and loans, are adjusted in accordance with the agreement in order to ascertain the amount outstanding at the end of the reporting period. These items are carried at this adjusted amount in the restated statement of financial position."
The CAPITAL amounts of inflation-linked loans and bonds are monetary items. The interest is a constant real value non-monetary item under CMUCPP.
"14 All other assets and liabilities are non-monetary."
Non-monetary items are divided in (i) variable real value non-monetary items and (ii) constant real value non-monetary items under CMUCPP.
"Some non-monetary items are carried at amounts current at the end of the reporting period, such as net realisable value and fair value, so they are not restated."
The statement just above refers to variable real value non-monetary items, e.g., property, plant, equipment, foreign exchange, patents, raw material, finished goods, stock, listed and unlisted shares, etc.
All other non-monetary assets and liabilities are restated.
The statement just above refers to constant real value non-monetary items, e.g., issued share capital, all items in shareholders equity (see the special treatment of opening retained earnings below), trade debtors, trade creditors, all non-monetary payables (e.g., salaries payable, taxes payable), all non-monetary receivables (e.g., salaries receivable, taxes receivable), provisions, etc.
A number of items are treated as monetary items under the Historical Cost paradigm as a result of the implementation of the stable measuring unit assumption (the assumption that money is perfectly stable under all levels of inflation and deflation), e.g., trade debtors, trade creditors, all non-monetary payables, all non-monetary receivables, salaries, wages, rent, pensions, employee benefits, interest, fees, duties, etc. They are all constant real value non-monetary items under CMUCPP.
"Restated" in Par. 14 means ´measured in units of constant purchasing power´ as from the original date to the date of the opening balance sheet.
"15 Most non-monetary items are carried at cost or cost less depreciation; hence they are expressed at amounts current at their date of acquisition."
The statement just above generally refers to variable real value non-monetary items like property, plant and equipment.
"The restated cost, or cost less depreciation, of each item is determined by applying to its historical cost and accumulated depreciation the change in a general price index from the date of acquisition to the end of the reporting period. For example, property, plant and equipment, inventories of raw materials and merchandise, goodwill, patents, trademarks and similar assets are restated from the dates of their purchase. Inventories of partly-finished and finished goods are restated from the dates on which the costs of purchase and of conversion were incurred.
16 Detailed records of the acquisition dates of items of property, plant and equipment may not be available or capable of estimation. In these rare circumstances, it may be necessary, in the first period of application of this Standard, to use an independent professional assessment of the value of the items as the basis for their restatement.
17 A general price index may not be available for the periods for which the restatement of property, plant and equipment is required by this Standard. In these circumstances, it may be necessary to use an estimate based, for example, on the movements in the exchange rate between the functional
currency and a relatively stable foreign currency."
This relatively stable foreign currency is normally the US Dollar official rate or unofficial parallel or black market rate.
"18 Some non-monetary items are carried at amounts current at dates other than that of acquisition or that of the statement of financial position, for example property, plant and equipment that has been revalued at some earlier date. In these cases, the carrying amounts are restated from the date of the revaluation."
"Non-monetary items" in Par. 18 refer to variable real value non-monetary items.
"19 The restated amount of a non-monetary item is reduced, in accordance with appropriate IFRSs, when it exceeds its recoverable amount. For example, restated amounts of property, plant and equipment, goodwill, patents and trademarks are reduced to recoverable amount and restated amounts of inventories are reduced to net realisable value.
20 An investee that is accounted for under the equity method may report in the currency of a hyperinflationary economy. The statement of financial position and statement of comprehensive income of such an investee are restated in accordance with this Standard in order to calculate the investor’s share of its net assets and profit or loss. When the restated financial statements of the investee are expressed in a foreign currency they are translated at closing rates.
21 The impact of inflation is usually recognised in borrowing costs. It is not appropriate both to restate the capital expenditure financed by borrowing and to capitalise that part of the borrowing costs that compensates for the inflation during the same period. This part of the borrowing costs is recognised as an expense in the period in which the costs are incurred.
22 An entity may acquire assets under an arrangement that permits it to defer payment without incurring an explicit interest charge. Where it is impracticable to impute the amount of interest, such assets are restated from the payment date and not the date of purchase.
24 At the beginning of the first period of application of this Standard, the components of owners’ equity, except retained earnings and any revaluation surplus, are restated by applying a general price index from the dates the components were contributed or otherwise arose. Any revaluation surplus that arose in previous periods is eliminated. Restated retained earnings are derived from all the other amounts in the restated statement of financial position."
"25 At the end of the first period and in subsequent periods, all components of owners’ equity are restated by applying a general price index from the beginning of the period or the date of contribution, if later. The movements for the period in owners’ equity are disclosed in accordance with IAS 1. Statement of comprehensive income
26 This Standard requires that all items in the statement of comprehensive income are expressed in terms of the measuring unit current at the end of the reporting period. Therefore all amounts need to be restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded in the financial statements."
The IFRS Foundation owns copyright over IAS 29
Rest of the CMUCPP DAILY INDEX PLAN
To be continued .........
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