Thursday, 27 February 2014
Ukraine and Venezuela can achieve economic stability in the very short run with help from the IASB
The implementation of capital maintenance in units of constant purchasing power in terms of a DAILY index which follows all - at least DAILY - changes in the general price level would GUARANTEE stability in the REAL VALUE (constant purchasing power) of
salaries
wages
rents
taxes
trade debtors
trade creditors
all non-monetary payables
all non-monetary receivables
all items in the income statement
all profits
all losses
issued share capital
retained earnings
capital reserves
all other items in shareholders´equity
provisions
etc.
at any level of high or hyperinflation in Ukraine and Venezuela in the very short run. This requires the calculation and accounting of net monetary losses and gains.
This would stabilize the constant real value non-monetary economies in Ukraine and Venezuela in the very short run.
This was done very successfully in Brazil from 1964 to 1994 with "correcção monetária" or DAILY indexing which is CMUCPP in terms of a DAILY INDEX.
Extending DAILY INDEXING or "correcção monetária" or CMUCPP in terms of a DAILY INDEX to include the daily inflation-adjustment of all monetary items with all cash in the banking system (obviously not 100% possible) and it would GUARANTEE the stability of the REAL VALUE of these inflation-indexed monetary items at all levels of high and hyperinflation in Ukraine and Venezuela in the very short run. There would still be high or hyperinflation in Ukraine and Venezuela but there would be no EFFECT OF high or hyperinflation just like the effect of low and high inflation is eliminated in the global USD 3 trillion in government capital inflation-indexed bonds (e.g. TIPS) currently inflation-adjusted DAILY during low and high inflation in terms of the DAILY CPI in a great number of countries in the world economy.
Chile already inflation-indexes 25% + of all monetary items in its economy on a DAILY basis during low inflation since 2012. Chile started indexing in 1967 in its economy. They adopted DAILY INDEXING since 1990.
Robert Shiller decried governments´ lack of interest in DAILY INDEXING years ago.
The IASB can achieve that today in a very short time by requiring DAILY INDEXING in IAS 29 Financial Reporting in Hyperinflationary Economies by means of the short turn-around process for correcting an issued IFRS.
Venezuela is implementing IAS 29 since 2009. Ukraine is or would soon be in high inflation. IAS 29 in terms of the monthly published CPI does NOT achieve the above monetary and non-monetary stability as very well proven during the 6 years IAS 29 was implemented at the end of Zimbabwe´s hyperinflation.
Nothing stops the IASB from requiring DAILY INDEXING in IAS 29 and nothing stops the IASB from encouraging it immediately and changing IAS 29 to require it over the very short term.
The above would also stabilize the foreign currency exchange rates of Ukraine and Venezuela with the rest of the world economy - obviously only with all else being equal. DAILY INDEXING would always guarantee internal economic stability no matter what happens with the external exchange rate. Internal economic stability generally always has a stabilizing effect on the external exchange rate - all else being equal.
What a difference DAILY INDEXING of all monetary items and all constant real value non-monetary items would make in Ukraine and Venezuela. Ask Robert Shiller and Gustavo Franco. Franco was one of the architects of the Real Plan in Brazil in 1994.
All of the above also hold true for Argentina and all other countries in high and hyperinflation. The constant purchasing power of constant real value non-monetary items and inflation-indexed monetary items is not only to be maintained constant in real value with the onset of high inflation or only during hyperinflation. CMUCPP in terms of a DAILY INDEX is required at all levels of inflation and deflation: during low inflation and deflation too.
Nicolaas Smith
Copyright (c) 2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday, 19 February 2014
Scotland can unofficially dollarize using the Pound - without London´s consent
According to Forbes:
"In an almost unheard of outbreak of unanimity, the three major political parties in London – the Conservatives, Labor, and the Liberal Democrats – last week concurred in saying that the U.K. would not allow an independent Scotland to use the pound."
Scotland - or any country in the world, for that matter - can unilaterally adopt the British Pound, or any other country´s currency, as its currency. It is called unofficial dollarization.
No-one can stop a country from using another country´s currency. Many small economies (island-state economies) are unofficially dollarized using the US Dollar as the national currency.
Zimbabwe uses the British Pound as one of the several currencies it uses in its multi-currency dollarization of its economy.
The fact that the Zimbabwean population refused to accept the Zimbabwean Dollar as payment towards November 2008, means that Zimbabwe dollarized spontaneously. The people decided: not the government.
When Zimbabwe then officially withdrew the Zimbabwean Dollar from circulation as from 20 November 2008, it then unofficially dollarized the Zimbabwean economy allowing the official use of the US Dollar, British Pound, SA Rand, Euro and Botswana Pula.
Zimbabwe did not ask permission from the US, UK, EU, SA or Botswana. The Zimbabwean government just decided by themselves to follow the Zimbabwean population´s lead.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
"In an almost unheard of outbreak of unanimity, the three major political parties in London – the Conservatives, Labor, and the Liberal Democrats – last week concurred in saying that the U.K. would not allow an independent Scotland to use the pound."
Scotland - or any country in the world, for that matter - can unilaterally adopt the British Pound, or any other country´s currency, as its currency. It is called unofficial dollarization.
No-one can stop a country from using another country´s currency. Many small economies (island-state economies) are unofficially dollarized using the US Dollar as the national currency.
Zimbabwe uses the British Pound as one of the several currencies it uses in its multi-currency dollarization of its economy.
The fact that the Zimbabwean population refused to accept the Zimbabwean Dollar as payment towards November 2008, means that Zimbabwe dollarized spontaneously. The people decided: not the government.
When Zimbabwe then officially withdrew the Zimbabwean Dollar from circulation as from 20 November 2008, it then unofficially dollarized the Zimbabwean economy allowing the official use of the US Dollar, British Pound, SA Rand, Euro and Botswana Pula.
Zimbabwe did not ask permission from the US, UK, EU, SA or Botswana. The Zimbabwean government just decided by themselves to follow the Zimbabwean population´s lead.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Monday, 10 February 2014
Selection of the capital maintenance concept is a choice that is available within the Conceptual Framework
“Par. 14 . The selection of the capital maintenance concept is a choice that is available within the Conceptual Framework that provides a fundamental basis of preparation of financial statements. Paragraph 4.58 of the Conceptual Framework states that “the selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements”. Accordingly, those who support this view argue that the entity is permitted to use the financial capital maintenance concept defined in constant purchasing power units if this concept, among the alternative concepts described in the Conceptual Framework, provides the most useful information to users.
Par. 15. Having made a choice of using the financial capital maintenance concept in constant purchasing power units, the entity would develop accounting policies by referring to an IFRS that addresses a transaction, other event or condition analysed in accordance with paragraph 10 of IAS 8. The entity would need to adapt each IFRS for the use under that capital maintenance concept.”
STAFF PAPER Agenda ref 12, 10–11 September 2013 IFRS Interpretations Committee Meeting
Project IAS 29 Financial Reporting in Hyperinflationary Economies
Paper topic Applicability of the concept of financial capital maintenance defined in constant purchasing power units.
I fully support the above view.
Nicolaas Smith
Par. 15. Having made a choice of using the financial capital maintenance concept in constant purchasing power units, the entity would develop accounting policies by referring to an IFRS that addresses a transaction, other event or condition analysed in accordance with paragraph 10 of IAS 8. The entity would need to adapt each IFRS for the use under that capital maintenance concept.”
STAFF PAPER Agenda ref 12, 10–11 September 2013 IFRS Interpretations Committee Meeting
Project IAS 29 Financial Reporting in Hyperinflationary Economies
Paper topic Applicability of the concept of financial capital maintenance defined in constant purchasing power units.
Nicolaas Smith
Friday, 7 February 2014
DAILY GENERAL PRICE LEVEL
DAILY GENERAL PRICE LEVEL
A price index is a normalized average of prices for goods and services within an economy over a given period of time. The best known is the Consumer Price Index (CPI).
The general price level is a hypothetical measure of overall prices of goods and services in an economy over time, normalized relative to some base set. The general price level is approximated with the Daily Consumer Price Index (Daily CPI).
During low inflation consumer goods and most other prices, including salaries, wages, rents, transport fees, government-administered prices, electricity prices, water, gas, etc., are generally updated once a year in terms of the change in annual inflation. However, the general price level, in fact, changes at least DAILY. This only becomes evident during LOW inflation when a product is actually priced in terms of the CPI when it is bought and sold on a daily basis and thus has to be priced on a daily basis in terms of the DAILY CPI. This happens daily in the global US Dollar 3 Trillion government capital inflation-indexed bond market in many countries where these sovereign bonds have a different price every day in low and high inflation economies set in terms of the DAILY CPI. This is obviously also true for inflation-indexed bonds during high inflation, hyperinflation and deflation.
During hyperinflation consumer prices are generally updated daily, actually every time the parallel rate changes, in terms of the US Dollar black market rate. Everyone in a hyperinflationary economy knows for a fact that the general price level changes daily (or even more often) as consumer prices are adjusted daily, i.e., every time the US Dollar parallel rate changes. At levels of hyperinflation above 1000 percent per annum, everyone in the economy knows that the previous day´s price is meaningless the next day: it has to be updated at least daily in terms of the change in the black market rate. Everyone involved in business and money matters in a hyperinflationary economy with hyperinflation above 1000 percent per annum knows the general price level changes at least daily.
All DAILY US Dollar parallel market rates around the world in high and hyperinflationary countries are proxies for the DAILY general price level in those countries as far as the updating of consumer, property and many other prices are concerned. This excludes consumer prices fixed by the government, for example, currently in Venezuela.
The general price level is indicated by a DAILY Non-Monetary Index that follows ALL changes in the general level of prices, normally at least DAILY changes. It is represented by the Daily CPI during low inflation, high inflation, the initial stage of hyperinflation and deflation.
The general price level is indicated by the DAILY US Dollar parallel rate as from the stage of hyperinflation when the Daily CPI falls too far behind the Daily USD parallel rate. The DAILY real (parallel or black market) foreign exchange rate is then used as a proxy for the general price level. The daily price level as represented by the DAILY US Dollar parallel rate can change more than once per day by a huge percentage during severe hyperinflation. See Hyperinflation in Zimbabwe, Hungary, Yugoslavia and Germany.
All countries that issue government capital inflation-indexed bonds already calculate a Daily CPI. These bonds trade DAILY. They are priced DAILY in terms of the DAILY CPI.
Here are links to some Daily CPIs which indicate the DAILY general price levels in the respective countries:
Chile - UF: Daily Unidad de Fomento Index. Not a Daily CPI, but a monetized daily indexed unit of account based on the CPI.
Turkey - Daily CPI (Click on Reference Indices under CPI Indexed Government Bonds)
The constant purchasing power of capital and all other constant real value non-monetary items, e.g., salaries, wages, rent, taxes, trade debtors, trade creditors, all non-monetary payables, all non-monetary receivables, all profits and losses, all items in shareholders equity, etc. can only be maintained constant in real value in terms of a DAILY INDEX during low inflation, high inflation, hyperinflation and deflation.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
A price index is a normalized average of prices for goods and services within an economy over a given period of time. The best known is the Consumer Price Index (CPI).
The general price level is a hypothetical measure of overall prices of goods and services in an economy over time, normalized relative to some base set. The general price level is approximated with the Daily Consumer Price Index (Daily CPI).
During low inflation consumer goods and most other prices, including salaries, wages, rents, transport fees, government-administered prices, electricity prices, water, gas, etc., are generally updated once a year in terms of the change in annual inflation. However, the general price level, in fact, changes at least DAILY. This only becomes evident during LOW inflation when a product is actually priced in terms of the CPI when it is bought and sold on a daily basis and thus has to be priced on a daily basis in terms of the DAILY CPI. This happens daily in the global US Dollar 3 Trillion government capital inflation-indexed bond market in many countries where these sovereign bonds have a different price every day in low and high inflation economies set in terms of the DAILY CPI. This is obviously also true for inflation-indexed bonds during high inflation, hyperinflation and deflation.
During hyperinflation consumer prices are generally updated daily, actually every time the parallel rate changes, in terms of the US Dollar black market rate. Everyone in a hyperinflationary economy knows for a fact that the general price level changes daily (or even more often) as consumer prices are adjusted daily, i.e., every time the US Dollar parallel rate changes. At levels of hyperinflation above 1000 percent per annum, everyone in the economy knows that the previous day´s price is meaningless the next day: it has to be updated at least daily in terms of the change in the black market rate. Everyone involved in business and money matters in a hyperinflationary economy with hyperinflation above 1000 percent per annum knows the general price level changes at least daily.
All DAILY US Dollar parallel market rates around the world in high and hyperinflationary countries are proxies for the DAILY general price level in those countries as far as the updating of consumer, property and many other prices are concerned. This excludes consumer prices fixed by the government, for example, currently in Venezuela.
The general price level is indicated by a DAILY Non-Monetary Index that follows ALL changes in the general level of prices, normally at least DAILY changes. It is represented by the Daily CPI during low inflation, high inflation, the initial stage of hyperinflation and deflation.
The general price level is indicated by the DAILY US Dollar parallel rate as from the stage of hyperinflation when the Daily CPI falls too far behind the Daily USD parallel rate. The DAILY real (parallel or black market) foreign exchange rate is then used as a proxy for the general price level. The daily price level as represented by the DAILY US Dollar parallel rate can change more than once per day by a huge percentage during severe hyperinflation. See Hyperinflation in Zimbabwe, Hungary, Yugoslavia and Germany.
All countries that issue government capital inflation-indexed bonds already calculate a Daily CPI. These bonds trade DAILY. They are priced DAILY in terms of the DAILY CPI.
Here are links to some Daily CPIs which indicate the DAILY general price levels in the respective countries:
Chile - UF: Daily Unidad de Fomento Index. Not a Daily CPI, but a monetized daily indexed unit of account based on the CPI.
- Venezuela - Today´s Rate USD parallel rate
More countries that issue daily inflation-indexed bonds and thus already calculate a Daily CPI to price these bonds daily are:
France, Canada, Australia, Germany, Greece, Honk Kong, Italy, India, Japan, Sweden, Portugal, South Africa and Brazil.
The constant purchasing power of capital and all other constant real value non-monetary items, e.g., salaries, wages, rent, taxes, trade debtors, trade creditors, all non-monetary payables, all non-monetary receivables, all profits and losses, all items in shareholders equity, etc. can only be maintained constant in real value in terms of a DAILY INDEX during low inflation, high inflation, hyperinflation and deflation.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Saturday, 1 February 2014
Prize for the Best Statement regarding Financial Reporting in 2014-to-date
EUROPEAN ACCOUNTING ASSOCIATION
"Capital maintenance is a competing objective of financial reporting."
Response to Question 26, Comment Letter to the Discussion Paper regarding the Review of the Conceptual Framework, on Page 2 of comment letters, dated 2014-01-24
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