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Wednesday, 27 December 2017

Why does the IASB refuse to update IAS 29?


IAS 29 was implemented during the last 8 years of hyperinflation in Zimbabwe with zero positive effect. It was completely ineffective during the entire eight years as well as when the Zimbabwe economy imploded in 2008.

Why does the IASB refuse to update IAS 29?

Because the Board members and the IFRS Foundation staff members do not understand the zero effect of hyperinflation automatically resulting from Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI as I explained in several of my comment letters to them.

They do not understand it because, unfortunately, they have no personal experience of the vastly different economic situation during hyperinflation. 

Not a single IASB board member and not a single IFRS Foundation staff member as well as a specific Big Four partner unsuccessfully used by the IFRS Foundation in the past to deal with the matter, unfortunately, understand the zero effect of hyperinflation automatically resulting from daily updating all economic items in terms of the Daily CPI.  

The IASB´s predecessor body, the IASC was very newly set up in 1994 when Brazil used CMUCPP in terms of the Daily CPI.  The Brazilians called it monetary correction and their Daily CPI was their famous Daily Unidade Real de Valor. The IASC had just approved IAS 29 in April 1989. It was and still is wrongly based on monthly and annual restatement of HCA statements in terms of the monthly published CPI. The latter changed by billions of percent per month in Zimbabwe during hyperinflation. For example 79.6 billion percent during November 2008.  

 Restatement in terms of the monthly published CPI was, is and always will be useless during high inflation and hyperinflation. Their economy imploded despite the implementation of IAS 29 during the last 8 years of hyperinflation in Zimbabwe.

The IASC saw no reason to investigate why IAS 29 was a complete failure in Zimbabwe. Why? Because they did not understand then - and still not today, 28 years later, that what the Brazilians did and what they called monetary correction, was in fact CMUCPP in terms of the Daily CPI and that it automatically results in zero effect of low inflation, high inflation, hyperinflation and deflation when correctly implemented in terms of the Daily CPI.

When the IFRS Foundation receive a request to interpret something related to hyperinflation, then they appoint a Big Four partner with zero experience of hyperinflation to deal with the matter and present his findings to them. (He used email correspondence and a few phone calls to gather information about the matter from me.) They send outreach letters regarding the matter to people who have no knowledge or experience about hyperinflation.

They do not understand the zero effect of hyperinflation, low inflation, high inflation and deflation automatically resulting from CMUCPP in terms of the Daily CPI.

Why do they not understand it?

Have you ever heard about it before reading this blog article?

Only street vendors in hyperinflationary economies - who often never even went to school - and millions of ordinary consumers in those economies including 150 million Brazilians in 1994, know that prices in a hyperinflationary economy have to be updated every time the general price level changes. At least daily. Sometimes more than once a day.

People in low inflationary economies are not aware of this basic economic survival fact clearly obvious to everyone in hyperinflationary economies.

What can be done about the IASB and the IFRS Foundation´s staff´s lack of understanding of the automatic zero effect of hyperinflation, low inflation, high inflation and deflation resulting from CMUCPP in terms of the Daily CPI?

Nothing.

Resistance to change.

An absolutely normal human way of dealing with something new - to them.

As long as the staff members at the IFRS Foundation and the IASB individual board members do not understand the automatic zero effect of low inflation, high inflation, hyperinflation and deflation resulting from CMUCPP in terms of the Daily CPI, IAS 29 will, logically, never be updated to require financial capital maintenance in units of constant purchasing power in terms of the Daily CPI as authorized in April, 1989 in the original Framework with the original authorization still word for word in the current Conceptual Framework. 

No matter how many special requests the IASB receive from Latin American countries about the matter. The Board has received two special requests from South American countries to help them solve their problems of high inflation. The IASB did not update IAS 29 as a result of those requests. Why? Because IAS 29 works perfectly well - according to the IASB. Why update IAS 29? There is nothing wrong with IAS 29 - according to the IASB. It is working well for 28 years by now - according to the IASB. 

The fact that IAS 29 had no positive effect during the 8 years it was implemented during hyperinflation in Zimbabwe is in doubt. Why? Because the IASB has not yet appointed a commission to review the implementation of IAS 29 in Zimbabwe which ended in 2008. That is what the IASB told me in 2013. 2008 was 9 years ago. During 9 years the IASB saw no need to investigate why IAS 29 had no positive effect in the Zimbabwean economy during hyperinflation. 

The staff members of the IFRS Foundation, the IASB members, the people in low inflation economies they send their hyperinflation outreach letters to and the Big Four partners the IFRS Foundation use to lead investigations in matters relating to hyperinflation, all who have no experience and very little knowledge of hyperinflation, do not expect IAS 29 to have any specific positive effect when it is implemented in a hyperinflationary economy besides making the restated period-end financial statements more "useful". These people, having spent their entire lives in low inflation economies, do not understand the automatic zero effect of hyperinflation under CMCUPP in terms of the Daily CPI as was so successfully done in Brazil in 1994. All my comment letters to the IFRS Foundation in which I repeatedly explained CMUCPP in terms of the Daily CPI and repeatedly referenced the brilliant example in Brazil in 1994 were, apparently, ignored. To them and all interested parties in the low inflation world, there is absolutely no problem with IAS 29. It does what it is supposed to do: it makes restated HC financial statements more "useful" during hyperinflation. 

The South African Institute of Chartered Accountants, whose examination many of the auditors and accountants involved in Zimbabwe audits at the time of hyperinflation had to pass to get their professional qualifications, emphatically stated that financial statements restated in terms of IAS 29 during hyperinflation in Zimbabwe soon became meaningless because of the rapid increase in hyperinflation. So there you have it: a very quick move from more "useful" to meaningless under IAS 29. 

I am sure the IASB and the IFRS staff fully understand what SAICA means with the term "meaningless" and that it is absolutely the opposite of more "useful".

This is a 1000 year journey.

Populations in countries in hyperinflation and high inflation like 

South Sudan, 

Venezuela, 

Malawi, 

Sudan, 

Libya, 

Suriname, 

Angola, 

Yemen, 

Egypt, 

Mozambique, 

Ukraine, 

Syria and 

Argentina 

will simply continue to suffer while the solution is freely available online and authorized in IFRS and US GAAP since April, 1989.

"Feasibility studies               Description

High Inflation: Scope of    The project’s objective will be to assess whether it would be          IAS 29                               feasible to extend the scope of IAS 29 Financial Reporting in
                                          Hyperinflationary Economics to cover economies subject to only                                            high inflation, without amending other requirements of IAS 29.

Comments

If the research establishes that it would not be feasible to extend the scope of IAS 29 in this way, the staff expects to recommend no work on IAS 29." IFRS.org

Nicolaas Smith Copyright (c) 2005-2017 Nicolaas J Smith. All rights reserved. No reproduction without permission.