Applicability of IAS 29 No 3

Applicability of IAS 29 No 3

The many emails between Kenichi Yoshimura from the IASB and me regarding the Potential Agenda Item Request

7 January 2013

Dear Nicolaas,

Thank you so much for providing us with the revised example and your observations on the outreach activities.

Please let us study them prior to the call.

Looking forward to talking to you tomorrow from 11:00 am.

Kind regards,

Ken

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 07 January 2013 11:42
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal

Dear Ken,

Thank you for last mail.

Attached please find the latest update of the example before the meeting.

I changed the start dates of items to show the effect of accounting items transacted at a different daily rate in terms of always the month-end CPI under IAS 29 while they are accounted at the actual daily rate under CMUCPP (not a HCA model). I included hyperinflation in the prior year to show that effect too. The Long Term Debt for $ 15 657.89 would of necessity be accounted incorrectly through-out its lifetime as $5 000 under IAS 29 – there is no other way to do it under IAS 29: IAS 29 is an inappropriate model. I showed the Other Expenses accounts under the two models on the day of 29-2-08 in order to show the effect of using different rates for the same transactions under the two models. It is assumed we look at those accounts on 29-2-08 which is only possible in practice under CMUCPP.

The only time non-monetary items would be the same under the two models would be transactions on the year-end date (during that single day with no price level change on that day) when the BS is prepared on that day under both models. This could be done for the CMUCPP BS but not for the IAS 29 BS. Non-monetary items would thus never be the same.

Monetary items - cash and other monetary items that are included in the money supply (non-monetary Receivables and Payables never being included in the money supply) - would be the same in the actual ledger accounts during the financial year but never in any historical financial statements under the two models – non-historical financial statements not being able to be prepared under the two models.

Conclusions:

1. Nothing is ever the same in financial statements prepared under the two models.
2. IAS 29 is an inappropriate accounting model.

Your outreach activities

I think you will find that national accounting-standard setters with experience of hyperinflation would know about the advantages of CMUCPP, but that they do (did) not see it as an IFRS authorised accounting model that automatically maintains the non-monetary economy stable (and can maintain the monetary economy stable too): they understand (understood) it in other – maybe macro-economic - terms.

Brazil instinctively understood the advantages of CMUCPP (daily measurement – in the case of Brazil - of some monetary and most non-monetary items in units of constant purchasing power) during 30 years of very high and hyperinflation from 1964 to 1994, but they did not see it as CMUCPP: an accounting model.Their Central Bank (and Central Banks generally) looked for solutions to stop the effects of hyperinflation: they never realised that the effect (cost) of hyperinflation is caused by the implementation of the stable measuring unit assumption in HC accounting. Daily indexing is the opposite of the stable measuring unit assumption; it accompanies the daily changes in the price level.

Daily indexing was also totally ignored by the International Accounting Standards Committee, the IASB´s predecessor body, in the formulation of IAS 29 in 1989.

Other Latin American countries also instinctively understood the advantages of CMUCPP, but they also did not see it as such, e.g., Chile that stopped “correcção monetária” in 2010 or 11 to “conform with” IFRS and adopted HCA – not realizing:

(a) that they had been implementing a form of CMUCPP since 1967 and that

(b) it was authorized in IFRS since 1989 and that it was totally unnecessary and a big mistake to have stopped it “to conform with” IFRS.

The implementation of aspects (parts) of CMUCPP developed naturally in high inflationary and hyperinflationary LA countries in the past without them seeing it as part of a complete alternative accounting model – alternative to HCA - (authorised in IFRS) and that it that should simply be carried on with after high or hyperinflation; i.e., during low inflation.

The reason was that non-monetary items were not split in constant real value non-monetary items and variable real value non-monetary items: the split only being identified in 2005. They did not know which items to measure in units of constant purchasing power during low inflation because during hyperinflation it is necessary – in practice - to measure all non-monetary items – irrespective of being variable or constant items – in units of constant purchasing power. In practice – in the desparate fight against hyperinflation (in fact, the fight against the stable measuring unit assumption, i.e., HCA) – it is not necessary to know the difference between constant and variable items - during hyperinflation: they all have to be measured in units of constant purchasing power in terms of a daily index: the daily URV (and other daily indices before it) in Brazil.

A lot of education about CMUCPP is needed. Its practical implementation since 1977 in terms of daily indices in LA is there for all to see and examine.

Kind regards,

Nicolaas

From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Friday, January 4, 2013 3:24 PM

Subject: RE: IAS 29 Agenda proposal

Dear Nicolaas,

Thank you so much for revising the example. The conclusion in the example is in line with our understanding of the CMUCPP.

And please accept my apology for the delay in rescheduling the call but can we have a chat on Tuesday 8^th January from 11:00 am?

If it does not work for you, please just let me know.

With regard to our outreach, we are now trying to cover jurisdictions that have experiences of hyperinflation using our own channels and hope we can summarise the result of our outreach by the time of the call. Now we are currently forming our views on this issue on the basis of the information provided by you including the illustrative example. I think we can discuss our view in the call.

Thank you again for your help,

Kind regards,

Ken

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 04 January 2013 13:45
To: Yoshimura Kenichi

Subject: Fw: IAS 29 Agenda proposal

Dear Ken,

Attached please find the latest updated version of the hyperinflation example.

It now shows clearly that IAS 29 is not an appropriate accounting model during hyperinflation as explained on the spreadsheet.

I misspelt Prof. Pareja´s name in my previous email.

Kind regards

Nicolaas

----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: Yoshimura Kenichi <kyoshimura@ifrs.org>
Sent: Thursday, January 3, 2013 5:10 PM

Subject: Re: IAS 29 Agenda proposal

Dear Ken,

Thank you for changing to the more elaborate example. I still need to improve it.

I really hope you are contacting national standard-setters in hyperinflationary countries and countries that have relatively recent experience of hyperinflation. I doubt whether these national standard-setters would have the same grasp or view as I have because I look at the issue from the viewpoint that I feel I can run any company or country in hyperinflation in real values with CMUCPP as I did in Auto-Sueco(Angola) in 1996. I confidently state that I would be able to stop hyperinflation overnight at no cost with an IFRS: CF, Par 4.59 (a). It authorises CMUCPP at all levels of inflation and deflation - including during hyperinflation. I feel that I would be able to show any national standard-setter how to stabilise their economy by them authorising a national accounting standard based on IFRS ´X`, now with a URV base Daily Index (not a UF based Daily Index as currently stated in Par. 10).

I hope you contact the national accounting standard-setters in Belarus, Venezuela, Iran, Ethiopia and Brazil (30 years of very high and hyperinflation: 1960-1964.

Please contact Dr Cemal Kucuksozen, the Head of the Accounting Standards Department at the Capital Markets Board of Turkey in 2007. He knows a lot about hyperinflation in Turkey. I have not informed him that I have suggested to you to contact him. He stated to me in 2005 that Turkey was prepared to implement CMUCPP after he read the manuscript of the first book I wrote about the issue. Then I called it Real Value Accounting. He is still connected to the Capital Markets Board.

cemal.kucuksozen@spk.gov.tr

You should ideally consult with people who has or who had experience of hyperinflation. It is a very different economic environment. They will more easily understand what you are asking them.

Hardly anyone would know anything about the implementation CMUCPP.

But, they would be able to give you good input about what would work and what would not work in hyperinflation.

Hardly anyone understands the ability of CMUCPP to stabilise a constant real value non-monetary item economy. Accountants would all agree once it is explained to them. Hardly anyone would believe that you could eliminate the effect of inflation (not actual inflation) from an entire economy by simply inflation-indexing the entire money supply daily. This would have to be attempted - as a second phase - after implementing CMUCPP at 10% annual inflation as per the Argentinean proposal. That would help countries to stabilise their constant item economies. Then the monetary economy side has to be attempted.

I was just informed by Prof. Pajera from Colombia that they use their Real Value Unit to inflation-index all mortgages in the country on a daily basis. Chile currently inflation-indexes 25% of its entire broad M3 money supply.

Not knowing exactly what your "next" means, I am available on Monday the 7th, Tuesday the 8th, Monday the 14th and Tuesday the 15 as follow:

8 am till 6 pm

Kind regards

Nicolaas

From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, January 3, 2013 4:06 PM

Subject: RE: IAS 29 Agenda proposal

Dear Nicolaas,

Thank you for your feedback. I certainly understood that my example would not depict the major differences between the two models effectively and we will use the example prepared by you going forward instead of my example.

 I thought that the new language of agenda request “IAS 29 is not required during hyperinflation when an entity implements CMUCPP because this model is not a HCA model and only HC or CC financial statements can be restated as required in IAS 29” really summarises that point. Let’s discuss the differences in the call along with the point on how we can proceed with this issue.

With regard to that call scheduled tomorrow, I would like to postpone the call sometime early next week if it still works for you because until today we have not received enough responses to our outreach request from national standards-setters. Could you provide me with your availability for the next Monday and Tuesday if you could accept my offer to put off the call to the next week. My apology is asking for the change in such a short notice.

Best regards,

Ken

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 03 January 2013 14:13
To: Yoshimura Kenichi

Subject: Re: IAS 29 Agenda proposal

Dear Ken,

Thank you for your mail.

Your example is not a valid example demonstrating the differences between IAS 29 and CMUCPP.

A. If we assume that the date on which you publish your financial results is 31/12/x1 then you can only publish the CMUCCP results. You cannot prepare your IAS 29 financial statements because you do not have the CPI for 31/12/x1 on that day. It only becomes available by the earliest on 10/01/x2. Thus you cannot compare IAS 29 with CMUCPP on 31/12/x1 as you do in your example. Your example is thus not a valid example.

B. If we assume that the date on which you publish your financial results is 10/01/x2 you would certainly have the CPI for 31/12/x1 and you could publish your IAS 29 results for the year ended 31/12/x1 - preparing them on 10/01/x2. If you wish to compare those financial statements to CMUCPP financial statements for the year ended 31/12/x1 then you would have to do the CMUCPP results for that year-end and then update them to the Daily Index on 10/01/x2 because the stable measuring unit assumption is never implemented under CMUCPP. The two sets of results would thus never be the same.

You do not do that in your example. You could change your example to one representing the differences between the two models as explained above.

When you have changed your example to show the totally different results at 10/01/x2, you would still not demonstrate some of the most important real differences between the two models besides the fact that IAS 29 results (always prepared after the year-end date) are fixed at the year-end date while CMUCPP results change daily to the current (today´s) - the 10/01/x2 - Daily Index value.

What are the differences between the two models beside the fact that IAS 29 results are fixed at the year-end date and that the CMUCPP values change ever day for ever after?

One reason for real differences between the two models result from the fact that under CMUCPP constant real value non-monetary items in the income statement are measured in units of constant purchasing power in terms of the Daily Index relating to the day of the transaction maintaining their real values constant during hyperinflation, e.g., salaries, wages, rentals and all similar items and that this is not done under IAS 29 - the monthly CPI for that date not even being available on month-end under IAS 29 necessitating the use of the previous month´s CPI which destroys even more real value. The reason why all constant real value non-monetary item real values under CMUCPP are maintained constant for an indefinite period of time is the fact that the stable measuring unit assumption is never implemented under CMUCPP while it is implemented in the income statement under IAS 29 as clearly shown in the USD included Hyperinflation example.

You could change your example to show these real differences in the income statement copying the examples in the USD included Hyperinflation example.

You could also change your example to show the real differences resulting from using the monthly CPI to value, for example, Other Expenses incurred on two different days in the same month and then valued incorrectly at the same monthly CPI under IAS 29 while they are correctly valued at their correct daily values in terms of the Daily Index (which is almost entirely based on the daily USD freemarket rate) or in terms of the actual USD daily parallel rate under CMUCPP. You could again do this copying the example in the USD included Hyperinflation example.

You could change your example to show all these real differences between the two models - copying what is in the USD included Hyperinflation example - besides the real differences in net monetary losses or gains and net constant item losses or gains.

Or you could simply use the USD included Hyperinflationary example that alread include all these examples correctly accounted and balanced.

I suggest we do that.~

Your example is not a valid example showing the differences between the two models for the various reasons explained above.

Kind regards

Nicolaas

From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, January 3, 2013 1:16 PM

Subject: RE: IAS 29 Agenda proposal

Dear Nicolaas,

Thank you for sending me the revised spreadsheet.

With regard to my example, I should have added the following languages but I missed them in the example I just sent yesterday. Please allow me to add those languages in the next round.

Just for the simplicity, this example is prepared on the basis of the assumption that all the transactions in previous years occurred at the end of X0. In addition, restatements of prior year financial statements are disregarded for the purpose of this exercise.

Thank you very much for your understanding and co-operation.

Kind regards,

Ken

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 03 January 2013 10:15
To: Yoshimura Kenichi

Subject: Re: IAS 29 Agenda proposal

Dear Ken,

Thank you for your reply.

This is just a mail to send you the updated USD included Hyperinflation example.

I will respond to your actual mail a little later.

Kind regards

Nicolaas

From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Wednesday, January 2, 2013 9:31 PM
Subject: RE: IAS 29 Agenda proposal

Dear Nicolaas,

At first, please accept my apology for the delay in updating my example using a hyperinflation rate. And I really appreciate that you kindly prepared your example for me to better understand the differences between IAS 29 model and CMUCPP model.

Even though it might be too late to update my spreadsheet, please let me send you the revised spreadsheet for your review. Unfortunately, I could not complete the numbers under CMUCPP model (shaded with yellow). This is, I think, due to lack of my understanding of the CMUCPP model. If you could help me out with filling the missing parts in the example, it would be really appreciated. And please note that I used 100% inflation rate per annum instead of a few million per cent as advised in your previous email. This is just because I wanted to avoid to make numbers too large to fit in a cell of MS Excel for the sake of reviewers within my organisation including Michael. We understand that normal situations we saw in hyperinflation economy are not like 100% inflation rate.

With regard to your example, please give me a bit more time to fully analyse all the numbers. I will send another email with my questions, if any.

Finally, I also wish you for a wonderful new year.

Kind regards,
Ken


________________________________

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: Wed 02/01/2013 17:44
To: Yoshimura Kenichi
Subject: Fw: IAS 29 Agenda proposal


Dear Ken,

I wish you a very successful and prosperous 2013.

Some notes about the IAS 29 issue:

IAS 29 is an extension to HCA while CMUCPP is not based on HCA.

'Inflation-adjusted financial statements are an extension to, not a departure from, historical cost accounting.'

PricewaterhouseCoopers Understanding IAS 29 2006:5

The stable measuring unit assumption is never implemented under CMUCPP while it is implemented under IAS 29: in a month of 31 days the transactions of 31 days that occurred or were performed at 31 different USD daily parallel rates, are all measured at the same - the month end - CPI under IAS 29 implementing the stable measuring unit assumption, i.e., assuming that the local currency is perfectly stable during the month during hyperinflation of, for example, 240% per month.

Only HC and CC financial statements can be restated in terms of IAS 29. CMUCPP financial statements are always stated at the measuring unit current at the end of the financial period in terms of the current (today´s) URV based Daily CPI or USD parallel rate during hyperinflation. They cannot be restated. They never use the same index values as IAS 29 statements. The values in the two models are thus never the same and the accounting result is always different.

I have prepared an example (the attached file USD included Hyperinflation example with Hanke Zimbabwe rates) based on your example using the hyperinflationary rates for Zimbabwe as reported by Prof. Steve Hanke in his paper: 'On the Measurement of Zimbabwe´s Hyperinflation.' <http://www.cato.org/sites/cato.org/files/serials/files/cato-journal/2009/5/cj29n2-8.pdf> Pdf copy attached.

Some of the assumptions are:

For both IAS 29 and CMUCPP

The BS date is 29 Feb 2008 and the accounts are presented on the actual day of 31 July 2008. The day you look at the financial statements is 31 July 2008.

Facts under IAS 29

Salaries during actual hyperinflation are paid at the monthly CPI available at month end; i.e., the previous month´s CPI. This erodes internal demand and the internal economy drastically during hyperinflation in a way that cannot be stopped under IAS 29. This is part of the explanation of what happened in Zimbabwe (and in all countries implementing IAS 29) where IAS 29 was implemented during the last 8 years of hyperinflation with no effect.

Some of the assumptions under IAS 29 in the example

Credit Sales, and Inventory Purchases are at 2 Dec and 30 Dec. Values are at those day´s daily values, but are accounted under IAS 29 at the Dec month-end CPI.
Other Expenses are incurred on two different days in the same month. Under IAS 29 the two very different local currency values (representing the same real value) are restated at the month-end CPI even during monthly inflation of 240%, as in Dec 2007 in Zimbabwe. The monthly HC nominal local currency value for Other Expenses is thus different from the CMUCPP updated HC nominal local currency value for the same expenses. The same would be true for Paid-in Capital, Long Term Loan, Investment Property, PP&E, Depreciation, Accumulated Depreciation and Inventory in the example and all similar items under similar circumstances.

Updated Historical Cost is a measurement basis under CMUCPP. Nominal Historical Cost is not a measurement basis under CMUCPP because the stable measuring unit assumption is never implemented under CMUCPP.

Under CMUCPP

The Daily CPI (or daily USD parallel rate) is used. The DCPI based on the Unidad de Fomento formula is always available: up to one month in advance. The daily USD parallel rate is always available on the day till the last day of hyperinflation.

The Daily CPI based on the URV (Unidade Real de Valor used in Brazil till 1994) becomes available on the actual day, like the daily USD daily parallel (free-market) rate on which it is almost entirely based.

Conclusions

IAS 29 is about the restatement of financial period-end HC or CC BS values.



1. All values are always different in the two models because the monthly published CPI and the URV based Daily Index are never the same on the same day. IAS 29 uses the monthly published CPI and CMUCPP uses (a) the Daily CPI based on the monthly published CPI during low inflation and (b) the Unidade de Real Valor based Daily Index during hyperinflation. Henceforth in this issue regarding hyperinflation, the daily index under CMUCPP during hyperinflation is always the URV based Daily Index. The monthly published CPI is never the same as either of these two indices on the same day. All values in the two models are thus always different. IAS 29 uses the monthly published CPI to value all transactions that took place on all 28 to 31 different days of the month. CMUCPP value each transaction in terms of the URV based Daily Index on the day of the transaction and thereafter in terms of the current (today´s) Daily Index. All historical BS values are always different under the two models because:

(i) IAS 29 treats non-monetary receivables and payables as monetary items as a result of the wrong definition of monetary items under IAS 29. This results in different calculations of net monetary losses and gains and net constant item losses and gains and consequently different net income, equity, net asset value, etc. Under IAS 29, year-end Historical Cost or Current Cost financial statements are restated in units of constant purchasing power in terms of the monthly published CPI at the year-end during hyperinflation. These IAS 29 year end BS values are permanently fixed nominal values at the BS date forever after - even under severe hyperinflation of hundreds of millions percent per annum (see the Hanke article). Historical IAS 29 BS values are thus misleading as stated in IAS 29 Par 2: ´Money loses purchasing power at such a rate that comparisons of amounts from transactions and other events that have occurred at different times, even within the same period, is misleading.' Historical IAS 29 values are fixed forever during hyperinflation. In fact, historical IAS 29 BS values are of little or no use during hyperinflation of hundreds of millions per cent per annum. Although they are of little use, they do get restated again at the next year-end and may be of some use the closer to year-end they are done and the lower the level of hyperinflation, although it is doubtful that IAS 29 financial statements have any use at all. However, since IAS 29 requires the use of the monthly CPI when the price level changes every day during hyperinflation and because non-monetary receivables and payables are mistakenly treated as monetary items under IAS 29, a large percentage of constant item real value (receivables, salaries, wages, rentals, all similar items) is unnecessarily permanently eroded/destroyed (net monetary losses are generally only tax deductible during a maximum of five years) during the financial year under IAS 29 (see Zimbabwe during hyperinflation), till the new restatement of HC nominal values at the year-end - in a way that cannot be stopped under IAS 29. On the other hand, CMUCPP would be done in terms of the URV based Daily Index or daily USD parallel rate value during the entire financial year. The real values in the year-end CMUCPP BS are then kept constant forever by changing their nominal values daily again in terms of the URV based Daily Index or daily USD parallel rate forever after the BS date. Historical CMUCPP BS values are never the same from the one day to the next during all levels of inflation and deflation - all else being equal. All historical period-end financial statement values under the two models are thus always different. During the financial year specific nominal cash values under the two models (HCA compared to CMUCPP) would be the same. However, IAS 29 is about the restatement of period-end financial statements. No values would ever be the same in any two sets of historical financial statements at the same date under the two models taking into account that IAS 29 financial statements cannot be done on the period-end date.
(ii) It is not possible to prepare the IAS 29 BS on the period end date because the monthly published CPI is not available on that day. The ECB issues a flash report, but it is not the official rate. It becomes available at the earliest 10 days later. Historical CMUCPP financial statements are thus always different: historical CMUCPP accounts always presented at the current (today´s) URV based Daily Index or daily USD parallel rate. CMUCPP financial statements can be prepared on the period end date while IAS 29 FS cannot be done on that day.



2. The accounting result is always different because, for example:


(i) IAS 29 treats non-monetary Receivables and Payables as monetary items (wrong definition of monetary items under IAS 29).
(ii) The monthly/daily Index and always different indices issues.
(iii) Cash a/c is always different - see example (monthly/daily Index and always different indices issues).
(iv) Salaries, wages, rentals and similar costs are necessarily paid at the previous month´s CPI at month-end under IAS 29 while they are paid at the URV based Daily Index or daily USD rate at the month-end (monthly/daily Index and always different indices issues).
(v) Net monetary losses and gains always different.
(vi) Constant item losses and gains always different - only during the period of HC contracts.

Mainly three reasons:



1. Monthly/daily Index issue (periodicity); the use of the stable measuring unit assumption or not: wrong Index used under IAS 29.
2. Wrong definition of monetary items in IAS 29.
3. Indices used are always different on the same date.


It is impossible to maintain the economy stable / real value stable / the constant purchasing power of capital stable with a monthly CPI and HCA. It is only possible with a daily rate and CMUCPP during high and hyperinflation (and all other levels of inflation and deflation).

The URV based Daily Index is not primarily based on the CPI. This is a very important factor. It is almost entirely based on the daily USD free-market rate: either the official daily USD rate as in the case of Brazil in 1994 (and before) or the unofficial daily USD parallel rate.

Incomprehensibility of financial statements under IAS 29 and CMUCPP done in a nominal hyperinflationary currency

Under IAS 29 accounts are done in units of constant purchasing power at the BS date in terms of a monthly CPI with the two mistakes: (a) wrong index used (b) wrong definition of monetary items. The IAS 29 BS values are nominal after the BS date during hyperinflation and almost immediately meaningless as stated in IAS 29 Par. 2, although they are again restated at the new financial period-end with constant real value non-monetary items suffering unnecessary permanent real value erosion/destruction as a result of the three reasons mentioned above - which cannot be fixed under IAS 29.

These mistakes can only be fixed under CMUCPP: a much better model. Presentation of CMUCPP accounts during hyperinflation in a relatively stable foreign currency (normally the USD) allows constant value CMUCPP financial statements: maybe the best option: maybe the best real value / real world solution. There is nothing better than the free market price: in this case the daily free market price of the local currency used as the main item in the Daily Index.

USD CMUCPP accounts are done in a relatively stable (low inflationary) foreign exchange currency.

Under hyperinflation you cannot grasp what is happening in the entity (economy) under both IAS 29 and CMUCPP in nominal local currency values because although CMUCPP is doing your accounting in a constant local currency unit (updating all values in terms of the URV based Daily Index under CMUCPP) at the current daily rate, the massive change in daily real value of the local currency is of such a magnitude that it is not possible for the human mind to grasp the extent of the daily real value change. All constant items 'constant real values will still be maintained constant under CMUCPP in nominal local currency values, but it is not possible to grasp it from the updated CMUCPP financial statements measured in units of constant purchasing power in terms of the local hyperinflationary monetary unit and especially impossible from the IAS 29 results after the BS date during hyperinflation. The only way to make sense of what is happening in the entity (economy) is by using a relatively stable constant unit of account, for example, the daily USD rate: official or parallel.

A very important point about doing your accounting (not just translating your year-end financial statements) in a relatively stable constant unit is the following:

What I presented in the USD accounts is not "translation" of the year-end financial statements in USD - as you can clearly see in the Cash account and P+L in the example. Translation is what is done with the CMUCPP local currency accounts after BS date - not during the actual financial year). CMUCPP in terms of the daily USD rate is doing the actual daily accounting for the entire financial year (not just translating the y/e BS) in terms of the daily USD rate. It is CMUCPP in terms of a daily rate in a relatively stable constant unit. It is not translation of year-end FS in a relatively stable currency.

I think I should change the agenda item request as follows:

IAS 29 is not required during hyperinflation when an entity implements CMUCPP because this model is not a HCA model and only HC or CC financial statements can be restated as required in IAS 29.

CMUCPP financial statements cannot be restated because all items in these financial statements are already (always) at the current level of the URV based Daily Index or daily USD parallel rate during hyperinflation which are better indices to use than the monthly published CPI as required in IAS 29.

A Daily Constant Unit calculated in terms of the URV based Daily Index at a date in the past, e.g., the previous year-end, has the special advantage that it makes the use of the USD parallel rate unnecessary during hyperinflation. Some political regimes, for example Iran and North Korea, would prefer the DCU for that reason. It would be virtually the same as the USD daily rate.

The daily USD parallel rate can be very problematic: it is often banned by the government for open use during hyperinflation. It all depends on the regime and the circumstances of the hyperinflation. Towards the very end of the hyperinflation, the USD parallel rate is progressively more adopted by the government.

The USD parallel rate (cross rate in the end) could have been used with severe hyperinflation in Zimbabwe till the last day of the existence of the ZimDollar which stopped on 20 November 2008 when it lost its last exchange rate: with the UK Pound via the Old Mutual Implied Rate (OMIR): the Zimbabwe Stock Exchange activities were stopped by decree and that ended the OMIR rate which ended the existence of the ZimDollar.

Kind regards,

Nicolaas

----- Forwarded Message -----
From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Friday, December 21, 2012 11:32 PM
Subject: RE: IAS 29 Agenda proposal


Dear Nicolaas,

I am very sorry that your observations in the email dated 20 December slipped my mind for some reason. Please refer to the followings for my responses :

1. It is not a hyperinflation example: 5% and 10% inflation are not hyperinflation levels. The minimum should be 26% pa. 2000% per annum would be better.

I never regarded 10% inflation as hyperinflation. I used 10% in this example just for simplifying the example. Please let me revise the spreadsheet to change the inflation rate and resend to you until the next call.

2. We have both forgotten to restate the prior year B/S.

I completely agree that I have not considered restatements of prior year BS. I did not include prior year financials just for simplifying the example. Please let me include such a language in the example.

3. All items in the prior year B/S should have had different transaction dates during year x0.

I agree. All items in the previous year BS should have had different original transaction dates. However, again, I assumed that all transactions occured at the end of X0 to simplify the example. Please let me include such a language in the example.

Thank you very much for your co-operation.

Kind regards,
Ken

________________________________

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: Fri 21/12/2012 16:41
To: Yoshimura Kenichi
Subject: Fw: IAS 29 Agenda proposal


Dear Ken,

Please change the 5% and 10% inflation in your example to hyperinflationary rates.

You, Michael Stewart and everybody at the IASB may regard that as hyperinflation. It is not hyperinflation to the rest of the world. It is a good example of your and the IASB´s understanding of what hyperinflation is.

I mentioned it before and you simply ignore it like you ignore many things regarding hyperinflation and FCMUCPP. I do not accept it that you ignore the fact that the 5% and 10% inflation are not hyperinflationary rates.

If you do not change the inflation rates in the example to hyperinflationary rates, then I withdraw all my contributions - only to that example. I am very upset with myself working on the example for so long and only now realizing that the rates are totally wrong as far as hyperinflation is concerned. My eagerness to work with you on this issue blinded my to that fact.

Just as you apparently have very little understanding of hyperinflation in the same way you apparently have very little understanding of what measurement in units of constant purchasing power, let alone FCMUCPP and even Dollarization are all about - especially their effects in a company, in an economy and during hyperinflation.

If you are not prepared to change the example to one of hyperinflation, then please blank out all my contributions on the example.

Please do not take this as a negative approach. We will lose a lot of credibility, I know I will, if we use that example as an example of hyperinflation. We have to do things correctly.

Regarding the fact that you and the IASB do not understand this issue very well: it is absolutely normal. This is about changing the HC paradigm, the only paradigm the world has ever known. It is absolutely normal that everyone, like you and the IASB, will initially be totally against a change in the status quo. I am not the first person to make this observation about human resistance to change. It is absolutely normal. So, I am not surprised or upset about it. To the contrary, I was expecting it. I have 16 years experience of resitance to a change of in HCA. That is why I say: this may take another 100 years.

Kind regards

Nicolaas


----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: "kyoshimura@ifrs.org" <kyoshimura@ifrs.org>
Sent: Friday, December 21, 2012 4:08 PM
Subject: Fw: IAS 29 Agenda proposal

Dear Ken,

I confirm 1.30 pm on the 4th January.

Kind regards

Nicolaas


----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: Yoshimura Kenichi <kyoshimura@ifrs.org>
Sent: Friday, December 21, 2012 2:08 PM
Subject: Re: IAS 29 Agenda proposal

Dear Ken,

My response to your email dated 20th:

I sincerely aplogise for using the term "a waste of time". It is a great honour for me working with you and the IASB. Nothing you and the IASB do in this issue is or could ever be a "waste of time" with whatever outcome or result: IFRS `X´or no IFRS `X´. I am really sorry I used that phrase. Please forgive me. Whatever you and the IASB do on this issue is of great value - as you will see in the future.
The issue is too important. I have already managed to get Dr Cemal Kucuksozen <http://www.linkedin.com/profile/view?id=115286406&authType=name&authToken=t4d_&goback=%2Econ> , the Head of the Accounting Standards Department of the Capital Markets Board in Turkey in 2007 and Member of the Turkish Accounting Standards Board from 2007 to 2008 , to agree in 2005 - long before I even identified key concepts in the practical application of FCMUCPP - that Turkey, a country, was ready to implement FCMUCPP (I then called it Real Value Accounting), not during hyperinflation, but during low inflation. He authorised me to publish his statement in the book I wrote about the matter in 2005. Turkey then just emerged out of hyperinflation and he fully understood the value of FCMUCPP in hyperinflation and low inflation. Turkey was ready to implement FCMUCPP country wide during low inflation in 2005. All they needed was a requirement in IFRS. Everybody only does - and wants to do - only what is in IFRS or what they mistakenly think is required in IFRS. See Chile unknowingly abandoning FCMUCPP to "conform with" IFRS (implementing HCA) - not realizing in 2010 or 11 that FCMUCPP was authorized in IFRS in 1989

Dr Kucuksozen would be one of the best people to contact about this matter. His email is:cemal.kucuksozen@spk.gov.tr <mailto:cemal.kucuksozen@spk.gov.tr>

I am very glad you are contacting Venezuela, Belarus, Iran and Ethiopia - the countries in hyperinflation.
Dr Rafael Rodriguez Ramos is the President of the FCCPV, the Venezuelan accounting authority. His email is presidente <mailto:presidente@fccpv.org> @fccpv.org <mailto:presidente@fccpv.org>
The Ministry of Finance is the accounting authority in Belarus. I am sure you have their contacts.
The Audit Group is the accounting authority in Iran.
I do not have the contact for Ethiopia, but I am sure you have.
I have only communicated once with Dr Ramos in Venezuela and not specifically about FCMUCPP.
All these countries will agree with you that they can stop hyperinflation overnight in their countries with Dollarization. I think all of them would find the cost in US Dollars prohibitive. Prof. Steve Hanke has already publicly offered Dollarization and a currency board to Iran. I know these countries would all be very interested when you tell them you can help them do that overnight at no cost with an IFRS, namely FCMUCPP as authorised in the CF 4.59 (a): an IFRS that would "dollarize" their constant and monetary economies with a constant (not nominal) local currency via daily indexation. They would be very grateful to the IASB for doing that, as you can well imagine. Especially the Belarus and Iran populations are having tremendous problems. People are without food in Belarus. They would welcome your help with open arms and they would be forever grateful to the IASB for that help.
I am convinced that when you ask these countries in actual hyperinflation whether it would be useful to have a statement that IAS 29 is not required when they implement FCMUCPP, they would all agree. Their views would be very valuable. They know what hyperinflation is. Their views are the ones that really matter: directly related to the matter we are dealing with. Countries that have never had the experience of hyperinflation would find it difficult to answer questions in this regard. Hyperinflation is not related to their economic experience. Hyperinflation is a very different economic experience.
Michael Madsen, the group CFO from East Asiatic Company (Denmark) very kindly agreed to answer some specific questions about how they have implemented IAS 29 over the last four years in Venezuela where they have been operating a big subsidiary company in the food processing business over the last 50 years. I previously communicated with him in 2010 regarding that statement of his in EuroInvest. I will let you know what his answers are. I don´t know when he will reply. I told him I would use his answers in my correspondence with you.
My response to your email dated 21 December:

I see I have failed completely in my attempt to explain to you that although IAS 29 and FCMUCPP financial statements may be exactly the same at the B/S date, the two models are totally different. I have stated this various times, but you seem to ignore it completely or my explanations are not capable of being understood.

During our teleconference I also made a point of stating that the two are different, not the same at all. You did not understand me as saying that, although I said the words. You understood me differently. You came back with an example to show that the two are exactly the same and I think that is all you want to show in this excercise, no matter how often I said in the teleconference and how often I write that the two are different. I just cannot get the message through to you. I am very sorry that that is what is happening, but that is the case.


FCMUCPP, on the other hand, stabilises an economy. It is very similar to Dollarization while IAS 29 has no effect on the operations and cashflow as stated by Michael Madsen in EuroInvest in 2010. You seem to ignore that. You and the IASB completely ignore the well proven fact that IAS 29 had no effect in Zimbabwe during 6 years of implementation.

May I then respectfully ask you: what is your and the IASB´s response to the fact that IAS 29 had no effect during 6 years of implementation in Zimbabwe. Do I formally have to ask this question to Hans Hoogervorst. I will if I have to in order to get an answer from the IASB. What is your and the IASB´s response to Michael Madsen´s statement that IAS 29 has on effect on the operation and the cash flow during hyperinflation. Do you and the IASB agree with Michael Madsen? Has the IASB made any public statement to justify the use of IAS 29 during hyperinflation after what happened in Zimbabwe? If the IASB has made such a statement, I would appreciate it very much if you could send me a copy. If that question has not been asked before, then I have now asked it from you.

This is more or less what happens under IAS 29:

A company runs its business during the entire first year in a hyperinflationary country as normal in a low inflation country, implementing HCA. At the year end, it restates the HCA financial statements in terms of IAS 29. That is all it does. Nothing changes in its operations or cashflow - as stated by Madsen.

The second year it carries on with HCA, as required by IAS 29. At the year end, it does nothing to the ledger accounts. It simply restates its financial statements in terms of IAS 29. It repeats this for 4 years in the case of Venezuela and 6 years in the case of Zimbabwe and I don´t know for how many years now in the case of Belarus.

Under FCMUCPP, which is the same as Dollarization, but, in a constant (not nominal) local currency achieved via daily indexation and with full Central Bank independent monetary policy capacity and full advantage of seignorage, the ecomomy stabilises like in Zimbabwe as a Dollarised country. It seems to me that I cannot get this through to you. You seem not to understand this at all. I am very sorry this is happening.

FCMUCPP is not the same as during the 14 years of hyperinflation in Zimbabwe. Zimbabwean companies diligently did everything in HCA during 14 years of hyperinflation: the first 8 and last 6 years were exactly the same in terms of doing everyting in terms of HCA. During the last 6 years they diligently restated their HCA financial statements in terms of IAS 29 to no avail. Nothing changed. Their economy still imploded in 2008.

I am very sorry, but this is what is happening with our working together on this issue.

It is also very clear from your statement about "whether the IASB would accept the method written in the IFRS 'X' " that you seem to have no understanding of what happens under FCMUCPP. I really explain things very badly.

As I said, I am very sorry that this is what is transpiring.



Kind regards

Nicolaas



From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Friday, December 21, 2012 11:07 AM
Subject: RE: IAS 29 Agenda proposal

Dear Nicolaas,

Thank you for your quick attention to my questions.

Looking at ONLY the accounting results, the IAS 29 model and the FCMUCPP would end up with the same accounting results except for the differences due to the difference in the scope of monetary items (receivables and payables) even though you use the terminology of 'net constant item loss' for part of it.

And with regard to the point on whether the IASB would accept the method written in the IFRS 'X', I would say that it won't be a short period of time to know if the IASB decides to use that concept. As you know, currently it is just a research project and therefore it is reasonable to expect the IASB to take a time to decide if it wants to add the project to the IASB's agenda. After that, it will decide what kind of model the IASB should explore.

And for the discussion on 4th January, how about starting from 1:30 pm? Please let me know if it works for you.

Kind regards,
Ken

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 20 December 2012 18:39
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal

Dear Ken,

You are right. I should stick to the nominal values. I was trying to get some inflation
in the example. Net constant item loss included.

Friday 4th will be fine.




Kind regards

Nicolaas Smith

Blog Constant Item Purchasing Power Accounting - CIPPA <http://realvalueaccounting.blogspot.com/> My Facebook <http://www.facebook.com/#!/profile.php?id=1588417151> My Twitter <http://twitter.com/NicolaasSmith> My LinkedIn <http://www.linkedin.com/profile/view?id=4965181&trk=tab_pro> Lisboa, Portugal

Buy the Kindle e-book CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS at Amazon.com <http://realvalueaccounting.blogspot.pt/2012/07/buy-ebook-for-299-or-149-or-260.html>

I promote financial capital maintenance in units of constant purchasing power in terms of a Daily CPI or other daily rate at all levels of inflation and deflation including hyperinflation as originally authorized in IFRS in the Framework (1989), Par 104 (a) which states: 'Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.'

CIPPA automatically maintains the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value during inflation and deflation including hyperinflation - all else being equal.



From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, December 20, 2012 5:55 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,

Thank you for providing me with the revised spreadsheet. I have one more question with regard to the cell E69 that you just changed.

In calculating the closing balance of cash, cash paid for other expenses are measured at 100 (nominal value) while cash paid for payables and cash collected from receivables are measured at 420 and 630 which reflects general price changes up to 30/6/X1. Could you please elaborate more on why these are treated differently when arriving at the closing balance of cash as of 31/12/X1?

And with regard to the point "a waste of time", currently we are doing extensive outreach to national standard-setters around the world to see if they have a similar issue in their jurisdictions. Even though we wanted to talk to you anyway right before posting our agenda papers, I think we can discuss in that talk on whether we should go further on this issue after we gather responses from them. Do you have a time in the week c/o 31 December 2013, say Friday, 4th of January or next Monday, 7th of January?

Thank you again for your help,

Kind regards,
Ken

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 20 December 2012 17:19
To: Yoshimura Kenichi
Subject: Fw: IAS 29 Agenda proposal

Dear Ken,

We are getting there.

Ok, I fixed the example and attached the latest Revised Examples file.

I suppose you think: why are we doing this if no-one is using FCMUCPP accounting? Colombia may be using it now without having the faintest idea that they are using a form of FCMUCPP just like Brazil and Chile never realised and understood that they were doing it. Maybe more LA countries did it in the past and may be doing it now. I don´t know. Venezuela does not use a daily index. They are not doing it.

It all depends on whether the IASB will require it in IFRS ´X`. If IFRS ´X` is not approved to require it at 10% annual inflation or 26% cumulative inflation over 3 years as the South Americans suggested, then all of this is a waste of time.

You know more about the status of IFRS `X´ than I do. So you are more in a position to say if this is a waste of time or not.

I can fix the economies (show them how to implement FCMUCPP as authorised in IFRS) of Venezuela, Belarus, Ethiopia and all other hyperinflationary and high inflationary countries. Unfortunately I do not have the means (finance) to go to these countries and speak to their accounting authorities. I tried in Venezula and Belarus over the internet without success. I did it in a company in 1996 without understanding a single concept of what I was doing. I simply used common sense from living and working in a hyperinflationary economy: I implemented accounting-dollarization and killed our fear in the company of hyperinflatio after 15 months of living and working in a hyperinflationary economy. Now I understand all the concepts involved and I am confident to even say that I can show Belarus and every hyperinfationary country how to stop hyperinflation overnight at no cost implementing an IFRS.

But, I don´t know if I will ever have a chance to do it. I will keep on trying though.

I formed a NGO, Sustainable Development Without Borders <http://sustainabledevelopmentwithoutborders.blogspot.pt/> with the aim of getting finance from international organizations which would be pleased to see these economies operating on a stable basis. I have not had any success with receiving any finance. The NGO was formed on 30 November 2012. So, nothing is happening except with what you are doing.

So, now you know the full story so far.

Kind regards

Nicolaas

----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: "kyoshimura@ifrs.org" <kyoshimura@ifrs.org>
Sent: Thursday, December 20, 2012 4:45 PM
Subject: Fw: IAS 29 Agenda proposal
Dear Ken,

I agree that I am treating Other Expenses differently from Sales. That is a mistake. Other Expenses should be 100 at 30/06/x1 (CPI 105) and then measured in units of constant purchasing power at the B/S CPI of 110 giving a value of 105 like you have in the IAS 29 P+L.

I am going to change the Revised Example and will mail it you.

Kind regards,

Nicolaas

----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: Yoshimura Kenichi <kyoshimura@ifrs.org>
Sent: Thursday, December 20, 2012 2:33 PM
Subject: Re: IAS 29 Agenda proposal
Dear Ken,

Thank you for your reply.

Your first question: Ask any accountant in the world (except me and the people who read my blog) which IFRS you implement during hyperinflation and they will all tell you IAS 29.

No-one implements FCMUCPP. 99% of accountants in the world do not even know that IFRS authorized FCMUCPP twenty-three years ago. 99% of accountants today will agree with you if you say that inflation erodes companies´ capital and invested profits. They hardly ever deal with the phrase "stable measuring unit assumption". Prof. Geoffrey Whittington wrote the best book ever written about inflation accounting and did not even once mentioned the phrase "stable measuring unit assumption." FCMUCPP is as dead as a doornail in world accounting. Although, I may be wrong: I do not know what they are doing with that Real Value Unit <http://www.banrep.gov.co/statistics/sta_rvu.htm> in Colombia. They may be implementing a form of FCMUCPP in Colombia and maybe other LA countries too. I do not know. Yes, if Brazil were still in high and hyperinflation today and was updating capital, trade debtors, trade creditors and all non-monetary items and many monetary items daily in terms of the URV then not a single accountant in Brazil would implement IAS 29 during high or hyperinflation. But that is not the case. Brazil was one of the accounting authorities that commented on IFRS `X´INFLATION to the Argentinean Federation.

FCMUCPP is only relevant today because it may be required in IFRS in a few years time at 10% annual inflation if the amended version of IFRS `X´ is authorised. If that were not the case, we would not be emailing each other about this.

If the IASB rejects the amended IFRS ´X` and goes back to the Argentinean Federation´s version as IFRS ´X`INFLATION, then you and I have been wasting our time over the last few days and we are wasting our time now.
Your second question: The price level of nominal sales (600) at the transaction date is 105 as at 30/06/x1. See cell E14. It is then measured in units of constant purchasing power at the CPI at the B/S date: 600 x (110/105) = 629. See cell D42. All items in the P+L are correctly measured at the CPI at the B/S date (110). See cells D42 to D47. This includes Cost of Sales.

You measure the nominal value of Other Expenses 100 (CPI 105) on 30/06/x1 (under the HC paradigm) at the B/S CPI (110) and get to 105 in your P+L. Under FCMUCPP the Other Expenses item is expended on 30/06/x1 at 105 (CPI 105) (prices have gone up). This value is then measured in units of constant purchasing power at the B/S CPI (110) 105 x (110/105) = 110 in the FCMUCPP P+L under the CMUCPP paradigm. That is how the IAS 29 and FCMUCPP P+Ls are different in the case of Other Expenses.

Under IAS 29 you implement the HCA model. Sales are nominal and so are Cost of Sales. At the transaction date of 30/06/x1 they are incurred at nominal value, which you then correctly stated in the IAS 29 P+L at the B/C CPI and so did I in the FCMUCPP P+L.

Some observations regarding your example:

1. It is not a hyperinflation example: 5% and 10% inflation are not hyperinflation levels. The minimum should be 26% pa. 2000% per annum would be better.

2. We have both forgotten to restate the prior year B/S.

3. All items in the prior year B/S should have had different transaction dates during year x0.

Note: I corrected the example in cell D19 and E19. See attached file.

Kind regards

Nicolaas


From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Wednesday, December 19, 2012 5:22 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,

Thank you so much for your dedication to this issue. Your comments and explanation are really helpful to me.
Having read your comments, can I ask you a few more questions? (I am a person who always a mistake...)

· Your submission states that 'it is currently generally accepted by accountants in countries implementing IFRS that IAS 29 is always required during hyperinflation.' Doesn't this mean that you are told by accountants or have heard that IAS 29 is required in all cases including financial statements under the FCMUCPP?
· In the spreadsheet, you mentioned that 'other expenses is a constant real value non-monetary item in the P+L always measured in units of constant purchasing power, i.e., stated at the B/S date CPI'. What is the difference from sales and cost of sales, which are stated at the price level at the transaction date in the example? Shouldn't sales and cost of sales be stated at the price level at the BS date like other expenses?

Kind regards,
Ken


From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 19 December 2012 16:00
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal

Dear Ken,

Thank you for your reply. Please accept my apology for the delay in my response.

I have made various alterations to the spreadsheet: the calculations, dates and the notes. Please read all the notes again. You cannot have payments and receipts "evenly" during the year. You would then have to divide each payment and receipt in 365 payments and receipts and calculate the net monetary loss or gain on each on every single day of the year for each item. You cannot have two different CPI values in the column CPI at B/S date. There is only one CPI on that date, except maybe during severe hyperinflation - or not even severe hyperinflation (we had two prices levels on the same day once or twice in Angola in '95/96.).

The fact that you stated that the CPI at the beginning is 100 for 31/12/x0 "and before", removed the necessity to deal with the hidden gain in stock, in this case inventory and investment property. It cannot be for "and before". It can only be on one day. It would have been interesting doing those calculations - and very informative - to have had the items at 31/12/x0 with historical CPI values.

You mix Net Constant Item Losses and Gains with your Net Monetary Item Losses and Gains since you treat non-monetary items as monetary items. You have net constant item losses and gains in the example under IAS 29. Under FCMUCPP all the constant items are always measured in units of constant purchasing power: thus, there are no net constant item losses and gains in the example under FCMUCPP.

This needs further analysis of the mix under IAS 29 because the calculation of net monetary losses and gains under IAS 29 is a mix of HCA and FCMUCPP principles in the same calculation.

You state in A:

'Under the CMUCPP the amount of cash could be different from the nominal amount
(200) because the changes in CPI are reflected continuously by using a daily
index.'
'Could' is conditional. That is not the case under FCMUCPP. There is no conditionality under FCMUCPP.
Opening Balance
31/12/x0
100
100
Collection of Receivables
evenly
105
630
Payment of Payables
evenly
105
-420
Payment for other Expenses
evenly
105
-105

Closing Balance

205
The measurements in the Cash Account under FCMUCPP are the above and only the above. They 'could' not be any other values. On 31/12/x0 the Daily CPI was 100 and no other value. It could not be any other value. The same is true for the receipts and payments. The closing balance can only be 205. It could not be any other value.

I thus do not agree with the statement in A. I am sorry that I cannot offer an alternative, because I cannot work out what you are trying to say in A.

Trade Creditors and Trade Debtors are not monetary items

Neither are all other constant real value non-monetary items and payables like salaries payable and receivable, taxes payable and receivable, etc. They are simply paid in money as the monetary medium of exchange like almost 99 percent of all items, monetary and non-monetary in the world economy.

We can work together on projects and be absolutely respectful to different opinions as we both are, but, we have to acknowledge that there are mistakes in Historical Cost Accounting on a global scale over a very long time, but not on an absolute scale.

I do admit that this is an item (and there are others) that will have to be analysed 100 percent.

Other generally accepted mistakes in this category that are already accepted as total mistakes are the statement that inflation causes the erosion of companies´ capital and invested profits. It was stated in those word in FAS 33 and FAS 89 by David Mosso, one of the best minds in accounting. Inflation has no effect on the real value of non-monetary items. He already accepts that it was a mistake.

The Argentinean Accounting Federation, with the co-operation of the accounting authorities in Brazil, Mexico and Chile plus two IASB staff members worked from 2009 to 2010 on IFRS ´X` INFLATION. They submitted it in 2010 to the IASB stating that inflation causes the erosion of the real value of capital, retained earnings, fixed assets, etc, etc, etc. That was a total mistake. They have accepted it by now.

In the same way, it is a mistake to treat trade debtors and trade creditors as monetary items.

They have been treated as non-monetary items and updated daily during 30 years by all accountants in Brazil from 1964 to 1994. This was completely ignored by the IASB in the formulation of IAS 29 in 1989.

The same is true for Chile from 1967 to 2010. The same is true for Auto-Sueco (Angola) in 1995 and 1996 where I corrected it. They are most probably today being updated daily in Colombia and maybe other LA countries.

I asked Dr Gustavo Franco, the ex-Chairman of the Central Bank of Brazil in 1994 and one of the architects of the Real Plan whether they treated them like monetary or non-monetary items in Brazil. The URV was the Unidade Real de Valor, the government supplied daily index they used.

I asked him:

'Were trade debtors and trade creditors treated as monetary items under the URV and not updated or were they treated as non-monetary items and updated under the URV?

What are trade debtors and trade creditors in your opinion. Are they monetary or non-monetary items?'

He replied:

'Two observations are in order. First for spot transactions, the existence of the URV is immaterial, sums of means of payment are surrendered in exchange for goods, all delivered and liquidated on spot. Second, the unit of account enters the picture only when at least one leg of a commercial transaction is deferred. In this case the URV serves the purpose of defining the price at the day of the contract. The same quantity of URVs is to be paid at the payment day, though this should represent larger quantities of whatever means of payment is used.'

Franco 2007

He was replying to my questions regarding trade debtors and trade creditors. It is clear from his answer that they were updated over time: they were not fixed in nominal value - they were not monetary items or treated as monetary items.

I am an expert in making mistakes. (I made a mistake in the treatment of Other Expenses in your example. I have now corrected it.) That is maybe why I was a little ahead for a very short time in knowledge about FCMUCPP: we learn from our mistakes. I first identified a number of items in my work by publicly making mistakes. I found that this is sometimes an essential part of arriving at the correct answer by publicly stating something and then seeing if it can be defended or not.

I know that it is generally accepted that trade debtors and trade creditors and other constant real value non-monetary items are monetary items. I know that it is stated in FAS, by PricewaterhouseCoopers, in most accounting text books and treated as such by the IASB. It is a mistake. The same way as it was a mistake to state that inflation erodes the real value of companies´ capital and invested profits, for example.

Question 1

Regarding the statement in IAS 15:

"Paragraph 11 of IAS 15, which was withdrawn in 2005, stated 'the general purchasing power approach involves the restatement of some or all of the items in the financial statements for changes in the general price level.' "

I agree that there are conflicting interpretations of the above statement and the concepts stated in it.

One such interpretation is the following:

A) The phrase "general purchasing power approach" always means only the following:

(1) actual valuation or actual measurement for tax purposes of economic items on a daily basis in units of constant purchasing power based on changes in the general price level instead of in nominal monetary units.

(2) "General purchasing power approach" means FCMUCPP: a departure from the HC paradigm, i.e., the stable measuring unit assumption is never implemented because it is correctly realized that, in general, it is impossible to maintain any real value stable in nominal monetary units during inflation.

Under this interpretation the phrase "general purchasing power approach" does not mean restatement of values in year-end HC or CC financial statements simply to make them more useful (IAS 29.2) or not misleading (IAS 29.2).

Under this interpretation, the two phrases "general purchasing power approach" and "restatement" do not go together in accounting. Using the two together would thus be a mistake under this interpretation.

B) Another - very generally accepted - interpretation is that the phrase "general purchasing power approach" simply involves the restatement of some or all of the items in financial statements for changes in the general price level to make such financial statements more useful (IAS 29.2) and not misleading (IAS 29.2).

I agree that there is a generally accepted view with Historical Cost accountants - outside Latin America - that measurement in units of constant purchasing power ("the general purchasing power approach") is simply the restatement of HC financial statements in terms of the measuring unit current at the end of the reporting period with no effect on the economy. So much so, that a top accounting country's number one accountant, namely the head of the number one accounting university in that country - an emeritus professor of accounting and ex-member of the country's accounting standard setting board - stated to me in a personal communication that "we can measure items in units of constant purchasing power or US Dollars or whatever, it won't make any difference to the economy."!!! I have the email to prove it.

He was right under the view as stated in IAS 15. I only realized years later how he and - I think - all HC accountants see measurement in units of constant purchasing power. They see it simply as one of many different ways that HC financial statements can be measured: everything stays the same: it is simply a different way of measuring the values only in the financial statements and nothing else. This is why that emeritus professor of accounting (you may know who he is) could state that it has no effect on the economy - something that stunned me because I know that FCMUCPP is the same as dollarization of an economy in a constant local currency: it stablises the economy. It has a huge effect on the economy.

He - as well as the accounting authority in that country who stated on their website (in response to me) that they do not agree with the rejection of the stable measuring unit assumption - were so sure of themselves (so inculcated with the HC principle) that they completely forgot that all countries in the world (including themselves) measure salaries, wages, rentals and thousands of other items under "the general purchasing power approach" (HCA implements various measurement bases) on an annual basis and that this makes a huge difference to the actual economy in all those (180 plus) countries: it maintains these countries´ internal demand relatively stable: it effects the economy in a very positive way. To that country´s number one accountant - an emeritus professor of accounting - this "makes no difference in the economy". I agree that this generally accepted view is very strongly held - as proven in IAS 29 over the last 23 years.

I agree that there is no consensus regarding this matter. There are, however, various positive and negative facts that have to be taken into account:

Positive (supporting) facts for daily measurement of items in terms of the "general purchasing power approach" (FCMUCPP) as opposed to restatement of HC financial statements at the measuring unit current at the end of the reporting period:

1. Brazil implemented financial capital maintenance in unit of constant purchasing power in terms of a daily index for 30 years under very high and hyperinflation from 1964 to 1994. They had a relatively stable non-monetary economy for those 30 years even during hyperinflation.
2. The same was true (the daily measurement, not the high and hyperinflation) in Chile for the 43 years from 1967 to 2010. They use their Unidad de Fomento daily index.
3. Colombia is today using a daily index (the Real Value Unit) to implement the "general purchasing power approach".
4. All low inflation countries (80% of the world economy?) are doing it - in principle - too: a 2 percent inflation rate means the country is, in principle, implementing 98% of financial capital maintenance in units of constant purchasing power in terms of a daily index (the low inflation).
5. Dollarizations and currency boards are direct proofs of the fact that financial capital maintenance in units of constant purchasing power in terms of a daily index would stabilize the monetary and constant item economies because this accounting model is, in principle, the "dollarization" of the monetary and constant item economies in terms of a constant local currency unit.

Negative facts for daily measurement of items in terms of the "general purchasing power approach" (FCMUCPP) not being simple restatement of HC financial statements.

1. No-one understands it: see Brazil going back to HCA in 1994 and Chile doing the same in 2010 or 11. Chile went back to HCA to "conform" with IFRS not realizing that FCMUCPP was authorized during low inflation in IFRS twenty-three years ago.
2. Everyone initially thinks it is the same as what is done under IAS 29 during hyperinflation, while it is, in fact, authorized in IFRS in the CF, Par. 4.59 (a) at all levels of inflation and deflation, including during low inflation.
Positive (supporting) facts for "the general purchasing power approach involves the restatement of some or all of the items in financial statements for changes in the general price level".

1. It has been going for 23 years.
2. It is an IFRS, namely IAS 29.
3. Very few people understand what it is or what it is suppose to do or not to do: it thus relies on very little knowledge of accounting concepts for its very successful survival.
4. Its total failure in Zimbabwe is simply ignored by the IASB and the accounting profession in general since 2008. This is easily explained by the fact that Zimbabwe's economy was and is a very, very small economy: USD 5 Billion at the time of implosion in 2008. IAS 29 has had no effect on Venezuela's USD 380 billion economy either for the last four years. But, I suppose, people feel Venezuela does not deserve to have a stable economy because of their political views.

Negative facts for "the general purchasing power approach involves the restatement of some or all of the items in financial statements for changes in the general price level".

1. It was implemented during 6 years in Zimbabwe´s hyperinflationary economy with ZERO effect: the economy imploded nevertheless: IAS 29´s most damaging achievement. It achieved nothing in Zimbabwe when it could have been used to stabilize the non-monetary economy.
2. It is currently implemented in Venezuela´s economy over the last 4 years and I do not know for how long in the Belarus hyperinflationary economy with ZERO effect. No-one would even think of IAS 29 as a way to stop hyperinflation or to stabilize an economy while it could be used for that purpose.
3. It is not stated anywhere that the implementation of IAS 29 stopped the effect of hyperinflation in any country, although it could be use to do that by someone who understands hyperinflation and the general purchasing power approach or by proper IFRS guidance - provided daily measurement is used: see IFRS ´X`.
4. IAS 29 is simply required to make restated financial statement more useful and not misleading. IAS 29 has no written responsibility to stabilize an economy under hyperinflation although it could be used to do that by someone who knows how to use IAS 29 for that purpose or with proper guidance in IFRS as set out in the amended draft IFRS ´X`. IAS 29 would then simply be used to implement financial capital maintenance in units of constant purchasing power with daily measurement in the first year of implementation: IAS 29 or IFRS currently give no guidance in this respect. The second year, IAS 29 would not be implemented during hyperinflation because the entity would not have any HC or CC financial statements to restate in terms of IAS 29 because the entity would then be operating permanently under financial capital maintenance in units of constant purchasing power in terms of a daily index as a result of the first year's changeover to this model under IAS 29. It can very easily be done with just a few changes in IAS 29. However, the amended draft IFRS `X´ is much more valuable than IAS 29 because of the very valuable Argentinean (South American) contribution: the requirement at 10 percent annual inflation instead of at 26 percent annual inflation for three years in a row (100 percent cumulative inflation over three years, i.e., hyperinflation). This is the magnum leap in IFRS that will have a profound effect on the world economy: it will mark the beginning of the end of the HCA model in accounting. However, this may take another 100 years to come about as a result of the almost non-existence of knowledge about FCMUCPP.


IAS 29 is restatement: it is simply the separate restatement of values in a set of HC or CC financial statements.

FCMUCPP is not restatement. In general terms, it is daily accounting in units of constant purchasing power - not simply the restatement of month-end or year-end financial statements based on HC accounts. FCMUCPP is an accounting model that maintains the constant purchasing power of existing capital (equity) constant in terms of units of constant purchasing power in terms of a daily index only when the entity breaks even in real (not nominal) value - all else being equal, and not only during hyperinflation.

===========

No, I do not agree that "the accounting under IAS 29 is also one of the approaches to achieve financial capital maintenance in constant purchasing power units as described in the Conceptual Framework ".

FCMUCPP is only possible with daily measurement of all items in terms of the requirements of this model and IAS 29 never requires daily measurement.

Question 2

An entity implementing FCMUCPP during hyperinflation would attempt to implement IAS 29 in terms of IAS 29.1. Then, it would ignore IAS 29, in terms of IAS 29.8, because

(1)IAS 29 is only required - as per IAS 29.8 - for entities preparing their financial statements based on the HC or CC approach and
(2)All items in the FCMUCPP financial statements would already be stated in terms of the measuring unit current at the end of the reporting period: it would find it unnecessary and impossible to implement IAS 29.

The entity consequently would state in its notes to the financial statements that it prepared its financial statements during hyperinflation based on the FCMUCPP approach as authorized in IFRS in the CF, Par. 4.59 (a).

FCMUCPP is not being implemented in any hyperinflationary economy. IAS 29 is being implemented under the HC paradigm with HC financial statements being restated in all hyperinflationary economies.

Summary of answers to the two questions:

Question 1.

You ask a question with two parts:

1. I agree that there is no uniform, standardized approach agreed upon by everybody (and no guidance in IFRS) to achieve FCMUCPP as described in the CF (the description simply being: financial capital maintenance can be measured in units of constant purchasing power: CF 4.59 (a)).
2. I do not agree that the accounting as required under IAS 29 is also one of the approaches to implementing FCMUCPP because FCMUCPP is only possible with daily measurement during the entire financial year and IAS 29 never requires daily measurement.

Question 2

No, I do not confirm that accountants in jurisdictions implementing IAS 29 are telling me that an entity in a hyperinflationary economy needs to refer to IAS 29 even if they implement FCMUCPP because this model is not implemented anywhere in Venezuela, Belarus, Ethiopia or Iran - the countries currently in hyperinflation. They do their accounts under HCA and then restate their HC financial statements in terms of IAS 29 with absolutely no known, heard of or reported effects in these hyperinflationary countries.

FCMUCPP is the core principle of the future possible replacement of IAS 29, namely the amended draft IFRS ´X` CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.


Kind regards

Nicolaas

From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Monday, December 17, 2012 7:07 PM
Subject: RE: IAS 29 Agenda proposal
Dear Nicolaas,

Thank you so much for your review and detailed comments on the spreadsheet and please accept my apology for the delay in my response.
Your comments and the document you provided are very helpful for me to understand the CMUCPP.

I did some modifications to the original spreadsheet (please see the âEUR~revised examplesâEUR(tm) tab of the attached spreadsheet). The cells modified are shaded with darker blue.
Could you please look through the revised cells and provide me with your comments, especially on the comments marked A to C?

In addition, from a larger perspective I just wonder if you could provide me with your thoughts on the following points:

1. I did a small research on how the notion of financial capital maintenance in constant purchasing power units is explained in some accounting textbooks. The accounting results in the example I prepared are on the basis of an example found in an accounting book which explains a way of preparing financial statements under the financial capital maintenance concept in terms of constant purchasing power units. Paragraph 11 of IAS 15, which was withdrawn in 2005, stated âEUR~the general purchasing power approach involves the restatement of some or all of the items in the financial statements for changes in the general price level.âEUR(tm)  I understand that there is no uniform standardised approach agreed upon by everybody (and no guidance in IFRSs) to achieve the financial capital maintenance in constant purchasing power units as described in the Conceptual Framework (not the one as described in the IFRS âEUR(tm)XâEUR(tm)), and the accounting required under IAS 29 is also one of the approach to it. Do you agree with this?
2. In accordance with IAS 8.11, entities need to refer to accounting sources in the order described in that paragraph in the absence of an IFRS that specifically applies to a transaction, other event or condition. If the financial statements are prepared by employing the financial capital maintenance concept in constant purchasing power units, the entity may conclude that there is no relevant guidance under current IFRSs for that kind of financial statements. In that case, in light of the requirements in paragraph 11 of IAS 8, some may argue that the entity in hyperinflation economy needs to refer to IAS 29 even if they employ the financial capital maintenance concept in constant purchasing power units. Is this what you are told by âEUR~accountantsâEUR(tm) in jurisdictions implementing IAS 29 as described in the submission? Please confirm.

Thank you in advance for your help,

Kind regards,
Ken

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 17 December 2012 11:39
To: Yoshimura Kenichi
Subject: Fw: IAS 29 Agenda proposal

Dear Ken,

I hope you had a nice week-end.

I think I sent you an email on Friday. Unfortunately I either deleted the sent copy in my mailbox or I never sent it. I am sorry for this problem.

So, I am sending you the previous one again and the one I want to send you today. Please forgive my bad housekeeping.

Here we go: The one dated Friday:

Herewith please find my detailed response to your example. I attached two files: your Excel file and a short introduction to Capital Maintenance in Units of Constant Purchasing Power.
I have found 4 more differences between the two models in your example. They now total 16.
My answers show that the accounting result of the use of financial capital maintenance in units of constant purchasing power would never result in the same accounting result as applying IAS 29 requirements.
Thus, entities in a hyperinflationary economy which employ financial capital maintenance in units of constant purchasing power would not need to apply and find it impossible to apply IAS 29 because:
(1) The use of financial capital maintenance in units of constant purchasing power would never result in the same accounting result as applying IAS 29 requirements.
(2) This accounting model employs a fundamentally different financial capital maintenance concept (namely financial capital maintenance in units of constant purchasing power in terms of a daily index under which the stable measuring unit assumption is never implemented) to what is in the ambit of IAS 29 which is only required for financial statements based on a historical cost approach (i.e., financial capital maintenance in nominal monetary units under which the stable measuring unit assumption is always implemented under all levels of inflation and deflation, i.e., during low inflation, high inflation and hyperinflation âEUR" even at levels of hundreds of billions percent per annum, for example) or a current cost approach (IAS 29, Par. 8) âEUR" the accounting result, consequently, always being different.
(3) The financial statements based on a financial capital maintenance in units of constant purchasing power approach are, however, always already stated at the measuring unit current at the end of the reporting period, it thus not being necessary and impossible to apply restatement in terms of IAS 29: it is not possible to âEURoerestateâEUR? items that are already stated at the measuring unit current at the end of the reporting period.
Please read the attached paper âEURoeCapital Maintenance in Units of Constant Purchasing PowerâEUR? first before you analyse the 16 differences in your example. By then you would understand what happens under financial capital maintenance in units of constant purchasing power in terms of a daily index and it would be much easier to verify and understand the 16 differences.
I will send you an update of your Example file with the IFRS ´X` references.

The one dated today:
Herewith please find your Example with the draft IFRS ´X`references. I also linked the items and inserted the formulas for the CMUCPP financial statements.

A) In my opinion the reason for IAS 29 not being required during hyperinflation with CMUCPP is:

All items in CMUCPP financial statements are already stated at the measuring unit current at the end of the reporting period as required in IAS 29: it is thus not necessary to apply IAS 29.

In fact, all accounting (daily entries and financial reporting) under CMUCPP is always only done in real value and only updated at the current, i.e., today´s, Daily CPI.

It is to be noted that:

Financial statements based on the CMUCPP approach are prepared under the CMUCPP paradigm [authorized in IFRS in CF 4.59 (a)] that is fundamentally different from the HC paradigm under which IAS 29 is implemented, always producing a different accounting result because the erosion of constant items not maintained constant during inflation by HCA, i.e., by the implementation of the stable measuring unit assumption (not inflation) - is stopped. The constant real value of already existing capital (accounting cannot create value out of nothing - by simply passing some entries) being maintained constant in all entities that at least break even in real value âEUR" all else being equal - instead of being eroded by the stable measuring unit assumption, i.e., by the HCA model during inflation. The stable measuring unit assumption - always implemented and the basis of the HC paradigm - is never implemented under the CMUCPP paradigm.

B) It is also to be noted that the problems IAS 29 tries to overcome under the HC paradigm during hyperinflation with restatement of HC or CC financial statements, are not experienced under CMUCPP as a result of the stabilizing effect of this model on the constant and monetary item economies: Brazil had a relatively stable non-monetary economy during 30 years of very high and hyperinflation with positive economic growth during hyperinflation as a result of the use of various government supplied daily indices to (1) update variable items daily, (2) measure constant items daily in units of constant purchasing power and (3) to inflation-adjust some money items daily. Brazil, in principle, implemented CMUCPP during the 30 years from 1964 to 1994 during very high and hyperinflation, although they did not understand it as such. So did Chile from 1967 to 2010 also without understanding it as such.

Colombia, like Chile with the daily Unidad de Fomento <http://si3.bcentral.cl/Indicadoressiete/secure/IndicadoresDiarios.aspx?Idioma=en-US> , also uses a daily index today (for a lot more than pricing their government capital inflation-indexed bonds, I think), the Real Value Unit <http://www.banrep.gov.co/statistics/sta_rvu.htm> (both the Chilean and Colombian daily indices published by the Central Bank and not the statistics authority in the country). I tried to find out what they use the Real Value Unit for, but I got no reply. According to Prof. Robert Shiller the UF (because of its success) was copied by various LA countries. (Shiller 2008).

C) The reason why it is now important to state that IAS 29 is not required with CMUCPP is:

IAS 29´s future replacement (draft IFRS ´X`) is going to require CMUCPP not only during hyperinflation, but at annual inflation equal to or greater than 10 percent and cumulative inflation over three years equal to or greater than 26 percent.

=====

I acknowledge that the question whether IAS 29 has any effect on a company and economy is not part of this agenda request. It has to do with the choice between restatement and CMUCPP for the future replacement of IAS 29. It is a related matter regarding the agenda request.

You may find it strange that I keep on stating that IAS 29 has no effect. In my opinion the Zimbabwean experience where it was implemented for either 4 or 6 years during hyperinflation is complete proof of my statement. However, here is another:

Michael Madsen, the group CFO of the East Asiatic Company, the Danish multinational with a big food processing business in hyperinflationary Venezuela stated in EuroInvest in 2010:

âEUR~U <http://www.euroinvestor.com/news/2010/01/11/company-announcement-no-1-2010-venezuela-introduces-multi-tiered-exchange-rate-regime/10821702> nder the International Financial Reporting Standards (IFRS) this requires the application of IAS 29, "Reporting in hyperinflationary economies" for 2009 and subsequent years. The application of the standard affects the accounting presentation, but does not affect the operation or the cash flow.âEUR(tm)
Jensen N H 2010 Company announcement Nº 1/2010 - Venezuela introduces multi-tiered exchange rate regime <http://www.euroinvestor.com/news/2010/01/11/company-announcement-no-1-2010-venezuela-introduces-multi-tiered-exchange-rate-regime/10821702> EUROINVESTOR
Your example confirms that IAS 29 has no effect on the cash flow. You however think it affects the operation. Michael Madsen stated it does not affect the operation. But, this is another, related, matter.

By the way, I have found my email I thougth I sent to you on Friday: it is still sitting in my Drafts folder. I´m sorry about this.

Please feel free to contact me any time you want regarding this issue.

Kind regards,

Nicolaas.



----- Forwarded Message -----
From: Nicolaas Smith <realvalueaccounting@yahoo.com>
To: Yoshimura Kenichi <kyoshimura@ifrs.org>
Sent: Wednesday, December 12, 2012 2:34 PM
Subject: Re: IAS 29 Agenda proposal

Dear Ken,

Thank you for your kind wishes. I am well thanks, and I hope to hear the same from you.

I have started to work on the 12 differences in your example between capital maintenance in units of constant purchasing power (not constant purchasing power units accounting - as you describe - and see âEUR" it :-) and what is attempted in IAS 29 âEUR" just in your example.

I hope to give you âEUR" if I may - an introduction to how capital maintenance in units of constant purchasing power is totally different from what is done âEUR" or tried to be done - in IAS 29. It is not a short answer, as you can imagine.

I have never personally implemented IAS 29.

I have, however, developed (in 1995) and implemented (as from 1 January, 1996) accounting-dollarization in the company (Auto-Sueco âEUR" Angola, the Volvo agents in that country) where I worked in Angola´s hyperinflationary economy in Luanda. Accounting-dollarization is capital maintenance in units of constant purchasing power by using the US Dollar (or any other relatively stable foreign currency) as the daily unit of account and daily reporting currency instead of the hyperinflationary local currency during hyperinflation: you do your daily business and your daily accounting and monthly, quarterly, semi-annual and annual financial reporting in terms of the daily US Dollar parallel or black market rate: the free-market or real US Dollar daily rate during hyperinflation. This allows you to eliminate only the very erosive effect of the stable measuring unit assumption on only your company´s constant real value non-monetary items. Keeping no local currency cash from the one day to the next (over time) allows you to avoid only the effect of hyperinflation on only the local hyperinflationary currency.

I then took the next 16 years to research the effects of the stable measuring unit assumption (not inflation - as everyone generally accepts: as they were taught) on the real value of only constant real value non-monetary items in companies and the economy; discovering a lot along the way including first identifying the split of non-monetary items in constant real value non-monetary items and variable real value non-monetary items (both inferred in IFRS) âEUR" a critical pre-requisite (sine qua non) for capital maintenance in units of constant purchasing power: my only actual (real) contribution to the body of knowledge of accounting in the sense of something completely new and essential and adding a lot of value.

I have first identified other items, but they are simply first identifications, for example, that IFRS already authorized three ([1] physical, [2] financial capital maintenance in nominal monetary units and [3] financial capital maintenance in units of constant purchasing power) instead of the generally accepted two (physical and financial) concepts of capital maintenance since 1989: quite a revelation to accountants in general: now already accepted because it is very evident in the CF.

The split of non-monetary items in constant and variable items is something very different: without it capital maintenance in units of constant purchasing power (with its guaranteed stabilising effect) as an alternative to HCA would not be possible (it would never happen without the split being made and accepted as it already has in this very short time since I first identified it in about 2005 âEUR" thanks to the power of the internet): that is why Constant Purchasing Power Accounting (identifying only monetary and non-monetary items: no split) as described by the eminent ex-IASB member, Prof. Geoffrey Whittington, in his excellent benchmark book Inflation Accounting (however, never mentioning the word âEUR~stable measuring unit assumptionâEUR(tm) even once in his book: everyone believed it is inflation doing all the eroding), failed in the high inflation 1970´s and 80´s: non-monetary items were not split between constant and variable items.

That is why I call capital maintenance in units of constant purchasing power Constant ITEM Purchasing Power Accounting <http://realvalueaccounting.blogspot.pt/> (non-monetary items split in two: CONSTANT ITEMS and variable items) to differentiate it from Constant Purchasing Power Accounting (no split in non-monetary items âEUR" the reason why it failed and cannot succeed to implement capital maintenance in units of constant purchasing power).

You and Michael Stewart have also not implemented IAS 29, I think.

I personally think that the Big Four all âEURoedo their own thingâEUR? with the implementation of IAS 29 âEUR" even differently in every different country: there is so much confusion and misunderstanding about the implementation of IAS 29 and what it is and what it isn´t. I could see that from what the East Asiatic Company was doing in 2010 âEUR" in their audited annual accounts. I did not attempt to describe my concerns to them at the time âEUR" it would have been too involved taken into account my short acquaintance with them then.

The fact that IAS 29 does not actually have any effect on anything in a particular company or an economy, âEURoedoing your own thingâEUR? is fine really: it does not affect anything âEUR" see especially what happened in Zimbabwe where it was implemented for at least the last 4 or 6 years of hyperinflation in that country: the economy imploded in any case âEUR" with full implementation of IAS 29: capital maintenance in units of constant purchasing power, on the other hand, would have kept their non-monetary economy relatively stable during hyperinflation âEUR" as it happened in Brazil during 30 years of very high and hyperinflation under daily indexation of most non-monetary and some monetary items.

This is what this issue is really about: capital maintenance in units of constant purchasing power does exactly what the name states: it maintains capital perfectly constant (stable) in real value for an indefinite period of time in all entities that at least break even in real value âEUR" all else being equal âEUR" while IAS 29 does nothing: an enormous difference! This is what I have to be able to convey to you and Michael.

[I feel at ease in expressing my personal opinions âEUR" here and there (a lot of things have happened over the last 16 years of my research into this issue âEUR" in different countries âEUR" mostly on the internet - with different figures (people) in this issue) - to you. Clearly, most of what I say are not simply my personal opinions: most are facts.]

I hope to send you my detailed answer by the latest by the end of tomorrow.

In my opinion, detailing the 12 differences in your example is not the best way for you to understand the fundamental difference between IAS 29 and capital maintenance in units of constant purchasing power in terms of a daily index. In my opinion, a better approach would be for you to get to understand what capital maintenance in units of constant purchasing power actually is and what it does âEUR" automatically âEUR" to a company´s constant items and monetary items and what it does âEUR" automatically - to a country´s constant item economy and monetary item economy under low inflation, high inflation, hyperinflation or deflation.

When I use the term âEUR~automaticallyâEUR(tm) it is used in the same way that benefits from 2 percent inflation are âEUR~automaticâEUR(tm). Those you know well.

I will do that in my detailed answer to your example.

Kind regards,

Nicolaas


From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Tuesday, December 11, 2012 10:53 AM
Subject: RE: IAS 29 Agenda proposal

Dear Nicolaas,

Hope this emails finds you well.

In order to help myself better understand this issue, I prepared a case study using a simple example as attached.
This illustration is intended to show that the accounting result of the use of constant purchasing power units would generally result in the same accounting result of applying IAS 29 requirements. I thought this could support the view that an entities in hyperinflation economy which employs a capital maintenance concept in terms of constant purchasing power units would not need to apply IAS 29 requirements because in both cases the entity could achieve the same result.

I would really appreciate it If you could take a look at this file quickly and advise me on my misunderstandings, if any.

Thank you in advance for your co-operation.

Kind regards,
Ken



From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 29 November 2012 15:48
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal

Dear Ken,

Yes, you can identify me as the submitter of this issue.

You can contact me as often as you want. It is an honour for me to work with you and the IASB.

Kind regards,

Nicolaas



From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, November 29, 2012 3:20 PM
Subject: RE: IAS 29 Agenda proposal

Dear Nicolaas,

Thank you for your reply and additional information.

Sorry, quickly one more point regarding to the report.
By our policy, we make a submitterâEUR(tm)s name anonymous unless the submitter agrees with the submitterâEUR(tm)s name being made public. If the report written by you were made public, your name would be at least indicated as a submitter of this issue. Then I would like to reconfirm that if you are OK with your name being identified as a submitter of this issue?

My apology is bothering you again and again.

Kind regards,
Ken

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 29 November 2012 15:01
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal

Dear Ken,

A) Yes certainly you can. You can use the revised report in your public website and/or make it available to your constituents such as other national standard setters in your process for addressing this issue.

The revised draft IFRS `X´ is also published in my e-book. I asked permission to publish if from the IASB who then advised me to get permission from the Argentinean Federation. Dr Fermín del Valle, from the Argentinean Federation, subsequently gave me that permission to publish it in my e-book.

=====================

B) Some update on the actual draft IFRS ´X`: I have realized by now that it is not complete. As I stated during the teleconference, I superimposed the core principle capital maintenance in units of constant purchasing power on the Argentinean Federation´s draft, trying to change the minimum possible.

What is missing in the draft IFRS ´X` is a paragraph or paragraphs dealing with first time adoption of capital maintenance in units of constant purchasing power. I do not agree with the approach adopted in IAS 29 of restating all equity items (capital) as from the initial date of the entity and I especially do not agree with the simple deleting of accumulated retained earnings.

Eventually (in many years to come) capital maintenance in units of constant purchasing power will be required from all companies world wide in low inflation economies. A company like Exxon Mobil with USD 150 + billion in retained earnings ( I am referring to the 2005 value - when I last looked at it) will never agree to eliminate USD 150 Billion in accumulated retained earnings. Neither would I if I were an Exxon Mobil director or shareholder.

I feel that the deemed cost approach in IFRS 1 is more appropriate and correct. This is however a complex issue that cannot be treated in this email. I simply wish to bring this to your attention, namely, that the draft IFRS `X´ is not complete.

It also needs a one-time treatment of hidden gains in stock at the changeover from HCA to capital maintenance in units of constant purchasing power.

I just want to bring this to your attention. The first item (the deemed cost approach) is very important and the one-time adjustment for hidden gains in stock is less important: it is simply a one-time adjustment account. These matters will have to be dealt with in the future development of draft IFRS ´X`.


Kind regards

Nicolaas Smith



From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, November 29, 2012 2:16 PM
Subject: RE: IAS 29 Agenda proposal

Dear Nicolass

Thank you for your quick confirmation.

Even though it seems that the revised report is made public, could you please confirm that I can use your revised report in our public website and/or make it available to our constituents such as other national standards setters in our process for addressing this issue?

Kind regards,
Ken


From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 29 November 2012 13:58
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal

Dear Ken,

Yes it is.
http://realvalueaccounting.blogspot.pt/2012/02/ifrs-x-capital-maintenance-in-units-of.html

Kind regards

Nicolaas Smith


From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Thursday, November 29, 2012 11:13 AM
Subject: RE: IAS 29 Agenda proposal

Dear Nicolaas,

Thank you for your time to discuss this issue this morning.

I would like to confirm one point quickly. Is the link below the modified version of the research report issued by Argentina you just referred to in the call?

http://realvalueaccounting.blogspot.pt/2012/02/ifrs-x-capital-maintenance-in-units-of.html

Thank you again for your help,

Best regards,
Ken

From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 27 November 2012 15:17
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal

Dear Ken (if I may),

I confirm 29 Thursday from 10 am to 11 am.

Kind regards,

Nicolaas




From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: Nicolaas Smith <realvalueaccounting@yahoo.com>
Sent: Tuesday, November 27, 2012 1:30 PM
Subject: RE: IAS 29 Agenda proposal

Dear Nicolaas Smith,

Thank you for your swift attention to my request.
Then can we talk on 29 Thursday from 10 am to 11 am?
I agree that we are in the same time zone.

Could you please confirm the time?

Kind regards,
Ken


From: Nicolaas Smith [mailto:realvalueaccounting@yahoo.com]
Sent: 27 November 2012 11:54
To: Yoshimura Kenichi
Subject: Re: IAS 29 Agenda proposal

Dear Kenichi Yoshimura,

Thank you for your email.

I will be available to speak to you by phone as follows:

Wednesday 28 8 am till 6 pm
Thursday 29 8 am till 6 pm
Friday 30 8 am till 10 am and 5 pm till 6 pm
I think Lisbon and London time is the same.

My mobile phone number is + 351 919 471 788

Kind regards,

Nicolaas


Blog Constant Item Purchasing Power Accounting - CIPPA <http://realvalueaccounting.blogspot.com/> My Facebook <http://www.facebook.com/#!/profile.php?id=1588417151> My Twitter <http://twitter.com/NicolaasSmith> My LinkedIn <http://www.linkedin.com/profile/view?id=4965181&trk=tab_pro> Lisboa, Portugal

Buy the Kindle e-book CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS at Amazon.com <http://realvalueaccounting.blogspot.pt/2012/07/buy-ebook-for-299-or-149-or-260.html>

I promote financial capital maintenance in units of constant purchasing power in terms of a Daily CPI or other daily rate at all levels of inflation and deflation including hyperinflation as originally authorized in IFRS in the Framework (1989), Par 104 (a) which states: 'Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.'

CIPPA automatically maintains the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value during inflation and deflation including hyperinflation - all else being equal.



From: Yoshimura Kenichi <kyoshimura@ifrs.org>
To: realvalueaccounting@yahoo.com
Sent: Monday, November 26, 2012 5:09 PM
Subject: Re: IAS 29 Agenda proposal

Dear Nicolaas Smith,

My name is Ken Yoshimura, a staff at the IASB, currently working on your submission related to IAS 29 Financial Reporting in Hyperinflationary Economies. In order for us to analyse your submission efficiently and effectively, we would like to talk to you over a phone to get a better idea on what your concerns are.

If you are fine with having a call with us, could you please provide me with your available time slots for the dates from 28th to 30th November?

Thank you again for your submission and I am looking forward to talking to you.

Kind regards,
Ken

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Kenichi Yoshimura | Seconded National Standards Fellow

International Accounting Standards Board (IASB)
30 Cannon Street | London EC4M 6XH | UK