Applicability of IAS 29 No 1
Date 24 September 2012
The original IFRIC Potential Agenda Item Request
The original IFRIC Potential Agenda Item Request
Michael Stewart
Director of Implementation Activities
International Accounting Standards Board
First Floor
30 Cannon Street
London EC4M 6XH
United Kingdom
Dear Mr Stewart,
Re: IFRIC Potential Agenda Item Request
Attached herewith please find the IFRIC Potential Agenda Item Request regarding the implementation of financial capital maintenance in units of constant purchasing power during hyperinflation.
Your sincerely,
Nicolaas Smith
_______________________________________________________________
IFRIC POTENTIAL AGENDA ITEM REQUEST
The Issue:
The Conceptual Framework (2010), Par. 4.59 states:
‘Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.’
Par. 4.59 (a) does not specifically indicate whether financial capital maintenance in units of constant purchasing power is applicable during low inflation, high inflation, hyperinflation or deflation.
IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 8 states:
‘The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period.’
As a result of the fact that it is currently generally accepted by accountants in countries implementing IFRS that IAS 29 is always required during hyperinflation, please indicate whether the following two statements are valid or not:
1. In terms of The Conceptual Framework (2010), Par. 4.59 (a), financial capital maintenance in units of constant purchasing power is applicable during low inflation, high inflation, hyperinflation and deflation.
2. In terms of IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 8, this standard is only required for the restatement of historical cost and current cost financial statements and not in the case of financial capital maintenance in units of constant purchasing power during hyperinflation since all items in the latter financial statements would already be measured either (a) in terms of the measuring unit current at the balance sheet date (e.g., the CPI); or (b) in terms of IFRS-authorized measurement bases current at the end of the reporting period (e.g., fair value, net realizable value, recoverable value, present value, etc.), excluding nominal Historical Cost (updated Historical Cost to be used under financial capital maintenance in units of constant purchasing power), i.e., excluding the stable measuring unit assumption which is never implemented under financial capital maintenance in units of constant purchasing power.
Current Practice:
It is currently generally accepted by accountants in countries implementing IFRS that IAS 29 is always required during hyperinflation.
Reasons for the IFRIC to address the issue:
(a) The issue is widespread: most accountants believe that IAS 29 is always required during hyperinflation.
(b) The issue involves significantly divergent interpretations since a proposed emerging practice, namely, the Argentinean Federation´s 2010 proposal for a future replacement of IAS 29, in the form of a draft IFRS, entitled IFRS ‘X’ INFLATION, amended in January 2012 to IFRS ‘X’ CONSTANT ITEM PURCHASING POWER ACCOUNTING, is based on the core principle of financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation, including during hyperinflation. The IASB voted unanimously in May 2012 to submit the replacement of IAS 29 to research.
(c) Financial reporting would be improved through the elimination of the diversity, namely, indicating now that financial capital maintenance in units of constant purchasing power during hyperinflation is already authorized in IFRS, namely, in The Conceptual Framework (2010), Par. 4.59 (a). In fact, it was authorized in April 1989, the date the original Framework (1989) was authorized.
(d) The issue is sufficiently narrow in scope to be capable of interpretation within the confines of IFRSs and the Conceptual Framework, but not so narrow that it is inefficient to apply the interpretation process.
(e) The issue relates to the current IASB research project regarding the replacement of IAS 29. There is a pressing need for guidance sooner than would be expected from the IASB research project regarding the replacement of IAS 29 especially with regard to hyperinflation in Venezuela and high inflation in, for example, countries like Ethiopia (20%), Tanzania (15.7% ), Mongolia (15.6%), Nigeria (11.7%), Angola (10%) and Argentina (10 or 20%).
Submitted by
Name: Nicolaas Smith
Organization: Constant Item Purchasing Power Accounting
Address: Avenida dos Descobrimentos 10, 3 E, 2740-044 Porto Salvo, Portugal
Telephone: +351 919471788
Email: realvalueaccounting@yahoo.com
Date 24 September 2012
Nicolaas Smith Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.
