Second submission: Nicolaas Smith Comment Letter: IASB Exposure Draft - Severe Hyperinflation
Submitter Organization Date
Nicolaas Smith Constant ITEM Purchasing Power Accounting 2nd November, 2010
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Second submission via “Create Comment Letter” page on www.ifrs.org. First submission on 22-10-2010 - confirmed by IASB email - not published after 10 days. This second submission is different from the first submission. I respectfully request that you publish this – updated – submission. Thank you.
Dear Sirs/Mesdames,
Request for comment on IASB Exposure Draft ED/2010/12: Severe Hyperinflation - Proposed Amendment to IFRS 1
Thank you for the opportunity to comment on the IASB Exposure Draft: Severe Hyperinflation - Proposed Amendment to IFRS 1
I agree with the IASB´s proposal to add an exemption to IFRS 1 to allow an entity which has been subject to severe hyperinflation to measure assets and liabilities at fair value and use that fair value as the deemed cost of those assets and liabilities in the opening IFRS statement of financial position when the date of said opening IFRS statement of financial position is on, or after, the date when the reporting currency of the reporting entity ceases to be subject to severe hyperinflation or when the reporting currency is a relatively stable foreign currency in a newly dollarized economy after a period of severe hyperinflation.
I disagree with the IASB´s definition of severe hyperinflation. Severe hyperinflation is impossible when there is no exchangeability.
My detailed answers to the questions in the Exposure Draft and my suggestions are contained in the attached appendix.
If you have any questions regarding this submission, please do not hesitate to contact me at realvalueaccounting@yahoo.com
Yours sincerely
Nicolaas Smith
Constant ITEM Purchasing Power Accounting
http://realvalueaccounting.blogspot.com/
Page 1 of 3
Second submission: Nicolaas Smith Comment Letter: IASB Exposure Draft - Severe Hyperinflation
Appendix – Response to the questions asked in the Exposure Draft: Severe Hyperinflation
Question 1 – Severe hyperinflation exemption
The Board proposes adding an exemption to IFRS 1 that an entity can apply at the date of transition to IFRSs after being subject to severe hyperinflation. This exemption would allow an entity to measure assets and liabilities at fair value and use that fair value as the deemed cost of those assets and liabilities in the opening IFRS statement of financial position.
Do you agree that this exemption should apply when an entity prepares and presents an opening IFRS statement of financial position after being subject to severe hyperinflation?
Why or why not?
Yes, I agree with the IASB´s proposal to add an exemption to IFRS 1 to allow an entity which has been subject to severe hyperinflation to measure assets and liabilities at fair value and use that fair value as the deemed cost of those assets and liabilities in the opening IFRS statement of financial position when the date of said opening IFRS statement of financial position is on, or after, the date when the reporting currency of the reporting entity ceases to be subject to severe hyperinflation or when the reporting currency is a relatively stable foreign currency in a newly dollarized economy after a period of severe hyperinflation.
I agree because it is the only economically logical, correct and common sense solution.
I suggest that the dollarization option – which can be in any relatively stable foreign currency - be specifically added to the wording of the amendment to IFRS 1.
Question 2 – Other comments
Do you have any other comments on the proposals?
Yes, I suggest that the following changes (in bold and underlined) should be made to paragraph D28 (b):
Paragraph D28: The currency of a hyperinflationary economy is subject to severe hyperinflation if it has both of the following characteristics: (a) a reliable general price index is not available to all entities with transactions and balances in the currency, (b) exchangeability between the currency and most relatively stable foreign currencies does not exist,
Rationale for my answers and suggestions above:
The IASB proposes to define severe hyperinflation as follows:
D28 The currency of a hyperinflationary economy is subject to severe hyperinflation if it has both of the following characteristics:
(a) a reliable general price index is not available to all entities with
Page 2 of 3
Second submission: Nicolaas Smith Comment Letter: IASB Exposure Draft - Severe Hyperinflation
transactions and balances in the currency,
(b) exchangeability between the currency and a relatively stable foreign currency does not exist,
In fact, it is exactly the opposite: severe hyperinflation stops when “(b) exchangeability between the currency and a relatively stable foreign currency does not exist.” (As stated in the singular it means it includes the plural since this is IFRS nomenclature.)
D28 (b) is thus not a definition of severe hyperinflation, but, a definition of when severe hyperinflation stops.
Severe hyperinflation is only possible when there is exchangeability with at least one relatively stable foreign currency.
The one exchange rate that lasted till the end of hyperinflation in Zimbabwe was the Old Mutual Implied Rate (OMIR).
“The ratio of the Old Mutual share price in Harare to that in London equals the Zimbabwe dollar/sterling exchange rate." p8
Severe hyperinflation stops the moment exchangeability between the currency and all foreign currencies does not exist.
“Zimbabwe’s hyperinflation came to an abrupt halt. The trigger was an intervention by the Reserve Bank of Zimbabwe. On November 20, 2008, the Reserve Bank’s governor, Dr. Gideon Gono, stated that the entire economy was “being priced via the Old Mutual rate whose share price movements had no relationship with economic fundamentals, let alone actual corporate performance of Old Mutual itself” (Gono 2008: 7–8). In consequence, the Reserve Bank issued regulations that forced the Zimbabwe Stock Exchange to shut down. This event rapidly cascaded into a termination of all forms of non-cash foreign exchange trading and an accelerated death spiral for the Zimbabwe dollar. Within weeks the entire economy spontaneously “dollarized” and prices stabilized.” p 9-10
There was severe hyperinflation in Zimbabwe while there was exchangeability with at least one relatively stable foreign currency – the British Pound in this case as made possible via the OMIR. When this last exchangeability stopped it was not possible to set prices in the ZimDollar any more and severe hyperinflation stopped: no exchangeability means no severe hyperinflation.
I thus suggest that paragraph D28 (b) should be changed to: “(b) exchangeability between the currency and most relatively stable foreign currencies does not exist,”
, Hanke, S. H. and Kwok, A. K. F., On the Measurement of Zimbabwe’s Hyperinflation, Cato Journal, Vol. 29, No. 2 (Spring/Summer 2009), pp. 353-64 Available at http://www.cato.org/pubs/journal/cj29n2/cj29n2-8.pdf
No other issues noted.
______________________________________________________
This comment letter is available HERE on the IFRS.org website.
Severe hyperinflation comment letter available in the following book:
Buy the ebook
Submitter Organization Date
Nicolaas Smith Constant ITEM Purchasing Power Accounting 2nd November, 2010
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Second submission via “Create Comment Letter” page on www.ifrs.org. First submission on 22-10-2010 - confirmed by IASB email - not published after 10 days. This second submission is different from the first submission. I respectfully request that you publish this – updated – submission. Thank you.
Dear Sirs/Mesdames,
Request for comment on IASB Exposure Draft ED/2010/12: Severe Hyperinflation - Proposed Amendment to IFRS 1
Thank you for the opportunity to comment on the IASB Exposure Draft: Severe Hyperinflation - Proposed Amendment to IFRS 1
I agree with the IASB´s proposal to add an exemption to IFRS 1 to allow an entity which has been subject to severe hyperinflation to measure assets and liabilities at fair value and use that fair value as the deemed cost of those assets and liabilities in the opening IFRS statement of financial position when the date of said opening IFRS statement of financial position is on, or after, the date when the reporting currency of the reporting entity ceases to be subject to severe hyperinflation or when the reporting currency is a relatively stable foreign currency in a newly dollarized economy after a period of severe hyperinflation.
I disagree with the IASB´s definition of severe hyperinflation. Severe hyperinflation is impossible when there is no exchangeability.
My detailed answers to the questions in the Exposure Draft and my suggestions are contained in the attached appendix.
If you have any questions regarding this submission, please do not hesitate to contact me at realvalueaccounting@yahoo.com
Yours sincerely
Nicolaas Smith
Constant ITEM Purchasing Power Accounting
http://realvalueaccounting.blogspot.com/
Page 1 of 3
Second submission: Nicolaas Smith Comment Letter: IASB Exposure Draft - Severe Hyperinflation
Appendix – Response to the questions asked in the Exposure Draft: Severe Hyperinflation
Question 1 – Severe hyperinflation exemption
The Board proposes adding an exemption to IFRS 1 that an entity can apply at the date of transition to IFRSs after being subject to severe hyperinflation. This exemption would allow an entity to measure assets and liabilities at fair value and use that fair value as the deemed cost of those assets and liabilities in the opening IFRS statement of financial position.
Do you agree that this exemption should apply when an entity prepares and presents an opening IFRS statement of financial position after being subject to severe hyperinflation?
Why or why not?
Yes, I agree with the IASB´s proposal to add an exemption to IFRS 1 to allow an entity which has been subject to severe hyperinflation to measure assets and liabilities at fair value and use that fair value as the deemed cost of those assets and liabilities in the opening IFRS statement of financial position when the date of said opening IFRS statement of financial position is on, or after, the date when the reporting currency of the reporting entity ceases to be subject to severe hyperinflation or when the reporting currency is a relatively stable foreign currency in a newly dollarized economy after a period of severe hyperinflation.
I agree because it is the only economically logical, correct and common sense solution.
I suggest that the dollarization option – which can be in any relatively stable foreign currency - be specifically added to the wording of the amendment to IFRS 1.
Question 2 – Other comments
Do you have any other comments on the proposals?
Yes, I suggest that the following changes (in bold and underlined) should be made to paragraph D28 (b):
Paragraph D28: The currency of a hyperinflationary economy is subject to severe hyperinflation if it has both of the following characteristics: (a) a reliable general price index is not available to all entities with transactions and balances in the currency, (b) exchangeability between the currency and most relatively stable foreign currencies does not exist,
Rationale for my answers and suggestions above:
The IASB proposes to define severe hyperinflation as follows:
D28 The currency of a hyperinflationary economy is subject to severe hyperinflation if it has both of the following characteristics:
(a) a reliable general price index is not available to all entities with
Page 2 of 3
Second submission: Nicolaas Smith Comment Letter: IASB Exposure Draft - Severe Hyperinflation
transactions and balances in the currency,
(b) exchangeability between the currency and a relatively stable foreign currency does not exist,
In fact, it is exactly the opposite: severe hyperinflation stops when “(b) exchangeability between the currency and a relatively stable foreign currency does not exist.” (As stated in the singular it means it includes the plural since this is IFRS nomenclature.)
D28 (b) is thus not a definition of severe hyperinflation, but, a definition of when severe hyperinflation stops.
Severe hyperinflation is only possible when there is exchangeability with at least one relatively stable foreign currency.
The one exchange rate that lasted till the end of hyperinflation in Zimbabwe was the Old Mutual Implied Rate (OMIR).
“The ratio of the Old Mutual share price in Harare to that in London equals the Zimbabwe dollar/sterling exchange rate." p8
Severe hyperinflation stops the moment exchangeability between the currency and all foreign currencies does not exist.
“Zimbabwe’s hyperinflation came to an abrupt halt. The trigger was an intervention by the Reserve Bank of Zimbabwe. On November 20, 2008, the Reserve Bank’s governor, Dr. Gideon Gono, stated that the entire economy was “being priced via the Old Mutual rate whose share price movements had no relationship with economic fundamentals, let alone actual corporate performance of Old Mutual itself” (Gono 2008: 7–8). In consequence, the Reserve Bank issued regulations that forced the Zimbabwe Stock Exchange to shut down. This event rapidly cascaded into a termination of all forms of non-cash foreign exchange trading and an accelerated death spiral for the Zimbabwe dollar. Within weeks the entire economy spontaneously “dollarized” and prices stabilized.” p 9-10
There was severe hyperinflation in Zimbabwe while there was exchangeability with at least one relatively stable foreign currency – the British Pound in this case as made possible via the OMIR. When this last exchangeability stopped it was not possible to set prices in the ZimDollar any more and severe hyperinflation stopped: no exchangeability means no severe hyperinflation.
I thus suggest that paragraph D28 (b) should be changed to: “(b) exchangeability between the currency and most relatively stable foreign currencies does not exist,”
, Hanke, S. H. and Kwok, A. K. F., On the Measurement of Zimbabwe’s Hyperinflation, Cato Journal, Vol. 29, No. 2 (Spring/Summer 2009), pp. 353-64 Available at http://www.cato.org/pubs/journal/cj29n2/cj29n2-8.pdf
No other issues noted.
______________________________________________________
This comment letter is available HERE on the IFRS.org website.
Severe hyperinflation comment letter available in the following book:
Buy the ebook
Copyright © Nicolaas J Smith 2010
