A negative interest rate is impossible under CMUCPP in terms of the Daily CPI.
Monday 21 January 2013
Venezuela in hyperinflation struggles for food supplies
Venezuela in hyperinflation struggles for food supplies
Nicolaas Smith Opinions on this blog expressed by me are my personal opinions. Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday 18 January 2013
Financial reporting is accounting and it does affect the economy
Financial
reporting is accounting and it does affect the economy
Every
accounting entry eventually is part of the financial reports for the financial
period. To prepare the financial reports in terms of IFRS or US GAAP or
whatever standard at the end of the financial period, an entity´s economic
activities are accounted from the first till the last day of the financial
period. That all ends up finally in the financial report. The measurement bases
used during the reporting period do affect the economy. In principle, it all
boils down to whether you implement the stable measuring unit assumption or
not.
To
be able to prepare the financial reports at the year-end you have to do the
whole financial year’s accounting: from the beginning to the end. So, all of
accounting is part of financial reporting. It is impossible to do the financial
reports without accounting.
David
Mosso stated that accounting is a measurement instrument. He could just as well
have stated financial reporting is a measurement instrument. Financial
reporting includes accounting: all accounting entries during the financial year
and the financial reports at the end of the financial period.
So,
financial reporting does affect the economy.
Nicolaas Smith
Opinions on this blog expressed by me are my personal opinions.
Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday 17 January 2013
Implementation of the failed IAS 29 in Zimbabwe
The implementation
of daily measurement of most non-monetary and some monetary items in units of
constant purchasing power in terms of a daily index based almost entirely on
the daily USD free-market exchange rate during hyperinflation, for example the
Unidade Real de Valor (URV),
in Brazil during 30 years of very high and hyperinflation resulted in a
relative stable non-monetary economy from 1964 to 1994 in that country.
Brazil´s hyperinflation ended in 1994 with the implementation of the Real Plan.
IAS 29 was authorized in 1989.
The above model of
daily measurement in units of constant purchasing power did not happen during the implementation of the failed IAS 29
during hyperinflation in Zimbabwe.
In this respect,
the implementation of the failed IAS 29 Financial Reporting in
Hyperinflationary Economies, had no positive effect on the economy in Zimbabwe. Zimbabwe´s economy imploded in 2008.
Under IFRS-authorised Capital Maintenance in Units of Constant Purchasing Power in terms of a URV-based Daily Index, Zimbabwe´s economy would not have imploded in 2008. This model would today stabilise Belarus, Venezuela and (I am sorry, President Obama) Iran´s economy.
CMUCPP was authorised in IFRS in the original Framework (1989), Par. 104 (a), now the Conceptual Framework (2010), Par. 4.59 (a) which states:
"Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
Under IFRS-authorised Capital Maintenance in Units of Constant Purchasing Power in terms of a URV-based Daily Index, Zimbabwe´s economy would not have imploded in 2008. This model would today stabilise Belarus, Venezuela and (I am sorry, President Obama) Iran´s economy.
CMUCPP was authorised in IFRS in the original Framework (1989), Par. 104 (a), now the Conceptual Framework (2010), Par. 4.59 (a) which states:
"Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
Nicolaas Smith
Opinions on this blog expressed by me are my personal opinions.
Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday 15 January 2013
Monday 14 January 2013
No guidance from the IASB to hyperinflationary countries
No guidance from the IASB to
hyperinflationary countries
The
replacement of the failed IAS 29 was not initially
about the replacement of the failed IAS 29 restatement
model; it was initially
about when – at what level of annual or cumulative inflation – the failed IAS
29 restatement model has to be implemented as stated by the Chairman of the
IASB, Mr Hans Hoogervorst, in the covering letter to the 2011 Agenda
Consultation comment letter request.
The
Argentinean Federation (supported by the Mexican, Chilean and Brazilian
accounting standard-setting authorities) proposed the continued use of the failed
IAS 29 restatement model at
10% annual inflation or at 26% cumulative inflation over three years instead of
at 100% cumulative inflation over three years as required in the failed IAS 29.
They proposed this in their draft IFRS ´X`INFLATION submitted to the IASB in
2010. I support a change from HCA at the above levels of inflation as proposed
by the Argentinean Federation as I set out in my amendment to the Argentinean Federation´s
proposal in which I changed the core principle and the name of the proposal
from IFRS ´X`INFLATION to IFRS
´X`CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER. In it I
propose the adoption of the IFRS-authorised CMUCPP model instead of the failed
IAS 29 restatement model. I am
totally against the continuance of the failed IAS 29 restatement model which had no
positive effect during its implementation during 8 years in Zimbabwe´s
hyperinflation.
In
my opinion, the future replacement of the failed IAS 29 is only now being researched correctly to determine:
(1)
Whether
it is correct to implement a change in financial reporting at 10% annual
inflation or at 26% cumulative inflation over three years as proposed in the
Argentinean Accounting Federation´s proposal IFRS `X´ INFLATION instead of at
100% cumulative inflation over three years as required in the failed IAS 29 and
(2)
Whether
the failed IAS 29 restatement model should be maintained in the future
replacement of IAS 29 or whether it should be replaced with the IFRS-authorised
Capital Maintenance in Units of Constant Puchasing Power in terms of a Daily
Index model as proposed in the amended IFRS
´X`CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.
I
do realise that I may also be totally wrong in my assumption that the replacement of the failed IAS 29 now
also includes the analysis of whether or not the failed replacement model
should be replaced with the IFRS-authorised Capital Maintenance in Units of
Constant Purchasing Power model. There is no official statement from the IASB to this effect. The IASB so
far only indicated officially what its Chairman, Mr Hans Hoogervorst, stated in
the 2011 Agenda Consultation comment letter request document: “Inflation accounting (revisions to IAS 29
Financial Reporting in Hyperinflationary Economies)
IAS 29 provides guidance on the
preparation of financial statements in a functional currency that is suffering
from hyperinflation. Concerns have been raised from some countries whose economies
suffer from high inflation, but which are not hyperinflationary. Those concerns
are that the effects of high inflation on an entity’s financial results are not
adequately reflected in IFRS financial statements. A research paper was
prepared on this issue and submitted to the IASB
by the
Federación Argentina de Consejos Profesionales de Ciencias Económicas. A
future project could use this research paper to consider revisions to IAS 29 to
include guidance for entities whose functional currency is that of an economy subject
to high inflation, but not to hyperinflation.”
The
fact that I have sent an amendment to the Argentinean Federation´s proposal to
the IASB in January 2012, does not mean that my proposal to change the core
principle of the Argentinean Federation´s proposal from INFLATION to CAPITAL
MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER was accepted by the IASB as a
second valid reason for
replacing the failed IAS 29. In my opinion, there seems to be very little
understanding of the benefits of the IFRS-authorised CMUCPP in terms of a Daily
Index model at the IASB.
During
my collaboration with the IASB in my IFRIC agenda request I was informed, I assume
unofficially, “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.”
However,
there is nothing official
from the IASB regarding researching the future replacement of the failed IAS 29
with the view of replacing the failed restatement
model as required in the failed IAS 29 with the IFRS-authorised CMUCPP
model in terms of a Daily Index as proposed in the amendment IFRS
`X´ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.
The
last indication I had from the IASB was from what Micheal Stewart, the Director
of Implementation Activities at the IASB, very firmly indicated during the
teleconference on 8 January 2013, namely that the IASB is satified with the
implementation of IAS 29 during 8 years
in Zimbabwe´s hyperinflationary economy, because financial reporting has no effect in the economy. This
statement from Michael Stewart is obviously totally wrong. That was his very
firm response when I asked him what the IASB´s response was to the fact that
IAS 29 had no positive effect during 8 years of implementation during
Zimbabwe´s hyperinflation. According to him it is what people do with the
information in financial reports that affects the economy.
View that financial reporting has no
effect in the economy may be widely held at the IASB
In my opinion, the IASB has a very
irresponsible attitude to the fact that the implementation of IFRS-authorised Capital
Maintenance in Units of Constant Purchasing Power in terms of a Daily Index in
the current hyperinflationary economies of Belarus, Venezuela and Iran would
stabilise these countries´ economies. In
my opinion, this may be because the view that financial reporting has no effect in the economy may be widely
held at the IASB: it may not be generally accepted or realised (understood) at
the IASB that financial reporting
affects the economy (see Michael Stewart´s very firm indication in this
regard) and that the implementation of CMUCPP in terms of a Daily Index – as
authorised in IFRS in 1989 – would very quickly stabilise the hyperinflationary
economies in Belarus, Venezuela and Iran.
This is only my private opinion: I may be wrong. Maybe
the IASB does realise that CMUCPP in terms of a Daily Index – as authorised in
IFRS in 1989 – would stabilise the above hyperinflationary economies very
quickly and are about the put the replacement of the failed IAS 29 on a fast
track.
On
the other hand, I doubt this very much especially when Michael Stewart indicated
very firmly that financial reporting has no effect in the economy: a totally
wrong – and very worrying - indication. I thus have little hope for guidance
from the IASB for the accountants in the above hyperinflationary countries. An
IFRS requiring CMUCPP in
terms of a Daily Index during hyperinflation – CMUCPP was authorised in IFRS as
an option to HCA in 1989 at
all levels of inflation and deflation, including during hyperinflation - would
stabilise these countries´ economies overnight at no cost. In my opinion, the
IASB does not demonstrate the necessary understanding of the real value
maintaining benefits of CMUCPP in terms of a Daily Index during hyperinflation
to authorise such an IFRS and to provide such guidance. So, in my opinion, concluding from
what I have stated before, the IASB would, most probably, also not be able to sufficiently
understand (similar to what I personally experienced with the two IASB staff members
in my collaboration with them during my IFRIC agenda request) the real value
maintaining benefits of IFRS-authorised Capital Maintenance in Units of
Constant Purchasing Power in terms of a Daily Index, to put the replacement of
the failed IAS 29 on a fast track. In my opinion, Michael Stewart will
certainly not be able to convey the real value maintaining benefits of
IFRS-authorised CMUCPP in terms of a Daily Index to the IASB. In my opinion, he
does not understand those benefits and he would not be able to describe those
benefits in detail nor the reason
why IFRS-authorised CMUCPP in terms of a Daily Index affects the economy very
positively. According to him financial reporting has no effect in the economy: in
my opinion, a totally wrong understanding of financial reporting. That is very unfortunate for the populations
of Belarus, Venezuela and Iran and the populations of all high inflationary
countries in the world economy.
The
benefits of CMUCPP in terms of a daily index was instinctively understood and widely
implemented in Brazil during very high and hyperinflation from 1964 to 1994: it
was widespread. It was also implemented instinctively and widely understood in
Chile from 1967 to 2010 (mostly during low inflation) and in other Latin
American countries: it was widespread in Latin America. Latin American
countries seem to have understood it instinctively and applied it widely during
low inflation, very high and hyperinflation.
The
IASB, at best, could actively assist, like IASB staff actively assisted the
Argentinean Federation in the preparation of their 2010 proposal, the national
accounting standard-setting authorities in the above hyperinflationary
countries to rapidly authorise national accounting standards requiring IFRS-authorised
Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily
Index in order to stabilise these countries´economies – before the requirement by the IASB of IFRS-authorised CMUCPP
in the replacement of the failed IAS 29.
With respect to both
(1)
the
preparation of the IFRIC agenda request, namely: to include in IFRIC that “IAS 29 is not required during
hyperinflation when an entity implements CMUCPP because this model is not a HCA
model and only HC and CC financial statements are restated as required in IAS
29”, being directed by Michael Stewart, as well as
(2)
the
future work (as detailed above) on the replacement of the failed IAS 29,
it is important to acknowledge that
it is a fact that financial
reporting affects the economy – and that it is not what Michael Stewart very firmly indicated, namely that
financial reporting has no effect
in the economy.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Financial reporting affects the economy
Financial reporting affects the
economy
From
the here
it is very clear that financial reporting affects the economy.
According
to Michael Stewart, the Director of Implementation Activities at the
International Accounting Standards Board, financial reporting has no effect in the economy and
that is the reason why the IASB is satisfied with the implementation of IAS 29
during 8 years in Zimbabwe´s hyperinflationary economy with no positive effect.
The
above indication by Michael Stewart is completely wrong.
It
is very strange and very worrying that a senior director at the IASB makes such
an indication which, in my opinion,
indicates no understanding on
the part of Michael Stewart of the effect of financial reporting in the economy.
This was certainly the impression to
me during the teleconference on 8 January 2013: in my opinion, Michael Stewart has no understanding of the effect of financial reporting in the
economy otherwise he would have clearly
indicated such understanding during the teleconference which dealt very
much with the measurement of economic items in units of constant purchasing
power in terms of a Daily Index, i.e., with IFRS-authorised CMUCPP. He
indicated the opposite.
Update from Michael Stewart: "In response to comments you made about how you think that CMUCPP would have solved Zimbabwe's hyperinflation problem, I expressed a view about the effect of financial reporting on the economy. As you noted in your blog of 10 January 2013 I expressed a view that it is the actions that people take and the way that they use the information contained in financial reporting that I think can affect an economy, rather than just the financial reporting itself (in retrospect I accept that the language I used could have been more specific to the matter we were discussing, which was about how financial reporting could have solved Zimbabwe's hyperinflation problem)."
Update from Michael Stewart: "In response to comments you made about how you think that CMUCPP would have solved Zimbabwe's hyperinflation problem, I expressed a view about the effect of financial reporting on the economy. As you noted in your blog of 10 January 2013 I expressed a view that it is the actions that people take and the way that they use the information contained in financial reporting that I think can affect an economy, rather than just the financial reporting itself (in retrospect I accept that the language I used could have been more specific to the matter we were discussing, which was about how financial reporting could have solved Zimbabwe's hyperinflation problem)."
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Enemy Number One
Enemy Number One
The
stable measuring unit assumption
is the number one enemy in the economy.
In
the
A. Monetary Economy the stable
measuring unit assumption causes
(1)
the
cost of inflation (not actual inflation),
(2)
the
cost of hyperinflation (not actual hyperinflation) as well as
(3)
the
deflation effect: the creation of real value in monetary items never
deflation-adjusted daily during deflation (not actual deflation).
Inflation
/ hyperinflation is caused by an increase in the general price level. An increase
in the general price level is caused by various economic factors, an important
one being an excessive increase in the money supply. Deflation is caused by a
decrease in the general price level.
With
no stable measuring unit assumption (i.e., implementing IFRS-authorised Capital
Maintenance in Units of Constant Purchasing Power) – inflation-indexing and
hyperinflation-indexing all monetary items on a daily basis in terms of a Daily
Index - there would be no cost of inflation / hyperinflation and no deflation
effect. Thus, with no HCA (instead implementing CMUCPP), there would be no cost
of inflation or cost of hyperinflation during inflation and hyperinflation.
In
the
B. Constant Real Value Non-monetary Economy the stable measuring unit
assumption causes
(1)
the
erosion of the real value of constant real value non-monetary items never
maintained constant during inflation and hyperinflation and
(2)
the
creation of real value in constant items never maintained constant during
deflation.
With
no stable measuring unit assumption – no HCA (i.e., implementing IFRS-authorised
CMUCPP) – measuring all constant items daily in units of constant purchasing
power in terms of a Daily Index – the erosion of constant real value in
constant items never maintained constant during inflation / hyperinflation and
the creation of real value in constant items never maintained constant during
deflation, would be stopped for an indefinite period of time in all entities
that at least break even in real value – all else being equal – at all levels
of inflation and deflation, including during hyperinflation.
The
stable measuring unit assumption is implemented under
(1)
The
traditional, generally accepted, globally implemented Historical Cost
Accounting model during low inflation, high inflation and deflation and
(2)
The
failed IAS 29 Financial Reporting In
Hyperinflationary Economies model during hyperinflation.
The
stable measuring unit assumption is never
implemented under the IFRS-authorised
Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily
Index model as proposed as a replacement of the failed IAS 29 model in IFRS
´X`CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Saturday 12 January 2013
The failed IAS 29: the IASB´s greatest failure
The failed IAS 29: the IASB´s
greatest failure
The
failed IAS 29 Financial Reporting in
Hyperinflationary Economies is the IASB´s greatest failure. Here is just
one example why: it was implemented during the last 8 years of hyperinflation
in Zimbabwe – which ended in 2008 - with no
positive effect in the economy. The implementation of the failed IAS 29
resulted in maintaining the very
negative effect of implementing HCA during hyperinflation in Zimbabwe,
because “Inflation-adjustment of
financial statements is an extension to, not a departure from historical cost
accounting,” as stated by PricewaterhouseCoopers in their publication Understanding IAS 29 (2006). The
implementation of the failed IAS 29 thus did
affect the Zimbabwean economy: very negatively. It affected the Zimbabwean hyperinflationary economy very negatively
because it resulted in maintaining HCA during hyperinflation.
When
the failed IAS 29 has no positive effect
during hyperinflation, why is the failed IAS 29 still an IFRS in 2013? The failed
IAS 29 restatement model in terms of the monthly published CPI (when the
general price level generally changes daily during hyperinflation) is still an
IFRS in 2013 because the IASB is satisfied with the failed IAS 29 since financial reporting has no effect in the
economy, according to Michael Stewart, Director of Implementation
Activities at the IASB, as very firmly indicated by him during a teleconference
on 8 January 2013.
Update from Michael Stewart: "In response to comments you made about how you think that CMUCPP would have solved Zimbabwe's hyperinflation problem, I expressed a view about the effect of financial reporting on the economy. As you noted in your blog of 10 January 2013 I expressed a view that it is the actions that people take and the way that they use the information contained in financial reporting that I think can affect an economy, rather than just the financial reporting itself (in retrospect I accept that the language I used could have been more specific to the matter we were discussing, which was about how financial reporting could have solved Zimbabwe's hyperinflation problem)."
The
above very firm indication by Michael Stewart is completely wrong: financial reporting does affect the
economy. The fact that financial reporting affects the economy is one of the fundamental – basic -
reasons why International Financial Reporting Standards are authorised by the
International Accounting Standards Board. It is one of the fundamental reasons
why the IASB exists.
Implementing
Historical Cost Accounting during hyperinflation has a very negative effect in a hyperinflationary economy which is
one of many proofs that financial
reporting does affect the economy.
The
implementation of the failed IAS 29 during the last 8 years of hyperinflation
in Zimbabwe had no positive effect
because “Inflation-adjustment of
financial statements is an extension to, not a departure from historical cost
accounting,” per PricewaterhouseCoopers in their publication Understanding IAS 29. Zimbabwean
entities implemented HCA during hyperinflation before the failed IAS 29 was
implemented in the country. The implementation of HCA during hyperinflation affected the Zimbabwean economy
very negatively. When the failed IAS 29
was implemented in Zimbabwe during hyperinflation, Zimbabwean companies simply
carried on with HCA during the financial year during hyperinflation because the failed IAS 29 requires the restatement of Historical Cost and Current Cost
financial statements during hyperinflation. This continued to affect the Zimbabwean
hyperinflationary economy very
negatively: see its final collapse in 2008.
It
is thus very strange and very worrying that Michael Stewart, a senior director
at the IASB, very firmly indicates that financial
reporting has no effect in the economy.
All views regarding the failed IAS 29 and all other aspects of financial
reporting are welcome and are treated with respect. This is part of the
scientific process. Very wrong indications (I made a few in the past - and learnt
a lot from correcting them) – from whoever - should be quickly acknowledged as
such and corrected. This is for the benefit of advancing with the long-lasting endeavour
of finding the correct solution to
(1) the very negative effects of the Generally Accepted Accounting Practice
of implementing the stable measuring
unit assumption in the measurement of constant real value non-monetary items
in the constant item economy during inflation, deflation and hyperinflation and
(2) the very negative effects of the Generally Accepted Accounting Practice
of implementing the stable measuring
unit assumption in the measurment of monetary items in the monetary economy
during inflation, deflation and hyperinflation.
In this respect, it is to be noted that Capital Maintenance in Units of
Constant Purchasing Power in terms of a Daily Index as authorised in IFRS in 1989 automatically maintains the constant purchasing power of
equity constant for an indefinite period of time at all levels of inflation and
deflation (including during hyperinflation) in all entities that at least break
even in real value – all else being equal. The
stable measuring unit assumption is never implemented under Capital Maintenance in Units of Constant
Purchasing Power.
Defending IAS 29 is defending a failed IFRS: see its implementation in
Zimbabwe.
I strongly support open discussion of all aspects of financial reporting.
I actively promote Capital Maintenance in Units of Constant Purchasing Power
in terms of a Daily Index as authorised in IFRS in 1989 at all levels of
inflation and deflation, including during hyperinflation.
Opinions expressed on this blog are my personal opinions.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday 10 January 2013
In my opinion the IASB has a very irresponsible attitude to the failure of IAS 29
In my opinion the IASB has a very irresponsible
attitude to the failure of IAS 29
In my opinion the
IASB is failing its responsibility to authorise International Financial
Reporting Standards that comply with its own stated objective of general
purpose financial reporting:
The provision
of decision-useful financial information about the reporting entity to capital
providers and other users.
After
I presented an example (available here)
to the IASB that in my opinion clearly illustrates the fact that financial reports prepared
under the failed IAS 29 during hyperinflation are (1) not timely, (2) cannot be compared
to prior year financial statements, (3) are not understandable and (4) always
provide a different accounting result than under Capital Maintenance in Units
of Constant Purchasing Power, Michael Stewart, the Director of Implementation
Activities at the IASB, very firmly indicated that the IASB is satisfied
with the implementation of the - in my opinion - failed IAS 29
Financial Reporting in Hyperinflationary Economies which had no positive effect
during 8 years of implementation during hyperinflation in Zimbabwe.
When
I asked him in a teleconference on 8 January 2013 what the IASB´s response is
to the fact that the implementation of the - in my opinion - failed IAS 29 had - in my opinion - no positive effect during 8 years of
implementation during hyperinflation in Zimbabwe, he indicated very firmly that
financial reporting (accounting) has no effect on the economy – an indication
that is - in my opinion - clearly totally wrong. It is very strange and very worrying - in my opinion - that
a senior director at the IASB makes such an indication. According to him it is
what users do with the information in financial reports that affects the
economy, not the actual measurement activities happening during financial reporting.
Update from Michael Stewart: "In response to comments you made about how you think that CMUCPP would have solved Zimbabwe's hyperinflation problem, I expressed a view about the effect of financial reporting on the economy. As you noted in your blog of 10 January 2013 I expressed a view that it is the actions that people take and the way that they use the information contained in financial reporting that I think can affect an economy, rather than just the financial reporting itself (in retrospect I accept that the language I used could have been more specific to the matter we were discussing, which was about how financial reporting could have solved Zimbabwe's hyperinflation problem)."
Update from Michael Stewart: "In response to comments you made about how you think that CMUCPP would have solved Zimbabwe's hyperinflation problem, I expressed a view about the effect of financial reporting on the economy. As you noted in your blog of 10 January 2013 I expressed a view that it is the actions that people take and the way that they use the information contained in financial reporting that I think can affect an economy, rather than just the financial reporting itself (in retrospect I accept that the language I used could have been more specific to the matter we were discussing, which was about how financial reporting could have solved Zimbabwe's hyperinflation problem)."
When
I pointed out to him that the traditional Historical Cost Accounting model
employs various measurement bases, including the measurement of, for example,
salaries, wages and rentals on an annual basis in units of constant purchasing
power, that this is generally done by accountants worldwide for many decades now and
that this certainly affects the economy, my statement was simply ignored by
Michael Stewart, representing the IASB during the teleconference. He did not
specifically indicate whether or not he understood what I stated. I assumed he
understood what I stated.
In my opinion the IASB finds it difficult to understand the principles, workings,
implementation and effect of IFRS-authorised Capital Maintenance in Units of Constant
Purchasing Power in terms of a URV-based
daily index - authorised in IFRS since 1989. In my opinion the IASB has
difficulty in understanding IFRS-authorised CMUCPP as this was - in my opinion - very evident during my
presentation of a detailed example
to the IASB.
The staff member working with the IASB´s original very simple example, e-mailed me that he could not balance his simple balance sheet “due to lack of my understanding of the CMUCPP model”. I previously answered all his questions regarding the balancing of his low inflation balance sheet. In my opinion, he did not learn even the most basic principles of IFRS-authorised CMUCPP - in my opinion - proven by the fact that he could not even balance his own simple 10 line balance sheet (shown here) implementing IFRS-authorised CMUCPP with his chosen 100% inflation from one year to the next. He sent me his unbalanced balance sheet. I sent him my detailed balanced example with 231 209 127.83 percent actual annual Zimbabwe hyperinflation from annual inflation data supplied by Prof. Steve Hanke in his article On Measuring Zimbabwe´s Hyperinflation.
The staff member working with the IASB´s original very simple example, e-mailed me that he could not balance his simple balance sheet “due to lack of my understanding of the CMUCPP model”. I previously answered all his questions regarding the balancing of his low inflation balance sheet. In my opinion, he did not learn even the most basic principles of IFRS-authorised CMUCPP - in my opinion - proven by the fact that he could not even balance his own simple 10 line balance sheet (shown here) implementing IFRS-authorised CMUCPP with his chosen 100% inflation from one year to the next. He sent me his unbalanced balance sheet. I sent him my detailed balanced example with 231 209 127.83 percent actual annual Zimbabwe hyperinflation from annual inflation data supplied by Prof. Steve Hanke in his article On Measuring Zimbabwe´s Hyperinflation.
In my opinion, I
should have realized the difficulty for IASB staff members to understand the principles
of CMUCPP as authorised in IFRS when I received the first example balance sheet
from the IASB staff member stating that the example compares “both cases”:
IAS 29 and CMUCPP. There was only an IAS 29 balance sheet in the example – as can
be seen in the IASB example. There was no IFRS-authorised CMUCPP balance sheet. That was the IASB
example of “both cases”.
Here
is the original example comparing “both cases”
I received from the IASB. There is only an IAS 29 balance sheet in the example.
Being very pleased and honoured to work with the IASB on the issue, I said
nothing at the time.
Michael
Stewart also simply indicated that I better understand this model. In my opinion, that was his
way of dismissing the problem of them - in my opinion - not being able to understand IFRS-authorised CMUCPP and
- in my opinion - not being responsible enough to learn the principles involved. The IASB staff
members involved in this issue - in my opinion - were unable to learn the principles of IFRS-authorised CMUCPP
and the effect on the economy of implementing those principles. They could not
balance their own simple 10 line balance sheet implementing the basic
principles of IFRS-authorised CMUCPP and their chosen 100% annual inflation.
In my opinion, this
is a very worrying state of affairs when we take into that countries like
Belarus, Venezuela and Iran are currently in hyperinflation and could stabilise
their economies with the implementation of CMUCPP in terms of a URV-based
Daily Index. Belarus and Venezuela now also implement IAS 29 for a number of
years with no positive effect in their economies.
The
implementation of Capital Maintenance in Units of Constant Purchasing in terms
of a URV-based Daily Index would
automatically maintain the constant purchasing power of capital (equity)
constant for an indefinite period of time in all entities that at least break
even in real value – all else being equal – at all levels of inflation and
deflation, including during hyperinflation.
Implementing
IFRS-authorised CMUCPP would stabilise the constant real value non-monetary
economy in a hyperinflationary economy just as it would in all other economies
operating at all other levels of inflation and deflation.
Daily
inflation-indexing of the entire money supply would eliminate the cost of
inflation and the cost of hyperinflation, not actual low inflation and actual
hyperinflation, from the economy.
In my opinion, it
appears that IASB staff members find difficulty in learning about the advantages of
IFRS-authorised CMUCPP and - in my opinion - refuse to acknowledge or - in my opinion - even discuss the specific advantages and
differences when they are presented to them in a detailed
example. In my opinion, the IASB staff members simply ignore the advantages of CMUCPP just as the IASB - in my opinion - simply
ignores the well proven fact that the failed IAS 29 had no positive effect during its
implementation in Zimbabwe´s hyperinflationary economy and that it has no
positive effect where it is currently implemented in Belarus and Venezuela.
In my opinion, this
is a very irresponsible attitude from the IASB taking into account, in
particular, the hardships that are currently being endured by the populations in
hyperinflationary countries and that it can be avoided by the implementation of
Capital Maintenance in Units of Constant Purchasing Power as authorised in IFRS
in 1989.
The term IASB is used in this blogpost as a general term for generally everyone involved in international standard setting activities at the "IASB". I do know and acknowledge that only actual IFRS authorised by the actual International Accounting Standards Board are actual pronouncements of the actual Board.
The term IASB is used in this blogpost as a general term for generally everyone involved in international standard setting activities at the "IASB". I do know and acknowledge that only actual IFRS authorised by the actual International Accounting Standards Board are actual pronouncements of the actual Board.
The opinions stated in this blogpost and all blogposts on this blog are my private opinions. Blogs are generally regarded as expressions of private opinions.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday 9 January 2013
IAS 29 guarantees the erosion of the internal economy during hyperinflation
IAS 29 guarantees the erosion of the
internal economy during hyperinflation
The
implementation of IAS 29 Financial Reporting in Hyperinflationary Economies automatically
causes the internal economy in a hyperinflationary economy to contract as a
result of the fact that it requires the use of the monthly CPI to measure items
that are valued at a daily changing price level. See Hyperinflation examplecomparing IAS 29 and Capital Maintenance in Units of Constant Purchasing Powerwith Zimbabwe data as presented to the IASB on 8 January 2013.
Balance
sheet non-monetary assets and liabilities can be measured at any time at their
fair values. During inflation and hyperinflation, price setters in the free
market automatically adjust variable items´ prices to account for the lower
value of the monetary unit of account. The free market price of a building would automatically be adjusted in
the free market to reflect the change in the real value of the monetary unit of
account over time.
The
stable measuring unit assumption, causing the cost of inflation and the cost of
hyperinflation, effects the real value of monetary items over time. It also effects
the real value of constant real value non-monetary items. Inflation and hyperinflation would
have no cost without the implementation of the stable measuring unit
assumption; i.e., without the implementation of Historical Cost Accounting.
Capital Maintenance in Units of Constant Purchasing Power was authorised in
IFRS in 1989 as an alternative to HCA at all levels of inflation and deflation,
including during hyperinflation. The failed IAS 29 is not required during hyperinflation
when an entity implements CMUCPP because the latter is not a HCA model and only HC and CC financial
statements can be restated in terms of the failed IAS 29.
The
real value of variable real value non-monetary items are thus continuously
adjusted to reflect (1) the change in demand and supply for the item and (2)
the change in the real value of the monetary unit of account; i.e., every time
the general price level changes. When the general price level changes daily,
the price level component of the price is adjusted daily; i.e., every time the
general price level changes which may be more than once a day during severe
hyperinflation.
This
price level adjustment for a variable item´s real value does not have to
accompany every change of the general price level as long as the item is not
being exchanged. The moment it is valued in a period end financial report, the
item´s real value can be stated, it can be fair valued, at the measuring unit
current at the end of the financial period. The fact that it has not been fair
valued during the entire financial year before the period end date (or during a
very long period before), does not effect its real value: the stable measuring
unit assumption has no effect on the real value of non-monetary items.
This
is true for balance sheet constant real value non-monetary items too. For
example, capital can be measured at the measuring unit current at the balance
sheet date. Capital is equal the real value of net assets.
This
happens naturally in a free market for variable real value non-monetary items
where their prices are determined by supply and demand for an item. See the
free market price for quoted shares, commodities and most variable items in the
world economy. For example, the change in the price of oil is indicated by its
daily quotation in the free market.
During
hyperinflation the general price level changes daily at a rate as indicated by
the daily US Dollar free-market exchange rate or a URV based Daily Index. Where a government in a hyperinflationary
economy fixes the country´s exchange rate with the US Dollar, this daily change
in the general price level is indicated by the US Dollar daily parallel or
black market rate.
The
internal economy, internal demand is mostly automatically eroded by the fact
that salaries, wages, rentals, etc. are paid during hyperinflation at a price
level generally behind the actual price level at the time of payment when the
monthly published CPI is used as required by IAS 29. See hyperinflation example
above. The monthly CPI is normally not available at month end. It only becomes
available, generally at the earliest, by the 7th of the following month.
The
implementation of IAS 29 thus guarantees the erosion of the internal economy in
this manner. This can not be stopped under IAS 29 with the use of the monthly
published CPI.
IAS
29 is an inappropriate accounting model.
Capital
Maintenance in Units of Constant Purchasing Power in terms of a daily index as
authorised in IFRS in 1989 at all levels of inflation and deflation, including
during hyperinflation, would automatically maintain the constant purchasing
power of capital (equity) constant for an indefinite period of time in all
entities that at least break even in real value – all else being equal.
It
would also stabilise the constant item economy at all levels of inflation and
deflation, including during hyperinflation.
Inflation-indexing
the entire money suppply on a daily basis with complete co-ordination would
eliminate the total cost of inflation or cost of hyperinflation (not actual inflation
and hyperinflation) from the monetary economy.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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