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.

 

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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)."

 

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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.

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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.

 

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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)."

 

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.

 

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 opinions stated in this blogpost and all blogposts on this blog are my private opinions. Blogs are generally regarded as expressions of private opinions.

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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.

 

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IAS 29 not required with Capital Maintenance in Units of Constant Purchasing Power

IAS 29 not required with Capital Maintenance in Units of Constant Purchasing Power

 

IFRS authorised Financial Capital Maintenance in Units of Constant Purchasing Power at all levels of inflation and deflation – including during hyperinflation - as an alternative to Historical Cost Accounting in the original Framework for the Preparation and Presentation of Financial Statements, Par. 104 (a) in 1989 – now the Conceptual Framework (2010), Par. 4.59 (a) - which states:

 

“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”

 

The Conceptual Framework, Par. 4.59 (a) does not state that it (Par. 4.59 (a)) only applies to low inflationary and deflationary economies. It applies to all levels of inflation and deflation, including during hyperinflation.

 

An entity in a hyperinflationary economy is thus authorised in IFRS to measure financial capital maintenance in units of constant purchasing power; i.e., authorised in IFRS to implement Capital Maintenance in Units of Constant Purchasing Power during hyperinflation.

 

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IASB not to include Capital Maintenance in Units of Constant Purchasing Power difference with IAS 29 in IFRS

IASB not to include Capital Maintenance in Units of Constant Purchasing Power difference with IAS 29 in IFRS

 

 

 

‘ “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 are restated as required in IAS 29.” ‘

 

Communication from the IASB, 2013

 

The issue treated in the above statement is not to be added to IFRS as an IFRIC or an addition to IAS 29 because “the issue is not widespread” as stated by the IASB in a teleconference in December 2012 and again in a second teleconference on 8 January 2013.

 

We are all very thankful that hyperinflation is not widespread in the world economy. That does not mean that we should be satisfied with the fact that the failed IAS 29 has no positive effect during hyperinflation as fully proven during the 8 years that it was implemented in Zimbabwe´s hyperinflation with no positive effect - in the way the IASB indicated that the Board is satisfied with the fact that IAS 29 had no positive effect in Zimbabwe, that nothing needs to be done about it and that it would most probably be maintained in the future replacement of IAS 29: implementing the failed IAS 29 model even at lower levels of inflation as proposed by the Argentinean Accounting Federation.

 

It is correct to depart from Historical Cost Accounting at 10% annual inflation and at 26% cumulative high inflation over three years instead of only at hyperinflation of 100% cumulative inflation over three years as required in IAS 29, but not maintaining the failed IAS 29 model since  “Inflation-adjusted financial statements are an extension to, not a departure from historical cost accounting” as correctly stated by PricewaterhouseCoopers: the failed IAS 29 requires the inflation-adjustment of Historical Cost and Current Cost financial statements during hyperinflation.The implementation of the failed IAS 29 had no positive effect during 8 years of implementation in the Zimbabwe economy.

 

Although the IASB indicated that the above issue would not be included in IFRS because it is not “wide spread”, the future replacement of IAS 29, which deals with financial reporting during hyperinflation – an economic environment which falls in the same not “wide spread” category – is nevertheless being submitted to research by the IASB.

 

The IASB thus, luckily, does not have a consistent basis for deciding what to deal with and what not to deal with in IFRS. The above two issues deal with the same topic.

 

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

IASB satisfied with IAS 29 having no effect during hyperinflation

IASB satisfied with IAS 29 having no positive effect during hyperinflation

 

The IASB is satisfied with the way IAS 29 was implemented during the last 8 years of hyperinflation in Zimbabwe with no positive effect. Nothing needs to be done about that matter according to the IASB. According to the IASB, actual financial reporting (accounting) does not affect the economy! A senior IASB director indicated this in a teleconference on 8 January 2013 in relation to measurement in units of constant purchasing power in terms of an Unidade-Real-de-Valor-based Daily Index as proposed under Capital Maintenance in Units of Constant Purchasing Power as an IFRS-authorised alternative to IAS 29. According to the IASB, it is what users do with financial reports that affects the economy.

 

The above IASB indicated position regarding the fact that the Board is satisfied with IAS 29 having no positive effect during hyperinflation is not a very good sign for the research authorised by the IASB regarding the replacement of the failed IAS 29 standard. It thus appears that the IASB would prefer the Argentinean Federation´s proposal to simply carry on with the failed IAS 29-style restatement of period-end financial statements in terms of the measuring unit current at the end of the reporting period – the monthly published CPI available by the earliest 7 days after the month-end - when actual prices change daily – often at a significant daily percentage - during hyperinflation. This was the failed IAS 29 model used during the last 8 years of hyperinflation in Zimbabwe with no positive effect which the IASB is satisfied with. Hyperinflation ended in Zimbabwe in 2008.

 

An amendment to the Argentinean Federation´s 2010 proposal as a replacement of the failed IAS 29 was submitted to the IASB in January 2012. The amendment is based on and changed the title of the Argentinean Accounting Federation´s proposed new IFRS from IFRS ´X` INFLATION to IFRS ´X´ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER after it was pointed out to the IASB and the Argentinean Accounting Federation that inflation has no effect on the real value of non-monetary items. A copy of the amended IFRS `X´ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER is available here.

 

It now seems that there is a very good chance that the failed fundamental IAS 29 restatement model – that had no positive effect during 8 years of implementation in Zimbabwe´s hyperinflation – would be followed in the future replacement of IAS 29 instead of the real value maintaining IFRS-authorised – but little (not) understood at the IASB - Capital Maintenance in Units of Constant Purchasing Power model.

 

See:

 

Hyperinflationary example comparing IAS 29 and Capital Maintenance in Units of Constant Purchasing Power as presented to the IASB on 8 January 2013.

 

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Hyperinflation example comparing IAS 29 and Capital Maintenance in Units of Constant Purchasing Power

Hyperinflation example comparing IAS 29 and Capital Maintenance in Units of Constant Purchasing Power.

As presented to the IASB on 8 January 2013.

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.