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.
