IAS 29 requires Capital Maintenance in Units of Constant Purchasing Power during hyperinflation

IAS 29 requires Capital Maintenance in Units of Constant Purchasing Power during hyperinflation

Updated on 18-04-2013

Capital is required to create wealth. Sustainable wealth creation is the sustainable profitable application of real (not nominal during inflation and deflation) capital: the constant purchasing power of capital. Capital is generally saved up wealth or borrowed financial resources at a financial cost.

Capital needs to be separate from the human owners of capital. It is not reasonable to expect people to risk losing their homes by starting a company.

A legal company structure is thus required plus a double-entry accounting model.

A perfectly stable unit of account is required for double-entry accounting. All generally accepted units of measure, e.g. inch, centimetre, pound, gram, etc., are perfectly constant values. There is no perfectly stable nominal monetary unit of account. A Daily Consumer Price Index is thus required to implement Capital Maintenance in Units of Constant Purchasing Power as authorized in IFRS by measuring constant real value non-monetary items in units of constant purchasing power in terms of a daily index during inflation and deflation.

Capital is a constant real value non-monetary item. The constant purchasing power (real value) of capital has to be maintained constant over time during inflation/high inflation/hyperinflation and deflation. A Capital Maintenance in Units of Constant Purchasing Power accounting model (CIPPA) is thus required.

The above is the ideal (correct/logical) method of creating wealth during low inflation, high inflation, hyperinflation and deflation.

A reasonable person would apply the above method of creating wealth even if it is not authorized or required under IFRS.

Capital Maintenance in Units of Constant Purchasing Power was authorized at all levels of inflation and deflation, including during hyperinflation, in IFRS in the original Framework (1989), Par. 104 (a) [not 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.’

Capital Maintenance in Units of Constant Purchasing Power is not required in terms of IFRS during low inflation, high inflation or deflation. It is optional to the 3000 year old, globally implemented, general accepted, traditional Historical Cost Accounting model (financial capital maintenance in nominal monetary units) during low inflation, high inflation and deflation. Capital Maintenance in Units of Constant Purchasing Power is, however, specifically required during hyperinflation. IAS 29 Financial Reporting in Hyperinflationary Economies requires the "restatement" of Historical Cost or Current Cost period-end financial statements in terms of the period-end monthly published CPI. IAS 29 gives specific guidance regarding Capital Maintenance in Units of Constant Purchasing Power: (i) it defines monetary items; (ii) it defines non-monetary items; (iii) it states how to measure capital maintenance in units of constant purchasing power, namely, by "restating" HC or CC period-end financial statements in terms of the measuring unit current at the balance sheet date.

But, IAS 29, although it requires Capital Maintenance in Units of Constant Purchasing Power during hyperinflation, unfortunately does not result in complete (or 100%) capital maintenance in units of constant purchasing power because it is generally accepted (2013) to use the monthly published CPI instead of the generally available Daily CPI (most countries in the world issue government capital inflation-indexed bonds which are priced on a daily basis using country specific Daily CPI´s based on the monthly published CPI). Current year profits are thus eroded/destroyed because of the use of the monthly CPI instead of the generally available Daily CPI when IAS 29 is implemented using the monthly CPI. A month can have 28 to 31 different daily price levels, or even more from about 3000 per cent per annum inflation and above. It is mistakenly generally accepted under current implementation practises of IAS 29, to use the CPI at the month end instead of 28 to 31 different generally available Daily CPI values to maintain current year profit. Current year profit is thus not fully maintained in this manner. A portion is eroded/destroyed using IAS 29  in terms of a monthly published CPI during hyperinflation. It is also a well-proven and undeniable fact that the implemetation of IAS 29 can also have absolutely no positive effect during hyperinflation. This was undeniably proven during hyperinflation in Zimbabwe. Zimbabwe´s economy imploded on 20 November 2008 after 8 years of full implementation of IAS 29. Thus, beware of IAS 29 in terms of the monthly CPI during hyperinflation.

PricewaterhouseCoopers states the following regarding the use of the HCA model during hyperinflation:

‘Inflation–adjusted financial statements are an extension to, not a departure from, historical cost accounting.’

Financial Reporting in Hyperinflationary Economies –Understanding IAS 29, PricewaterhouseCoopers, May 2006, p 5.

Inflation has no effect on non-monetary items. Only monetary items in financial statements can be inflation-adjusted. PricewaterhouseCoopers, other Big Four audit firms, the IASB and most historical cost accountants do not understand the concept of Capital Maintenance in Units of Constant Purchasing Power as defined in the Conceptual Framework, Par 4.59 (a) and guide-lined in IAS 29.

What PricewaterhouseCoopers wanted to state was that "Period-end Historical Cost or Current Cost 'financial statements' with non-monetary items restated in units of constant purchasing power, 'are an extension to, not a departure from, historical cost accounting.’ Reporting year financial statements are never inflation-adjusted because it is impossible to inflation-adjust non-monetary items and monetary items in reporting year financial statements are not inflation-adjusted: what happens is the net monetary loss or gain is accounted while monetary items are measured in nominal monetary units. PricewaterhouseCoopers does not understand CMUCPP as authorized in IFRS and guide-lined in IAS 29.

A standard takes precedence over the Framework according to IAS 8, Par. 11. CMUCPP as guide-lined in IAS 29 thus applies during hyperinflation: thus, Capital Maintenance in Units of Constant Purchasing Power is required in IFRS during hyperinflation.

Financial capital maintenance in nominal monetary units (HCA) is a fallacy: it is impossible to maintain the real value of capital in nominal monetary units during inflation per se. It is only possible in the single case where an entity always invests 100 per cent of all contributions to shareholders´ equity in revaluable fixed assets (revalued or not) with an equivalent updated fair value which is most probably only the case with hotel, hospital and other property-intensive entities.

Every company in the world implementing IFRS can now change over to Capital Maintenance in Units of Constant Purchasing Power (CIPPA). Entities in economies subject to hyperinflation implementing IAS 29 already implement an incomplete version of CMUCPP. See IFRS 'X' Capital Maintenance in Units of Constant Purchasing Power. Zimbabwean listed companies implemented IAS 29 Financial Reporting in Hyperinflationary Economies during the last eight years of hyperinflation in that country. The implementation of IAS 29 in Zimbabwe made absolutely no difference.

Capital maintenance in units of constant purchasing power automatically maintains the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation (including during hyperinflation) - ceteris paribus - whether they own any revaluable fixed assets or not.

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

ECB should make unlimited credit available to PIGS as requested by Spain

ECB should make unlimited credit (see current US and Japan policies) available to PIGS as finally requested by Spain (see Bloomberg article below). In Portugal, no-one in the government or at the Bank of Portugal or in the financial press or at economics departments at Portuguese universities even knows what quantitative easing is. No-one in Portugal even mentions the subject.

PIGS´ politicians mistakenly signed away national Central Banks'  sovereign power to stimulate the economy with free money (like the US and Japan are doing right now) to the ECB for 20 years (or more) of recession and stagnation imposed by austerity. An initial lost decade after entrance into the EMU is now becoming a lost generation(s?) because the political class failed their nations.

Central Banks at Ease Limit Risk Political Backlash

Bloomberg
 

By Craig Torres & Simon Kennedy - Apr 16, 2013 9:26 AM GMT+0100

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Central banks are setting new expectations for monetary policy that may be hard to reverse as they slide deeper into the realms of fiscal policy.
To save their economies from debt crises or slow growth, the Bank of Japan is uniting with a new government by aiming to lift inflation to 2 percent by 2015, and the European Central Bank stands ready to purchase bonds of stressed nations. The Bank of England now has more room to ignore price pressures and is discussing with politicians how to ease credit further, while the Federal Reserve has extended more than $1 trillion worth of unprecedented credit to a single industry: housing.

Enlarge image

BOJ Governor Haruhiko Kuroda

Tomohiro Ohsumi/Bloomberg

Haruhiko Kuroda, governor of the Bank of Japan (BOJ), attends the annual meeting of the Trust Companies Association of Japan in Tokyo on April 15, 2013.

Haruhiko Kuroda, governor of the Bank of Japan (BOJ), attends the annual meeting of the Trust Companies Association of Japan in Tokyo on April 15, 2013. Photographer: Tomohiro Ohsumi/Bloomberg

13:21

March 27 (Bloomberg) -- Axel Weber, chairman of UBS AG, talks about the outlook for the company's wealth management business, capital controls in Cyprus and equity markets. He speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

1:28:43

March 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke speaks about central bank monetary policies and global exchange rates. Bank of England Governor Mervyn King, UBS AG Chairman Axel Weber, former U.S. Treasury Secretary Lawrence Summers and International Monetary Fund chief economist Olivier Blanchard also speak at the London School of Economics. (Source: Bloomberg)

3:25

April 4 (Bloomberg) -- European Central Bank President Mario Draghi talks about the decision to leave the benchmark interest rate at 0.75 percent, the euro-zone economy and the financial crisis in Cyprus. Draghi, speaking in Frankfurt at his monthly news conference, also discusses inflation expectations. (Excerpts. Source: Bloomberg/European Central Bank)

The defense for activism is that monetary authorities need to protect their inflation goals from the possibility of Japan-style disinflation if governments don’t boost demand. The risk is they’re left doing the work of those governments -- or even financing them, creating precedents they may be pressured to extend or repeat in the future.
“Central banks have to be very careful in what they’re doing,” Axel Weber, chairman of UBS AG, told Bloomberg Television on March 27. “There is a challenge that their independence may be undermined simply because they’re getting closer to fiscal policy and politics.”
Weber resigned as president of the Bundesbank in 2011 partly because of his opposition to the ECB’s purchase of sovereign assets.

‘Unprecedented Intervention’

The role of central banks will be front and center in Washington this week when officials gather for the spring meetings of the International Monetary Fund. Maintaining independence is key to controlling inflation expectations, the IMF said April 9, and in an April 11 report, it urged authorities to remain vigilant to negative side effects from what it called their “unprecedented intervention.”
“Central banks are now doing something that if you asked 10 or 15 years ago whether they should, people would have said emphatically not,” said Alistair Darling, the U.K.’s chancellor of the exchequer from 2007 to 2010. “They are not targeting inflation any more, they are targeting growth.”
The shift has been accelerating since the outbreak of the global financial crisis in 2008 and marks a rejection of the rigid monetary orthodoxy that made low inflation a primary objective for central banks.

Greater Responsibility

In the U.K., Japan, euro-area countries including France and Spain, and at least among Democrats in the U.S., politicians are looking to central banks to take greater responsibility for the health of their economies because fiscal policy is constrained and dragging on expansions.
The Fed’s $85 billion in monthly bond buying is leaning against fiscal tightening. The U.S. Congressional Budget Office estimates that federal outlays will fall to 21.5 percent of gross domestic product by 2017 from 22.8 percent last year and 25.2 percent in 2009.
According to research by Tom Lam, chief economist at DMG & Partners Securities in Singapore, for every one percentage-point rise in the projected ratio between the U.S. budget deficit and gross domestic product, yields on U.S. 10-year notes rise 24 basis points. The yield was 1.68 percent at 5 p.m. on April 15 in New York, according to Bloomberg Bond Trader prices.
“It is politicians who abdicated their responsibility for dealing with a whole host of regulatory and fiscal issues that put central banks in this situation,” said Michael Hanson, senior U.S. economist at Bank of America Merrill Lynch in New York, and a former Fed staffer. They “have gone far beyond what most people thought their role was.”

Reduced Yield

The 1997 decision to hand the Bank of England independence may have reduced the extra yield investors demand for inflation risk by as much as 150 basis points as measured by long-dated breakeven rates, estimates Philip Rush, an economist at Nomura International Plc. in London. The U.K. 10-year breakeven rate, an index of inflation expectations, traded last week at thehighest level in more than 4 1/2 years.
Not all central banks have drifted from their mandates. The Bank of Canada maintained its focus on inflation throughout the crisis period and began raising interest rates in June 2010, saying it its actions were “consistent with achieving the 2 percent inflation target.”
The Reserve Bank of Australia cut its benchmark rate to a half-century low during the crisis, then raised it to a developed-world high of 4.75 percent in 2010 to contain inflation as the biggest resource-investment expansion in more than a century spurred hiring.

Cooperation Groundwork

Fed Chairman Ben S. Bernanke laid the groundwork for active fiscal-monetary cooperation in May 2003. In a speech on Japanese monetary policy, he said the government could cut taxes for households and businesses and the Bank of Japan could buy government debt, in effect financing the deficit. Or the Bank of Japan could buy government debt to finance “industrial restructuring.”
“It is important to recognize that the role of an independent central bank is different in inflationary and deflationary environments,” Bernanke said. In times of deflation, “a more cooperative stance on the part of the central bank may be called for.”
He didn’t describe in the speech how the central bank would re-establish its independence relative to the politically controlled fiscal authority once the crisis ended.

Possible Backlash

Now, central banks’ more explicit targeting of economic growth or segments of financial markets could produce a backlash. Legislatures could take a greater interest in monetary-policy decision making or ask central banks for even more direct support of industries or federal programs. Republicans in the U.S. have continuously championed an audit of U.S. monetary policy, making it a plank in their 2012 presidential platform.
Also, larger balance sheets take on interest-rate and credit risks that might reduce payments to taxpayers as central banks sell these assets when interest rates rise. They typically return profits they make on their portfolios to their national treasuries, supplementing government revenue.
Some members of the U.S. Federal Open Market Committee have been “concerned that a substantial decline in remittances might lead to an adverse public reaction or potentially undermine Federal Reserve credibility,” according to the minutes of the March 19-20 meeting released April 10.

Potential Hazard

The Bank of England in November said it would transfer about 35 billion pounds ($54 billion) in income to the Treasury from gilts it had bought. The potential hazard is a loss when interest rates gain, requiring money to flow in the opposite direction. A study by the U.K. central bank last month estimated the purchases could end up costing taxpayers 8 billion pounds.
Central banks also may obscure the cost of fiscal imbalances by keeping long-term interest rates low, reducing pressure on politicians to regain budgetary control. Even some Fed supporters in Congress lament the extremes monetary policy has taken because of the lack of better fiscal policy.
Political systems too often “just default to the central bank” because it becomes tough to make hard fiscal choices, Senator Mark Warner, a Virginia Democrat, said in an interview March 21. “At the end of the day, we should be making the hard choices, not the central bankers.”

Economic Ailments

Central bankers aren’t blind to the risks and regularly warn that monetary policy alone cannot fix economic ailments.
“I am not surprised by the questions that have arisen about our independence and, around the globe, about the governance arrangements around central banks,” Richmond Federal Reserve Bank President Jeffrey Lacker said in response to a question from Bloomberg News April 9. “The scale and scope of our intervention in 2008 went well beyond what people expected.”
Lacker opposes the Fed’s purchases of mortgage-backed securities because the program targets monetary policy toward a single industry.
Some central banks may find themselves with little option but to keep pulling the monetary levers or risk deeper economic pain. Not acting also could risk the credibility of banks including the Fed and Bank of Japan.
The Fed has an explicit mandate from Congress to achieve“maximum employment” as well as price stability. The jobless rate was 7.6 percent in March, above the 5.2 percent to 6 percent rate Fed officials estimate represents full use of labor resources.

‘Three Arrows’

The Japanese central bank is working closely with the government after Prime Minister Shinzo Abe won power in December, counting monetary stimulus with fiscal spending and deregulation as the “three arrows” aimed at reversing 15 years of falling prices.
Abe nominated Haruhiko Kuroda to replace Masaaki Shirakawa as governor, and the bank said on April 4 that it will double monthly bond purchases to 7.5 trillion yen ($78 billion) with the aim of doubling the country’s monetary base and achieving 2 percent inflation within two years. This will mean buying the equivalent of 70 percent of the government’s new bond issuances each month. Abe says changing the law governing the central bank is an option, signaling he could remove its freedom to set the policy target if it fails to revive the economy.
“The cooperation to conquer deflation between the government and the BOJ has never been stronger,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo and a former BOJ official. “The Japanese public are frustrated with the state of Japan’s economy. In that sense, the BOJ doesn’t have independence any more.”

Bundesbank Offshoot

The ECB, initially viewed by the euro’s founders as an offshoot of Germany’s proudly independent Bundesbank, also is fueling tension over how far it’s willing to help governments battle a debt crisis that has just taken Cyprus as its latest victim.
Having already bought government bonds to soothe markets, made unlimited long-term loans to banks and diluted the quality of acceptable collateral, President Mario Draghi last year crafted the Outright Monetary Transactions program, which allows the ECB to buy the bonds of nations that agree to austerity and to revamp their economies. He says doing so would help unblock bottlenecks that prevent the central bank’s easy-money stance from filtering equally through the 17-nation region.

Printing Money

As yet untapped, it has been opposed by Bundesbank President Jens Weidmann on the grounds that it’s tantamount to printing money to finance governments, which the ECB’s founding treaty prohibits. Underscoring German disdain, former ECB board member Juergen Stark, who quit in 2011 in protest at the first round of bond buying, dubs the strategy “Out of Mandate Transactions.”
“The ECB has made an amazing power grab on fiscal policy,” said Tim Duy, an economist at the University of Oregon in Eugene who writes a blog on monetary policy. “To what extent does this political intrusion prevent them from doing their job in the future?”
The independence dilemma may be greater for the ECB than its counterparts because “there is more incentive for an individual country to push risk on to the central bank, since that way it spreads the risk away from the country itself to the euro area as a whole,” said Huw Pill, chief European economist at Goldman Sachs Group Inc. and a former ECB official.

At Odds

Some politicians already want more. Spanish Prime MinisterMariano Rajoy last week called on the ECB to match the quantitative easing of the U.S. and Japan. French PresidentFrancois Hollande has leaned on the ECB to do more to weaken the euro.
The government and central bank of Cyprus also are at odds over whether to sell the nation’s gold. Bundesbank board member Andreas Dombret warned in today’s Handelsblatt newspaper against politicizing central banks by handing them sole responsibility in areas requiring democratic legitimacy such as financial market supervision.
The fiscal and monetary authorities of the U.K. also may be blurring lines amid the risk of a third recession since 2008. The central bank already has tolerated inflation above its 2 percent target every month since November 2009 and has 375 billion-pound quantitative-easing program.
The ties may nevertheless be getting stronger as the economy stays weak. Calling “monetary activism” a necessary part of the government’s economic strategy, Chancellor of the Exchequer George Osborne last month made the bank’s mission statement more flexible and told it to explore Fed-style policy guidance to enhance stimulus after Mark Carney becomes governor in July.
The Fed in December tied changes in its benchmark lending rate directly to economic indicators for employment and inflation for the first time.

‘Actively Considering’

Osborne also said government and central-bank officials are“actively considering” extending the Funding for Lending Scheme they united to start last year. The goal is to boost the provision of credit by lowering funding costs for financial companies.
“There does seem to be an element of politicization” in the programs, said Robert Wood, chief U.K. economist at Berenberg Bank in London and a former Bank of England official.“But for the moment it’s not pushing policy where it shouldn’t be because the economy does need stimulus.”
The upshot is that the world economy is in a period when central banks are willing to restrain the cost of servicing government and household debt for fear of derailing economies if they don’t, said Joachim Fels, co-global head of economics at Morgan Stanley in London.
“Central bank independence is history,” he said.

Bloomberg

Understanding IAS 29 per PricewaterhouseCoopers: Corrections 16: Financial statements prepared under IAS 29 can be very (even completely) unreliable and irrelevant depending on the level of hyperinflation

Understanding IAS 29 per PricewaterhouseCoopers: Corrections 16: Financial statements prepared under IAS 29 can be very (even completely) unreliable and irrelevant depending on the level of hyperinflation

‘Benefits of purchasing power adjusted financial statements

Financial statements that are expressed under IAS 29 in a measuring unit that is current at the balance sheet date provide several benefits:

• They enable management to make more reliable decisions on capital expenditure plans, as the financial statements are more relevant;’

PricewaterhouseCoopers Understanding IAS 29 2006 p4

Correction 16

Financial statements that are expressed under IAS 29 in a measuring unit that is current at the balance sheet date based on using the monthly published CPI result in the erosion/destruction of a part of the real value of current year profits. They thus impede management in making reliable decisions on capital expenditure plans, as the financial statements do not demonstrate this fact and are thus not fully relevant. They were completely irrelevant and completely unreliable during the 8 years that IAS 29 was implemented during hyperinflation in Zimbabwe. The Zimbabwe economy imploded on 20 November 2008 with full implementation of IAS 29. Thus beware of IAS 29 in terms of the monthly published CPI during hyperinflation.

Only implementing IAS 29 in terms of the Daily CPI will correctly result in capital maintenance in units of constant purchasing power (a departure from HCA) during hyperinflation. Brazil did that, without IAS 29, for 30 years from 1964 to 1994 with governments supplied daily indices based almost entirely on the US Dollar daily exchange rate with their currency.

Both PricewaterhouseCoopers and the IASB simply ignore what was so successfully done during 30 years of very high and hyperinflation of up to 2000 per cent per annum in Brazil because PwC and the IASB do not understand the concept of capital maintenance in units of constant purchasing power as authorized in IFRS in 1989. They blindly believe in the incorrect and misleading “restatement” model as they advise their clients incorrectly and misleadingly.

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Daily indexation has three applications

Daily indexation has three applications

1.      The Daily CPI is used in the form of a 4, 3, 2 or 1 month lagged daily interpolated daily index based on the monthly CPI based on similar formulae used to price government capital inflation-indexed bonds on a daily basis in this USD 3.5 trillion global market. This is done in most countries in the world. Most countries in the world thus already publish a Daily CPI. The US uses the Daily Reference CPI-U.

2.      The  Daily CPI is being suggested to the IASB in IFRS ´X´ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER to be used to correctly implement Capital Maintenance in Units of Constant Purchasing Power as already authorized in IFRS in terms of a Daily CPI in the future replacement of IAS 29 Financial Reporting in Hyperinflationary Economies. This application is the use of the Daily CPI with capital maintenance in units of constant purchasing power to replace the stable measuring unit assumption, i.e., to replace (depart from) Historical Cost Accounting.

3.      Daily indices were used in the form of government supplied daily indices as “correcção monetaria” or monetary correction in mainly Latin American countries during generally very high and hyperinflationary periods from the 1960´s to 2010. Correcção monetary or monetary correction was stopped in Chile in 2010 in order to conform with IFRS which are almost 100 per cent Historical Cost Accounting based. The Brazilian Unidade Real de Valor (URV) was one of these very successful Daily Indices used in Latin America. Others are the currently used Unidad de Fomento in Chile and the currently used Real Value Unit in Colombia. The latter is used to index all mortgages in Colombia on a daily basis. Latin American countries did not see daily indexing as simply an accounting model (which it, in fact, is), but as monetary correction as they inflation-indexed some, not all, monetary items as well as all non-monetary items. This was done very successfully during 30 years in Brazil under different governments and with different daily indices without the implementation of IAS 29. This was not done during 14 years of hyperinflation in Zimbabwe with the last 8 years with full implementation of IAS 29 and the Zimbabwe economy imploded on 20 November 2008 - with full implementation of IAS 29. 

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Understanding IAS 29 per PricewaterhouseCoopers: Corrections 14 and 15: Daily indexing is required

Understanding IAS 29 per PricewaterhouseCoopers: Corrections 14 and 15: Daily indexing is required

‘Benefits of purchasing power adjusted financial statements

Financial statements that are expressed under IAS 29 in a measuring unit that is current at the balance sheet date provide several benefits:

• They provide management, shareholders and other users with comparable information from period to period, relating to the underlying results of operations, capital maintenance and trends in performance;’

PricewaterhouseCoopers Understanding IAS 29 2006 p4

Correction 14

Under IAS 29 in terms of the monthly published CPI (the way PricewaterhouseCoopers advises its clients to implement IAS 29), a part of the real value of the underlying profit made during the current year is eroded/destroyed. IAS 29 in terms of the monthly CPI does not provide this information. IAS 29 in terms of the monthly CPI causes this to happen as PricewaterhouseCoopers advises its clients.

IAS 29 in terms of the Daily CPI maintains 100 per cent of the real value of trading profit made during the current year. PricewaterhouseCoopers does not advise clients to use the Daily CPI because PricewaterhouseCoopers does not understand that IAS 29 is not about making financial statements more meaning full via “restatement”, but about capital maintenance in units of constant purchasing power during hyperinflation as authorized in IFRS. PricewaterhouseCoopers does not understand the concept of capital maintenance in units of constant purchasing power as authorized in IFRS. PricewaterhouseCoopers still believes that the “restatement” of financial statements as it advises its clients to do will maintain the real value of capital constant.

Corrections 15

From Correction 14 it is clear that the real value of capital is not maintained under IAS 29 in terms of the monthly CPI. The way PricewaterhouseCoopers advises its clients to implement IAS 29 causes them to erode/destroy a part of the real value of their capital.

It is a very well-known fact that IAS 29 was implemented during the last eight years of hyperinflation in Zimbabwe with absolutely no positive effect: Zimbabwe´s economy imploded on 20 November 2008 with full implementation of IAS 29.

Brazil implemented daily indexation of all non-monetary and some monetary items during 30 years (1964 to 1994) of very high and hyperinflation in terms of a government supplied daily index almost entirely based on the daily US Dollar exchange rate. Daily indexation is not a new idea.

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Don't get bitten by Bitcoins

Don't get bitten by Bitcoins

Gold, Long a Secure Investment, Loses Its Luster

Gold, Long a Secure Investment, Loses Its Luster

Understanding IAS 29 per PricewaterhouseCoopers: Correction 12 and 13: PricewaterhouseCoopers clueless about Capital Maintenance in Units of Constant Purchasing Power

Understanding IAS 29 per PricewaterhouseCoopers: Correction 12 and 13: PricewaterhouseCoopers clueless about Capital Maintenance in Units of Constant Purchasing Power

‘Benefits of purchasing power adjusted financial statements.’

PricewaterhouseCoopers Understanding IAS 29 2006 p4

Correction

What PricewaterhouseCoopers should have stated:

Benefits of Capital Maintenance in Units of Constant Purchasing Power during hyperinflation.

Correction 13

‘Financial statements that are expressed under IAS 29 in a measuring unit that is current at the balance sheet date provide several benefits:’

PricewaterhouseCoopers Understanding IAS 29 2006 p4

PricewaterhouseCoopers and the IASB do not understand that IAS 29 is a failed attempt at implementing Capital Maintenance in Units of Constant Purchasing Power during hyperinflation because

(1)   they do not understand the concept of financial capital maintenance in units of constant purchasing power

(proof: they do not understand

(a) that (and why) a daily index instead of a monthly published index needs to be used and

(b) they do not understand that the IFRS-authorized statement in the Conceptual Framework (2010), Par. 4.59 (a) that ‘Financial capital maintenance can be measured in units of constant purchasing power’ means that non-monetary items are split in two: variable real value non-monetary items and constant real value non-monetary items)

(2) they mistakenly believe that by simply “restating” HC or CC financial statements in a measuring unit that is current at the balance sheet date will stop making these financial statements misleading since that is what they believe is the objective of IAS 29.  They are duped by their blind believe in the meaningless “restatement” dogma. They are clueless about Capital Maintenance in Units of Constant Purchasing Power authorized in IFRS in 1989.

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

North Korean economy is a Dollarized economy?

CNN

The DPRK's official currency is the North Korean won, but Jang said everything in North Korea was pegged on the U.S. dollar, including the black market economy. The won was effectively "like toilet paper" he said and because all business was done using dollars the currency was used by people to barter even at the lowest levels of North Korean society.

Pyongyang had tried to revalue the currency but because everyone used U.S. dollars to trade, the dollar consistently went up and the won continued to fall in value, he said.

Hoare said euros were increasingly being used in some areas because North Koreans were worried the U.S. would somehow cut off dollars. Foreign currency flowed into North Korea in a number of ways including cross border trade with China and visiting foreigners, he said. All embassies also had to operate in foreign currency.

"We were not supposed to handle North Korean money. So it's pretty widespread. If you go into a hotel or restaurant prices are in foreign currency rather than Korean won,"

Understanding IAS 29 per PricewaterhouseCoopers: Correction 11: Monetary amounts per se (meaning all values in the economy) are not expressed in terms of a relatively stable foreign currency.

Understanding IAS 29 per PricewaterhouseCoopers: Correction 11: Monetary amounts per se (meaning all values in the economy) are not expressed in terms of a relatively stable foreign currency.

‘Monetary amounts are expressed in terms of a relatively stable foreign currency.’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

Correction

 All monetary amounts per se (meaning all values in the economy) are not expressed in terms of a relatively stable foreign currency.

All local currency monetary items (local currency bank values, bank statements, cheques, local currency loans, etc.) are not expressed in terms of a relatively stable foreign currency. They are expressed in local currency values.

Most variable real value non-monetary items are expressed in terms of a relatively stable foreign currency.

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Understanding IAS 29 per PricewaterhouseCoopers: Correction 10: People do not accumulate wealth in a stable foreign currency during hyperinflation

Understanding IAS 29 per PricewaterhouseCoopers: Correction 10: People do not accumulate wealth in a stable foreign currency during hyperinflation

‘Characteristics of hyperinflation

There is no absolute definition of hyperinflation. The characteristics identified in IAS 29 are as follows:

• People accumulate wealth in non-monetary assets or in a stable foreign currency;’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

Correction

Generally people do not accumulate wealth in a stable foreign currency. It is often forbidden and a crime to accumulate wealth in a stable foreign currency in a country with hyperinflation.

If what PricewaterhouseCoopers state above was true, then it would be no problem dealing with hyperinflation in a hyperinflationary country. Often the single biggest problem in a hyperinflationary country is that it is a crime to trade in and to hold especially the US Dollar.

It would be relatively easy to solve the monetary problem of hyperinflation if it were always legal to hold and freely trade in especially the US Dollar in hyperinflationary countries. All people would have to do would be to buy US Dollars every end of the day with excess local currency.

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Understanding IAS 29 per PricewaterhouseCoopers: Correction 9: IAS 29 aims to implement Capital Maintenance in Units of Constant Purchasing Power

Understanding IAS 29 per PricewaterhouseCoopers: Correction 9: IAS 29 aims to implement Capital Maintenance in Units of Constant Purchasing Power

‘IAS 29 aims to overcome the limitations of historical cost financial reporting in hyperinflationary environments.’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

Correction

IAS 29 does not aim to overcome the limitations of historical cost financial reporting in hyperinflationary environments. IAS 29 aims to replace financial capital maintenance in nominal monetary units (HCA) during hyperinflation with capital maintenance in units of constant purchasing power during hyperinflation.

IAS 29 unfortunately does not succeed in this aim because it is generally implemented in terms of the monthly published CPI. The price level changes at least from 28 to 31 times per month (or even more often, generally above 3000 per cent inflation per annum). However, IAS 29 is currently being implemented using one single price level change: the month end CPI.

This means that a part of the real value of current year profits and a part of the real value of non-monetary receivables treated as monetary items are eroded (destroyed) in this fashion under IAS 29.

IAS 29 can also have absolutely no positive effect in an economy during hyperinflation. IAS 29 had absolutely no positive effect during the last eight years in Zimbabwe´s hyperinflation. Zimbabwe´s economy imploded on 20 November 2008 with the full implementation of IAS 29.

It is quite easy to stop this from happening: simply copy what Brazil did during 30 years from 1964 to 1994. Brazil updated some monetary items and all non-monetary items daily in terms of a government supplied daily index during those 30 years of very high and hyperinflation.

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Understanding IAS 29 per PricewaterhouseCoopers: Correction 8: Companies implementing IAS 29 have departed from Historical Cost Accounting

Understanding IAS 29 per PricewaterhouseCoopers: Correction 8: Companies implementing IAS 29 have departed from Historical Cost Accounting

‘Inflation-adjusted financial statements are an extension to, not a departure from, historical cost accounting.’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

Correction

Reporting period financial statements are never inflation-adjusted. Only monetary items can be inflation-adjusted. Monetary items are never inflation-adjusted in reporting period financial statements. What happens under IAS 29 is that the net monetary loss or gain is recorded and non-monetary items are measured in units of constant purchasing power in terms of the monthly CPI. Reporting period financial statements are never inflation-adjusted under IAS 29 – no matter what PricewaterhouseCoopers states.

What PricewaterhouseCoopers wanted to state is the following:

Financial statements ‘restated’ in terms of IAS 29 are an extension to, not a departure from, historical cost accounting.

PricewaterhouseCoopers is correct - when the firm´s statement above is corrected – as far as the way in which IAS 29 is being implemented under the guidance of Big Four audit firms. Companies implementing IAS 29 – under their guidance – carry on implementing the Historical Cost Accounting model during hyperinflation as required by IAS 29: IAS 29 states that either Historical Cost or Current Cost financial statements have to be ‘restated’ in terms of the guidelines in IAS 29.

This is what is supposed to happen under IAS 29 when it is implemented correctly (no-one is doing it this way - at the moment).

The first year that IAS 29 is being implemented, a company is obviously implementing HCA or CCA. IAS 29 requires the company to implement the measures guide-lined in the Standard as from the start of the year in which it detects hyperinflation in the economy. The company departs from HCA when it starts implementing IAS 29: it changes its capital maintenance concept from financial capital maintenance in nominal monetary units (HCA) to financial capital maintenance in units of constant purchasing power. It stops doing HCA. It stops implementing the stable measuring unit assumption.

However, it has a problem: IAS 29 and all IFRS are seen by the IASB, Big Four audit firms, national accounting standard and other accounting authorities and most Historical Cost accountants as the Ten Commandments of Accounting: The letter of IAS 29 has to be followed. So, IAS 29 requires Historical Cost or Current Cost financial statements to be ‘restated’ in terms of the measuring unit current at the end of the reporting period.

A company implementing IAS 29 has however departed from HCA the moment it started implementing IAS 29. Now what? From the second year on, it is not complying with IAS 29, because it has departed from HCA: it does not implement HCA anymore.

Fortunately, this problem is very easy to overcome: All accounting items are recorded at their original or historical values (costs). So, it is very easy to satisfy the requirement of IAS 29 to ‘restate’ Historical Cost financial statements: simply run a set of HC financial statements from the original data and IAS 29 is complied with. A company can always print a set of HC financial statements for the sole reason of complying with IAS 29. The HC financial statements would serve no other purpose: they are completely meaningless during hyperinflation, but, IAS 29 requires them. So, they are printed simply to satisfy the requirement in IAS 29.

A company, in fact, departed from HCA in the first year it adopted IAS 29.

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Understanding IAS 29 per PricewaterhouseCoopers: Correction 7: PricewaterhouseCoopers does not understand IAS 29

Understanding IAS 29 per PricewaterhouseCoopers: Correction 7: PricewaterhouseCoopers does not understand IAS 29

Because IAS 29 incorrectly and misleadingly states in Par 2 that

‘Money loses purchasing power at such a rate that comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading.’

PricewaterhouseCoopers misleadingly and incorrectly states

‘Significant changes in the purchasing power of money mean that financial statements unadjusted for inflation are likely to be misleading. Amounts are not comparable between periods, and the gain or loss in general purchasing power that arises in the reporting period is not recorded. Financial statements unadjusted for inflation do not properly reflect the company’s position at the balance sheet date, the results of its operations or cash flows.’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

Neither the IASB nor PricewaterhouseCoopers understands IAS 29.

 Implementing Historical Cost Accounting during hyperinflation is suicidal for a company and a country (see Zimbabwe in 2008 and Yugoslavia before that), not because financial statements are misleading, but because

1.      The real value of only monetary items are hyper-destroyed by hyperinflation (hyper-inflate your economy long enough and you can wipe out the real value of your entire money supply: see Zimbabwe on 20 November 2008 and Yugoslavia three times during four months before that) and

2.      The constant real non-monetary value of only constant real value non-monetary items never maintained constant in terms of units of constant purchasing power in terms of the Daily CPI or daily USD (or other relatively stable foreign currency) parallel rate are hyper-destroyed by, not inflation as the IASB, PricewaterhouseCoopers, other Big Four audit firms, the Argentinian Accounting Federation, the Brazilian accounting authorities, the Chilean Accounting Authorities and most Historical Cost accountants believe, but, by the implementation of the stable measuring unit assumption, i.e., by the implementation of HCA during hyperinflation.

What is stated in the 1 and 2 above is what happens during hyperinflation and what IAS 29 is unsuccessfully trying to stop with the incomplete IASB guidelines to the implementation of Capital Maintenance in Units of Constant Purchasing Power.

Yes, PricewaterhouseCoopers is correct when the firm states

‘Amounts are not comparable between periods, and the gain or loss in general purchasing power that arises in the reporting period is not recorded.’

But, that is not what it is about during hyperinflation: What is stated in 1 and 2 above is what it is about during hyperinflation.

IAS 29 is not implemented simply to (i) make amounts comparable between periods and (ii) to record the gain or loss in general purchasing power that arises in the reporting period.

IAS 29 is supposed to implement Capital Maintenance in Units of Constant Purchasing Power during hyperinflation - a form of which was very successfully done during 30 years in Brazil from 1964 to 1994 (IAS 29 was authorized in 1989) when that country inflation-adjusted, not all, but some monetary items daily and measured most non-monetary items – variable real value non-monetary items and constant real value non-monetary items – in units of constant purchasing power in terms of a government supplied daily index.

Unfortunately IAS 29 does not result in Capital Maintenance in Units of Constant Purchasing Power because the monthly and not the Daily CPI is used in the implementation of IAS 29.

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Understanding IAS 29 per PricewaterhouseCoopers: Correction 6: Reporting year financial statements are never adjusted for inflation under IAS 29

Understanding IAS 29 per PricewaterhouseCoopers: Correction 6: Reporting year financial statements are never adjusted for inflation under IAS 29

 ‘Significant changes in the purchasing power of money mean that financial statements unadjusted for inflation are likely to be misleading.’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

It is impossible to adjust reporting year financial statements for inflation under IAS 29. Reporting year financial statements are never adjusted for inflation under IAS 29.

Inflation only affects the real value of monetary items. It is impossible to adjust non-monetary items for inflation. Thus only monetary items can be adjusted for inflation. This happens in the case of, for example, daily inflation-adjusted government bonds (TIPS in the US) on an almost worldwide basis ; all mortgages in Colombia are inflation-adjusted daily in terms of the Colombian Real Value Unit; all 90-day deposits and many other items (25 per cent of the broad M3 money supply) are inflation-adjusted daily in Chile in terms of the Unidad da Fomento (UF), etc.

Actual monetary items values in reporting year financial statements are never adjusted for inflation under IAS 29. What is done is the net monetary loss or gain on monetary items are calculated and accounted under IAS 29 and under Capital Maintenance in Units of Constant Purchasing Power. That is the case with monetary items.

It is impossible to adjust constant real value non-monetary items for inflation in current year financial statements or anywhere else because inflation has no effect on the real value of non-monetary items. What happens is that constant real value non-monetary items are measured in units of constant purchasing power as authorized in the Conceptual Framework (2010), Par 4.59 (a) and guide-lined in IAS 29.

The PricewaterhouseCooper´s statement that

‘Significant changes in the purchasing power of money mean that financial statements unadjusted for inflation are likely to be misleading.’

should thus be corrected to state:

Significant changes in the purchasing power of money mean that financial statements prepared under the Historical Cost principle are likely to be misleading because the net monetary item loss or gain is not accounted.

The implementation of the stable measuring unit assumption means that Historical Cost financial statements are likely to be misleading because constant real value non-monetary items are measured in nominal monetary units during inflation, hyperinflation and deflation and result in the unnecessary erosion (destruction) of real value in constant real value non-monetary items never maintained constant under this model during inflation and hyperinflation.

Nicolaas Smith

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.