Example of Daily versus monthly CPI under IAS 29

Example of Daily versus monthly CPI under IAS 29

The following are data showing a derived monthly CPI and Daily CPI for Zimbabwe from 1 November 2007 till 31 December 2007 based on actual monthly inflation percentages. Only the monthly inflation information is actual data from the Central Bank of Zimbabwe. The rest are all theoretically derived data.

Application of IAS 29 and CMUCPP using data from Zimbabwe
Monthly inflation rates reported by the CB of Zimbabwe from Mar 2007 till July 2008 (Steve Hanke article)
Date	Derived relatively stable foreign curreny rate	Mnthly	Derived Monthly CPI on month-end
	ZimDollars per 1 US Dollar	Inflation %	URV based Daily Index on other days
	Zim$/USD rate based on derived CPI		Month-end Daily Index assumed = CPI
01/nov/07	43,8769		4 387,69
02/nov/07	45,7184		4 571,84
03/nov/07	47,5598		4 755,98
04/nov/07	49,4012		4 940,12
05/nov/07	51,2427		5 124,27
06/nov/07	53,0841		5 308,41
07/nov/07	54,9256		5 492,56
08/nov/07	56,7670		5 676,70
09/nov/07	58,6084		5 860,84
10/nov/07	60,4499		6 044,99
11/nov/07	62,2913		6 229,13
12/nov/07	64,1327		6 413,27
13/nov/07	65,9742		6 597,42
14/nov/07	67,8156		6 781,56
15/nov/07	69,6570		6 965,70
16/nov/07	71,4985		7 149,85
17/nov/07	73,3399		7 333,99
18/nov/07	75,1813		7 518,13
19/nov/07	77,0228		7 702,28
20/nov/07	78,8642		7 886,42
21/nov/07	80,7056		8 070,56
22/nov/07	82,5471		8 254,71
23/nov/07	84,3885		8 438,85
24/nov/07	86,2300		8 623,00
25/nov/07	88,0714		8 807,14
26/nov/07	89,9128		8 991,28
27/nov/07	91,7543		9 175,43
28/nov/07	93,5957		9 359,57
29/nov/07	95,4371		9 543,71
30/nov/07	97,2786	131,42	9 727,86
01/dez/07	104,8117		10 481,17
02/dez/07	112,3448		11 234,48
03/dez/07	119,8779		11 987,79
04/dez/07	127,4111		12 741,11
05/dez/07	134,9442		13 494,42
06/dez/07	142,4773		14 247,73
07/dez/07	150,0105		15 001,05
08/dez/07	157,5436		15 754,36
09/dez/07	165,0767		16 507,67
10/dez/07	172,6098		17 260,98
11/dez/07	180,1430		18 014,30
12/dez/07	187,6761		18 767,61
13/dez/07	195,2092		19 520,92
14/dez/07	202,7423		20 274,23
15/dez/07	210,2755		21 027,55
16/dez/07	217,8086		21 780,86
17/dez/07	225,3417		22 534,17
18/dez/07	232,8749		23 287,49
19/dez/07	240,4080		24 040,80
20/dez/07	247,9411		24 794,11
21/dez/07	255,4742		25 547,42
22/dez/07	263,0074		26 300,74
23/dez/07	270,5405		27 054,05
24/dez/07	278,0736		27 807,36
25/dez/07	285,6067		28 560,67
26/dez/07	293,1399		29 313,99
27/dez/07	300,6730		30 067,30
28/dez/07	308,2061		30 820,61
29/dez/07	315,7392		31 573,92
30/dez/07	323,2724		32 327,24
31/dez/07	330,8055	240,06	33 080,55

                                                                                                                                     

 

Example

Zimbabwean company formed on 1 November 2007 with USD 1000 in capital invested on day one in stock and sold on day one with a 300 percent markup. IAS 29 applied in terms of the monthly CPI and the Daily CPI.

						Hist Cost
Date		Dr			Cr	Dr	Cr
		USD			USD	Zim$	Zim$
1/11/07	Capital				1000		43 877
1/11/07	Stock	1000				43 877
1/11/07	Bank		4000			175 508
1/11/07	Sales				4000		175 508
30/11/07
31/12/07	P+L – CoS		1000			43 877
31/12/07	Stock				1000		43 877
31/12/07	Sale		4000			175 508
31/12/07	P+L – Sales				4000		175 508
31/12/07	Net Monetary Loss		-		-	-	-
31/12/07	P+L - Net Mon Loss		-		-	-	-
31/12/07	Net Monetary Loss		-		-	-	-
31/12/07	Ret Profit/Loss				3000		131 631
31/12/07	P+L - Ret Profit/Loss		3000
					Profit		Profit

 

 

				IAS 29 with monthly CPI
Date	Daily CPI	Z$/USD		Conv	Dr	Cr
	Derived	Derived		Factor	Zim$	Zim$
1/11/07	4 387,69	43,8769	Capital	3,40		149 208
1/11/07	4 387,69	43,8769	Stock	3,40	149 208
1/11/07	4 387,69	43,8769	Bank	1,00	175 508
1/11/07	4 387,69	43,8769	Sales	3,40		596 831
30/11/07	9 727,86	97,2786		3,40
31/12/07	33 080,55	330,8055	P+L – CoS	3,40	149 208
31/12/07	33 080,55	330,8055	Stock	3,40		149 208
31/12/07	33 080,55	330,8055	Sales	3,40	596 831
31/12/07	33 080,55	330,8055	P+L - Sales	3,40		596 831
31/12/07	33 080,55	330,8055	Net Monetary Loss		421 322
31/12/07	33 080,55	330,8055	P+L - Net Mon Loss		421 322
31/12/07	33 080,55	330,8055	Net Monetary Loss			421 322
31/12/07	33 080,55	330,8055	Ret Profit/Loss			26 301
31/12/07	33 080,55	330,8055	P+L - Ret Profit/Loss		26 301
					1 939 700	1 939 700
						Profit

 

 

				IAS 29 with Daily CPI
Date	Daily CPI	Z$/USD		Conv	Dr	Cr
	Derived	Derived		Factor	Zim$	Zim$
1/11/07	4 387,69	43,8769	Capital	7,54		330 806
1/11/07	4 387,69	43,8769	Stock	7,54	330 806
1/11/07	4 387,69	43,8769	Bank	1,00	175 508
1/11/07	4 387,69	43,8769	Sales	7,54		1 323 222
30/11/07	9 727,86	97,2786
31/12/07	33 080,55	330,8055	P+L - CoS	7,54	330 806
31/12/07	33 080,55	330,8055	Stock	7,54		330 806
31/12/07	33 080,55	330,8055	Sales	7,54	1 323 222
31/12/07	33 080,55	330,8055	P+L - Sales	7,54		1 323 222
31/12/07	33 080,55	330,8055	Net Monetary Loss	7,54	1 147 714
31/12/07	33 080,55	330,8055	P+L - Net Mon Loss	7,54	1 147 714
31/12/07	33 080,55	330,8055	Net Monetary Loss	7,54		1 147 714
31/12/07	33 080,55	330,8055	Ret Profit/Loss		155 298
31/12/07	33 080,55	330,8055	P+L - Ret Profit/Loss			155 298
					4 611 067	4 611 067
					Loss

 

From the above examples we can see that the results under IAS 29 with a Daily CPI is different from IAS 29 with the monthly CPI. The Daily CPI data show what really happened.

When all sales are for cash, net equity will be the same under both the monthly and Daily CPI. This is only the case when all sales are only for cash.

Under IAS 29 applying HC principles, sales for cash and on credit would have the same result. Debtors are monetary items under HCA and as IAS 29 is implemented. Not under CMUCPP in terms of a Daily CPI. Debtors are constant real value non-monetary items under CMUCPP since they are always linked to non-monetary items and the result would be the same as in USD: no loss at all in the real value of Debtors, i.e., no Net Constant Purchasing Power Loss that is calculated in the same way as the Net Monetary Loss. Profit would be better than in USD. Ideal CMUCPP results in zero erosion of real value, i.e., the same as under zero inflation. There is still erosion of real value in USD since USD accounts assumes the low inflation in the USD does not exist, i.e., the HC stable measuring unit assumption is applied.

Ideal CMUCPP in terms of a Daily Index would result in actual zero erosion of real value in all entities that at least break even in real value – ceteris paribus – at all levels of inflation and deflation.

 

Nicolaas Smith

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

Only Daily CPI maintains equity as well as current year results

Only Daily CPI maintains equity as well as current year results

IAS 29 requires entities in hyperinflationary economies to restate HC or CC financial statements in terms of the measuring unit current at the end of the reporting period. IAS 29 does not prescribe the use of the monthly published CPI for this purpose. It simply requires restatement in terms of a general price index. The Daily CPI is based on the monthly published CPI, i.e., the general price index. IAS 29 has, however, been implemented since its authorization in 1989 in terms of the monthly published CPI. In this way IAS 29 has been implementing an imperfect form of Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) since current year results are not fully maintained when the monthly published CPI is used. IAS 29 in terms of the monthly CPI can also have absolutely no effect in a hyperinflationary country. That is what happened in Zimbabwe where IAS 29 was implemented for the last 8 years of hyperinflation with no positive effect at all.

Brazil implemented CMUCPP in the form of indexation (monetary correction) in terms of a government supplied daily index from 1964 till 1994. Price-level restatement in terms of a daily index was widely used in Latin America during that period. Brazil did not use IAS 29. Zimbabwe used IAS 29. The result during hyperinflation in the two countries are very well known. Only the IASB refuses to admit that IAS 29 had no positive effect in Zimbabwe. Everyone else has the common sense to realize it. The IASB claims that they first have to have a formal review about what happened before they can form an opinion about the effect of IAS 29 in Zimbabwe.

The IASB does not understand the effect of CMUCPP in terms of a daily index. Basically, the IASB does not understand CMUCPP as implied in IAS 29. In January 2013 an IASB staff paper stated:

"10. Under current IFRS, there is no particular guidance on how to prepare financial statements stated in constant purchasing power units."

IAS 29 prescribes how to restate HC or CC financial statements in terms of the measuring unit current at the end of the reporting period.

Only the IASB does not understand that as stated above. PricewaterhouseCoopers, the World Bank and other Big Four audit companies published papers on how IAS 29 gives guidance on how to restate financial statements in terms of the measuring unit current at the end of the reporting period.

Nicolaas Smith

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

Standard setting institutions (the IASB) are highly politicised

THE PROBLEM WITH ACCOUNTING RESEARCH 

Accounting academics remain disconnected from standards setting, which weakens accounting frameworks.

Problem solving in accounting has, as a result, mainly been left to standard-setting institutions, not universities - in environments that are typically highly politicised and in which academic freedom is conspicuous only for its absence.

Prof Mark Bunting
Rhodes University

The problem with accounting research,  Accountancy SA, May 2013, p 15

IAS 29 Financial Reporting in Hyperinflationary Economies - Reporting according to IFRSs after a period of chronic hyperinflation.

IAS 29 Financial Reporting in Hyperinflationary Economies - Reporting according to IFRSs after a period of chronic hyperinflation.

IFRS Foundation

The Applicability of IAS 29 to financial statements prepared under the concept of financial capital maintenance in constant purchasing power units.

The Applicability of IAS 29 to financial statements prepared under the concept of financial capital maintenance in constant purchasing power units.

The above IFRS Staff Paper contains 16 mistakes which I pointed out to the IASB over here.

Nicolaas Smith

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

What is the Significance of Generally Accepted Principles of Accounting?

What is the Significance of Generally Accepted Principles of Accounting?

Infoxin

Application of IAS 29

Application of IAS 29

World Bank

Daily CPI one step better than inflation targeting

Daily CPI one step better than inflation targeting

There are no surprises with the Daily CPI. The Daily CPI is always known in advance. The Daily CPI is thus one step better than inflation targeting: it is daily inflation known in advance.

Here are the links to the future daily inflation in the

US,

UK - Daily Reference RPI: Click on Index Ratio data for indexed linked gilts,

Chile (Unidad de Fomento or UF),

Colombia and

Iceland.

Nicolaas Smith

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

CMUCPP used (not implemented) in low inflationary countries too

CMUCPP used (not implemented) in low inflationary countries too

CMUCPP was implemented in a number of countries, including Turkey, Russia and Zimbabwe during hyperinflation in terms of IAS 29 since 1990, the year of first implementation of the standard (IAS 29). CMUCPP is currently (2013) being implemented during hyperinflation in Venezuela and Belarus in terms of IAS 29. CMUCPP has been used since 1990  in terms of IAS 29 and is currently being used in terms of IAS 29 by multi-nationals with subsidiaries in hyperinflationary countries, in low inflationary countries too when they consolidated/consolidate the financial statements of these subsidiaries in their consolidated financial statements.
Nicolaas Smith Copyright

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

Capital Maintenance in Units of Constant Purchasing Power is the only accounting model specifically prescribed in IFRS

Capital Maintenance in Units of Constant Purchasing Power is implied during hyperinflation in terms of IAS 29. Capital Maintenance in Units of Constant Purchasing Power, i.e., restatement required in IAS 29, is the only accounting model specifically prescribed in IFRS.

 ‘At the present time, it is not the intention of the Board to prescribe a particular model other than in exceptional circumstances, such as for those entities reporting in the currency of a hyperinflationary economy.’

Conceptual Framework (2010), Par. 4.65

Nicolaas Smith

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

Different forms of Capital Maintenance in Units of Constant Purchasing Power

The following are all forms of Capital Maintenance in Units of Purchasing Power:

·         Indexation of non-monetary items (including equity) in countries with high or hyperinflation.

·         Monetary correction  of non-monetary items (including equity) in countries with high or hyperinflation.

·         Price-level accounting

·         Price-level restatement of non-monetary items (including equity) in countries with high or hyperinflation.

·         Restatement of Historical Cost or Current Cost financial statements in terms of the measuring unit current at the balance sheet date during hyperinflation (IAS 29).

None of the above would result in ideal Capital Maintenance in Units of Constant Purchasing Power with 100 percent of the constant purchasing power of equity and current year profits/losses maintained without the implementation of a daily index (e.g., the Daily CPI) which generally recognizes all changes in the general price level.

Updated on 13-05-2013
 

Nicolaas Smith

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

Definition of Capital Maintenance in Units of Constant Purchasing Power

Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) is the maintenance of the constant purchasing power of capital - capital being equal to the real value of net assets - for an indefinite period of time at all levels of inflation and deflation in entities that at least break even in real value – ceteris paribus – in units of constant purchasing power in terms of an index that recognizes all  - normally daily - changes in the general price level.

Updated on 13-05-2013


Nicolaas Smith

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

Physical capital maintenance is very different from financial capital maintenance

Physical capital maintenance is very different from financial capital maintenance

Updated on 16-05-2016

In IFRS the Conceptual Framework (2010), Par. 4.59 (b) states the following:

 ‘Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.’

The (1) physical capital maintenance concept is a fundamentally (totally) different capital maintenance concept compared to the two financial capital maintenance concepts, namely (2) financial capital maintenance in nominal monetary units (traditional Historical Cost Accounting) and (3) financial capital maintenance in units of constant purchasing power in terms of a Daily CPI. The latter is authorised at all levels of inflation (including hyperinflation) and deflation in IFRS in 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" as an alternative to financial capital maintenance in nominal monetary units (i.e., as an alternative to HCA). 

Financial capital maintenance in units of constant purchasing power is required during hyperinflation in IAS 29 Financial Reporting in Hyperinflationary Economies. It has been implemented under IAS 29 in terms of the monthly published CPI which, unfortunately, does not result in any capital maintenance at all. 

In fact, IAS 29 in terms of the IASB promoted monthly published CPI was implemented for the final 8 years in Zimbabwe´s hyperinflationary economy (hyperinflation in Zimbabwe ended on 20 November 2008) with no positive effect at all, an irrefutable fact the IASB stubbornly refuses to admit. The IASB refuses point blank to research the very successful implementation of financial capital maintenance in units of constant purchasing power in terms of a Daily Index as it was very successfully done in Latin America from 1960 to 1994. The IASB very irresponsibly ignores the fact that daily indexing of all item in terms of all (at least daily) changes in the general price level eliminates the effect of inflation during inflation, the effect of hyperinflation during hyperinflation and the effect of deflation during deflation. 

The IASB also very irresponsibly refuses to update IAS 29 to require DAILY INDEXING in terms of the DAILY CPI although I have pointed out to them a number of times in various comment letters published on their website that the effect of hyperinflation in the entire economy during hyperinflation in the monetary unit is only eliminated (as it was very successfully done in Brazil in the 1990's) when a DAILY CPI is used and that the use of the monthly published CPI is a waste of time as was very clear with the ineffective use of IAS 29 during hyperinflation in Zimbabwe. 

Capital maintenance in units of constant purchasing power (not IAS 29) was widely implemented with great success in the form of DAILY monetary correction or DAILY indexation in Latin America from the early 1960´s to the mid 1990´s and carried on in Chile till 2008).

(1), (2) and (3) above are the three capital maintenance concepts authorised in IFRS.

The Conceptual Framework (2010), Par. 4.57 states:

‘Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.’

So, it is all about ‘units of output per day’. An entity must be using ‘units of output per day’ as the measurement basis to maintain its physical capital.

Physical capital maintenance is not just another way or an additional way of looking at or presenting the two financial capital maintenance concepts.

Actual physical capital maintenance is not widely used in any economy. Prof. Rachel Baskerville from Victoria University in New Zealand states in her paper ‘100 Questions and Answers about IFRS’, Question 39:

‘It is equally possible for a company to adopt a concept of physical capital; i.e. the cycle of operation moves from assets/goods to dollar to goods/assets. Some public sector entities consider that their stewardship responsibilities are best served by reporting physical capital maintenance; e.g., is the capacity of the waterworks, waste water system, etc. in the local town the same as, or better, than it was last year?

Some Key Performance Indicators (KPIs) will be chosen to report this.

The Framework states: ― ‘Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.”’

So: physical capital maintenance is not generally about ‘measurements currently reported in balance sheets’. Physical capital maintenance is not often used.

Financial capital maintenance in nominal monetary units (HCA) is the generally accepted accounting model worldwide. It is an option in IFRS: see the Conceptual Framework, Par. 4.59(a).

Financial capital maintenance in units of constant purchasing is REQUIRED during hyperinflation in terms of IAS 29. Unfortunately IAS 29 has been implemented since 1989 in terms of the monthly published CPI which makes it useless during hyperinflation. 

IAS 29 does not actually REQUIRE the use of the monthly published CPI. Companies simply used the monthly published CPI because the Daily CPI has never been used for accounting purposes on a national scale outside of Latin America. In Latin America the use of daily indexing also was not seen as being the implementation of an accounting model in terms of the Daily CPI. It was always seen as monetary correction, something required by the central bank, not an accounting requirement. 

IAS 29, Par. 8 requires the following: "The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period."

The Daily CPI is also a "measuring unit current at the end of the reporting period." The use of the Daily CPI when IAS 29 is implemented during hyperinflation is thus authorised in IFRS. Unfortunately no-one has implemented IAS 29 in terms of the Daily CPI yet because the IASB very irresponsibly refuses to point out to countries in hyperinflation that Daily indexing of all items would remove the effect of hyperinflation during hyperinflation and that it is authorised in IAS 29. Brazil used a type of Daily CPI during a number of years leading up to June 1994. They used their Unidade Real de Valor daily index which was based on the daily US Dollar exchange rate during hyperinflation. During those years they eliminated a great deal of the effect of hyperinflation during hyperinflation in their monetary unit by indexing most of the economy in terms of their daily index, namely the Unidade Real de Valor. 


Thus financial capital maintenance in units of constant purchasing is widely used in hyperinflationary economies. It (not IAS 29) was very widely used  - very successfully - from 1964 to 1994 in Latin America during high inflation as well as hyperinflation, but always in terms of a DAILY INDEX. That is why it was so successful in South America while IAS 29 in terms of the monthly published CPI had no positive effect at all during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy. IAS 29 was a total disaster in Zimbabwe.

Physical capital maintenance is rarely used.

Update (16-05-2016)

Some respondents in their comment letters regarding the IASB´s Exposure Draft Conceptual Framework for Financial Reporting feel that a new Conceptual Framework should state that a physical capital maintenance concept will never be used. 

"Specific suggestions included that the Conceptual Framework should state that a financial concept of capital maintenance should be adopted, or that a physical capital maintenance concept will never be used."

Project Conceptual Framework 

Paper topic Feedback summary—Measurement and Capital Maintenance 

Par 65 (a), P 15

Nicolaas Smith

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

Inflation only affects monetary items in financial statements

Inflation only affects monetary items in financial statements

The statement The effects of inflation in financial statements is a very common statement in accounting literature, international accounting standard setting, central banking research and in accounting in general.

Inflation only affects the real value on monetary items and nothing else. Inflation has no effect on the real value of non-monetary items. The stable measuring unit assumption affects the real value of non-monetary items.

What is intended with the statement The effects of inflation in financial statements is to state: The effects of (1) inflation on monetary items and (2) the stable measuring unit assumption on non-monetary items in financial statements.

Nicolaas Smith

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

Inflation-linked accounting unit draws big Money to Chile

Inflation-linked accounting unit draws big Money to Chile

Bloombergs

Not enough inflation

Not enough inflation

Paul Krugman

New York Times