The real values of many constant real value non-monetary items, for example, retained earnings never maintained, are currently not being maintained constant in the world´s low inflation economies. To the contrary: they are unnecessarily, unknowingly and unintentionally being eroded at a rate equal to the annual rate of inflation by the implementation of the traditional HCA model where under accountants apply the very erosive stable measuring unit assumption when they measure financial capital maintenance in nominal monetary units – the accounting fallacy as authorized by the IASB in the Framework, Par 104 (a) in 1989 – during low inflation.
Many accountants see themselves as simply providing historic economic information. They do not understand the fact that continuously maintaining the constant purchasing power of capital which requires continuously maintaining the real values of all constant items constant during inflation and deflation is a basic objective of accounting.
This is the result of:
(1) the three popular accounting fallacies; namely,
(a) the stable measuring unit assumption based on the fallacy that changes in the purchasing power of the functional currently are not sufficiently important for accountants to measure financial capital maintenance in units of constant purchasing power during low inflation (authorized by the IASB) ,
(b) financial capital maintenance in nominal monetary units per se during low inflation (authorized by the IASB) and
(c) the erosion of companies´ profits and capital by inflation (fully accepted by the IASB and the FASB);
(2) the fact that most accountants and accounting authorities do not understand the real value destroying effect of the very erosive stable measuring unit assumption on reported constant items never maintained during low inflationary periods when the stable measuring unit assumption/financial capital maintenance in nominal monetary units is applied, and
(3) the fact that most accountants and accounting authorities do not understand the real value maintaining effect on constant real value non-monetary items of continuously measuring financial capital maintenance in units of constant purchasing power during inflation as approved by the IASB in the Framework, Par 104 (a).
If they had understood the above, they would have stopped the stable measuring unit assumption / financial capital maintenance in nominal monetary units, i.e. the HCA model, during low inflation by now.
The accounting model accountants choose determines whether they unknowingly erode significant amounts annually in the real value of existing constant real value non-monetary items never maintained constant or knowingly would maintain significant amounts of real value every year in existing constant real value non-monetary items in the constant item economy depending on whether they choose the IASB-approved traditional HCA model when they apply the very erosive stable measuring unit assumption during low inflation or IASB-approved financial capital maintenance in units of constant purchasing power during inflationary and deflationary periods – both models amazingly approved in the Framework, Par 104 (a) in 1989. It is not inflation doing the eroding in real value of existing constant real value non-monetary items never maintained, e.g. in companies´ capital and profits, as the IASB, the FASB and most accountants believe. Implementing the HCA model is unnecessarily, unknowingly and unintentionally doing the eroding when accountants apply the stable measuring unit assumption during low inflation. Inflation has no effect on the real value of non-monetary items.
Copyright (c) Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday, 4 February 2011
IAS 29 impossible during hyperinflation
The implementation of IAS 29 Financial Reporting in Hyperinflationary Economies by Zimbabwean listed companies as required by the Zimbabwean Stock Exchange made no difference to the Zimbabwean economy during the final stages of the hyperinflationary erosion of the monetary unit in Zimbabwe, i.e. the Zimbabwe Dollar. The IASB has agreed that it was not possible to implement IAS 29 during severe hyperinflation at the end of the hyperinflationary period in Zimbabwe since there was no CPI available. The daily Old Mutual Implied Rate (OMIR) was, however, available till 20th November, 2008, the day Gideon Gono, the governor of the Reserve Bank of Zimbabwe issued regulations that closed down the Zimbabwe Stock Exchange and effectively led to the end of the Zimbabwe Dollar.
Severe hyperinflation is only possible when there is exchangeability with at least one relatively stable foreign currency. The one exchange rate that lasted till the end of hyperinflation in Zimbabwe was the Old Mutual Implied Rate (OMIR).
“The ratio of the Old Mutual share price in Harare to that in London equals the
Zimbabwe dollar/sterling exchange rate." P 8 ¹
Severe hyperinflation stops the moment exchangeability between the currency and all foreign currencies does not exist.
“Zimbabwe’s hyperinflation came to an abrupt halt. The trigger was an intervention by the Reserve Bank of Zimbabwe. On November 20, 2008, the Reserve Bank’s governor, Dr. Gideon Gono, stated that the entire economy was “being priced via the Old Mutual rate whose share price movements had no relationship with economic fundamentals, let alone actual corporate performance of Old Mutual itself” (Gono 2008: 7–8). In consequence, the Reserve Bank issued regulations that forced the Zimbabwe Stock Exchange to shut down. This event rapidly cascaded into a termination of all forms of non-cash foreign exchange trading and an accelerated death spiral for the Zimbabwe dollar. Within weeks the entire economy spontaneously “dollarized” and prices stabilized.” P 9-10 ²
¹,² Hanke, S. H. and Kwok, A. K. F., On the Measurement of Zimbabwe’s Hyperinflation,
Cato Journal, Vol. 29, No. 2 (Spring/Summer 2009), pp. 353-64 Available at
http://www.cato.org/pubs/journal/cj29n2/cj29n2-8.pdf
There was severe hyperinflation in Zimbabwe while there was exchangeability with at least one relatively stable foreign currency – the British Pound in this case as made possible via the OMIR. When this last exchangeability stopped it was not possible to set prices in the ZimDollar any more and severe hyperinflation stopped: no exchangeability means no severe hyperinflation.
Valuing all non-monetary items as required by the IAS 29 inflation accounting model in terms of the period-end Consumer Price Index which was published a month or more after the month to which it related when the real value of the Zimbabwe Dollar halved every day, obviously, had no effect at all.
“The Zimbabwe government last published an official Zimbabwe dollar inflation index in July 2008. This, combined with the complexities of not having a stable currency due to the phenomenon described above, meant that there were severe limitations to accurate financial reporting in the period from August 2008 to when the Zimbabwe dollar was abandoned in early 2009. During this period the Institute of Chartered Accountants in Zimbabwe set up a technical subcommittee to address these challenges, as it was impossible to apply IAS 29 “Financial Reporting in Hyperinflationary Economies” without a general price index, or IAS 21 “Exchange Rates” without a single spot rate.” Inflation Gone Wild, Gordon Whiley, Accountancy SA, March 2010.
http://www.accountancysa.org.za/resources/ShowItemArticle.asp?ArticleId=1885&Issue=1090
Zimbabwean accountants unnecessarily, unknowingly and unintentionally eroded their country’s real economy by implementing HCA during the financial year, as required by the IASB in IAS 29, and then restated their year-end HC financial statements of their very much hyper-eroded companies in terms of the year-end CPI (while the CPI was made available in Zimbabwe) to make them more useful for comparison purposes. That did not stop them from unknowingly eroding their real or non-monetary economy with HCA - as supported by the IASB and PricewaterhouseCoopers - during the course of the financial year in a period of hyperinflation.
PricewaterhouseCoopers state 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.
How anyone can use or recommend the use of the HCA model during hyperinflation is completely incomprehensible. The use of the HCA model during hyperinflation should be banned by law.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Severe hyperinflation is only possible when there is exchangeability with at least one relatively stable foreign currency. The one exchange rate that lasted till the end of hyperinflation in Zimbabwe was the Old Mutual Implied Rate (OMIR).
“The ratio of the Old Mutual share price in Harare to that in London equals the
Zimbabwe dollar/sterling exchange rate." P 8 ¹
Severe hyperinflation stops the moment exchangeability between the currency and all foreign currencies does not exist.
“Zimbabwe’s hyperinflation came to an abrupt halt. The trigger was an intervention by the Reserve Bank of Zimbabwe. On November 20, 2008, the Reserve Bank’s governor, Dr. Gideon Gono, stated that the entire economy was “being priced via the Old Mutual rate whose share price movements had no relationship with economic fundamentals, let alone actual corporate performance of Old Mutual itself” (Gono 2008: 7–8). In consequence, the Reserve Bank issued regulations that forced the Zimbabwe Stock Exchange to shut down. This event rapidly cascaded into a termination of all forms of non-cash foreign exchange trading and an accelerated death spiral for the Zimbabwe dollar. Within weeks the entire economy spontaneously “dollarized” and prices stabilized.” P 9-10 ²
¹,² Hanke, S. H. and Kwok, A. K. F., On the Measurement of Zimbabwe’s Hyperinflation,
Cato Journal, Vol. 29, No. 2 (Spring/Summer 2009), pp. 353-64 Available at
http://www.cato.org/pubs/journal/cj29n2/cj29n2-8.pdf
There was severe hyperinflation in Zimbabwe while there was exchangeability with at least one relatively stable foreign currency – the British Pound in this case as made possible via the OMIR. When this last exchangeability stopped it was not possible to set prices in the ZimDollar any more and severe hyperinflation stopped: no exchangeability means no severe hyperinflation.
Valuing all non-monetary items as required by the IAS 29 inflation accounting model in terms of the period-end Consumer Price Index which was published a month or more after the month to which it related when the real value of the Zimbabwe Dollar halved every day, obviously, had no effect at all.
“The Zimbabwe government last published an official Zimbabwe dollar inflation index in July 2008. This, combined with the complexities of not having a stable currency due to the phenomenon described above, meant that there were severe limitations to accurate financial reporting in the period from August 2008 to when the Zimbabwe dollar was abandoned in early 2009. During this period the Institute of Chartered Accountants in Zimbabwe set up a technical subcommittee to address these challenges, as it was impossible to apply IAS 29 “Financial Reporting in Hyperinflationary Economies” without a general price index, or IAS 21 “Exchange Rates” without a single spot rate.” Inflation Gone Wild, Gordon Whiley, Accountancy SA, March 2010.
http://www.accountancysa.org.za/resources/ShowItemArticle.asp?ArticleId=1885&Issue=1090
Zimbabwean accountants unnecessarily, unknowingly and unintentionally eroded their country’s real economy by implementing HCA during the financial year, as required by the IASB in IAS 29, and then restated their year-end HC financial statements of their very much hyper-eroded companies in terms of the year-end CPI (while the CPI was made available in Zimbabwe) to make them more useful for comparison purposes. That did not stop them from unknowingly eroding their real or non-monetary economy with HCA - as supported by the IASB and PricewaterhouseCoopers - during the course of the financial year in a period of hyperinflation.
PricewaterhouseCoopers state 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.
How anyone can use or recommend the use of the HCA model during hyperinflation is completely incomprehensible. The use of the HCA model during hyperinflation should be banned by law.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday, 3 February 2011
Valuing the three economic items
Economic items are made up of monetary items, variable items and constant items. Accountants value, record, classify, summarize and report transactions and events involving economic items in terms of depreciating functional currencies during inflation and appreciating functional currencies during deflation.
Monetary items
(1) The real value of the functional currency and all other monetary items in the monetary economy generally changes every month during low inflation. Months of zero annual inflation are rare and not sustained over a significant period of time.
Variable items
(2) The real value of variable items may change all the time, e.g. the price of foreign currencies, precious metals, quoted shares, commodities, properties, finished goods, services, raw materials, etc.
Constant items
(3) The real values of constant items stay the same (or are supposed to stay the same) all the time – all else except inflation and deflation being equal – e.g. salaries, wages, rentals, issued share capital, retained profits, shareholders equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc.
Accountants have to take all three scenarios - occurring simultaneously - into account over time when they account economic activity and prepare and present financial reports.
Monetary items
(1) Accountants value and account monetary items at their original historical cost nominal values in nominal monetary units during the current accounting period under all accounting models during low inflation, hyperinflation and deflation. Inflation, deflation and hyperinflation determine the always current real value of the functional currency (US Dollar, Bolívar, Euro, Yen, Yuan, etc.) and other monetary items within a monetary economy. This is the result of the fact that the real value of money and other monetary items cannot be updated or inflation-adjusted or valued in units of constant purchasing power during the current accounting period. The real value of the functional currency and other monetary items in the monetary economy changes equally (all monetary units are affected evenly) normally on a monthly basis during low inflation and deflation. The change is confirmed or quantified with the monthly publication of the new CPI value. Currently, the applicable CPI value can become available up to a month and a half after the date of a transaction in many low inflationary economies. The daily black market or parallel US Dollar exchange rate or street rate is generally constantly (24/7, 365 days a year) available in a hyperinflationary economy. The CPI is the internal exchange rate between the real value of a unit of the functional currency and a unit of real value in an economy. The parallel US Dollar exchange rate fulfils this role in a hyperinflationary economy.
Variable items
(2) Variable items in a national economy are valued and accounted in terms of IFRS or GAAP at, for example, fair value, market value, net realizable value, recoverable value, present value, etc. These prices change all the time: even minute by minute in many markets.
Constant items
(3) The real values of constant real value non-monetary items in the constant item economy have to be continuously maintained constant during low inflation and deflation by means of continuous financial capital maintenance in units of constant purchasing power, i.e. inflation-adjusting them monthly during low inflation and deflation by means of the CPI as authorized by the IASB in the Framework, Par 104 (a) in 1989. Annual inflation-adjustment is only currently being done, generally in the case of certain income statement items, e.g., salaries, wages, rentals, etc. in non-hyperinflationary economies.
Harvey Kapnick was correct when he stated in the Saxe Lecture in 1976: “In the long run both value accounting and price-level accounting should prevail.”
Valuation of all non-monetary items during Hyperinflation
Valuation in units of constant purchasing power is required for all non-monetary items (variable and constant items) by the IASB during hyperinflation as per the Constant Purchasing Power Accounting (CPPA) inflation accounting model defined in IAS 29 Financial Reporting in Hyperinflationary Economies. The only way a hyperinflationary country can maintain its non-monetary or real economy relatively stable (at a rate of real value erosion in constant items never maintained limited to the inflation rate of the hard currency used for determining the parallel rate) during hyperinflation is by continuously measuring all non-monetary items (variable and constant items) in units of constant purchasing power; however, not by restating HC and Current Cost financial statements at the end of the reporting period in terms of the period-end CPI to make them more useful as required by IAS 29, but, by applying the daily parallel US Dollar exchange rate, or - as was done in Brazil during the 30 years from 1964 to 1994 - with daily indexation which is, in principle, the same as measurement in units of constant purchasing power by applying the daily parallel rate.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Monetary items
(1) The real value of the functional currency and all other monetary items in the monetary economy generally changes every month during low inflation. Months of zero annual inflation are rare and not sustained over a significant period of time.
Variable items
(2) The real value of variable items may change all the time, e.g. the price of foreign currencies, precious metals, quoted shares, commodities, properties, finished goods, services, raw materials, etc.
Constant items
(3) The real values of constant items stay the same (or are supposed to stay the same) all the time – all else except inflation and deflation being equal – e.g. salaries, wages, rentals, issued share capital, retained profits, shareholders equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc.
Accountants have to take all three scenarios - occurring simultaneously - into account over time when they account economic activity and prepare and present financial reports.
Monetary items
(1) Accountants value and account monetary items at their original historical cost nominal values in nominal monetary units during the current accounting period under all accounting models during low inflation, hyperinflation and deflation. Inflation, deflation and hyperinflation determine the always current real value of the functional currency (US Dollar, Bolívar, Euro, Yen, Yuan, etc.) and other monetary items within a monetary economy. This is the result of the fact that the real value of money and other monetary items cannot be updated or inflation-adjusted or valued in units of constant purchasing power during the current accounting period. The real value of the functional currency and other monetary items in the monetary economy changes equally (all monetary units are affected evenly) normally on a monthly basis during low inflation and deflation. The change is confirmed or quantified with the monthly publication of the new CPI value. Currently, the applicable CPI value can become available up to a month and a half after the date of a transaction in many low inflationary economies. The daily black market or parallel US Dollar exchange rate or street rate is generally constantly (24/7, 365 days a year) available in a hyperinflationary economy. The CPI is the internal exchange rate between the real value of a unit of the functional currency and a unit of real value in an economy. The parallel US Dollar exchange rate fulfils this role in a hyperinflationary economy.
Variable items
(2) Variable items in a national economy are valued and accounted in terms of IFRS or GAAP at, for example, fair value, market value, net realizable value, recoverable value, present value, etc. These prices change all the time: even minute by minute in many markets.
Constant items
(3) The real values of constant real value non-monetary items in the constant item economy have to be continuously maintained constant during low inflation and deflation by means of continuous financial capital maintenance in units of constant purchasing power, i.e. inflation-adjusting them monthly during low inflation and deflation by means of the CPI as authorized by the IASB in the Framework, Par 104 (a) in 1989. Annual inflation-adjustment is only currently being done, generally in the case of certain income statement items, e.g., salaries, wages, rentals, etc. in non-hyperinflationary economies.
Harvey Kapnick was correct when he stated in the Saxe Lecture in 1976: “In the long run both value accounting and price-level accounting should prevail.”
Valuation of all non-monetary items during Hyperinflation
Valuation in units of constant purchasing power is required for all non-monetary items (variable and constant items) by the IASB during hyperinflation as per the Constant Purchasing Power Accounting (CPPA) inflation accounting model defined in IAS 29 Financial Reporting in Hyperinflationary Economies. The only way a hyperinflationary country can maintain its non-monetary or real economy relatively stable (at a rate of real value erosion in constant items never maintained limited to the inflation rate of the hard currency used for determining the parallel rate) during hyperinflation is by continuously measuring all non-monetary items (variable and constant items) in units of constant purchasing power; however, not by restating HC and Current Cost financial statements at the end of the reporting period in terms of the period-end CPI to make them more useful as required by IAS 29, but, by applying the daily parallel US Dollar exchange rate, or - as was done in Brazil during the 30 years from 1964 to 1994 - with daily indexation which is, in principle, the same as measurement in units of constant purchasing power by applying the daily parallel rate.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday, 2 February 2011
Accountants do not simply report on what took place
There is no substance in the statement that financial reporting simply reports on what took place. It can be correctly stated that the above statement has no substance when we refer to the IASB-approved basic accounting option of continuous financial capital maintenance in units of constant purchasing power which requires the valuing of only constant items in units of constant purchasing power during low inflation and deflation as authorized in the Framework, Par 104 (a) in 1989 which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”
The first option in Par 104, namely, financial capital maintenance in nominal monetary units during inflation and deflation is a fallacy: it is impossible to maintain the real value of capital stable in nominal monetary units per se during inflation and deflation. Continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation is generally applicable in the economy as a result of the absence of specific IFRS as per IAS8.11. However, that is not the same as comprehensive CPI-based adjustment of accounts themselves as accountants and accounting authorities automatically assume when financial capital maintenance in units of constant purchasing power during low inflation and deflation is suggested. Only constant items (not variable items) are continuously valued in units of constant purchasing power by continuously applying the CPI on a monthly basis during low inflation and deflation to implement a constant purchasing power capital concept of invested constant purchasing power and a constant purchasing power financial capital maintenance concept with measurement in units of constant purchasing power which includes a constant purchasing power profit or loss determination concept with the continuous valuation of only constant items in units of constant purchasing power during low inflation and deflation. The IASB is dead right that financial capital maintenance can be measured in units of constant purchasing power during low inflation and deflation as authorized in the Framework (1989), Par 104 (a) twenty two years.
The real values of banks´ and companies´ existing constant real value non-monetary items never maintained, e.g. retained profits, are unnecessarily, unknowingly and unintentionally being eroded by the implementation of the traditional HCA model at a rate equal to the annual rate of inflation when companies´ boards of directors choose to apply the stable measuring unit assumption during low inflation.
It is a simple fact that continuous financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par 104 (a) in 1989, i.e. inflation-adjusting all constant items in the economy during low inflation, would remedy this unknowing, unintentional and unnecessary erosion by the application of the HCA model in companies that at least break even whether they own revaluable fixed assets or not and without extra money or retained profits to maintain the constant real value of existing constant real value equity constant
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The first option in Par 104, namely, financial capital maintenance in nominal monetary units during inflation and deflation is a fallacy: it is impossible to maintain the real value of capital stable in nominal monetary units per se during inflation and deflation. Continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation is generally applicable in the economy as a result of the absence of specific IFRS as per IAS8.11. However, that is not the same as comprehensive CPI-based adjustment of accounts themselves as accountants and accounting authorities automatically assume when financial capital maintenance in units of constant purchasing power during low inflation and deflation is suggested. Only constant items (not variable items) are continuously valued in units of constant purchasing power by continuously applying the CPI on a monthly basis during low inflation and deflation to implement a constant purchasing power capital concept of invested constant purchasing power and a constant purchasing power financial capital maintenance concept with measurement in units of constant purchasing power which includes a constant purchasing power profit or loss determination concept with the continuous valuation of only constant items in units of constant purchasing power during low inflation and deflation. The IASB is dead right that financial capital maintenance can be measured in units of constant purchasing power during low inflation and deflation as authorized in the Framework (1989), Par 104 (a) twenty two years.
The real values of banks´ and companies´ existing constant real value non-monetary items never maintained, e.g. retained profits, are unnecessarily, unknowingly and unintentionally being eroded by the implementation of the traditional HCA model at a rate equal to the annual rate of inflation when companies´ boards of directors choose to apply the stable measuring unit assumption during low inflation.
It is a simple fact that continuous financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par 104 (a) in 1989, i.e. inflation-adjusting all constant items in the economy during low inflation, would remedy this unknowing, unintentional and unnecessary erosion by the application of the HCA model in companies that at least break even whether they own revaluable fixed assets or not and without extra money or retained profits to maintain the constant real value of existing constant real value equity constant
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Monday, 31 January 2011
Accounting dollarization compared to Brazilian-style indexation
Brazil indexed all non-monetary items during the 30 years from 1964 to 1994 by means of a daily non-monetary index supplied by the various governments over that period for everybody in the economy to use daily. Although the Brazilian indexes used during those 30 years were almost entirely based on the daily US Dollar exchange rate with the Brazilian currency, it was not a parallel rate used parallel to another “official” US Dollar exchange rate arbitrarily set by the government as happens in most cases where a parallel market for the US Dollar develops in hyperinflationary economies. However, the daily index supplied by the government was not the actual daily US Dollar exchange rate. Thus, although the Brazilian indexation was financial capital maintenance in units of constant purchasing power during those 30 years, and very similar to accounting dollarization, it was not exactly the same.
Brazilian indexation theoretically maintained the constant item economy perfectly stable whereas there is still real value erosion in the constant item economy as a result of the stable measuring unit assumption at a rate equal to the inflation rate in the US Dollar when accounting dollarization is employed. Brazilian-style indexation is thus better than accounting dollarization since real value erosion because of the use of the stable measuring unit assumption is completely eliminated with financial capital maintenance in units of constant purchasing power in terms of the daily index rate.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Brazilian indexation theoretically maintained the constant item economy perfectly stable whereas there is still real value erosion in the constant item economy as a result of the stable measuring unit assumption at a rate equal to the inflation rate in the US Dollar when accounting dollarization is employed. Brazilian-style indexation is thus better than accounting dollarization since real value erosion because of the use of the stable measuring unit assumption is completely eliminated with financial capital maintenance in units of constant purchasing power in terms of the daily index rate.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Accounting dollarization
Updated on 2 October 2013
Accounting dollarization is not the same as normal dollarization of an economy. An economy is dollarized when the national functional currency is physically substituted with a relative stable foreign currency, normally the US Dollar. That is how the phrase “dollarization” originated. The national currency is not used anymore. Its legal tender is legally terminated. Dollarization is generally adopted after a period of severe hyperinflation, e.g. in Zimbabwe in 2008.
Accounting dollarization is doing all your daily accounting in US Dollars or in any other relatively stable foreign currency during hyperinflation in your national functional currency in an economy that does not use the US Dollar as functional currency. It does not necessarily mean that you do all your actual business transactions in US Dollars. You normally do some business in US Dollars and some in the local hyperinflationary currency. You may even do no business in US Dollars.
You simply note down the daily parallel US Dollar rate and use it in all your daily business transactions and daily accounting. The existence of a US Dollar foreign exchange rate, official or unofficial, is essential for the application of accounting dollarization. When there is only one US Dollar rate the economy will normally not be in hyperinflation and accounting dollarization will not be required. Sometimes the US Dollar parallel rate changes more than the normal once per day. It can change every 8 hours, for example, during severe hyperinflation.
Accounting dollarization is the same as Capital Maintenance in Units of Constant Purchasing Power as defined in IAS 29 which requires financial capital maintenance in units of constant purchasing power during hyperinflation, but, not at the period-end monthly published CPI, as required in IAS 29, but at the DAILY US Dollar parallel rate.
I implemented it for the first time in Auto-Sueco (Angola), the Volvo agents in Angola, starting in January, 1996. Auto-Sueco (Angola) is the subsidiary of Auto-Sueco in Portugal.
Accounting dollarization is also not the same as the US GAAP requirement that US companies with subsidiaries in hyperinflationary economies simply translate their year-end HCA financial statements prepared in the hyperinflationary local currency into US Dollars at the year-end rate before consolidation into the controlling US company´s consolidated accounts. Accounting dollarization is running any local business in a hyperinflationary economy in US Dollars on a daily basis applying the daily parallel rate. This eliminates the hyper-eroding effect of
(1) the stable measuring unit assumption as implemented under HCA on the real value of all non-monetary items (variable and constant real value non-monetary items) in a hyperinflationary economy as well as the hyper-eroding effect of
(2) hyperinflation on monetary items inflation-indexed daily in terms of the daily US Dollar parallel rate.
Accounting dollarization is a daily price-level accounting model or daily indexation or daily monetary correction applying financial capital maintenance in units of constant purchasing power in terms of a Daily Index as authorized in IFRS in the original Framework (1989), Par. 104 (a), now the Conceptual Framework (2010), Par. 4.59 (a).
Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproducation without permission.
Accounting dollarization is not the same as normal dollarization of an economy. An economy is dollarized when the national functional currency is physically substituted with a relative stable foreign currency, normally the US Dollar. That is how the phrase “dollarization” originated. The national currency is not used anymore. Its legal tender is legally terminated. Dollarization is generally adopted after a period of severe hyperinflation, e.g. in Zimbabwe in 2008.
Accounting dollarization is doing all your daily accounting in US Dollars or in any other relatively stable foreign currency during hyperinflation in your national functional currency in an economy that does not use the US Dollar as functional currency. It does not necessarily mean that you do all your actual business transactions in US Dollars. You normally do some business in US Dollars and some in the local hyperinflationary currency. You may even do no business in US Dollars.
You simply note down the daily parallel US Dollar rate and use it in all your daily business transactions and daily accounting. The existence of a US Dollar foreign exchange rate, official or unofficial, is essential for the application of accounting dollarization. When there is only one US Dollar rate the economy will normally not be in hyperinflation and accounting dollarization will not be required. Sometimes the US Dollar parallel rate changes more than the normal once per day. It can change every 8 hours, for example, during severe hyperinflation.
Accounting dollarization is the same as Capital Maintenance in Units of Constant Purchasing Power as defined in IAS 29 which requires financial capital maintenance in units of constant purchasing power during hyperinflation, but, not at the period-end monthly published CPI, as required in IAS 29, but at the DAILY US Dollar parallel rate.
I implemented it for the first time in Auto-Sueco (Angola), the Volvo agents in Angola, starting in January, 1996. Auto-Sueco (Angola) is the subsidiary of Auto-Sueco in Portugal.
Accounting dollarization is also not the same as the US GAAP requirement that US companies with subsidiaries in hyperinflationary economies simply translate their year-end HCA financial statements prepared in the hyperinflationary local currency into US Dollars at the year-end rate before consolidation into the controlling US company´s consolidated accounts. Accounting dollarization is running any local business in a hyperinflationary economy in US Dollars on a daily basis applying the daily parallel rate. This eliminates the hyper-eroding effect of
(1) the stable measuring unit assumption as implemented under HCA on the real value of all non-monetary items (variable and constant real value non-monetary items) in a hyperinflationary economy as well as the hyper-eroding effect of
(2) hyperinflation on monetary items inflation-indexed daily in terms of the daily US Dollar parallel rate.
Accounting dollarization is a daily price-level accounting model or daily indexation or daily monetary correction applying financial capital maintenance in units of constant purchasing power in terms of a Daily Index as authorized in IFRS in the original Framework (1989), Par. 104 (a), now the Conceptual Framework (2010), Par. 4.59 (a).
Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproducation without permission.
Monday, 24 January 2011
Inflation only has a monetary component
I stated the following in a Letter to the Editor published in the Financial Mail in South Africa:
“Financial Mail 09 May 2008
Accounting for inflation
Nicolaas Smith, Lisbon
DA deputy finance spokesman Dion George states: "Reserve Bank governor Tito Mboweni recently hiked interest rates, despite real concern over the impact this will have on sustainable economic growth" (Letters April 25).
SA accountants freely destroy real value in the real economy with their assumption that the rand is perfectly stable only for the purpose of accounting constant value items, and have absolutely no concern about the negative impact this has on sustainable economic growth.
There is an option that would make this destruction of the SA real economy by inflation or hyperinflation impossible - if we so choose.
We have to remember that inflation is the destruction of value in monetary and constant items over time.
Inflation has two components: a monetary component - inflation - and a non monetary component - historical cost accounting inflation. We can stop the second component completely, which will stop the destruction of real value in the real economy completely.
The 10,6% (March) inflation was caused by excessive (21%) money supply growth in SA. What causes excessive money supply is a complex economic process that should be dominated by Mboweni and the Bank as it is dominated by central banks elsewhere.
Historical cost accounting inflation is caused by the combination of 10,6% inflation and SA accountants' implementation of the stable measuring unit assumption (a historical cost accounting practice) throughout the SA economy.
The destruction of real value in the real economy by SA accountants will stop when they stop their assumption that the rand is perfectly stable only for the purpose of accounting constant items never or not fully updated.
We will still have 10,6% inflation in the monetary economy - all else being equal - but we will have 0% inflation in the real economy with an (as for now unknown) increase in GDP and sustainable economic growth in SA.
Inflation would then have only a monetary component, namely, inflation.
No-one stops us from revoking the stable measuring unit assumption.
The historical cost accounting model is not required by SA law, or by Generally Accepted Accounting Practice or the International Accounting Standards Board.”
The full understanding of the difference between the generally accepted accounting practice whereby accountants unnecessarily, unknowingly and unintentionally erode the real values of only existing constant real value non-monetary items never maintained constant only in the constant item economy with their free choice of implementing their very erosive stable measuring unit assumption during low inflation as authorized by the IASB when it approved the very popular accounting fallacy of financial capital maintenance in nominal monetary units per se during low inflation in the Framework, Par 104 (a) in 1989 and the erosion by the economic process of inflation of the real value of only money and other monetary items only in the monetary economy is an ongoing process. It has become clear to me, since September 2008, that inflation and hyperinflation only erode the real value of money and other monetary items. Inflation and hyperinflation only have one – a monetary – component. It is clear to me now that it is not inflation or hyperinflation that is causing the erosion of the real value of existing constant real value non-monetary items never maintained in the real economy. It is clear to me now that inflation does not have a non-monetary component and that inflation has no effect on the real value of non-monetary items.
Copyright (c) Nicolaas J Smith. All rights reserved. No reproduction without permission.
“Financial Mail 09 May 2008
Accounting for inflation
Nicolaas Smith, Lisbon
DA deputy finance spokesman Dion George states: "Reserve Bank governor Tito Mboweni recently hiked interest rates, despite real concern over the impact this will have on sustainable economic growth" (Letters April 25).
SA accountants freely destroy real value in the real economy with their assumption that the rand is perfectly stable only for the purpose of accounting constant value items, and have absolutely no concern about the negative impact this has on sustainable economic growth.
There is an option that would make this destruction of the SA real economy by inflation or hyperinflation impossible - if we so choose.
We have to remember that inflation is the destruction of value in monetary and constant items over time.
Inflation has two components: a monetary component - inflation - and a non monetary component - historical cost accounting inflation. We can stop the second component completely, which will stop the destruction of real value in the real economy completely.
The 10,6% (March) inflation was caused by excessive (21%) money supply growth in SA. What causes excessive money supply is a complex economic process that should be dominated by Mboweni and the Bank as it is dominated by central banks elsewhere.
Historical cost accounting inflation is caused by the combination of 10,6% inflation and SA accountants' implementation of the stable measuring unit assumption (a historical cost accounting practice) throughout the SA economy.
The destruction of real value in the real economy by SA accountants will stop when they stop their assumption that the rand is perfectly stable only for the purpose of accounting constant items never or not fully updated.
We will still have 10,6% inflation in the monetary economy - all else being equal - but we will have 0% inflation in the real economy with an (as for now unknown) increase in GDP and sustainable economic growth in SA.
Inflation would then have only a monetary component, namely, inflation.
No-one stops us from revoking the stable measuring unit assumption.
The historical cost accounting model is not required by SA law, or by Generally Accepted Accounting Practice or the International Accounting Standards Board.”
The full understanding of the difference between the generally accepted accounting practice whereby accountants unnecessarily, unknowingly and unintentionally erode the real values of only existing constant real value non-monetary items never maintained constant only in the constant item economy with their free choice of implementing their very erosive stable measuring unit assumption during low inflation as authorized by the IASB when it approved the very popular accounting fallacy of financial capital maintenance in nominal monetary units per se during low inflation in the Framework, Par 104 (a) in 1989 and the erosion by the economic process of inflation of the real value of only money and other monetary items only in the monetary economy is an ongoing process. It has become clear to me, since September 2008, that inflation and hyperinflation only erode the real value of money and other monetary items. Inflation and hyperinflation only have one – a monetary – component. It is clear to me now that it is not inflation or hyperinflation that is causing the erosion of the real value of existing constant real value non-monetary items never maintained in the real economy. It is clear to me now that inflation does not have a non-monetary component and that inflation has no effect on the real value of non-monetary items.
Copyright (c) Nicolaas J Smith. All rights reserved. No reproduction without permission.
Accountants value everything they account
The debate concerning whether value accounting or price-level accounting should prevail is not on point, because in the long run both should prevail.
Harvey Kapnick, Chairman, Arthur Andersen & Company, “Value Based Accounting – Evolution or Revolution”, Sax Lecture, 1976.
Economic items have economic value. Accountants deal with economic items all the time. They deal with economic values when they account economic items and prepare financial reports. Accountants value economic items when they account economic transactions and events. Financial reporting does not simply report on what took place in the past. Accountants are not just scorekeepers of what happened in the past. Accountants value everything they account in the economy.
The three fundamentally different basic economic items in the economy, namely variable items, monetary items and constant items, have economic values expressed in terms of money; i.e. the functional currency. Accountants account economic transactions involving these three basic economic items in an organized manner when they implement the double entry accounting model: journal entries, general ledger accounts, trial balances, cash flow statements, income and expenses in the income statement, assets and liabilities in the balance sheet plus other financial, management and costing reports.
Accountants value economic items when they account economic activity in the accounting records and prepare financial reports of economic entities based on the double entry accounting model. Accounting entries are valuations of the economic items (the debit items and the credit items) being accounted.
Many accountants still think that accounting is simply a recording exercise during which they merely record past economic activity. That is not correct. Accountants value economic items when they account them. Financial reporting (accounting) is, firstly, the continuous maintenance of the constant purchasing power of capital and secondly the provision of continuously updated decision-useful financial information about the reporting entity to capital providers and other users. It includes the valuing, recording, classifying, summarizing and reporting of an entity’s economic activity.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Harvey Kapnick, Chairman, Arthur Andersen & Company, “Value Based Accounting – Evolution or Revolution”, Sax Lecture, 1976.
Economic items have economic value. Accountants deal with economic items all the time. They deal with economic values when they account economic items and prepare financial reports. Accountants value economic items when they account economic transactions and events. Financial reporting does not simply report on what took place in the past. Accountants are not just scorekeepers of what happened in the past. Accountants value everything they account in the economy.
The three fundamentally different basic economic items in the economy, namely variable items, monetary items and constant items, have economic values expressed in terms of money; i.e. the functional currency. Accountants account economic transactions involving these three basic economic items in an organized manner when they implement the double entry accounting model: journal entries, general ledger accounts, trial balances, cash flow statements, income and expenses in the income statement, assets and liabilities in the balance sheet plus other financial, management and costing reports.
Accountants value economic items when they account economic activity in the accounting records and prepare financial reports of economic entities based on the double entry accounting model. Accounting entries are valuations of the economic items (the debit items and the credit items) being accounted.
Many accountants still think that accounting is simply a recording exercise during which they merely record past economic activity. That is not correct. Accountants value economic items when they account them. Financial reporting (accounting) is, firstly, the continuous maintenance of the constant purchasing power of capital and secondly the provision of continuously updated decision-useful financial information about the reporting entity to capital providers and other users. It includes the valuing, recording, classifying, summarizing and reporting of an entity’s economic activity.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday, 21 January 2011
The objectives of general purpose financial reporting
The objectives of general purpose financial reporting are:
1) Maintenance of the constant purchasing power of capital.
2) Provision of continuously updated decision-useful financial information about the reporting entity to capital providers and other users.
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Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
1) Maintenance of the constant purchasing power of capital.
2) Provision of continuously updated decision-useful financial information about the reporting entity to capital providers and other users.
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Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Examples of constant real value non-monetary items
Examples of constant real value non-monetary items are all income statement items as well as the balance sheet constant items, e.g. retained earnings, issued share capital, capital reserves, share issue premiums, share issue discounts, capital reserves, all other shareholder’s equity items, trade debtors, trade creditors, provisions, other non-monetary debtors and creditors, taxes payable and receivable, deferred tax assets and liabilities, dividends payable and receivable, royalties payable and receivable, all other non-monetary payables, all other non-monetary receivables, etc.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday, 20 January 2011
Constant Item Purchasing Power Accounting
Constant Item Purchasing Power Accounting (CIPPA) is the International Accounting Standards Board's basic accounting alternative authorized in International Financial Reporting Standards in the Framework for the Preparation and Presentation of Financial Statements (1989), Paragraph 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power." It is the IASB-approved alternative to traditional Historical Cost Accounting whereunder ONLY constant real value non-monetary items (NOT variable real value non-monetary items) are measured in units of constant purchasing power; i.e. continuously inflation-adjusted or updated by applying the monthly change in the Consumer Price Index, during low inflation and deflation.
Monetary items, variable real value non-monetary items and constant real value non-monetary items are the three fundamentally different basic economic items in the economy.
Examples of constant items are issued share capital, retained income, capital reserves, all other items in shareholders´ equity, trade debtors, trade creditors, provisions, deferred tax assets and liabilities, all other non-monetary payables, all other non-monetary receivables, salaries, wages, rentals, all other items in the income statement, etc. valued in units of constant purchasing power during low inflation and deflation when financial capital maintenance in units of constant purchasing power (CIPPA) is implemented during low inflation and deflation.
Examples of variable items are property, plant, equipment, listed and unlisted shares, inventory, foreign exchange, etc. Variable items are valued in terms of IFRS at for example fair value, market value, recoverable value, present value, net realizable value, etc. or Generally Accepted Accounting Principles (GAAP) during non-hyperinflationary periods.
Monetary items are always valued at their original nominal HC monetary values in nominal monetary units during the current accounting period under all accounting and economic models because it is impossible to inflation-adjust money and other monetary items; monetary items being money held and other items with an underlying monetary nature. Examples of monetary items are bank notes and coins, bank account balances, all monetary loans owed or granted, house loans, car loans, consumer loans, student loans, government and commericial bonds, ets.
CIPPA is a price-level accounting model which implements the principle of financial capital maintenance in units of constant purchasing power during non-hyperinflationary periods. It automatically maintains the real value of all constant real value non-monetary items constant in all entities that at least break even, including banks´ and companies´ capital base, for an unlimited period of time (forever) - all else being equal - whether these entities own revaluable fixed assets or not and without the requirement of additional capital from capital providers in the form of extra money or extra retained profits simply to maintain the existing constant real non-monetary value of existing constant real value capital constant. This is opposed to the traditional Historical Cost Accounting model which unknowingly, unnecessarily and unintentionally erodes the real value of that portion of shareholders´equity never maintained constant as a result of insufficient revaluable fixed assets (revalued or not) during low inflation. The IASB´s Framework, Par 104 (a) is applicable as a result of the absence of specific IFRS relating to the concepts of capital and capital maintenance and the valuation of specific constant real value non-monetary items.
Constant Purchasing Power Accounting (CPPA) as defined in International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies is the IASB´s inflation accounting model required to be implemented ONLY during hyperinflation under which ALL non-monetary items (variable and constant real value non-monetary items) are measured in units of constant purchasing power by applying the change in the period-end CPI.
Accountants can freely choose the Constant Item Purchasing Power Accounting model to implement a financial capital concept of invested purchasing power. They will thus implement a constant purchasing power financial capital maintenance concept and they will implement a constant purchasing power profit/loss determination concept in units of constant purchasing power instead of in real value eroding nominal monetary units during low inflation.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
F
Monetary items, variable real value non-monetary items and constant real value non-monetary items are the three fundamentally different basic economic items in the economy.
Examples of constant items are issued share capital, retained income, capital reserves, all other items in shareholders´ equity, trade debtors, trade creditors, provisions, deferred tax assets and liabilities, all other non-monetary payables, all other non-monetary receivables, salaries, wages, rentals, all other items in the income statement, etc. valued in units of constant purchasing power during low inflation and deflation when financial capital maintenance in units of constant purchasing power (CIPPA) is implemented during low inflation and deflation.
Examples of variable items are property, plant, equipment, listed and unlisted shares, inventory, foreign exchange, etc. Variable items are valued in terms of IFRS at for example fair value, market value, recoverable value, present value, net realizable value, etc. or Generally Accepted Accounting Principles (GAAP) during non-hyperinflationary periods.
Monetary items are always valued at their original nominal HC monetary values in nominal monetary units during the current accounting period under all accounting and economic models because it is impossible to inflation-adjust money and other monetary items; monetary items being money held and other items with an underlying monetary nature. Examples of monetary items are bank notes and coins, bank account balances, all monetary loans owed or granted, house loans, car loans, consumer loans, student loans, government and commericial bonds, ets.
CIPPA is a price-level accounting model which implements the principle of financial capital maintenance in units of constant purchasing power during non-hyperinflationary periods. It automatically maintains the real value of all constant real value non-monetary items constant in all entities that at least break even, including banks´ and companies´ capital base, for an unlimited period of time (forever) - all else being equal - whether these entities own revaluable fixed assets or not and without the requirement of additional capital from capital providers in the form of extra money or extra retained profits simply to maintain the existing constant real non-monetary value of existing constant real value capital constant. This is opposed to the traditional Historical Cost Accounting model which unknowingly, unnecessarily and unintentionally erodes the real value of that portion of shareholders´equity never maintained constant as a result of insufficient revaluable fixed assets (revalued or not) during low inflation. The IASB´s Framework, Par 104 (a) is applicable as a result of the absence of specific IFRS relating to the concepts of capital and capital maintenance and the valuation of specific constant real value non-monetary items.
Constant Purchasing Power Accounting (CPPA) as defined in International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies is the IASB´s inflation accounting model required to be implemented ONLY during hyperinflation under which ALL non-monetary items (variable and constant real value non-monetary items) are measured in units of constant purchasing power by applying the change in the period-end CPI.
Accountants can freely choose the Constant Item Purchasing Power Accounting model to implement a financial capital concept of invested purchasing power. They will thus implement a constant purchasing power financial capital maintenance concept and they will implement a constant purchasing power profit/loss determination concept in units of constant purchasing power instead of in real value eroding nominal monetary units during low inflation.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
F
Wednesday, 19 January 2011
Conflict in IFRS
There is a conflict with the continuous financial capital maintenance in units of constant purchasing power concept as stated in the Framework, Par 104 (a) when IFRS treat constant real value non-monetary items like monetary items or variable real value non-monetary items, e.g. treating trade debtors and trade creditors like monetary items instead of constant real value non-monetary items. The only way the financial capital concept of continuously measuring financial capital maintenance in units of constant purchasing power in terms of the provision in the Framework, Par 104 (a) can be correctly implemented, is with the correct treatment of all constant items as constant items and not as monetary or variable items. The incorrect treatment of constant items as monetary or variable items in terms of IFRS would lead to the incorrect calculation of the Net Monetary Loss or Gain from holding monetary items as required when measuring financial capital maintenance in units of constant purchasing power in terms of the Framework, Par 104 (a) (Constant ITEM Purchasing Power Accounting) during low inflation and deflation and as required in IAS 29 (Constant Purchasing Power Accounting) during hyperinflation.
The crucial factor is the correct definition of monetary items because non-monetary items are correctly defined in IAS 29 as all items that are not monetary items. When the definition of monetary items is wrong – as it is under IAS 29 and IAS 21 – then the calculation of the net monetary loss or gain would be wrong as it is under current IFRS, namely in terms of IAS 29 and IAS 21. Monetary items are money held and other items with an underlying monetary nature. Monetary items are not items to be received or paid in money as stated in IAS 29. All items – monetary and non-monetary items - are normally received or paid in money.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The crucial factor is the correct definition of monetary items because non-monetary items are correctly defined in IAS 29 as all items that are not monetary items. When the definition of monetary items is wrong – as it is under IAS 29 and IAS 21 – then the calculation of the net monetary loss or gain would be wrong as it is under current IFRS, namely in terms of IAS 29 and IAS 21. Monetary items are money held and other items with an underlying monetary nature. Monetary items are not items to be received or paid in money as stated in IAS 29. All items – monetary and non-monetary items - are normally received or paid in money.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Saturday, 15 January 2011
Constant items under hyperinflation and low inflation
Constant items under hyperinflation
Accountants are required by the IASB to implement IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation. The IASB considers hyperinflation to be an exceptional circumstance. Hyperinflation is defined by the IASB as a cumulative inflation rate approaching or exceeding 100% over three years, i.e. 26% annual inflation for three years in a row.
Cagan defined the other popular definition of hyperinflation. Cagan (1951) defined hyperinflation to be present when monthly inflation equals or exceed 50%. The IASB´s definition will be followed in this work.
As per IAS 29, accountants have to restate their Historical Cost or Current Cost financial statements by applying the period-end CPI during hyperinflation to make the HC or CC financial statements more useful. They have to value all non-monetary items (both variable and constant real value non-monetary items) in units of constant purchasing power by applying the CPI at the period-end date. The restated values of HC or CC financial statements in terms of IAS 29 in a hyperinflationary economy are only valid new real values when the tax authorities accept the restated values for the calculation of taxes due.
“Regarding to tax regulation, I want to emphasize that tax regulation required restatement of assets and liabilities according to inflation (in terms of IAS 29) for the date of 31.12.2003 but taxes were not taken according to restated values in 2003. In 2004, financial statements were restated and taxes were taken based on restated values.”
Cemal KÜÇÜKSÖZEN, Ph.D, Head of Accounting Standards Department, Capital Markets Board of Turkey
Difference between CIPPA and CPPA
Constant Purchasing Power Accounting (CPPA) as defined in IAS 29 [not Constant ITEM Purchasing Power Accounting (CIPPA) as authorized in the Framework (1989), Par 104 (a)] is a complete price-level inflation accounting model only to be used during very high and hyperinflation where under all non-monetary items (variable and constant real value non-monetary items) are inflation-adjusted by means of the CPI at the period-end date during hyperinflation to make financial statements more useful. Constant ITEM Purchasing Power Accounting is also a price-level accounting model, but, only constant items (not variable items) are inflation adjusted during low inflation and deflation in terms of the change in the monthly CPI. CIPPA is not an inflation accounting model to be used during very high and hyperinflation. CIPPA is the IASB´s authorized alternative to the traditional Historical Cost Accounting model during low inflation and deflation.
IAS 29 can also be used to maintain the non-monetary economy relatively stable in a hyperinflationary economy. This is only possible when all non-monetary items (variable and constant items) are valued daily at the daily parallel US Dollar (or other hard currency) exchange rate instead of simply restating HC or CC financial statements at the period-end (normally year-end) CPI rate to make them more useful as required by IAS 29. Brazilian accountants did this very successfully from 1964 to 1994 without IAS 29 (IAS 29 was approved in 1989) by valuing all non-monetary items daily in term of a daily non-monetary index based almost entirely on the US Dollar exchange rate with their currency as supplied daily by various governments during those 30 years.
The constant item economy in a hyperinflationary environment would not be completely stable as in the case of financial capital maintenance in units of constant purchasing power applying the CPI during low inflation. Applying the daily USD parallel rate in the valuation of all non-monetary items (constant and variable items) during hyperinflation would still result in real value destruction of constant items, but, only at a rate equal to the inflation rate in the parallel hard currency used, normally the US Dollar. If this was done in the case of Zimbabwe it would have resulted in real value destruction in constant items of about 2% per annum – a rate equal to the USD inflation rate – instead of 89,700,000,000,000,000,000,000% in case of the Zimbabwe Dollar hyperinflation rate.
Constant items during low inflation
Only continuous financial capital maintenance in units of constant purchasing power as approved by the IASB in the Framework for the Preparation and Presentation of Financial Statements (1989), Par 104 (a) which states the principle which is the basis for the Constant ITEM Purchasing Power Accounting model and which is applicable – by free choice – in all entities applying IFRS since there are no specific IFRS relating to capital maintenance and the valuation of specific constant items, would enable accountants to automatically maintain the real value of all income statement and balance sheet constant items constant in the constant item economy for an indefinite period of time. This would be possible in all entities that at least break even during low inflation and deflation whether they own revaluable fixed assets or not and without requiring extra money for additional capital contributions or additional retained profits just to maintain the constant real value of existing constant items (e.g. shareholders´ equity) constant forever – all else being equal. The Constant ITEM Purchasing Power Accounting model is the only accounting model authorized in IFRS that automatically maintains the real value of all constant items constant forever as qualified above. There is no other way to do this automatically during low inflation and deflation.
The real value of equity (a constant item) is decreased when an entity makes a loss whether it applies financial capital maintenance in units of constant purchasing power or not.
Automatically maintaining the real value of all constant items constant - as stated above - in the economy is not possible, at present, while accountants implement the generally accepted traditional HCA model under which they apply the very erosive stable measuring unit assumption also authorized by the IASB in the Framework, Par 104 (a) in 1989. Implementing the HCA model unnecessarily, unknowingly and unintentionally erodes real value on a significant scale in the constant item economy when accountants measure financial capital maintenance in nominal monetary units in entities with insufficient revaluable fixed assets. This unnecessary, unknowing and unintentional erosion in the real value of constant items not fully or never maintained amounts to hundreds of billions of USD per annum in the world economy for as long as accountants choose to implement very erosive financial capital maintenance in nominal monetary units during inflation. When they freely choose to measure financial capital maintenance in units of constant purchasing power, also authorized by the IASB in the Framework, Par 104 (a) in 1989, they would knowingly maintain hundreds of billions of USD in existing real value per annum by not eroding existing constant item real value of, for example, retained profits, with their very erosive stable measuring unit assumption during low inflation.
The real value of equity never maintained constant with equivalent real value revaluable fixed assets under HCA can be maintained constant with continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation under IFRS in entities that at least break even, but, not under HCA. The HC model is also authorized under IFRS. Both the erosion and the maintenance of the existing real value of equity never maintained and all other constant items never maintained during low inflation are, paradoxically, authorized under IFRS. Accountants are free to choose the one or the other. Both are compliant with IFRS.
The specific choice of continuously measuring financial capital maintenance in units of constant purchasing power (the Constant ITEM Purchasing Power Accounting model) at all levels of inflation and deflation as contained in the Framework for the Preparation and Presentation of Financial Statements Par 104 (a), was approved by the International Accounting Standards Board’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.
“In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS Plus, Deloitte. Date: 21st March, 2010 http://www.iasplus.com/standard/framewk.htm
There are no applicable IFRS or Interpretations regarding the valuation of the constant real value non-monetary items issued share capital, retained earnings, capital reserves, share premium, share discount, the concepts of capital, the capital maintenance concepts, the determination of profit/loss concept, etc. The measurement concepts and direct and indirect definitions of these items in the Framework are thus applicable as per IAS8.11. There are Standards relating to the constant items trade debtors, trade creditors, other non-monetary payables, other non-monetary receivables, deferred tax assets, deferred tax liabilities, taxes payable and taxes receivable. In terms of IAS 8.11 the Standards take precedence over the Framework in the case of these items.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Fin24 29-3-11
Accountants are required by the IASB to implement IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation. The IASB considers hyperinflation to be an exceptional circumstance. Hyperinflation is defined by the IASB as a cumulative inflation rate approaching or exceeding 100% over three years, i.e. 26% annual inflation for three years in a row.
Cagan defined the other popular definition of hyperinflation. Cagan (1951) defined hyperinflation to be present when monthly inflation equals or exceed 50%. The IASB´s definition will be followed in this work.
As per IAS 29, accountants have to restate their Historical Cost or Current Cost financial statements by applying the period-end CPI during hyperinflation to make the HC or CC financial statements more useful. They have to value all non-monetary items (both variable and constant real value non-monetary items) in units of constant purchasing power by applying the CPI at the period-end date. The restated values of HC or CC financial statements in terms of IAS 29 in a hyperinflationary economy are only valid new real values when the tax authorities accept the restated values for the calculation of taxes due.
“Regarding to tax regulation, I want to emphasize that tax regulation required restatement of assets and liabilities according to inflation (in terms of IAS 29) for the date of 31.12.2003 but taxes were not taken according to restated values in 2003. In 2004, financial statements were restated and taxes were taken based on restated values.”
Cemal KÜÇÜKSÖZEN, Ph.D, Head of Accounting Standards Department, Capital Markets Board of Turkey
Difference between CIPPA and CPPA
Constant Purchasing Power Accounting (CPPA) as defined in IAS 29 [not Constant ITEM Purchasing Power Accounting (CIPPA) as authorized in the Framework (1989), Par 104 (a)] is a complete price-level inflation accounting model only to be used during very high and hyperinflation where under all non-monetary items (variable and constant real value non-monetary items) are inflation-adjusted by means of the CPI at the period-end date during hyperinflation to make financial statements more useful. Constant ITEM Purchasing Power Accounting is also a price-level accounting model, but, only constant items (not variable items) are inflation adjusted during low inflation and deflation in terms of the change in the monthly CPI. CIPPA is not an inflation accounting model to be used during very high and hyperinflation. CIPPA is the IASB´s authorized alternative to the traditional Historical Cost Accounting model during low inflation and deflation.
IAS 29 can also be used to maintain the non-monetary economy relatively stable in a hyperinflationary economy. This is only possible when all non-monetary items (variable and constant items) are valued daily at the daily parallel US Dollar (or other hard currency) exchange rate instead of simply restating HC or CC financial statements at the period-end (normally year-end) CPI rate to make them more useful as required by IAS 29. Brazilian accountants did this very successfully from 1964 to 1994 without IAS 29 (IAS 29 was approved in 1989) by valuing all non-monetary items daily in term of a daily non-monetary index based almost entirely on the US Dollar exchange rate with their currency as supplied daily by various governments during those 30 years.
The constant item economy in a hyperinflationary environment would not be completely stable as in the case of financial capital maintenance in units of constant purchasing power applying the CPI during low inflation. Applying the daily USD parallel rate in the valuation of all non-monetary items (constant and variable items) during hyperinflation would still result in real value destruction of constant items, but, only at a rate equal to the inflation rate in the parallel hard currency used, normally the US Dollar. If this was done in the case of Zimbabwe it would have resulted in real value destruction in constant items of about 2% per annum – a rate equal to the USD inflation rate – instead of 89,700,000,000,000,000,000,000% in case of the Zimbabwe Dollar hyperinflation rate.
Constant items during low inflation
Only continuous financial capital maintenance in units of constant purchasing power as approved by the IASB in the Framework for the Preparation and Presentation of Financial Statements (1989), Par 104 (a) which states the principle which is the basis for the Constant ITEM Purchasing Power Accounting model and which is applicable – by free choice – in all entities applying IFRS since there are no specific IFRS relating to capital maintenance and the valuation of specific constant items, would enable accountants to automatically maintain the real value of all income statement and balance sheet constant items constant in the constant item economy for an indefinite period of time. This would be possible in all entities that at least break even during low inflation and deflation whether they own revaluable fixed assets or not and without requiring extra money for additional capital contributions or additional retained profits just to maintain the constant real value of existing constant items (e.g. shareholders´ equity) constant forever – all else being equal. The Constant ITEM Purchasing Power Accounting model is the only accounting model authorized in IFRS that automatically maintains the real value of all constant items constant forever as qualified above. There is no other way to do this automatically during low inflation and deflation.
The real value of equity (a constant item) is decreased when an entity makes a loss whether it applies financial capital maintenance in units of constant purchasing power or not.
Automatically maintaining the real value of all constant items constant - as stated above - in the economy is not possible, at present, while accountants implement the generally accepted traditional HCA model under which they apply the very erosive stable measuring unit assumption also authorized by the IASB in the Framework, Par 104 (a) in 1989. Implementing the HCA model unnecessarily, unknowingly and unintentionally erodes real value on a significant scale in the constant item economy when accountants measure financial capital maintenance in nominal monetary units in entities with insufficient revaluable fixed assets. This unnecessary, unknowing and unintentional erosion in the real value of constant items not fully or never maintained amounts to hundreds of billions of USD per annum in the world economy for as long as accountants choose to implement very erosive financial capital maintenance in nominal monetary units during inflation. When they freely choose to measure financial capital maintenance in units of constant purchasing power, also authorized by the IASB in the Framework, Par 104 (a) in 1989, they would knowingly maintain hundreds of billions of USD in existing real value per annum by not eroding existing constant item real value of, for example, retained profits, with their very erosive stable measuring unit assumption during low inflation.
The real value of equity never maintained constant with equivalent real value revaluable fixed assets under HCA can be maintained constant with continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation under IFRS in entities that at least break even, but, not under HCA. The HC model is also authorized under IFRS. Both the erosion and the maintenance of the existing real value of equity never maintained and all other constant items never maintained during low inflation are, paradoxically, authorized under IFRS. Accountants are free to choose the one or the other. Both are compliant with IFRS.
The specific choice of continuously measuring financial capital maintenance in units of constant purchasing power (the Constant ITEM Purchasing Power Accounting model) at all levels of inflation and deflation as contained in the Framework for the Preparation and Presentation of Financial Statements Par 104 (a), was approved by the International Accounting Standards Board’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.
“In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS Plus, Deloitte. Date: 21st March, 2010 http://www.iasplus.com/standard/framewk.htm
There are no applicable IFRS or Interpretations regarding the valuation of the constant real value non-monetary items issued share capital, retained earnings, capital reserves, share premium, share discount, the concepts of capital, the capital maintenance concepts, the determination of profit/loss concept, etc. The measurement concepts and direct and indirect definitions of these items in the Framework are thus applicable as per IAS8.11. There are Standards relating to the constant items trade debtors, trade creditors, other non-monetary payables, other non-monetary receivables, deferred tax assets, deferred tax liabilities, taxes payable and taxes receivable. In terms of IAS 8.11 the Standards take precedence over the Framework in the case of these items.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Fin24 29-3-11
Friday, 14 January 2011
Constant Real Value Non-monetary Items
Inflation destroys the assumption that money is stable which is the basis of classic accountancy. In such circumstances, historical values registered in accountancy books become heterogeneous amounts measured in different units. The use of such data under traditional accounting methods without previous correction makes no sense and leads to results that are void of meaning. (Massone, 1981a. p.6)
http://books.google.com/books?id=WXwfMDDYOdkC&pg=PA259&lpg=PA259&dq=inflation+destroys+historical+cost+values&source=web&ots=YMBICCQr42&sig=lsiPcViCm3RhVQXwrigJK675RC8&hl=en&sa=X&oi=book_result&resnum=9&ct=result
The Taxation of Income from Business and Capital in Colombia: Fiscal Reform in the Developing World, By Charles E. McLure, John Mutti, Victor Thuronyi, George R. Zodrow, Contributor Charles E. McLure, Published by Duke University Press, 1990, ISBN 0822309254, 9780822309253, Page 259
Constant items are non-monetary items with constant real values over time.
The double entry accounting model was first comprehensively codified by the Italian Franciscan monk, Luca Pacioli in his book Summa de arithmetica, geometria, proportioni et proportionalita, published in Venice in 1494.
Accountants use the Consumer Price Index to maintain the real values of certain – not all - income statement constant items, e.g. salaries, wages, rentals, etc stable during low inflationary periods. They value these particular constant items in units of constant purchasing power while they generally implement the Historical Cost Accounting model. The Framework, Par 101 states that the measurement basis most often used by companies in preparing their financial reports is historical cost. This is normally used together with other measurement bases.
Constant items during Hyperinflation
Accountants are required by the IASB to implement IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation being an exceptional circumstance. Hyperinflation is defined by the IASB as a cumulative inflation rate approaching or exceeding 100% over three years, i.e. 26% annual inflation for three years in a row. Accountants have to restate their HC or Current Cost financial statements by applying the period-end CPI during hyperinflation to make the HC or CC financial statements more useful. They have to value all non-monetary items (both variable real value non-monetary items and constant real value non-monetary items) in units of constant purchasing power by applying the CPI at the period-end date. The restated values of HC or CC financial statements in terms of IAS 29 in a hyperinflationary economy are only valid new real values when the tax authorities accept the restated values for the calculation of taxes due.
“Regarding to tax regulation, I want to emphasize that tax regulation required restatement of assets and liabilities according to inflation (in terms of IAS 29) for the date of 31.12.2003 but taxes were not taken according to restated values in 2003. In 2004, financial statements were restated and taxes were taken based on restated values.”
Cemal KÜÇÜKSÖZEN, Ph.D, Head of Accounting Standards Department, Capital Markets Board of Turkey
Constant Purchasing Power inflation accounting (not Constant ITEM Purchasing Power Accounting) as defined in IAS 29 is a complete price-level inflation accounting model where under all variable and constant real value non-monetary items are inflation-adjusted by means of the CPI at the period-end date during hyperinflation to make financial statements more useful.
IAS 29 can also be used to maintain the non-monetary economy relatively stable in a hyperinflationary economy. This is only possible when all non-monetary items (variable and constant items) are valued daily at the daily parallel US Dollar (or other hard currency) exchange rate instead of simply restating HC or CC financial statements at the period-end (normally year-end) CPI rate to make them more useful as required by IAS 29. Brazilian accountants did this very successfully from 1964 to 1994 without IAS 29 (IAS 29 was approved in 1989) by valuing all non-monetary items daily in term of a daily non-monetary index based almost entirely on the US Dollar exchange rate with their currency as supplied daily by various governments during those 30 years.
The constant item economy in a hyperinflationary environment would not be completely stable as in the case of financial capital maintenance in units of constant purchasing power applying the CPI during low inflation. Applying the daily USD parallel rate in the valuation of all non-monetary items (constant and variable items) during hyperinflation would still result in real value destruction of constant items, but, only at a rate equal to the inflation rate in the parallel hard currency used, normally the US Dollar. If this was done in the case of Zimbabwe it would have resulted in real value destruction in constant items of about 2% per annum – a rate equal to the USD inflation rate – instead of 89,700,000,000,000,000,000,000% ( 89.7 sextillion%) in case of the Zimbabwe Dollar hyperinflation rate.
Nicolaas Smith
Copyright (c) 2005 - 2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Fin24 24-03-11
http://books.google.com/books?id=WXwfMDDYOdkC&pg=PA259&lpg=PA259&dq=inflation+destroys+historical+cost+values&source=web&ots=YMBICCQr42&sig=lsiPcViCm3RhVQXwrigJK675RC8&hl=en&sa=X&oi=book_result&resnum=9&ct=result
The Taxation of Income from Business and Capital in Colombia: Fiscal Reform in the Developing World, By Charles E. McLure, John Mutti, Victor Thuronyi, George R. Zodrow, Contributor Charles E. McLure, Published by Duke University Press, 1990, ISBN 0822309254, 9780822309253, Page 259
Constant items are non-monetary items with constant real values over time.
The double entry accounting model was first comprehensively codified by the Italian Franciscan monk, Luca Pacioli in his book Summa de arithmetica, geometria, proportioni et proportionalita, published in Venice in 1494.
Accountants use the Consumer Price Index to maintain the real values of certain – not all - income statement constant items, e.g. salaries, wages, rentals, etc stable during low inflationary periods. They value these particular constant items in units of constant purchasing power while they generally implement the Historical Cost Accounting model. The Framework, Par 101 states that the measurement basis most often used by companies in preparing their financial reports is historical cost. This is normally used together with other measurement bases.
Constant items during Hyperinflation
Accountants are required by the IASB to implement IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation being an exceptional circumstance. Hyperinflation is defined by the IASB as a cumulative inflation rate approaching or exceeding 100% over three years, i.e. 26% annual inflation for three years in a row. Accountants have to restate their HC or Current Cost financial statements by applying the period-end CPI during hyperinflation to make the HC or CC financial statements more useful. They have to value all non-monetary items (both variable real value non-monetary items and constant real value non-monetary items) in units of constant purchasing power by applying the CPI at the period-end date. The restated values of HC or CC financial statements in terms of IAS 29 in a hyperinflationary economy are only valid new real values when the tax authorities accept the restated values for the calculation of taxes due.
“Regarding to tax regulation, I want to emphasize that tax regulation required restatement of assets and liabilities according to inflation (in terms of IAS 29) for the date of 31.12.2003 but taxes were not taken according to restated values in 2003. In 2004, financial statements were restated and taxes were taken based on restated values.”
Cemal KÜÇÜKSÖZEN, Ph.D, Head of Accounting Standards Department, Capital Markets Board of Turkey
Constant Purchasing Power inflation accounting (not Constant ITEM Purchasing Power Accounting) as defined in IAS 29 is a complete price-level inflation accounting model where under all variable and constant real value non-monetary items are inflation-adjusted by means of the CPI at the period-end date during hyperinflation to make financial statements more useful.
IAS 29 can also be used to maintain the non-monetary economy relatively stable in a hyperinflationary economy. This is only possible when all non-monetary items (variable and constant items) are valued daily at the daily parallel US Dollar (or other hard currency) exchange rate instead of simply restating HC or CC financial statements at the period-end (normally year-end) CPI rate to make them more useful as required by IAS 29. Brazilian accountants did this very successfully from 1964 to 1994 without IAS 29 (IAS 29 was approved in 1989) by valuing all non-monetary items daily in term of a daily non-monetary index based almost entirely on the US Dollar exchange rate with their currency as supplied daily by various governments during those 30 years.
The constant item economy in a hyperinflationary environment would not be completely stable as in the case of financial capital maintenance in units of constant purchasing power applying the CPI during low inflation. Applying the daily USD parallel rate in the valuation of all non-monetary items (constant and variable items) during hyperinflation would still result in real value destruction of constant items, but, only at a rate equal to the inflation rate in the parallel hard currency used, normally the US Dollar. If this was done in the case of Zimbabwe it would have resulted in real value destruction in constant items of about 2% per annum – a rate equal to the USD inflation rate – instead of 89,700,000,000,000,000,000,000% ( 89.7 sextillion%) in case of the Zimbabwe Dollar hyperinflation rate.
Nicolaas Smith
Copyright (c) 2005 - 2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Fin24 24-03-11
Tuesday, 11 January 2011
IFRS should not be based on fallacies
The International Accounting Standards Board is a private, independent accounting standards board based in London. The mission of the IASB is to develop a single set of global accounting standards. The IASB cooperates with national accounting standard boards for international convergence of accounting standards.
The IASB should not authorize and approve International Financial Reporting Standards based on significantly erosive accounting fallacies, e.g. real value eroding financial capital maintenance in nominal monetary units per se and the very erosive stable measuring unit assumption during inflation which is based on a fallacy which costs the world economy hundreds of billions of USD per annum in real value unnecessarily, unknowingly and unintentionally eroded by the implementation of the traditional HCA model in the existing real value of constant real value non-monetary items (e.g. shareholders equity) never or not fully maintained. Currently the IASB is doing exactly that in the Framework, Par 104 (a) which states:
“Financial capital maintenance can be measured either in nominal monetary units or units of constant purchasing power.”
It is impossible to maintain the real value of financial capital constant in nominal monetary units per se during inflation and deflation since money is not perfectly stable in real value during inflationary and deflationary periods. However, accountants and financial statement users have been educated with the Historical Cost Accounting model of financial reporting which includes the stable measuring unit assumption as stated by the FASB in FAS 89. Financial capital maintenance in nominal monetary units per se is a fallacy during inflation and deflation while the stable measuring unit assumption is based on the fallacy that changes in the purchasing power of money are not sufficiently important to require continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation.
The real value of existing constant items never maintained constant is unknowingly, unnecessarily and unintentionally eroded as a result of the implementation of the HCA model with the very erosive stable measuring unit assumption during low inflation because accountants generally measure financial capital maintenance in banks and companies in nominal monetary units as part of traditional HC accounting based on those two very popular IASB-approved and authorized accounting fallacies.
Accountants who prepare their financial reports in terms of International Financial Reporting Standards generally choose to measure financial capital maintenance in nominal monetary units, the accounting fallacy as approved by the International Accounting Standards Board in the Framework for the Preparation and Presentation of Financial Statements, Par 104 (a) which they apply in the absence of specific IFRS relating to the concept of capital, the concept of capital maintenance, the concept of profit/loss determination and in the absence of specific IFRS for the valuation of specific constants items, e.g. Shareholders´ Equity items, etc.
Astonishingly, the IASB authorized both the HCA model stated in terms of the very popular accounting fallacy that financial capital maintenance can be measured in nominal monetary units as well as its only and perfect remedy (the remedy is perfect, not the resulting values) during inflation and deflation in one and the same statement in 1989. It is impossible to maintain the real value of financial capital stable by measuring it in nominal monetary units per se during inflation and deflation. The statement in the Framework, Par 104 (a) that financial capital maintenance can be measured in nominal monetary units is only true – per se – at sustainable zero inflation – a monetary environment never achieved over any significant period in the past and not soon to be achieved over a significant period in the future. The IASB statement that financial capital maintenance can be measured in nominal monetary units is a fallacy under all other economic environments: low inflation, hyperinflation and deflation. IFRS should not be based on fallacies as they currently are.
Accountants who prepare financial reports in terms of IFRS have to make the choice presented to them in the Framework, Par 104 (a). The boards of directors actually have to make the choice; their accountants being the accounting experts, obviously, advise them about the appropriate choice to make. Financial capital maintenance in nominal monetary units is a very popular accounting fallacy authorized by the IASB in the Framework, Par 104 (a) in 1989. It is, certainly, not an appropriate accounting policy for companies during inflation and deflation. Unfortunately most, if not all boards of directors choose financial capital maintenance in nominal monetary units as part of the traditional HCA model which includes the very erosive stable measuring unit assumption in the world economy. This results in the unnecessary, unknowing and unintentional eroding of hundreds billions of USD in the real value of existing constant items never or not fully maintained, e.g. retained profits, in the world´s real economy each and every year.
Accountants preparing financial reports of unlisted companies generally also choose to measure financial capital maintenance in nominal monetary units and implement the HCA model since it is the generally accepted traditional accounting model.
Copyright (c) 2005 - 2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The IASB should not authorize and approve International Financial Reporting Standards based on significantly erosive accounting fallacies, e.g. real value eroding financial capital maintenance in nominal monetary units per se and the very erosive stable measuring unit assumption during inflation which is based on a fallacy which costs the world economy hundreds of billions of USD per annum in real value unnecessarily, unknowingly and unintentionally eroded by the implementation of the traditional HCA model in the existing real value of constant real value non-monetary items (e.g. shareholders equity) never or not fully maintained. Currently the IASB is doing exactly that in the Framework, Par 104 (a) which states:
“Financial capital maintenance can be measured either in nominal monetary units or units of constant purchasing power.”
It is impossible to maintain the real value of financial capital constant in nominal monetary units per se during inflation and deflation since money is not perfectly stable in real value during inflationary and deflationary periods. However, accountants and financial statement users have been educated with the Historical Cost Accounting model of financial reporting which includes the stable measuring unit assumption as stated by the FASB in FAS 89. Financial capital maintenance in nominal monetary units per se is a fallacy during inflation and deflation while the stable measuring unit assumption is based on the fallacy that changes in the purchasing power of money are not sufficiently important to require continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation.
The real value of existing constant items never maintained constant is unknowingly, unnecessarily and unintentionally eroded as a result of the implementation of the HCA model with the very erosive stable measuring unit assumption during low inflation because accountants generally measure financial capital maintenance in banks and companies in nominal monetary units as part of traditional HC accounting based on those two very popular IASB-approved and authorized accounting fallacies.
Accountants who prepare their financial reports in terms of International Financial Reporting Standards generally choose to measure financial capital maintenance in nominal monetary units, the accounting fallacy as approved by the International Accounting Standards Board in the Framework for the Preparation and Presentation of Financial Statements, Par 104 (a) which they apply in the absence of specific IFRS relating to the concept of capital, the concept of capital maintenance, the concept of profit/loss determination and in the absence of specific IFRS for the valuation of specific constants items, e.g. Shareholders´ Equity items, etc.
Astonishingly, the IASB authorized both the HCA model stated in terms of the very popular accounting fallacy that financial capital maintenance can be measured in nominal monetary units as well as its only and perfect remedy (the remedy is perfect, not the resulting values) during inflation and deflation in one and the same statement in 1989. It is impossible to maintain the real value of financial capital stable by measuring it in nominal monetary units per se during inflation and deflation. The statement in the Framework, Par 104 (a) that financial capital maintenance can be measured in nominal monetary units is only true – per se – at sustainable zero inflation – a monetary environment never achieved over any significant period in the past and not soon to be achieved over a significant period in the future. The IASB statement that financial capital maintenance can be measured in nominal monetary units is a fallacy under all other economic environments: low inflation, hyperinflation and deflation. IFRS should not be based on fallacies as they currently are.
Accountants who prepare financial reports in terms of IFRS have to make the choice presented to them in the Framework, Par 104 (a). The boards of directors actually have to make the choice; their accountants being the accounting experts, obviously, advise them about the appropriate choice to make. Financial capital maintenance in nominal monetary units is a very popular accounting fallacy authorized by the IASB in the Framework, Par 104 (a) in 1989. It is, certainly, not an appropriate accounting policy for companies during inflation and deflation. Unfortunately most, if not all boards of directors choose financial capital maintenance in nominal monetary units as part of the traditional HCA model which includes the very erosive stable measuring unit assumption in the world economy. This results in the unnecessary, unknowing and unintentional eroding of hundreds billions of USD in the real value of existing constant items never or not fully maintained, e.g. retained profits, in the world´s real economy each and every year.
Accountants preparing financial reports of unlisted companies generally also choose to measure financial capital maintenance in nominal monetary units and implement the HCA model since it is the generally accepted traditional accounting model.
Copyright (c) 2005 - 2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Monday, 10 January 2011
Two systemic processes of real value erosion
There was only one systemic process of real value erosion operating only in the monetary economy before the invention of double entry accounting. The economic process of inflation only eroded the real value of depreciating money and other depreciating monetary items equally throughout only the monetary economy at that time as it does today in economies subject to inflation and hyperinflation.
There was no simultaneous second systemic real value erosion process, as we experience it today, whereby the Historical Cost Accounting model unknowingly, unnecessarily and unintentionally erodes significant amounts of real value of existing constant real value non-monetary items never or not fully maintained, e.g. Retained Profits, only in the constant item economy because accountants freely choose to implement their very erosive stable measuring unit assumption during inflation. The reason was that the traditional IFRS authorized Historical Cost Accounting model which includes the very erosive stable measuring unit assumption (based on a fallacy) and which is founded on financial capital maintenance in nominal monetary units (another very popular accounting fallacy) was not yet invented at that time.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Fin24 22-3-11
There was no simultaneous second systemic real value erosion process, as we experience it today, whereby the Historical Cost Accounting model unknowingly, unnecessarily and unintentionally erodes significant amounts of real value of existing constant real value non-monetary items never or not fully maintained, e.g. Retained Profits, only in the constant item economy because accountants freely choose to implement their very erosive stable measuring unit assumption during inflation. The reason was that the traditional IFRS authorized Historical Cost Accounting model which includes the very erosive stable measuring unit assumption (based on a fallacy) and which is founded on financial capital maintenance in nominal monetary units (another very popular accounting fallacy) was not yet invented at that time.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Fin24 22-3-11
Thursday, 6 January 2011
Accounting fallacies not yet extinct
Economic history is replete with fallacies which became extinct with the development of economic understanding.
Three accounting fallacies not yet extinct are:
1. Financial capital maintenance in nominal monetary units authorized in IFRS in the Framework (1989), Par 104 (a) which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”
It is impossible to maintain the real value of financial capital constant in nominal monetary units per se during inflation and deflation.
2. The stable measuring unit assumption is based on the fallacy that changes in the purchasing power of money are not sufficiently important to require continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation.
Changes in the purchasing power of money logically require continuous financial capital maintenance in units of constant purchasing power during inflation and deflation.
3. Accountants´ belief that the erosion of companies´ profits and capital is caused by inflation. This is fully supported by the IASB and the US Financial Accounting Standards Board.
Accountants unknowingly, unnecessarily and unintentionally erode the real value of companies´ profits and capital never maintained constant with their free choice of implementing the stable measuring unit assumption during inflation. Inflation can only erode the real value of money and other monetary items. Inflation has no effect on the real value of non-monetary items.
The erosion of companies´ capital and profits by inflation is a very popular accounting fallacy stated by, for example, the US Financial Accounting Standards Board:
Mr. Mosso dissents because he believes that the Statement does not bring the basic problem it addresses — measuring the effect of inflation on business operations — into focus. Because of that he doubts that it will effectively communicate the erosive impact of inflation on profits and capital and the significance of that erosion on all who have an investment stake in business enterprises. FAS 33 (superseded by FAS 89), Par 67, P 22, 1979.
The FASB blamed inflation for the erosion of companies´ capital and profits, but, admitted that the traditional HCA model, or, specifically the stable measuring unit assumption, actually does the eroding:
Because most accountants and users of financial statements have been inculcated with a model of financial reporting that assumes stability of the monetary unit, accepting a change of this consequence would take a lengthy period of time under the best of circumstances. FAS 89, Par 4, P6, 1986.
The IASB also blames inflation in IAS 29 Financial Reporting in Hyperinflationary Economies:
In most countries, financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued. IAS 29 Par 6
Both shareholders´ equity being a company’s capital as well as retained profits - as a separate item - are constant real value non-monetary items.
Inflation has no effect on the real value of non-monetary items: Milton Friedman famously stated that “inflation is always and everywhere a monetary phenomenon.”
This is confirmed by two Turkish academics as follows:
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
http://www.mufad.org/index2.php?option=com_docman&task=doc_view&gid=9&Itemid=100
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Three accounting fallacies not yet extinct are:
1. Financial capital maintenance in nominal monetary units authorized in IFRS in the Framework (1989), Par 104 (a) which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”
It is impossible to maintain the real value of financial capital constant in nominal monetary units per se during inflation and deflation.
2. The stable measuring unit assumption is based on the fallacy that changes in the purchasing power of money are not sufficiently important to require continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation.
Changes in the purchasing power of money logically require continuous financial capital maintenance in units of constant purchasing power during inflation and deflation.
3. Accountants´ belief that the erosion of companies´ profits and capital is caused by inflation. This is fully supported by the IASB and the US Financial Accounting Standards Board.
Accountants unknowingly, unnecessarily and unintentionally erode the real value of companies´ profits and capital never maintained constant with their free choice of implementing the stable measuring unit assumption during inflation. Inflation can only erode the real value of money and other monetary items. Inflation has no effect on the real value of non-monetary items.
The erosion of companies´ capital and profits by inflation is a very popular accounting fallacy stated by, for example, the US Financial Accounting Standards Board:
Mr. Mosso dissents because he believes that the Statement does not bring the basic problem it addresses — measuring the effect of inflation on business operations — into focus. Because of that he doubts that it will effectively communicate the erosive impact of inflation on profits and capital and the significance of that erosion on all who have an investment stake in business enterprises. FAS 33 (superseded by FAS 89), Par 67, P 22, 1979.
The FASB blamed inflation for the erosion of companies´ capital and profits, but, admitted that the traditional HCA model, or, specifically the stable measuring unit assumption, actually does the eroding:
Because most accountants and users of financial statements have been inculcated with a model of financial reporting that assumes stability of the monetary unit, accepting a change of this consequence would take a lengthy period of time under the best of circumstances. FAS 89, Par 4, P6, 1986.
The IASB also blames inflation in IAS 29 Financial Reporting in Hyperinflationary Economies:
In most countries, financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued. IAS 29 Par 6
Both shareholders´ equity being a company’s capital as well as retained profits - as a separate item - are constant real value non-monetary items.
Inflation has no effect on the real value of non-monetary items: Milton Friedman famously stated that “inflation is always and everywhere a monetary phenomenon.”
This is confirmed by two Turkish academics as follows:
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
http://www.mufad.org/index2.php?option=com_docman&task=doc_view&gid=9&Itemid=100
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday, 4 January 2011
Inflation
Inflation is always and everywhere a monetary phenomenon: Milton Friedman.
Inflation is a sustained rise in the general price level of goods and services inside a national economy or monetary union (e.g. the European Monetary Union) over a period of time. Prices are normally expressed in terms of unstable money (the unstable functional currency) which results in the unit of measure or unit of account being an unstable measuring unit in an economy or monetary union. Inflation always and everywhere erodes the real value of the depreciating functional currency (money) and other depreciating monetary items over time. Inflation has no effect on the real value of non-monetary items. Disinflation is a decrease in the rate of increase of the general price level; i.e. disinflation is lower inflation. Inflation still erodes the real value of depreciating money and other depreciating monetary items during disinflation - just at a slower rate than before.
Deflation is a sustained absolute decrease in the general price level. Deflation creates real value in appreciating money and other appreciating monetary items over time, recently mainly seen in the Japanese economy.
Inflation reared its ugly head soon after the invention of unstable money. It only eroded the real value of depreciating money and other depreciating monetary items at that time as it does today. Inflation did not and can not erode the real value of non-monetary items – either variable or constant real value non-monetary items.
Nicolaas Smith
Copyright (c) 2005 - 2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Fin24 18-3-11
Inflation is a sustained rise in the general price level of goods and services inside a national economy or monetary union (e.g. the European Monetary Union) over a period of time. Prices are normally expressed in terms of unstable money (the unstable functional currency) which results in the unit of measure or unit of account being an unstable measuring unit in an economy or monetary union. Inflation always and everywhere erodes the real value of the depreciating functional currency (money) and other depreciating monetary items over time. Inflation has no effect on the real value of non-monetary items. Disinflation is a decrease in the rate of increase of the general price level; i.e. disinflation is lower inflation. Inflation still erodes the real value of depreciating money and other depreciating monetary items during disinflation - just at a slower rate than before.
Deflation is a sustained absolute decrease in the general price level. Deflation creates real value in appreciating money and other appreciating monetary items over time, recently mainly seen in the Japanese economy.
Inflation reared its ugly head soon after the invention of unstable money. It only eroded the real value of depreciating money and other depreciating monetary items at that time as it does today. Inflation did not and can not erode the real value of non-monetary items – either variable or constant real value non-monetary items.
Nicolaas Smith
Copyright (c) 2005 - 2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Fin24 18-3-11
Monday, 27 December 2010
Monetary items
Money was then invented over a long period of time. Eventually money came to fulfil the following three functions during inflation and deflation:
a. Unstable medium of exchange
b. Unstable store of value
c. Unstable unit of account
Non-monetary items which are all items which are not monetary items were only defined in monetary terms after the invention of money. The economy came to be divided in the monetary economy and the non-monetary or real economy. There were only unstable monetary items and variable real value non-monetary items. There were no constant real value non-monetary items yet. The non-monetary or real economy consisted of only variable real value non-monetary items. Non-monetary items are all items that are not monetary items.
Monetary items are money held and items with an underlying monetary nature.
Examples of monetary items in today’s economy are bank notes and coins, bank loans, bank savings, other monetary savings, other monetary loans, bank account balances, treasury bills, commercial bonds, government bonds, mortgage bonds, student loans, car loans, consumer loans, credit card loans, notes payable, notes receivable, etc.
Unstable money and other unstable monetary items´ real values are continuously being eroded by inflation over time. Inflation only erodes the real value of unstable money and other unstable monetary items. Inflation has no effect on the real value of non-monetary items.
Non-monetary items are all items that are not monetary items.
Non-monetary items in today’s economy are divided into two sub-groups:
a) Variable real value non-monetary items
b) Constant real value non-monetary items
There were still no units of constant purchasing power because there was still no CPI at that time. There was still no HCA model, no very destructive stable measuring unit assumption based on a fallacy and no financial capital maintenance in nominal monetary units fallacy during inflation and deflation. There was still no price-level accounting, no constant purchasing power (CPPA) inflation accounting model for hyperinflationary economies and no real value maintaining continuous financial capital maintenance in units of constant purchasing power basic accounting model (CIPPA) for low inflationary and deflationary economies. There were still no financial reports.
Copyright (c) 2005-2010 Nicolaas Smith. All rights reserved. No reproduction without permission.
Fin24 17-3-11
a. Unstable medium of exchange
b. Unstable store of value
c. Unstable unit of account
Non-monetary items which are all items which are not monetary items were only defined in monetary terms after the invention of money. The economy came to be divided in the monetary economy and the non-monetary or real economy. There were only unstable monetary items and variable real value non-monetary items. There were no constant real value non-monetary items yet. The non-monetary or real economy consisted of only variable real value non-monetary items. Non-monetary items are all items that are not monetary items.
Monetary items are money held and items with an underlying monetary nature.
Examples of monetary items in today’s economy are bank notes and coins, bank loans, bank savings, other monetary savings, other monetary loans, bank account balances, treasury bills, commercial bonds, government bonds, mortgage bonds, student loans, car loans, consumer loans, credit card loans, notes payable, notes receivable, etc.
Unstable money and other unstable monetary items´ real values are continuously being eroded by inflation over time. Inflation only erodes the real value of unstable money and other unstable monetary items. Inflation has no effect on the real value of non-monetary items.
Non-monetary items are all items that are not monetary items.
Non-monetary items in today’s economy are divided into two sub-groups:
a) Variable real value non-monetary items
b) Constant real value non-monetary items
There were still no units of constant purchasing power because there was still no CPI at that time. There was still no HCA model, no very destructive stable measuring unit assumption based on a fallacy and no financial capital maintenance in nominal monetary units fallacy during inflation and deflation. There was still no price-level accounting, no constant purchasing power (CPPA) inflation accounting model for hyperinflationary economies and no real value maintaining continuous financial capital maintenance in units of constant purchasing power basic accounting model (CIPPA) for low inflationary and deflationary economies. There were still no financial reports.
Copyright (c) 2005-2010 Nicolaas Smith. All rights reserved. No reproduction without permission.
Fin24 17-3-11
Friday, 17 December 2010
Variable Items
Variable items are non-monetary items with variable real values over time.
Examples of variable items in today’s economy are property, plant, equipment, inventories, quoted and unquoted shares, raw material stock, finished goods stock, patents, trademarks, foreign exchange, etc.
The first economic items were variable real value items. Their values were not yet expressed in terms of money because money was not yet invented at that time. There was no inflation because there was no money. Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. There was no unstable monetary medium of exchange. There was no unstable monetary unit of account. There was no unstable monetary store of value.
There was no double entry accounting model at that time. There were no historical cost items. There was no very destructive stable measuring unit assumption approved by the International Accounting Standards Board whereby accountants assume the unit of measure is stable, i.e., they consider that changes in the general purchasing power of money are not sufficiently important to require financial capital maintenance in units of constant purchasing power during low inflation and deflation. The stable measuring unit assumption is based on a very popular accounting fallacy since the real value of money is never absolutely stable on a sustainable basis during inflation and deflation. There was no Historical Cost Accounting model and no financial capital maintenance in nominal monetary units per se (another very popular IFRS-authorized accounting fallacy) during inflation; that is to say: there were no Historical Cost accounting fallacies. There was no value based accounting. There was also no Consumer Price Index at that time. Consequently there were no units of constant purchasing power and no price-level accounting.
There was no International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies supplying us with the current definition of inflation accounting. There was thus no Constant Purchasing Power Accounting (CPPA) IFRS-approved inflation accounting model under which all non-monetary items (variable and constant real value non-monetary items) in Historical Cost and Current Cost financial statements were required to be restated by means of the period-end CPI to make these restated HC and CC financial statements more useful during hyperinflation.
There was also no real value maintaining financial capital maintenance in units of constant purchasing power accounting model – Constant ITEM Purchasing Power Accounting (CIPPA) – as an official IFRS-approved alternative basic accounting model to the traditional HCA model during low inflation and deflation. There was no IFRS compliant basic accounting option where under only constant items are continuously measured in units of constant purchasing power during low inflation and deflation. There was no option of continuously measuring only constant items in units of constant purchasing power by applying the monthly change in the CPI during low inflation and deflation in order to implement a constant purchasing power financial capital concept of invested purchasing power by continuously measuring financial capital maintenance in units of constant purchasing power and continuously determining profit/loss in units of constant purchasing power.
There were no financial reports: e.g. no income statements, no balance sheets, no cash flow statements, no statements of changes in shareholders´ equity, etc. There were no monetary items and no constant items. There were only variable real value items not yet expressed in monetary terms.
Copyright (c) Nicolaas J Smith 2005-2011. All rights reserved. No reproduction without permission.
Fin24 16-3-11
Examples of variable items in today’s economy are property, plant, equipment, inventories, quoted and unquoted shares, raw material stock, finished goods stock, patents, trademarks, foreign exchange, etc.
The first economic items were variable real value items. Their values were not yet expressed in terms of money because money was not yet invented at that time. There was no inflation because there was no money. Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. There was no unstable monetary medium of exchange. There was no unstable monetary unit of account. There was no unstable monetary store of value.
There was no double entry accounting model at that time. There were no historical cost items. There was no very destructive stable measuring unit assumption approved by the International Accounting Standards Board whereby accountants assume the unit of measure is stable, i.e., they consider that changes in the general purchasing power of money are not sufficiently important to require financial capital maintenance in units of constant purchasing power during low inflation and deflation. The stable measuring unit assumption is based on a very popular accounting fallacy since the real value of money is never absolutely stable on a sustainable basis during inflation and deflation. There was no Historical Cost Accounting model and no financial capital maintenance in nominal monetary units per se (another very popular IFRS-authorized accounting fallacy) during inflation; that is to say: there were no Historical Cost accounting fallacies. There was no value based accounting. There was also no Consumer Price Index at that time. Consequently there were no units of constant purchasing power and no price-level accounting.
There was no International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies supplying us with the current definition of inflation accounting. There was thus no Constant Purchasing Power Accounting (CPPA) IFRS-approved inflation accounting model under which all non-monetary items (variable and constant real value non-monetary items) in Historical Cost and Current Cost financial statements were required to be restated by means of the period-end CPI to make these restated HC and CC financial statements more useful during hyperinflation.
There was also no real value maintaining financial capital maintenance in units of constant purchasing power accounting model – Constant ITEM Purchasing Power Accounting (CIPPA) – as an official IFRS-approved alternative basic accounting model to the traditional HCA model during low inflation and deflation. There was no IFRS compliant basic accounting option where under only constant items are continuously measured in units of constant purchasing power during low inflation and deflation. There was no option of continuously measuring only constant items in units of constant purchasing power by applying the monthly change in the CPI during low inflation and deflation in order to implement a constant purchasing power financial capital concept of invested purchasing power by continuously measuring financial capital maintenance in units of constant purchasing power and continuously determining profit/loss in units of constant purchasing power.
There were no financial reports: e.g. no income statements, no balance sheets, no cash flow statements, no statements of changes in shareholders´ equity, etc. There were no monetary items and no constant items. There were only variable real value items not yet expressed in monetary terms.
Copyright (c) Nicolaas J Smith 2005-2011. All rights reserved. No reproduction without permission.
Fin24 16-3-11
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