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

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

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

PricewaterhouseCoopers Understanding IAS 29 2006 p3

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

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

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

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

The PricewaterhouseCooper´s statement that

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

should thus be corrected to state:

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

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

Nicolaas Smith

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

Understanding IAS 29 per PricewaterhouseCoopers: Correction 5: The stable measuring unit assumption erodes real value during low inflation too

Understanding IAS 29 per PricewaterhouseCoopers: Correction 5: The stable measuring unit assumption erodes real value during low inflation too

 ‘This produces a meaningful result provided that there are no dramatic changes in the purchasing power of money.’

PricewaterhouseCoopers Understanding IAS 29 2006 p3

The generally accepted, globally implemented, traditional Historical Cost Accounting model, i.e., financial capital maintenance in nominal monetary units, does not result in maintaining the real value of capital constant during inflation and deflation since this is impossible, per se.

‘Dramatic changes’ are considered by PricewaterhouseCoopers and all Historical Cost accountants to be 26 per cent inflation for three years in a row, i.e., 100 per cent cumulative inflation over three years, the generally accepted definition of hyperinflation by millions of accountants worldwide who follow the IASB´s definition of hyperinflation.  A few academics, particularly Prof Steve Hanke, very unscientifically do not recognize the IASB´s generally accepted definition of hyperinflation. These few academics follow Cagan´s definition of 50 per cent inflation per month.

Thus PricewaterhouseCoopers, the IASB and all Historical Cost accountants consider inflation of 15 or 20 per cent per annum as not dramatic and would not require the implementation of IAS 29. This is obviously a mistake. This is in the process of being corrected by the IASB. This however takes a very long time via the IFRS process. The Argentinian Accounting Federation submitted a proposal, entitled ‘IFRS X INFLATION’ to the IASB in 2010 which proposes changes to the accounting model at inflation of 10 per annum or cumulative inflation of 26 per cent over three years. I amended the Argentinian Federation´s proposal in January 2012 to ‘IFRS X CAPITALMAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER’. The IASB voted unanimously in May 2012 to make the replacement of IAS 29 a research project in the future. This research project has not jet started at the IASB.

The implementation of the very destructive stable measuring unit assumption, even at 2 per cent inflation per annum, results in the erosion (destruction) of hundreds of billions of US Dollars in the real value of constant real value non-monetary items per annum in the world economy. PricewaterhouseCoopers, the IASB and most HC accountants do not understand this.

Nicolaas Smith

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

Understanding IAS 29 per PricewaterhouseCoopers: Correction 4: Inflation only affects the real value of only monetary items.

 ‘The impact of inflation is ignored.’ P3

PricewaterhouseCoopers Understanding IAS 29 2006 p3

This should be stated as follows:

The impact of

(a)   inflation and deflation on the real value of only monetary items and

(b)   the implementation of the stable measuring unit assumption on the real value of constant real value non-monetary items during inflation and deflation

is ignored.

PricewaterhouseCoopers, like most people, mistakenly thinks that inflation affects non-monetary items. That is impossible. Inflation only affects the real value of monetary items – nothing else.

Nicolaas Smith

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

Inflation as a tool to stimulate the economy

Bank of Japan set to launch war on deflation

CNN

Understanding IAS 29 per PricewaterhouseCoopers: Correction: Assets are not stated at cost as PricewaterhouseCoopers states

Understanding IAS 29 per PricewaterhouseCoopers: Correction 3: Assets are not stated at cost as PricewaterhouseCoopers states

 ‘The individual assets, liabilities, shareholders’ equity, revenue, expenses and gains and losses are therefore stated at cost at the time at which these items were originated.’ P3

PricewaterhouseCoopers Understanding IAS 29 2006 p3

Assets are not stated at cost per se as PricewaterhouseCoopers states. Some assets can be stated at cost, but most are stated in terms of fair value, net realizable value, net present value, recoverable value, etc. in terms of IFRS.

Nicolaas Smith

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

Understanding IAS 29 per PricewaterhouseCoopers: Correction: Inflation has no effect on the real value of non-monetary items

Understanding IAS 29 per PricewaterhouseCoopers: Correction 2: Inflation has no effect on the real value of non-monetary items

 ‘Financial statements unadjusted for inflation in most countries are prepared on the basis of historical cost without regard to changes in the general level of prices.’ P3

PricewaterhouseCoopers Understanding IAS 29 2006 p3

This should be changed to:

Financial statements with (a) net monetary losses and gains (resulting from inflation – hyperinflation - and deflation) not accounted and (b) constant real value non-monetary items measured in nominal monetary units implementing the very destructive stable measuring unit assumption in most countries are prepared on the basis of historical cost without regard to (i) changes in the general level of prices and without regard to (ii) the fact that constant real value non-monetary items are measured in nominal monetary units during inflation (hyperinflation) and deflation.

Inflation only affects the real value of monetary items. Inflation has no effect on the real value of non-monetary items. It is thus misleading and incorrect to state that financial statements are unadjusted for inflation. Financial statements are never ‘adjusted for inflation’ since monetary items are not ‘adjusted for inflation.’ The net monetary loss or gain in monetary items is calculated and accounted under IAS 29, i.e., under capital maintenance in units of constant purchasing power.

Constant real value non-monetary items cannot be ‘adjusted for inflation’ because inflation has no effect on the real value of non-monetary items. Constant real value non-monetary items are measured in units of constant purchasing power in terms of the monthly published CPI in terms of IAS 29.

Financial statements are not ‘adjusted for inflation’ under IAS 29. (a) The net monetary loss or gain as a result of hyperinflation in only monetary items is calculated and accounted under IAS 29 and (b) constant real value non-monetary items are measured in units of constant purchasing power in terms of the monthly published CPI in terms of IAS 29.

IAS 29 is thus based on capital maintenance in units of constant purchasing power principles. However, implementing IAS 29 in terms of the monthly published CPI does not result in the maintenance of the constant purchasing power of capital during hyperinflation, specifically with respect to the current year´s profit (eventually retained income, i.e., part of capital). A part of current year profits is eroded (destroyed) as a result of the implementation of the monthly CPI (one single price-level change per month) when the price level changes at least 28 to 31 times per month or even more often (sometimes twice a day) generally at above 3000 per cent inflation per annum.

IAS 29 can also have absolutely no positive effect in a hyperinflationary economy. That is what happened in Zimbabwe where IAS 29 was implemented during the last 8 years of hyperinflation. The Zimbabwe economy imploded on 20 November 2008 with full implementation of IAS 29.

Nicolaas Smith

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

Understanding IAS 29 per PricewaterhouseCoopers: Corrections: Capital Maintenance in Units of Constant Purchasing Power principles instead of current purchasing power principles

Understanding IAS 29 per PricewaterhouseCoopers: Correction 1: Capital Maintenance in Units of Constant Purchasing Power principles instead of current purchasing power principles

‘Introduction

Why is this guide needed?

IAS 29 is based on current purchasing power principles and requires financial statements prepared in the currency of a hyperinflationary economy to be stated in terms of the value of money at the reporting balance sheet date.’

PricewaterhouseCoopers Understanding IAS 29 2006 P3

IAS 29 is not based on current purchasing power principles. IAS 29 contains the IASB´s specific guidelines on how to implement financial capital maintenance in units of constant purchasing power as authorized in the Conceptual Framework (2010), Par. 4.59 (a) during hyperinflation. Par. 4.59 (a) states ‘Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.’ Capital maintenance in units of constant purchasing power is authorized in IFRS at all levels of inflation and deflation, including during hyperinflation as specifically guide-lined in IAS 29.

IAS 29 is thus based on capital maintenance in units of constant purchasing power principles. However, implementing IAS 29 in terms of the monthly published CPI does not result in the maintenance of the constant purchasing power of capital during hyperinflation, specifically with respect to the current year´s profit (eventually retained income, i.e., part of capital). A part of current year profits is eroded (destroyed) as a result of the implementation of the monthly CPI (one single price-level change per month) when the price level changes at least 28 to 31 times per month or even more often (sometimes twice a day) generally at above 3000 per cent inflation per annum.

IAS 29 can also have absolutely no positive effect in a hyperinflationary economy. That is what happened in Zimbabwe where IAS 29 was implemented during the last 8 years of hyperinflation. The Zimbabwe economy imploded on 20 November 2008 with full implementation of IAS 29.

Nicolaas Smith

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

Scam at previous Venezuela parallel rate site

Scam at previous Venezuela parallel rate site

Reblogged from The Devil´s Excrement


Moraima Garcia Says:
March 27, 2013 at 11:25 am
Glenn, in truth there is more to the Lechuga Verde case, apparently they were running a scam, selling people dollars at lower prices (apparently dollars they got from SITME) and at some point they stopped paying peolple. There is a web page of the victims with very direct threats to the people of Lechuga Verde. Not sure if the creators of the site have been arrested or even if people really know who they are, but from what you can read online it seems they were not saints wanting to give us information about the real price that must not be mentioned.

Reply

• Nicolaas Smith Says:

  
  March 27, 2013 at 11:59 am CNN indicates this site Dolar Today http://dolartoday.com/ quoting the parallel rate daily.”Precio del Dolar paralelo en Venezuela y noticias SIN CENSURA…” It seems to be a Colombian site.
  

  Reply

island canuck Says:

March 27, 2013 at 11:33 am There’s been some confusion about this.
Lechuagaverde.com was responsible for defrauding 100′s(?) of people by offering US$ at below market prices. After paying off a few early clients they just stopped paying the rest. A typical Ponzi scheme.
I think its these owners who Maduro was referring to.
In the meantime you will see efforts to block access to other sites inside Venezuela that post current rates. One notably is publishing the current price in Cucuta, Colombia (which is a legal & active market) & the Implicit rate (current Bs. in circulation (liquidity) divided by the international reserves on hand).
Efforts to block access are pretty useless as they also have Twitter & FB accounts.

Bloomberg:


Dollar-Desperate Venezuelans Get Defrauded on Internet

Parallel rate in Venezuela

Parallel rate in Venezuela

CNN indicates this site Dolar Today http://dolartoday.com/ quoting the parallel rate daily.”Precio del Dolar paralelo en Venezuela y noticias SIN CENSURA…”

It seems to be a Colombian site.

Nicolaas Smith

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

Official and parallel rate generally unify at the parallel rate

Official and parallel rate generally unify at the parallel rate

The experience with unification indicates that it usually takes place at the parallel exchange rate.

Parallel exchange rates in developing countries : lessons from eight case studies, Volume 1

Kiguel, Miguel A.; O'Connell, Stephen A.;

Policy, Research working paper; no. WPS 1265

Nicolaas Smith

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

Fundamental mistake in IFRIC 7

Dear Mr Hoogervorst,

Thank you for your reply dated 19 February.

I further wish to point out to you that there is a fundamental mistake in IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies as follows:

Par 3 Consensus states:

Therefore, in relation to non-monetary items measured at historical cost, the entity’s opening statement of financial position at the beginning of the earliest period presented in the financial statements shall be restated to reflect the effect of inflationfrom the date the assets were acquired and the liabilities were incurred or assumed until the end of the reporting period. For non-monetary items carried in the opening statement of financial position at amounts current at dates other than those of acquisition or incurrence, that restatement shall reflect instead the effect of inflation from the dates those carrying amounts were determined until the end of the reporting period.

Inflation has no effect on the real value of non-monetary items.

‘Purchasing power of non monetary items does not change in spite of variation in national currency value.’

Gucenme U and Arsoy A P 2005 Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 – 2005 Academy of Accounting Historians 2005 Research Conference 6-8 Oct 2005 Ohio State University Columbus Ohio USA (Second last item on website referenced.)

It is the stable measuring unit assumption, and not inflation, that affects the real value of non-monetary items. Inflation only affects the real value of monetary items.

Please change the word inflation in IFRIC 7, Par 3 above to “the stable measuring unit assumption”.

You stated in your reply to me that “It is important that our staff collaboration approach retains a degree of flexibilityand agility to respond to the circumstances.” I have found that to mean flexibility to ignore facts.

You are free to ignore the above fact too.

Yours sincerely,

Nicolaas Smith

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

The IASB has double standards

1. IAS 21, Par. 8: "Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency."

2. IAS 29, Par. 12: "Monetary items are money held and items to be received or paid in money."


Here is the correct definition of monetary items:

Monetary items constitute the money supply.

For example: trade debtors (receivables) and trade creditors (payables) are not part of the money supply. They are not monetary items: they are constant real value non-monetary items.

 

Nicolaas Smith

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

More Inflation Is the Cure for the Fed’s Impotence

Bloomberg

More Inflation Is the Cure for the Fed’s Impotence.

PIGS have to stay impotent since there is no help from the ECB with higher inflation and unlimited credit.

Difference between Fed and ECB

Difference between Fed and ECB

The Fed's mandate is "to promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates." The ECB has no mandate to promote high levels of employment. The result is very real with 29 million unemployed in Europe.


Nicolaas Smith

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

EMU countries are dollarized in terms of the Euro (Deutsche Mark)

EMU countries are dollarized in terms of the Euro (Deutsche Mark)

Dollarized countries have no independent monetary policies. EMU countries have no independent monetary policies. Their Central Banks have no autonomous monetary policy capability, the same as in dollarized countries like Zimbabwe, Equador and Panama.

Nicolaas Smith

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

Unlimited credit for PIGS

America and Japan successfully use the economic policy of unlimited credit in their economies: creating inflation in the case of Japan and quantitive easing in the case of the USA. Germany used the policy of unlimited credit very successfully in the case of East Germany after unification, but refuses to agree to the ECB using it in the case of Portugal, Ireland, Greece and Spain.

Europe uses the economically destructive policy of austerity in Portugal, Ireland, Greece and Spain (PIGS).

Inflation means that where the inflation is created, i.e., where the unlimited credit or free money is injected in the economy the country receives unlimited credit at no cost while the rest of the economy (consumers) pays for it in a slight increase in prices over a single year.

The ECB should supply PIGS with unlimited credit and consumers in the European Monetary Union would pay for it in a sligth increase in prices in every transaction over a single year. This would eliminate the neccessity for disastrous bail-outs at punitive payback rates that could stretch over a number of years.

When PIGS are economically sound again, the ECB would stop the unlimited credit.

Nicolaas Smith

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

Objectives of accounting / general purpose financial reporting

Objectives of accounting / general purpose financial reporting 

Updated on 14 January 2014

The objectives of general purpose financial reporting / accounting are

1. "To provide financial information about  the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.”  Conceptual Framework

and

2. To legalise measurement bases that result in automatic capital maintenance in units of constant purchasing power in terms of an index that follows all (at least DAILY) changes in the general price level for an indefinite period of time in entities that at least break even in real value - ceteris paribus - during low inflation, high inflation, hyperinflation and deflation.


Nicolaas Smith

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

How to automatically maintain your compay´s capital (equity) constant in real value

How to automatically maintain your compay´s capital (equity) constant in real value

 

Stop the stable measuring unit assumption (i.e. stop Historical Cost Accounting).

Guidance

1.                  Implement IFRS-authorised Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily Index.

2.                  Keep no monetary item overnight unless it is inflation-indexed on a daily basis during inflation.

3.                  Your General Conditions of Sale (Contracts) has to state that outstanding receivables and payables will be measured in units of constant purchasing power on a daily basis in terms of a Daily Index from the date of sale (contract) till the date of settlement.

Do not ask the IASB for guidance in this issue. They do not understand IFRS-authorised CMCUPP. Contact me for guidance at realvalueaccounting[at]yahoo.com.

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

How to automatically stabilise your economy

How to automatically stabilise your economy

Stop the stable measuring unit assumption (i.e. stop Historical Cost Accounting).

 

Guidance

1.       Implement IFRS-authorised Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily Index.

2.       Inflation-index all monetary items daily in terms of a Daily Index with all money inside the banking system.

3.       The Central Bank is required to pay to (during inflation) or receive from (during deflation) commercial banks interest in terms of the Daily Index on the total overnight cash balances in commercial banks.

Do not ask the IASB for guidance in this issue. They do not understand IFRS-authorised CMCUPP. Contact me for guidance at realvalueaccounting[at]yahoo.com.

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

See Hyperinflation in action

See Hyperinflation r in action.