Indexation IFRS

International Accounting Standards Board

30 Cannon Street

London EC4M 6XH

United Kingdom

Dear Sirs,

Re: Request for comment on the Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting

Thank you for the opportunity to comment on the above Exposure Draft.

I would add the Units of Constant Purchasing Power measurement basis as required in IAS 29 Financial Reporting in Hyperinflationary Economies to the Conceptual Framework.

My detailed answers and suggestions are contained in the attached appendix.

Yours sincerely,

Nicolaas Smith

This comment letter is published by the IFRS Foundation HERE under the name Nicolaas Smith. The letter is ID number 1 and appears on page 1 of the table if it is sorted by ID number, or page 4 if it is sorted alphabetically by organisation.

Nicolaas Smith Comment Letter                                 ED/2015/3 Conceptual Framework

Appendix – Response to the Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting

Question 8—Measurement bases

Has the IASB:

(a) correctly identified the measurement bases that should be described in the Conceptual Framework? If not, which measurement bases would you include and why?

No, the IASB has not identified all the measurement bases that should be described in the Conceptual Framework.

I would include the following improved Units of Constant Purchasing Power measurement bases as required in IAS 29 Financial Reporting in Hyperinflationary Economies in the Measurement Chapter.

Units of Constant Purchasing Power Measurement Bases

1. Historical Cost plus associated net monetary or constant purchasing power gains or losses.

Nominal HC is used only during the current financial period for the measurement of:

(i) Monetary items1 not inflation-indexed daily2 and

(ii) Constant real value non-monetary items3 treated as nominal monetary items.

Examples of constant items treated as monetary items: trade debtors, trade creditors, taxes payable, taxes receivable, other non-monetary payables and receivables, etc.

2. Current Value

                    (i) Fair value for the measurement of variable real value non-monetary items3 updated daily; and

                    (ii) Value in use for the measurement of variable item assets and fulfilment value for variable item liabilities, updated daily.

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Current value is used for the measurement of variable items and then updated daily to the current (today´s) Daily CPI when the current value measurement is not made on the current (today’s) date.

3. Units of constant purchasing power3 for the measurement of constant real value non-monetary items updated daily.

Net monetary and constant purchasing power gains and losses are constant items.

Daily updated variable and constant items and daily inflation-indexed monetary items are indexed in terms of all changes in the general price level (generally at least daily) in terms of the Daily CPI (the latter always known in advance) or a proxy, normally the daily US Dollar parallel rate or another relatively stable hard currency daily parallel rate, when the general price level is not available, until the current (today's) Daily CPI/parallel rate.

Electronic, automatically updated financial reports is best practice.

Elaboration on the UCPP Measurement Bases

There are two accounting paradigms authorised in IFRS:

1. The Historical Cost paradigm is used (optional) in all IFRSs - except  in IAS 29 and IFRIC 7 - during low inflation, high inflation and deflation.

2. The UCPP paradigm is required during hyperinflation in terms of IAS 29 Financial Reporting in Hyperinflationary Economies and the related IFRIC 7.

Constant items first recognised during UCPP measurement in terms of the Daily CPI are always updated daily - never subject to net constant purchasing power losses or gains since the stable measuring unit assumption4 is never implemented under the UCPP paradigm.

Monetary items inflation-indexed daily in government inflation-linked bonds in terms of the Daily CPI are - generally - not  subject to net monetary gains or losses depending on the terms of the contract.

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The combined effect of nominal HC measurement and the associated net monetary and constant purchasing power losses or gains under the UCPP paradigm is not nominal.

Net monetary and constant purchasing power gains and losses are constant items updated daily in terms of the Daily CPI to the current (today’s) date once they are accounted.

There is no nominal historical cost concept under the UCPP paradigm since the stable measuring unit assumption is never implemented.

Reasons for inclusion

1. UCPP measurement bases are required and implemented in IAS 29 Financial Reporting in Hyperinflationary Economies and thus have to be dealt with in the measurement chapter.

2. A number of countries, e.g., Zimbabwe, Turkey, Russia, etc.  implemented UCPP measurement bases as required in IAS 29 over the last 26 years since the standard’s authorization. UCPP measurement bases are currently being implemented in Venezuela and Belarus by entities implementing IAS 29. UCPP measurement bases will be implemented in hyperinflationary economies in the future in terms of IAS 29.

Question 8 Measurement bases

Has the IASB:

(b) properly described the information provided by each of the measurement bases, and their advantages and disadvantages? If not, how would you describe the information provided by each measurement basis, and its advantages and disadvantages?

No, since the IASB has not yet identified the measurement bases under the UCPP paradigm required in IAS 29, the Board consequently also has not yet supplied a description of the information provided by each UCPP measurement basis nor its advantages and disadvantages.

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Information provided by each UCPP Measurement Basis

The information provided by each of the UCPP measurement bases is generally similar to the information described in paragraph 6.47 in the draft CF.

Additionally, UCPP measurement in terms of the Daily CPI provides information

(i) at the current (today´s) general price level;

(i) that presents the real position of an entity's operations: e.g., net monetary losses and gains are not calculated and accounted under the HC paradigm and

(iii) that results in relative stability in the non-monetary economy.

Period-end measuring unit requirement in IAS 29

The requirement in IAS 29, paragraph 8 that  “financial statements … shall be stated in terms of the measuring unit current at the end of the reporting period” is complied with as follows under the UCPP paradigm in terms of the Daily CPI:

The period-end financial reports are prepared at the period-end Daily CPI and thereafter all items are updated to the Daily CPI at the current (today’s) date.

IAS 29 does not require the use of the monthly published CPI. The Daily CPI is also a “measuring unit current at the end of the reporting period.” The Daily CPI is based on the monthly published CPI. IAS 29 can thus be implemented in terms of the Daily CPI and that complies with what is required in IAS 29.

Example: Zimbabwe December 2007 year-end financial reports

The monthly inflation rate for January 2008 was 120.83%.

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Hanke S H and Kwok A K F 2009 On the Measurement of Zimbabwe’s Hyperinflation Cato Journal 29 2

The Financial Reports prepared at the measuring unit current at 31 December 2007 and then published on, for example, 31 January 2008, were completely meaningless since the general price level was not 20.83%, but 120.83% higher. A value of ZimDollars 100 in the financial reports should have been Zim$ 220.83 at 31 January 2008. A value of 100 Zim$ appeared to be equal to Zim$ 45 to whoever read those reports in Zimbabwe on 31 January 2008.

Financial reports prepared in terms of IAS 29 implementing the monthly published CPI are more and more meaningless the higher and higher the rate of hyperinflation. The South African Institute of Chartered Accountants pointed out that financial reports prepared in terms of IAS 29 during hyperinflation in Zimbabwe were quickly out of date.

Under the UCPP paradigm in terms of the Daily CPI, the 2007 financial reports prepared in terms of the Daily CPI (representing the general price level) at 31 December 2007 would have been published with all items updated by 120.83%: i.e., they would have been updated to the Daily CPI (the general price level) on 31 March 2008, valid only for that day. The next day the values would have been different since the Daily CPI (the general price level) was different.

Those values on 31 March 2008 would have been the real values of all items - at 31 December 2007 stated at the 31 March 2008 general price level - if Zimbabwe were to have implemented IAS 29 in terms of the Daily CPI and their economy would not have imploded on 20 November 2008.

Zimbabwe would have had a relatively stable non-monetary economy under the UCPP paradigm in terms of the Daily CPI during hyperinflation (with no effect of hyperinflation in the non-monetary economy and in all monetary items inflation-indexed daily) similar to what Brazil had during the last 17 weeks till 30 June 1994 (URV from 1 March 1994 to 30 June 1994) in terms of the Unidade Real de Valor daily index and during all the months before (URV from January 1993 to June 1994) when the URV was implemented on a daily basis during hyperinflation in Brazil.

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The Daily CPI is generally known from 15 to 30 days in advance. There are no surprises. The URV was supplied by the Brazilian Central Bank on a daily basis. It was based on the daily USD rate plus three other non-monetary indices were taken into account in the URV’s formulation. It was not a lagged Daily CPI. It was a proxy for the Daily CPI. It was not known in advance. The Daily CPI, on the other hand, is generally a one-to-four-month lagged, daily interpolated, non-monetary index based on the monthly published CPI and is always known in advance because of its lagged nature.

Everybody in a hyperinflationary economy knows the daily parallel rate every day. Street vendors, some of whom have never been to school - know that the general price level changes every day: they all adjust their local currency prices daily. It is common knowledge in a hyperinflationary economy that the general price level (the parallel rate in the absense of a URV or a Daily CPI) changes every day.

All countries issuing government inflation-linked bonds already calculate and publish a Daily CPI which each country uses to value these sovereign inflation-linked bonds on a daily basis since they trade on a daily basis. The formula to calculate a Daily CPI from monthly published CPI data is freely available on the internet.

The formula is based on the one used to calculate Chile’s Unidad de Fomento daily index.

‘The formula for computation of the UF on day t is:

UF t = UF t–1 × (1+ ᷾∏) 1/d

where ∏ is the inflation rate for the calendar month preceding the calendar month in which t falls if t is between day ten and the last day of the month (and d is the number of days in the calendar month in which t falls), and ∏ is the inflation rate for the second calendar month before the calendar month in which t falls if t is between day one and day nine of the month (and d is the number of days in the calendar month before the calendar month in which t falls).’

Shiller R J 1998 Indexed Units of Account: Theory and Assessment of Historical Experience Cowles Foundation Discussion Paper Nº 1171

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The above formula applied to the UF in Chile where the CPI for the current calendar month used to be available on the tenth of the next calendar month. The general case formula for a UF–based Daily CPI is stated as follows:

On day t

DI t = DI t–1 X (1 + ∏) 1/d

where ∏ is the monthly inflation rate for the second calendar month before the calendar month in which t falls if t is on or between day one and the day of publication of the CPI of the previous calendar month (and d is the number of days in the calendar month before the calendar month in which t falls), and ∏ is the inflation rate for the calendar month preceding the calendar month in which t falls if t is on or between the day the CPI for the previous calendar month is published and the last day of the month (and d is the number of days in the calendar month in which t falls).

The Daily CPI within a given calendar month depends on the CPI for each of the three preceding months. For example, the July Daily CPI depends before the day the June monthly published CPI is available on the monthly published CPIs for April and May, and starting with the day the June monthly published CPI is available on the monthly published CPIs for May and June.

Some countries issuing government inflation-linked bonds

1. Argentina
2. Australia
3. Brazil
4. Canada
5. Chile
6. Colombia
7. Finland
8. France
9. Germany
10. Greece
11. Holland
12. Hong Kong

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13. Iceland
14. India
15. Israel
16. Italy
17. Japan
18. Kuwait
19. Mexico
20. New Zealand
21. Portugal
22. Qatar
23. Saudi Arabia
24. South Africa
25. South Korea
26. Spain
27. Sweden
28. Turkey
29. United Arab Emirates
30. United Kingdom
31. United States

Information provided under the UCPP paradigm in terms of the Daily CPI

1. Historical cost plus associated net monetary and constant purchasing power losses or gains.

Information provided in financial reports

(a) Prior period comparative items

(i) Nominal monetary items inflation-indexed daily and associated net monetary losses or gains updated daily to the Daily CPI at the current (today’s) date;

                             

(ii) Constant items treated as nominal items and the associated net constant purchasing power losses or gains updated daily to the Daily CPI at the current (today’s) date.

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(b) During the current financial period

(i) Nominal HC measurement applied to nominal monetary items. The associated net monetary losses or gains are updated daily to the Daily CPI at the current (today’s) date;

(ii) Nominal HC measurement applied to constant items treated as nominal items. The associated net constant purchasing power losses or gains updated daily to the Daily CPI at the current (today’s) date;

(c) Financial period´s financial reports published/accessed after the period-end date:

(i) Nominal monetary items,

(ii) net monetary losses and gains,

(iii) constant items treated as nominal monetary items and

(iv) net constant purchasing power losses and gains

(all items) updated daily from the period-end date to the Daily CPI at the current (today’s) date.

2. Current Value

Information provided

1. Prior period comparative items

Variable real value non-monetary items updated daily to the Daily CPI at the current (today's) date.

2. During current financial period

Variable items measured at current value and then updated daily to the Daily CPI at the current (today’s) date.

3. Last financial period´s financial reports published after the period-end date

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Variable items updated daily from the period-end date to the Daily CPI at the current (today’s) date.

         

3. Units of Constant Purchasing Power

Information provided

1. Prior period comparative items

(i) Constant real value non-monetary items updated daily to the Daily CPI at the current (today’s) date;

(ii) Inflation-indexed monetary items inflation-indexed daily to the Daily CPI at the current (today’s) date.

2. During current financial period

(i) Constant items updated daily to the Daily CPI at the current (today’s) date;

(ii) Inflation-indexed monetary items  measured at their inflation-indexed values at the current (today’s) date.

3. Last financial period´s financial reports published/accessed after the period-end date

(i) Constant items updated daily to the Daily CPI at the current (today’s) date;

(ii) Inflation-indexed monetary items inflation-indexed daily to the Daily CPI at the current (today’s) date.

1. Historical Cost under the UCPP paradigm in terms of the Daily CPI

Advantages

1. The loss or gain in the constant purchasing power of (i) nominal monetary items and (ii) constant items treated as monetary items is accounted as net monetary or constant item losses or gains. The  

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loss or gain is recognised and accounted resulting in the financial reports presenting the real position of the entity. That is not the case under the HC paradigm.

2. Daily updating of associated constant items (associated net monetary and constant purchasing power losses and gains) to the current (today’s) Daily CPI means that the constant purchasing power (real value) of losses and gains are correctly calculated which is not the case when the monthly published CPI is used in terms of IAS 29. See example below.

Disadvantages

1. There are no disadvantages.

II. Current Value

Advantages

1. The advantages are generally the same as already stated in the CF for current values under the HC paradigm.
2. Daily updating in terms of the Daily CPI of current values of variable items from the date of measurement to the current (today’s) date keeps these values always updated at the current (today’s) general price level during hyperinflation.
3. Daily updating of variable items secures economic stability in the non-monetary economy during hyperinflation
4. Daily updating of variable items removes distortions in the non-monetary economy during hyperinflation.
5. Daily updating of variable items removes many opportunities for corruption in the non-monetary economy during hyperinflation.
6. Daily updating of variable items prevents local-production -destroying price freezes during hyperinflation.
7. Daily updating of variable items promotes local production during hyperinflation.   

Disadvantages

1. There are no disadvantages.

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III. Units of Constant Purchasing Power in terms of the Daily CPI

Advantages

There are a great number of advantages when an entity and especially an entire economy change over from the HC paradigm implementing the stable measuring unit assumption to implementing the real value (constant purchasing power) preserving UCPP paradigm in terms of the Daily CPI under which the stable measuring unit assumption is never implemented.

Difference between Zimbabwe and Brazil during hyperinflation

The difference is like night and day - like Zimbabwe and Brazil during hyperinflation. Zimbabwean accountants implemented IAS 29 in terms of the monthly published CPI from 2000 to March 2008 while Brazilian accountants applied the very successful Unidade Real de Valor daily index from 1992 (or before: I do not know the start date of the URV) to June 1994. The great number of advantages from using a daily index is undeniable: Brazilian accountants used the URV daily index and the country had a relatively stable non-monetary economy during hyperinflation and also used it as the critical part of their Plano Real to stop hyperinflation overnight at no cost on 1 July 1994. In stark contrast, the Zimbabwean economy imploded on 20 November 2008 with the full implementation of IAS 29 in terms of the monthly published CPI by Zimbabwean accountants for 8 years till March 2008, the last month for which the Zimbabwean government published the monthly CPI. IAS 29 in terms of the monthly published CPI had no positive effect in Zimbabwe and Zimbabwean accountants and business people could not stop the economy (the Zimbabwean people) from dollarizing spontaneously while Brazilian accountants kept the Brazilian non-monetary economy relatively stable by using the URV daily index during hyperinflation. The URV daily index also was the pivotal element in Brazil's Plano Real used to stop hyperinflation from one day to the next at no cost on 1 July 1994.  

The difference between Zimbabwe and Brazil was the result of one fundamental concept: daily indexing instead of applying the monthly CPI. Both economies used the UCPP paradigm during hyperinflation. Only Brazil had a relatively stable non-monetary economy because it used a daily index. Zimbabwe imploded and was forced into spontaneous

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dollarization while Brazil stopped hyperinflation from the one day to the next - from 30 June 1994 to 1 July 1994 - at no cost (Brazil avoided

costly and stagnation-inducing dollarization) with the help of the URV daily index.

The higher the rate of hyperinflation, the greater the real value of the advantages of UCPP in terms of the Daily CPI.

These many advantages of daily indexing under the UCPP paradigm during hyperinflation, however, only materialise when the UCPP paradigm is implemented in terms of the Daily CPI - more correctly, in terms of all changes in the general price level. The general price level can change more than once per day during hyperinflation.

The URV was used like a Daily CPI in Brazil in 1994. Brazil did not see its use as the implementation of an accounting model under the UCPP paradigm in terms of a Daily Index. Brazil called it “correcção monetária “, a monetary correction procedure that became the central part of their Plano Real monetary reform plan. In fact, it was the implementation of the UCPP paradigm in terms of a Daily Index (the URV) in an entire economy.

Example

Monthly inflation was 240.06% in December 2007 in Zimbabwe.

Derived URV-based Daily Index

01.12.07  10 481.17

31.12.07  33 080.55  Note the difference in the index in the same month.

Zim$/USD rate based on derived CPI

                                                                      Zim$

01.12.07 104.8114   $100 worth of sales         10 481.14

31.12.07 330.8055   $100 worth of sales         33 080.55

Total sales in December 2007 under IAS 29     43 561.69

in terms of the monthly published CPI

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Total sales in terms of UCPP in terms of the Daily CPI

                                                                  Zim$

$100 * 104.8114 *(330.8055/104.8114) = 33 080.55

$100 * 330.8055                                   = 33 080.55

                                                    Total   66 161.10

The same applies to trade debtors, trade creditors, taxes payable, salaries, wages and all constant items.

The monthly inflation rates in Zimbabwe in 2008 were as follows:

Jan                   120.83%

Feb                   125.86%

Mar                   281.29%

Apr                    212.54%

May                   433.40%

Jun                    839.30%

Jul                  2 600.04%

Aug                 3 190.00%

Sep               12 400.00%

Oct        690 000 000.00%

Nov   79 600 000 000.00%

It is very easy to see why IAS 29 in terms of the monthly published CPI had no stabilising effect in Zimbabwe and why applying a Daily Index easily and always stabilises the non-monetary economy like the use of the URV daily index in Brazil did.

Here follow the advantages of the UCPP paradigm in terms of the Daily CPI in an entire hyperinflationary economy:

Advantages

1. All constant real value non-monetary items are always and everywhere updated in terms of the Daily CPI from the general price level on the day - not simply the month - they are recognised in the entity to the current (today’s) date. Their constant purchasing power thus stays constant: no net constant purchasing power losses or gains. This is not the case when the UCPP paradigm is implemented in terms of the monthly published CPI as IAS 29 has

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been implemented over the last 26 years including for 8 years in Zimbabwe where it had no positive effect during hyperinflation.

2. Stable labour relations/market: salaries and wages updated daily in terms of the Daily CPI: no stable measuring unit assumption.
3. Rents, pensions, transport fees, utilities, fees, etc. updated daily in terms of the Daily CPI.
4. Trade debtors, trade creditors, all other non-monetary payables and all other non-monetary receivables updated daily. The daily

updating of trade debtors, for example, ensures that the constant purchasing power (real value) of these items stay constant over time and the constant purchasing power of profit margins are fully recovered by entities. This has never happened under IAS 29 in terms of the monthly published CPI to date. It is impossible under IAS 29 in terms of the monthly published CPI during hyperinflation.

5. Very improved fiscal situation: taxes, taxes payable and taxes receivable updated daily in terms of the Daily CPI.
6. Capital and all other items in shareholders’ equity updated daily in terms of the Daily CPI.

General economic advantages using the UCPP paradigm in terms of the Daily CPI

1. Eliminates corruption via unfair, incredibly lucrative arbitrage opportunities for corrupt government officials, their families and friends which often happen during hyperinflation.
2. Eliminates general arbitrage distortions in the economy: See Venezuela and Zimbabwe for examples where it did not happen and it is not happening today because of the use of the monthly publised CPI under IAS 29.
3. Eliminates “money burning” as implemented in Zimbabwe.
4. Maintains local manufacturing and industrial production.
5. Reduces imports.
6. Strengthens the local currency.
7. Eliminates price freezes.
8. Promotes economic and financial stability.
9. Results in zero effect of hyperinflation during hyperinflation when all monetary items in the banking system are inflation-indexed daily.
10. Eliminates hoarding during hyperinflation.
11. Promotes social stability.
12. Reduces actual hyperinflation over time.

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13. Promotes the creation of new employment opportunities.
14. Promotes economic growth via economic stability in all sectors except the money supply with the hyperinflationary effect being eliminated with daily inflation-indexing of all monetary items.
15. UCPP in terms of the Daily CPI will always stabilise a  hyperinflationary economy - with an IFRS (IAS 29 implemented in terms of the Daily CPI, the use of which is inferred in the standard) - at no cost over a short period of time similar to the use of the very successful URV daily index in Brazil from 1992 to 1994.

Disadvantages

There are no disadvantages.

Hurdles (not disadvantages) for UCPP measurement in terms of the Daily CPI during hyperinflation

1. A number of different exchange rates for the US Dollar can be used by the government: see Venezuela today.
2. No CPI published (as happened in Zimbabwe - resulted in a change to IFRS 1). Entities have to use the parallel rate instead, thus not a real hurdle.
3. A problem everywhere during hyperinflation: the USD parallel rate is often declared illegal by the government and using it can even result in prison sentences for CFOs and owners: see Angola, Zimbabwe and Venezuela.
4. The CPI can fall too far behind the parallel rate during severe hyperinflation: see Zimbabwe. The solution is to change over from a Daily CPI based on the monthly published CPI to a URV-based daily index based primarily on the USD parallel rate or simply use the parallel rate.

Basis

Authorization for daily indexing is derived from the requirement of UCPP measurement bases in IAS 29 and the fact that constant purchasing power in all measured items (including Profit & Loss and Other Comprehensive Income items) can only be achieved when all changes in the general price level are followed, i.e., at least daily.

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The UCPP accounting paradigm is optional during low inflation, high inflation and deflation in terms of the CF (2010), paragraph 4.59 (a) [originally the Framework (1989), paragraph 104 (a)] which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.” The UCPP paradigm is required during hyperinflation in terms of IAS 29.

The UCPP paradigm is optional during low inflation, high inflation, hyperinflation and deflation in terms of particular countries´ national accounting standards, e.g. in Portugal - originally in the Plano Oficial de Contabilidade (1989).

The UCPP paradigm is optional during hyperinflation under US GAAP.

The UCPP paradigm is a departure from Historical Cost Accounting (the use of the stable measuring unit assumption).

The calculation and accounting of net constant purchasing power gains or losses result from the acceptance of HC contracts under the UCPP paradigm. There will be no net constant purchasing power gains or losses once there are no more HC contracts under the UCPP paradigm.

The stable measuring unit assumption is never implemented under the UCPP paradigm since net monetary gains and losses and net constant item gains or losses are always calculated and accounted.   

The restatement approach or method as set out in IAS 29, Daily CPI indexation, constant dollar, price-level accounting, price-level adjustment, monetary correction, inflation-adjustment, inflation-indexing, dollar indexing, “correcção monetária”, the use of the Unidad de Fomento Daily CPI in Chile since 1967, the use of the Real Value Daily CPI in Colombia, the use of the very successful Unidade Real de Valor daily index in Brazil, the daily measurement of more than $3 Trillion in government inflation-indexed bonds in terms of the Daily CPI in many countries worldwide, etc. were/are all implementations under the UCPP paradigm although not all nations realized they were implementing an accounting model, namely the UCPP model. It was mostly seen as simply monetary correction implemented by the monetary authorities at the central bank instead of UCPP, an accounting model.

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Notes

1 The definition of monetary items is critical under the UCPP paradigm since  non-monetary items are defined as all items that are not monetary items.

Definition of monetary items: Monetary items constitute the money supply.

When an item is included in the Central Bank´s aggregate of the money supply, then it is a monetary item. Otherwise it is a non-monetary item.

Trade debtors, trade creditors, salaries, wages, pensions, taxes, taxes payable, taxes receivable, etc. are not included in the money supply. They

are not monetary items. They are constant real value non-monetary items. The implementation of the stable measuring unit assumption under the HC paradigm allows these items to be treated as if they were monetary items under that paradigm.

2 Monetary items are generally stated in nominal value. However, many countries´ governments issue sovereign inflation-indexed bonds. The world market in these bonds amounts to more than USD 3 trillion. Chile  has been inflation-indexing more than 25% of its money supply for a number of years. All these countries already have Daily CPIs that they use to inflation-index these bonds on a daily bases since they trade on a daily basis.

3 There are three basic, fundamentally different economic items under the UCPP paradigm:

1. Monetary items

2. Variable real value non-monetary items

3. Constant real value non-monetary items

Monetary items

Definition Monetary items constitute the money supply.

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Examples

Bank notes and coins

Bank current accounts

The capital amounts of:

Inflation-linked bonds

Money loans

Mortgage bonds

Government Bonds

Commercial Bonds

Treasury Bills

Consumer loans

Bank loans

Car loans

Student loans

Credit card loans

All capital and money market items

Variable real value non-monetary items

Definition Variable items are non-monetary items with variable real values over time.

Examples

Property

Freehold land

Buildings

Plant

Equipment

Investment property

Other intangible assets

Patents

Trademarks

Licences

Investments in associates

Joint ventures

Available–for–sale investments

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Quoted and unquoted shares

Inventories

Raw materials

Work–in–progress

Finished goods

Foreign exchange

Commodities

Precious metals

Constant real value non-monetary items

Definition Constant items are non-monetary items with constant real values over time.

Examples

All Profit and Loss and Other Comprehensive Income statement items

Revenue

Cost of sales

Gross Profit

Investment revenues

Other gains and losses

Salaries

Wages

Rentals

Net monetary loss

Net monetary gain

Net constant item loss

Net constant item gain

Share of profits of associates

Changes in inventories of finished goods and work in progress

Raw materials and consumables used

Depreciation and amortisation expenses

Employee benefits expenses

Distribution expenses

Marketing expenses

Occupancy expenses

Administration expenses

Finance costs

Bank Charges

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Borrowing costs

Consulting expenses

Royalties

Other expenses

Profit before tax

Income tax expenses

Profit for the year from continuing operations

Profit for the year from discontinued operations

Net profit for the year

Comprehensive income

Deferred tax assets

Finance lease receivables

Trade and other non–monetary debtors

Provision for doubtful debts

Current tax assets

Issued share capital

Share premiums

Share discounts

Capital reserves

General reserves

Properties revaluation reserve

Investments revaluation reserve

Equity–settled employee benefits reserve

Hedging reserve

Foreign currency translation reserve

Retained earnings

Retained losses

Retirement benefit obligation

Deferred tax liabilities

Provisions

Employee benefits provision

Provision for rectification work

Provision for warranties

Onerous lease contract provision

Restructuring and termination costs provision

Decommissioning costs provision

Deferred Revenue

Trade and other non–monetary creditors

Current tax liabilities

Interest paid

Nicolaas Smith Comment Letter                                 ED/2015/3 Conceptual Framework

Interest received

Royalties

Fees

Short term employee benefits

Pensions

Dividends payable

Dividends receivable

Taxes payable

Taxes receivable

4  ‘The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general

purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.’

Walgenbach P H Dittrich N E and Hanson E I 1973 Financial Accounting 429

------------------------------------------------------------------------------------------------------------------------

This comment letter is published by the IFRS Foundation HERE under the name Nicolaas Smith. The letter is ID number 1 and appears on page 1 of the table if it is sorted by ID number, or page 4 if it is sorted alphabetically by organisation.

Nicolaas Smith Copyright (c) 2005-2015 Nicolaas J Smith. All rights reserved. No reproduction without permission.

IASB bluntly rejects Latin America´s request for Capital Maintenance in Units of Constant Purchasing Power during low inflation.

"IASB Update 


The IASB met in public from 27-29 April 2015 at the IASB offices in London, UK.

One of the topics for discussion was High Inflation.  

High Inflation (Agenda Paper 14)

The IASB discussed high inflation, a project in the research program. The purpose of this project is to consider the requests made by the Federación Argentina de Consejos Profesionales de Ciencias Económicas, the Argentinian standard-setter, and the Group of Latin American Standard Setters (GLASS) to: 

• eliminate or reduce the cumulative inflation rate threshold currently included in IAS 29 Financial reporting in Hyperinflationary Economies to identify when hyperinflation exists; and
• to modify the procedures for reporting the adjustments resulting from restating the financial statements.

The IASB tentatively decided that it would not propose lowering the inflation threshold in IAS 29 and nor would it do any work on developing an alternative to IAS 29 or a Standard that addresses inflation more generally. The project will therefore be designated as having a low priority but will remain on the research programme to enable interested parties to comment on these decisions in the Agenda Consultation. The 13 IASB members present supported this decision.

In addition, the IASB plans to ask its Emerging Economies Group to examine whether there could be merit in developing disclosure requirements for entities in jurisdictions suffering from high inflation."

Copyright (c) International Financial Reporting Standards Foundation

The above is a verbatim copy of the email to subscribers. IASB Update April 2015 is available here. 

Comment

The fact that Latin American standard setters requested the IASB to ELIMINATE the cumulative inflation rate threshold for the implementation of financial capital maintenance in units of constant purchasing power (the IASB-termed "restatement" approach) for which IASB guidance has been supplied since April 1989 in IAS 29 Financial Reporting in Hyperinflationary Economies, means that they basically requested authorization for Capital Maintenance in Units of Constant Purchasing Power at any inflation rate, even at 2% annual inflation. If it were done in terms of the Daily CPI it would certainly solve Latin America´s financial stability problems.

Since not a single IASB board member is able to explain to anyone that only daily inflation indexing of all constant real value non-monetary items - as so successfully implemented for 30 years from 1964 till 1994 in Brazil - would give Latin America what they requested, the above rejection of the request is thus not a surprise. IASB board members do not understand that only Daily Indexing as described above, could solve the problem. 

Not a single IASB board member knows that Brazil implemented financial capital maintenance in units of constant purchasing power as authorized in the Conceptual Framework, Par. 4.59 (a) under the name of "correcção monetária" or monetary correction. Not a single IASB board member even knows of the existence of the Brazilian Unidade Real de Valor (URV) daily index used in 1994.  Not a single IASB board member would be able to explain the most basic concepts of financial capital maintenance in units of constant purchasing power originally authorized in IAS 29 in April 1989. The IASB until a year ago stated on the IFRS website that IFRS provide no guidance for financial capital maintenance in units of constant purchasing power. I had to point out to them that the guidance is there in IAS 29 since 1989. For 24 years - andthe IASB did not realize it! How can you expect the current IASB board members to agree to urgent research - as requested by Latin America - when they do not understand financial capital maintenance in units of constant purchasing power in terms of the Daily CPI even though they have published various of my comment letters regarding the matter over the last few years?

They do not understand the subject matter. Naturally they will reject a request for research. 

Nicolaas Smith

Price stability requires daily indexation

Price stability is an important concept in economics. It is defined in a slightly different way by each and every central bank. Each central bank defines price stability in terms of its own inflation target. When a central bank has a two percent inflation target then any inflation (which is NOT price stability) up to and including the inflation target is simply stated to be "price stability." For example: SA, US, EU, etc.

The South African Reserve Bank has a three to six percent inflation target. Thus, when the general price lievel changes by three percent per annum, then the SARB proudly states that "price stability" has been achieved and when it changes by six percent per annum, then the SARB again very proudly states that "price stability" has been achieved. The same is true for all other central banks with all their other non-zero inflation targets.

Monetary price stability has one and only one definition, namely, zero monetary inflation which is the same as zero monetary deflation.

However, price stability requires, in fact, at least daily indexation since sustainable zero monetary inflation (/deflation) has never been achieved to date.

There are three economic items in the economy:

1. Monetary items

2. Variable real value non-monetary items

3. Constant real value non-monetary items

Variable real value non-monetary items are by definition not generally expected to be stable in price in free and open markets. For example: the price of oil, gold, foreign currencies, listed and unlisted shares, smart phones, TVs, computers, cars, planes, ships, horses, cows, sheep, clothing, food, houses, etc are not generally perfectly stable in free and open markets.

Constant real value non-monetary items´ prices (constant real values or constant purchasing power) are kept perfectly stable (constant) in real value (purchasing power) under the IFRS and US GAAP authorized Capital Maintenance in Units of Constant Purchasing in terms of the Daily CPI accounting model by means of at least daily indexing.

Examples of constant real value non-monetary items are salaries, wages, fees, employee benefits, pensions, trade debtors, trade creditors, all other non-monetary payables, all other non-monetary receivables, issued share capital, profits, losses, all other items in shareholders´ equity, provisions, taxes, interest received, interest paid, etc.

Monetary items constitute the money supply. 

Monetary items´ (excluding fixed nominal value bank notes and coins) prices are also kept perfectly stable (constant) in real value (purchasing power) under CMUCPP in terms of at least the Daily CPI when the entire money supply is indexed at least daily.

Examples of monetary items are monetary loans receivable and payable, the capital amounts of bonds, the capital amounts of mortgages, the capital amounts of student loans, the capital amounts of consumer loans, etc. Nominal value bank notes and coins are also monetary items but it is currently not possible to daily index a nominal bank note or coin.

Thus: price stability requires at least daily indexation during inflation or deflation.

In short: price stability requires daily indexation.

All changes in the general price level have to be followed by monetary item and constant real value non-monetary prices if price stability (constant real value/purchasing power) were to be achieved in these items. The general price level changes daily (see the Daily CPI in countries issuing daily inflation-indexed government bonds) during low and high inflation and deflation, but it can change more than once a day during hyperinflation.

Nicolaas Smith

Copyright (c) 2005-2015 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Completely ignorant IASB and FASB members mean perpetual bad luck for Venezuela

Arepa (a Venezuelan national delicacy) prices are following the (daily) US Dollar black market rate in Caracas:

Comment from BoludoTejano on the Devil´s Excrement blog: "Looks like the Arepa prices reflect the black market rate, not any of the official rates."

Which is very good for the VZ economy. The only problem is salaries and wages are not adjusted likewise: the normal set-up in an un-indexed hyperinflationary economy. 

Brazil had no such problems during their 30 years of daily indexing almost all items in their economy during high and hyperinflation. Unfortunately it was too long ago (1964 to 1994). No-one can remember Brazil indexed their entire economy for 30 years. 

Or rather, it was called monetary correction or “correção monetária" not indexation. Everybody expects the Central Bank to do it. If the Central Bank does not do it, then it will not be done – while in fact it is actually an accounting policy. No-one believes (understands) that. 

Obviously, if the International Accounting Standards Board members as well as the US Financial Accounting Standards Board members do not understand that, it is logical that ordinary people and accountants won´t understand it either. 

And that is exactly what is happening. Completely (daily indexing) ignorant international and US accounting standard setters mean perpetual bad luck for Venezuela. 

Sorry Venezuela, but that is how the cookie crumbled: IASB and FASB members are as stupid regarding economics (the effect of daily indexing in a hyperinflationary economy) as your President is regarding most other aspects of economics too. 

Nicolaas Smith 

Copyright (c) 2005-2015 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Effect of deflation eliminated by daily deflation-indexing of entire money supply

Only the effect of deflation would be eliminated from all un-adjusted monetary items when the entire un-adjusted money supply is deflation-adjusted on a daily basis in terms of the Daily CPI during deflation. This would do nothing to actual deflation in the short term. It would, however, immediately be as if there were no deflation in these monetary items (as qualified) during deflation.

This would only remove the effect of deflation from only un-adjusted monetary items. Some (not all) government inflation-indexed bonds provide for deflation-indexing.

Implementing Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI (instead of Historical Cost Accounting) during deflation would maintain the constant purchasing power (real value) of  all constant real value non-monetary items constant during deflation.

The two measures together would, ceteris paribus, remove the distortions caused by the implementation of the stable measuring unit assumption under Historical Cost Accounting from the economy during deflation.

Nicolaas Smith


Copyright (c) 2005-2015 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Don´t be fooled by Swiss negative interest rate

Swiss National Bank introduces NOMINAL negative interest rate of -0.25% during deflation of 0.10% which is a POSITIVE REAL interest rate of +0.15% under such an economic environment.

During deflation EVERYTHING financial is the opposite in order to get back to real from nominal.

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Inflation and deflation would have no effect on the economy ...

Inflation (low, high and hyperinflation) and deflation would have no effect on the economy when all items expressed in terms of money are indexed in terms of all (at least daily) changes in the general price level in terms of the Daily Consumer Price Index. There would still be inflation or deflation, but there would be no effect of inflation or deflation. It would be as if there were no inflation or deflation. 

Every economic item is expressed in terms of a fiat monetary unit of measure in a non-dollarized economy: a salary, a wage, capital, interest, a tax, rent, money, a debt, a loan, property, plant, equipment, inventory, shares and every other item: all expressed in terms of local currency fiat money. In a dollarized economy all items within the economy are expressed in terms of a foreign currency which is normally a relatively stable variable real value non-monetary item; in the vast majority of cases, the US Dollar.

The Daily CPI is based on the monthly published CPI. When the monthly published CPI is not available, for example, when a government refuses to publish it during hyperinflation, then the daily US Dollar parallel rate would be used as the Daily Index, i.e., all items would be Dollar-indexed daily.

Chile daily indexes more than 25% of its money supply in terms of their Unidad de Fomento daily index. All mortgages are indexed daily in Colombia. Globally, more than three trillion US Dollars in government inflation-indexed bonds are inflation-adjusted daily in terms of an official Daily CPI. Inflation has no effect on the real value of the capital amounts of these daily inflation-adjusted items.

The Brazilian economy was indexed from 1964 to 1994. The most successful daily index was their Unidade Real de Valor Daily Index used in 1994 as part of their Real Plan to stop hyperinflation overnight at no cost. 

The IFRS authorized Capital Maintenance in Units of Constant Purchasing Power accounting model requires the use of the Daily CPI during all levels of inflation (low, high and hyperinflation) and deflation. 

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Three measurement bases in IFRS

Very interestingly the same three measurement bases are used under both Historical Cost Accounting and its alternative authorized in IFRS, namely, Capital Maintenance in Units of Constant Purchasing Power.

1. Historical Cost
2. Fair Value
3. Units of Constant Purchasing Power (For example: generally salaries are updated periodically under HCA using the UCPP measurement basis, i.e., they are updated in an attempt to maintain their real value which is normally reduced as a result of the implementation of the stable measuring unit assumption during inflation and hyperinflation.)  

Click below for the application of these three measurement bases under 

I Historical Cost Accounting 

II Capital Maintenance in Units of Constant Purchasing Power

The implementation of one of the accounting models results in a paradigm completely different from the other.

There is only one reason for that. The stable measuring unit assumption: the assumption accountants make that money was, is and always will be perfectly stable in real value; that there never were, are or ever will be inflation and deflation.  

The stable measuring unit assumption is always implemented under HCA:

(i) net monetary gains or losses up to hyperinflation and during deflation were/are never calculated and accounted

plus

(ii) nominal equity is assumed to be equal to net assets in nominal value. No entity ever knew or now knows whether it kept or keeps or will keep the real value of all contributions to equity constant over the lifetime of the entity.

The stable measuring unit assumption is never implemented under CMUCPP: 

(a) net monetary gains or losses are always calculated and accounted 

plus 

(b) all historical (for example, yesterday´s) economic values (all items) are always updated till the current (today´s) real value in terms of the Daily CPI because the general price level changes at least daily resulting in the constant purchasing power (real value) of equity being maintained constant in all entities that at least break even in real value over time .

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Measurement Bases under the IFRS Units of Constant Purchasing Power Paradigm

MEASUREMENT BASES

There are three economic items in the economy.

1. MONETARY ITEMS

Definition: Monetary items are all items in the money supply.

Examples: Money (local fiat currency, cash, bank notes, bank coins), capital amount of money loans, capital amount of bonds, capital amount of bunds, capital amount of bank deposits, capital amount of money and capital market instruments, etc.

MEASUREMENT BASIS

(a) Nominal Historical Cost 

i.e., in nominal monetary units only during current financial year for monetary items not inflation-indexed daily in terms of the Daily CPI. These items exist in terms of Historical Cost contracts still being used under the Units of Constant Purchasing Power paradigm.

(b) Daily Updated Historical Cost

for prior year monetary items in current year financial reports and all other historical monetary items not part of current year financial reports:  

always and everywhere updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level - generally in terms of the Daily CPI. There is no such thing as a nominal historical cost monetary item except for current year monetary items that are not inflation-adjusted daily.

NON-MONETARY ITEMS

Definition: Non-monetary items are all items that are not monetary items. 

They are divided in two sub-groups:

2. VARIABLE REAL VALUE NON-MONETARY ITEMS

Definition: Variable items are non-monetary items with variable real values over time.

Examples: Property, plant, equipment, foreign exchange (foreign currencies), inventories, raw materials, work-in-progress, finished goods, listed and unlisted shares, trademarks, patents, bitcoins, etc

MEASUREMENT BASIS

Fair value always and everywhere updated at least daily till the current (today´s) real value. There is no such thing as a nominal historical variable real value non-monetary item.

3. CONSTANT REAL VALUE NON-MONETARY ITEMS

Definition: Constant items are non-monetary items with constant real values over time.

Examples: Salaries, wages, rent, bank charges, interest paid, interest received, interest payable, interest receivable, issued share capital, retained earnings, capital reserves, all other items in shareholders´equity, all items in the profit and loss account, all items in the comprehensive income statement, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary receivables, all other non-monetary payables, etc.

MEASUREMENT BASIS

Units of constant  purchasing power always and everywhere updated at least daily till the current (today´s) real value in terms of all (at least daily) changes in the general price level, generally in terms of the Daily CPI. There is no such thing as a nominal historical constant real value non-monetary item.

The Units of Constant Purchasing Power Measurement Basis: in terms of all - at least daily - changes in the general price level under all levels of inflation (low, high and hyperinflation) and deflation always and everywhere updated till the current (today´s) real value. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation.

Summary

MEASUREMENT BASES

1. Units of constant  purchasing power*
2. Fair value*
3. Updated Historical Cost*
4. Nominal Historical Cost
  
*Always and everywhere updated in terms of all (at least daily) changes in the general price level - generally in terms of the Daily CPI - up to the current (today´s) real value under all levels of inflation (low, high and hyperinflation) and deflation. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation.

The above measurement bases are used in general purpose accounting / financial reporting under the IFRS authorized UCPP paradigm, i.e., under Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI. 

General Price Level

The general price level (indicated by the Daily CPI) changes at least daily. It can change more than once a day during hyperinflation. The only place this is understood (not the Daily CPI part) by every adult member (as well as all child street vendors) of the general public, is in a hyperinflationary economy. Consequently, all items, except current year monetary items (in "live" bank accounts, nominal HC monetary item contracts, etc.) have to be updated daily in terms of all (at least daily) changes in the general price level, updated to the current (today´s) real value (in terms of today´s Daily CPI value). 

Real value of all historical values change at least daily

The real value of all historical (for example, all yesterday´s) economic values expressed in terms of a monetary unit of measure (i.e., the real value of all historical items), generally change in terms of all (at least daily) changes in the general price level. Simply stated: the real value of all historical (yesterday´s) items changes every day. 

The net monetary gain or loss in nominal monetary items - as qualified above - is calculated and accounted only during the current financial period only under IFRS authorized Capital Maintenance in Units of Constant Purchasing Power, i.e., only under the IFRS authorized Units of Constant Purchasing Power paradigm.

UCPP paradigm authorized in IFRS 25 years ago

Capital Maintenance in Units of Constant Purchasing Power was authorized in IFRS in the original Framework (1989), Par. 104 (a) which stated: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power".  This paragraph appears unaltered in the current Conceptual Framework (2010), Par. 4.59 (a). 

Irresponsible IASB

CMUCPP is required in IFRS in IAS 29 Financial Reporting in Hyperinflationary Economies. The guidance for CMUCPP given in IAS 29 unfortunately does not result in the achievement of actual CMUCPP in a hyperinflationary economy as a result of the use of the monthly published CPI. Only the use of the Daily CPI can result in actual CMUCPP. The IASB very irresponsibly refuses to change IAS 29 to require the use of the Daily CPI because the IASB refuses to take the time to get to understand the economy-wide stabilizing effect of daily indexing in terms of the Daily CPI.

The IASB very irresponsibly also refuses to deal with the Units of Constant Purchasing Power measurement basis as it has always been used under HCA in its current discussions regarding Measurement in the Conceptual Framework although all HC entities (almost all entities) used it over the last 100 years, all HC entities (almost all entities) use it today and all HC entities (almost all entities) will use it in the future. This is a very good example of the fact that all members of the current IASB and IASB staff have very little knowledge and almost no understanding of the effect of Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI authorized in IFRS 25 years ago. This continues to result in the issuance of low quality IFRSs by a very stubborn and boldly disrespectful IASB, mainly almost completely ignorant of the economic effects of financial capital maintenance in units of constant purchasing power in terms of the Daily CPI. 

See also 

Historical Cost Accounting versus Capital Maintenance in Units of Constant Purchasing Power™

Three measurement bases in IFRS

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

SAICA’s members use IFRS as an excuse to hide inefficiencies

The following article appeared in Business Day on 20 September 2007: 

“South African Institute of Chartered Accountants (Saica) executive president, Ignatius Sehoole has 

expressed concern about the number of companies criticising financial reporting standards in SA.

Several companies have said that International Financial Reporting standards as applied in SA did 

not give a true reflection of financial performance. ‘It is perplexing to see that companies do this 

every year. Not only is it a way of explaining why their results have not met expectations, but it is 

also a fine decoy for focusing attention away from more sensitive corporate issues,’ Sehoole said 

yesterday.”

How do you feel about this comment? The president of SAICA says that his members are deceitful. Hey, Mr President, who pays your salary? Are CEOs of listed companies supposed to submit to the stupidities of IFRS without a fight? I am surprised that more has not been written about this in the past. No, I am not surprised! SAICA will not tolerate any criticisms of IFRS. My articles were rejected by them because of my outspoken objection to some of the issues in the standards. When I tried to get the weekly financial journals to publish some of the issues I was told: “These issues are of no interest to our readers.”

Accounting standards are supposed to be written with the objective of enabling management of 

companies to report fairly on the performance of the companies under their stewardship. Because 

of stupidities in IFRS and because auditors in SA have an attitude that regardless of how stupid 

IFRS is, you must comply at all costs, we have the situation in SA today that companies are reporting nonsense figures. How can any logical accountant justify the following accounting treatments:

1. Charging the cost of buying back one’s shares to profit.

2. Writing off investments held on behalf of creditors to the company’s own equity.

3. Charging future year’s rental expenses to the current year or crediting future year’s rental income in the current year.

4. Creating liabilities for future operating rental payments or assets for future operating rental 

receipts.

5. Charging the capital cost of creating a BEE scorecard to headline earnings.

6. Charging the cash cost of rewarding staff directly to equity.

7. Raising liabilities that have absolutely no chance of ever materialising.

8. Capitalising intangible assets bought but not being allowed to capitalise identical assets 

developed.

9. Providing for deferred tax at the full income tax rate on assets that are valued after tax.

10. Depreciating buildings that appreciate.

11. Taking profits before selling the goods.

12. Revaluing fixed asset directly to income.

13. Including in headline earnings capital gains on equity investments but not capital gains on 

investment properties.

14. Capitalising assets of suppliers, which the entity does not own.

15. Recognising gains and losses on foreign exchange when the company is fully hedged.

And we won’t even talk about the all-time ludicrous effect that expensing embedded derivates has on the profits of some entities. I have listed over 150 adjustments analysts have to make to financial statements to arrive at economic reality!

Mr Sehoole has no idea how the above stupidities wreck havoc on relationships between auditors and clients. I know, because often I am called in to assist. However, SAICA and the IASB will not listen to or tolerate any criticism of IFRS. They want the world to believe that they have created a thing of beauty and perfection. If anyone questions the validity of some standard, they retaliate. 

What I want to know is: How are they going to handle the situation when they are eventually forced to change a standard that has been causing chaos it the past? For example, after ten years the IASB has realised that its standard on deferred tax is wrong (they would not listen to us at the time). 

Practice Review has been penalising members for not apply this wrong standard and SAICA has been threatening disciplinary action against practitioners who have not complied. Will there be an apology for all the chaos caused?

The standard setters will save much embarrassment to themselves if they listen to their constituents instead of retaliating with accusations of deceit.

Charles Hattingh

January 2008 

Criticisms of IFRS

1. IASB refusal to require Daily Indexing in IAS 29

IAS 29 Financial Reporting in Hyperinflationary Economies, which gives guidance regarding the implementation of capital maintenance in units of constant purchasing power during hyperinflation, does not actually result in such capital maintenance being achieved in practice. This was clearly demonstrated during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy with no positive effect at all. The reason being that IAS 29 does not require the use of the Daily CPI which is the only way such capital maintenance can be achieved using a fiat local currency. The IASB refuses to urgently review IAS 29 to require the use of the Daily CPI despite consistent requests for such a review and despite the fact that such a change would help countries like Venezuela and Belarus to stabilize their non-monetary economies very similar to the way it was done in Brazil from 1964 to 1994 with the use of a Daily Index: especially the very successful Unidade Real de Valor Daily Index used in Brazil in 1994.

2. IASB refusal to recognize the 100-year-old use of the Units of Constant Purchasing Power Measurement Basis under HCA

The IASB ignores measurement in units of constant purchasing power as a measurement basis to update certain expenses (e.g., salaries, wages, etc.) and certain prices (e.g., utilities) under the Historical Cost Accounting model (under the HC paradigm) in the Measurement section of the Conceptual Framework despite the fact that all entities (including the IFRS Foundation) that used HCA over the last 100 years, implemented it, all HCA entities (including the IFRS Foundation) use it today and all HCA entities (including the IFRS Foundation) will use it in the future.

3. IASB refusal to deal with the UCPP paradigm under Measurement in the CF

The IASB refuses to deal with the Units of Constant Purchasing Power paradigm under the Measurement section in the Conceptual Framework despite the fact that it has been used for 25 years in IFRS in IAS 29 and despite the fact that it is specifically defined in the Capital Maintenance section of the Conceptual Framework which specifically states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power".

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Bitcoin´s Achilles´ heel

The bitcoin dream: if only it could be money. Imagine!

Why is bitcoin not money? Because its price in terms of real currencies is not relatively stable.

Let´s assume for some unknown reason bitcoin´s price would become relatively stable with a 2% decrease in real value per annum. That would make it a medium of exchange with a relatively stable price that could be used as a relatively stable store of value, very similar to the US Dollar, Euro, British Pound, etc.

What would happen in a country with high inflation like Argentina?

People would start keeping their savings in bitcoin, they would start pricing their products in bitcoin, they would start doing business only in bitcoin, all prices would be stated in bitcoin. The CPI could be calculated from items priced only in bitcoin. Bitcoin would be able to be used as a unit of account for accounting purposes.

Result: it would be as if the Argentinean economy were dollarized: i.e., the economy would stabilize. However, the stabilizing currency would not be the US Dollar, but bitcoin.

Unfortunately this will never happen because bitcoin is not money. It is not a medium of exchange with a relatively stable price.

Bitcoin´s inherent quality of never being able to have a relatively stable price is thus its Achilles' heel.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Related article

Japanese Scholars Draft Proposal for a Better Bitcoin

Silliest statements in accounting

"Measuring items in units of constant purchasing power makes no difference to the economy."

Prof Geoff Everingham
University of Cape Town __________________________________________________________________

"Financial reporting has no effect on the economy."

Michael Stewart 
Director of Implementation Activities at the IASB

__________________________________________________________________

"Historical cost has predictive value."

IASB staff

_____________________________________________________________________________


"If capital maintenance concepts will only be used for high inflation issues, the question could be asked whether the concepts should be retained in the Conceptual Framework or not." 

South African Institute of Chartered Accountants

_______________________________________________________________________________

Welcome to the IASB

EVERYONE IN THE WORLD ECONOMY who today implements HISTORICAL COST ACCOUNTING uses the units of constant purchasing power measurement basis to update some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, i.e., to measure these items in units of constant purchasing power in terms of the CPI or a Cost of Living Index on an annual basis under HISTORICAL COST ACCOUNTING.

Basically, they implement the units of constant purchasing power measurement basis under HISTORICAL COST ACCOUNTING.

However, the current members of the IASB and the current members of the IASB staff refuse to acknowledge that.

That is what publicly donated funds are being used for: to pay these peoples´ salaries to come up with junk, low quality IFRSs.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

IASB continues to ignore Units of Constant Purchasing Power under HCA

Although all entities that ever used the HISTORICAL COST ACCOUNTING  model during the last 100 years (i.e., almost all entities), all entities using HISTORICAL COST ACCOUNTING  today (i.e., almost all entities) and all entities who will use HISTORICAL COST ACCOUNTING in the future (i.e., almost all entities), used, use and will use the units of constant purchasing power measurement basis to update some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, the IASB and IASB staff (in my personal opinion) very irresponsibly, continue to ignore it in their current proposals for measurement bases under HCA which only include:

1. Historical cost 

2. Current measurement bases, namely:

(a) fair value (see paragraphs A14–A21);

(b) fulfilment value for liabilities and value in use for assets (see 
paragraphs A22–A31).

All current members of the IASB and IASB staff used measurement in units of constant purchasing power under HISTORICAL COST ACCOUNTING during all of their careers to date. However, they refuse point blank and very irresponsibly to acknowledge its 100 year old usage under HISTORICAL COST ACCOUNTING. We cannot, in my personal, private opinion, accept their view regarding measurement bases under HISTORICAL COST ACCOUNTING, in this case. It would be very irresponsible from users to accept their current very irresponsible refusal to acknowledge that measurement in units of constant purchasing power was a generally accepted measurement basis under HISTORICAL COST ACCOUNTING  for the last 100 years, still is today used under HISTORICAL COST ACCOUNTING and will forever in the future be used while HISTORICAL COST ACCOUNTING is implemented by entities worldwide.

The low quality of current IFRSs thus continues into the future. See, for example, IAS 29 which had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy. The IASB refuses, again point blank, to acknowledge that IAS 29 had no positive effect in Zimbabwe. How can we keep the current IASB members and IASB staff in office when they are - in my personal, private opinion -  clearly very irresponsible?

The current IASB members and IASB staff members are, in my personal opinion (I had personal dealings with a number of IASB staff members in the past), most probably the worst incumbents in the history of the IASB. I have listened to IASB board members during public deliberations.

In my personal opinion, they have unbelievably low levels of knowledge about, for example:

(1) the units of constant purchasing power measurement basis

(2) capital maintenance in units of constant purchasing power in terms of a Daily CPI as was so successfully implemented in Latin America from 1960 till the late 1990´s.

(3) the economy wide stabilizing effect of daily indexing in terms of the Daily CPI.

In my personal opinion, all members of the current IASB as well as all current IASB staff members should be replaced immediately with people who have adequate knowledge about (1) to (3) mentioned above.

A lot of contributors' money is being wasted by keeping the current IASB members and IASB staff members. They should all be replace immediately, in my personal opinion.

See also: 

IASB defines measurement bases under Historical Cost Accounting

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Use of Daily CPI in IAS 29 compliant with IFRS

IAS 29 Financial Reporting in Hyperinflationary Economies has been implemented since its authorization in 1989 in terms of the monthly published CPI. This has consistently resulted in IAS 29 not being effective in implementing capital maintenance in units of constant purchasing power which is, in fact, the objective of IAS 29. For example: IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy which imploded on 20 November, 2008 despite the full implementation of IAS 29 during the final 8 years of hyperinflation in that country.

Accountants generally realize that it is common sense that IAS 29 had no positive effect in Zimbabwe.

The requirement that financial statements shall be stated at the "measuring unit current at the end of the reporting period" has - until very recently - always been interpreted by users and auditors as meaning that items like, for example, daily sales, daily cost of sales, daily expenses, daily costs, all daily items accounted from day one till the last day of every month have to be measured in units of constant purchasing power in terms of ONE, SINGLE, monthly published Consumer Price Index at the end of the reporting period (end of the month, for example for the preparation of monthly accounts during hyperinflation) while, in fact, the general price level during hyperinflation can change by 10% to 100% to 100 million per cent (see Zimbabwe during 2008) every day of the month.

During low and high inflation and deflation the general price level also changes at least daily as indicated by the official Daily CPI which is based on the official monthly published CPI.

Monthly accounts have in practice thus been prepared (and audited) over the last 25 years by users (and auditors approving those accounts) who implemented IAS 29 during hyperinflation when they used the respective single, monthly published CPI during the financial year when it was a very well known fact - acknowledged by everyone in the hyperinflationary economy - that the general price level changed at least DAILY.  This resulted in ever more meaningless monthly and annual profit or loss results and consequent wrong retained earnings and ever higher erosion of the real value of shareholders' equity (capital) the higher the rate of hyperinflation. It also resulted in the completely unnecessary destruction of tens of billions of US Dollars in real value in shareholders´ equity (see Zimbabwe) and all constant real value non-monetary items, for example, salaries, wages, rents, etc. never updated in terms of every - at least DAILY - change in the general price level during hyperinflation.

It is abundantly clear that IAS 29 does not REQUIRE the use of the monthly published CPI. It simply requires that financial statements "shall be stated in terms of the measuring unit current at the end of the reporting period." Users and auditors developed the practice of using the monthly published CPI  over the 25 years since IAS 29 had been required in IFRS during hyperinflation as from April, 1989 because Daily CPIs were only used and are currently only used for the daily pricing (valuation) of government inflation-indexed bonds in many different countries. The use of daily indices from 1960 till the late 1990's in especially South American countries was seen as fundamentally a monetary and not an accounting measure because of the mistaken belief that inflation affects the real value of both monetary and non-monetary items. Inflation only affects the real value of monetary items. It has no effect on the real value of non-monetary items. The implementation of the stable measuring unit assumption affects the real value of constant real value non-monetary items not updated daily in terms of the Daily CPI.

The reason for this practice was and is that users over the last 25 years generally did not and still generally do not understand that ONLY measurement in units of constant purchasing power in terms of ALL - at least DAILY - changes in the general price level is necessary to achieve actual capital maintenance in units of constant purchasing power (as was achieved in Brazil in 1994 with the Unidade Real de Valor Daily Index) that is required in IAS 29, but is not achieved as a result of the use of the monthly CPI instead of the DAILY CPI.

The Daily CPI was very successfully used in Brazil from 1964 till 1994 with the application of various government supplied indices during that period and especially with the final very successful Unidade Real de Valor DAILY INDEX that Brazil used together with their Real Plan monetary reform to stop hyperinflation overnight with a totally free accounting cum monetary practice at no cost.

Unfortunately daily indexing was never recognized in the many - mostly Latin American -  countries that widely implemented monetary correction or "correcção monetária" from the 1960's to the 1990's, as the underlying basis of a fundamental accounting model, namely capital maintenance in units of constant purchasing power in terms of the Daily CPI. All those countries saw daily indexing as only a monetary measure and never as an accounting model. This accounts for the lack of understanding of capital maintenance in units of constant purchasing power in terms of the Daily CPI today.

IAS 29 states the following:

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

IAS 29, Par. 8

IAS 29 does not REQUIRE the use of the monthly published CPI.

Using the DAILY CPI would also result in "financial statements stated in terms of the measuring unit current at the end of the reporting period."

However, using the DAILY CPI would result in ACTUAL capital maintenance in units of constant purchasing power since it is - in general - the ONLY way it can be achieved during inflation and deflation (and especially during hyperinflation) in a non-dollarized economy.

The use of the Daily CPI in IAS 29 is thus compliant with IFRS. The use of the Daily CPI in IAS 29 during hyperinflation would result in stabilizing the non-monetary or real economy during hyperinflation over a short period of time as it was done in Brazil in 1994.

What happened in Brazil in 1994 with respect to the use of the very successful Unidade Real de Valor DAILY INDEX is often ignored. The reason for this is the fact that very few people understand the economy-wide stabilizing effect of implementing capital maintenance in units of constant purchasing power - as required in IAS 29 - in terms of the DAILY CPI. IAS 29 is and always has been implemented in terms of the monthly published CPI.

 The IASB has stated in 2013 that IAS 29 gives guidance on the implementation of capital maintenance in units of constant purchasing power.

IAS 29 can thus correctly be implemented in terms of the Daily CPI which would result in "financial statements stated in terms of the measuring unit current at the end of the reporting period" during hyperinflation since the DAILY CPI on the last day of every month or year would also be "the measuring unit current at the end of the reporting period" when the Daily CPI is chosen as the measuring unit during hyperinflation. IAS 29 does not state which measuring unit must be used. The user has full discretion regarding the choice of measuring unit during hyperinflation.

The Daily CPI is a valid measuring unit since it is based on the official CPI. The Daily CPI is used by all (many) governments issuing sovereign inflation-indexed bonds, for example Treasury Inflation-Index Securities (TIPS) in the United States and the CER in Argentina.

 Argentina Daily CPI - CER (Coeficiente de Estabilización de Referencia)

Click in sequence: "Estadísticas e Indicadores"

"Monetarias y Financieras"
"Descarga de paquetes estandarizados de series estadísticas":

At the bottom of the page you will see: "Coeficiente de estabilización de referencia (CER), serie diaria", then choose a year and open the excel file.

The very simple formula to calculate the Daily CPI based on the official monthly published CPI is widely available on the internet in the few cases where a government does not issue inflation-indexed bonds. All government inflation-indexed bonds are currently priced DAILY in terms of an already existing official Daily CPI.

Links to some Daily CPIs appear on the right of this blog.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

IASB defines measurement bases under Historical Cost Accounting

HISTORICAL COST ACCOUNTING

The IASB mistakenly decided to recognize only the following two measurement bases under the Historical Cost Accounting model in the Conceptual Framework in IFRSs:

"A2. Measurement bases can be categorised as:

(a) historical cost (paragraphs A3–A11); or

(b) current measurement bases (paragraphs A12–A35).

1. HISTORICAL COST

A3. Measurements based on historical cost provide monetary information about resources, claims and changes in resources and claims using information about past transactions (for example, transaction prices). The initial measurement of assets or liabilities measured at historical cost is not adjusted to reflect changes in prices. However, the carrying amount is adjusted over time to reflect changes such as consumption, impairment and fulfilment.

2. Current measurement bases

A12. Current measurement bases are updated to reflect conditions at the measurement date. The following paragraphs describe the following current measurement bases:

(a) FAIR VALUE (see paragraphs A14–A21);

(b) fulfilment value for liabilities and value in use for assets (see paragraphs A22–A31)."

It is generally accepted that IFRSs, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies, deal with financial reports prepared under the Historical Cost basis.

The IASB thus, shockingly and very irresponsibly, continues to ignore the more than a 100-year-old and universally used Units of Constant Purchasing Power measurement basis under Historical Cost Accounting.

The third measurement basis used by all entities implementing Historical Cost Accoutning (but ignored by the IASB) is: 

3. UNITS OF CONSTANT PURCHASING POWER (ignored by the IASB)

The Units of Constant Purchasing Power measurement basis is used to update  some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, i.e., to measure these items in units of constant purchasing power in terms of the CPI or a Cost of Living Index on an annual basis under HISTORICAL COST ACCOUNTING. 

It is part of US GAAP. Its use is universal under Historical Cost Accounting, but the IASB refuses to recognize it in the Conceptual Framework. This is a fundamental mistake in the Conceptual Framework and adds to IFRS being of low quality.

Summary

MEASUREMENT BASES UNDER HCA

1. Nominal Historical Cost
2. Fair Value
3. Units of constant purchasing power (ignored by the IASB)

See also: 

Historical Cost Accounting versus Capital Maintenance in Units of Constant Purchasing Power™

and

Three measurement bases in IFRS

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.