Draft IASB Discussion Paper: CAPITAL MAINTENANCE

Draft IASB Discussion Paper: CAPITAL MAINTENANCE



Comment letter to the Draft IASB Discussion Paper: CAPITAL MAINTENANCE

Nicolaas Smith

Capital Maintenance in Units of Constant Purchasing Power at Princeton University

Capital Maintenance in Units of Constant Purchasing Power at Princeton University

Princeton University

Example of CMUCPP with a Daily CPI versus IAS 29

Example of CMUCPP with a Daily CPI versus IAS 29

All non-monetary receivables and payable are treated as monetary items under Historical Cost Accounting. They are not monetary items. Monetary items are defined as constituting the money supply. Non-monetary receivables and payables are not part of the money supply. They are constant real value non-monetary items since they are linked to underlying non-monetary items.

IAS 29 does not specifically require the implementation of Historical Cost Accounting during hyperinflation. IAS 29 requires the implementation of Capital Maintenance in Units of Constant Purchasing Power in the form of the restatement of HC or CC financial statements in terms of the measuring unit current at the balance sheet date. All non-monetary receivables and payables are thus treated as monetary items under IAS 29 too. The net “monetary” gain or loss is calculated with reference to these items under IAS 29.

They are constant real value non-monetary items under CMUCPP and are accounted as such. There is no net constant purchasing power gain or loss under ideal CMUCPP with complete coordination. This results in the maintenance of 100% of the real value of all non-monetary receivables and payables instead of destroying their real values at the rate of hyperinflation with the implementation of the stable measuring unit assumption during the 353 days of the year that the daily general price level is not recognized under IAS 29. IAS 29 only recognizes the 12 month-end CPIs.

The following example clearly proves the above:

				Hist Cost		Historical	Cost
						Zim$ Results
Date	Daily CPI	Z$/USD		Dr	Cr	Dr	Cr	Dr	Cr
	Derived	Derived		USD	USD	Zim$	Zim$	USD	USD
1/11/07	4 387,69	43,8769	Capital		1000		43 877		133
1/11/07	4 387,69	43,8769	Stock	1000		43 877		133
1/11/07	4 387,69	43,8769	Debtors	4000		175 508		531
1/11/07	4 387,69	43,8769	Sales		4000		175 508		531
30/11/07	9 727,86	97,2786
31/12/07	33 080,55	330,8055	P+L –CoS	1000		43 877		133
31/12/07	33 080,55	330,8055	Stock		1000		43 877		133
31/12/07	33 080,55	330,8055	Sale	4000		175 508		531
31/12/07	33 080,55	330,8055	P+L – Sales		4000		175 508		531
31/12/07	33 080,55	330,8055	Net MonetaryLoss	-	-	-	-
31/12/07	33 080,55	330,8055	P+L - Net Mon Loss	-	-	-	-
31/12/07	33 080,55	330,8055	Net MonetaryLoss	-	-	-	-
31/12/07	33 080,55	330,8055	Dividend	3000		131 631		398
31/12/07	33 080,55	330,8055	Bank		3000		131 631		398

				IAS 29 with the monthly CPI
Date	Daily CPI	Z$/USD		Conv	Dr	Cr	Dr	Cr
	Derived	Derived		Factor	Zim$	Zim$	USD	USD
1/11/07	4 387,69	43,8769	Capital	3,40		149 208		451
1/11/07	4 387,69	43,8769	Stock	3,40	149 208		451
1/11/07	4 387,69	43,8769	Debtors	1,00	175 508		531
1/11/07	4 387,69	43,8769	Sales	3,40		596 831		1 804
30/11/07	9 727,86	97,2786		3,40
31/12/07	33 080,55	330,8055	P+L – CoS	3,40	149 208		451
31/12/07	33 080,55	330,8055	Stock	3,40		149 208		451
31/12/07	33 080,55	330,8055	Sale	3,40	596 831		1 804
31/12/07	33 080,55	330,8055	P+L - Sales	3,40		596 831		1 804
31/12/07	33 080,55	330,8055	Net MonetaryLoss		421 322		1 274
31/12/07	33 080,55	330,8055	P+L - Net Mon Loss		421 322		1 274
31/12/07	33 080,55	330,8055	Net MonetaryLoss			421 322		1 274
31/12/07	33 080,55	330,8055	Dividend		26 301		80
31/12/07	33 080,55	330,8055	Bank			26 301		80

				CMUCPP (IAS 29) with Daily CPI
Date	Daily CPI	Z$/USD		Conv	Dr	Cr	Dr	Cr
	Derived	Derived		Factor	Zim$	Zim$	USD	USD
1/11/07	4 387,69	43,8769	Capital	7,54		330 806		1000
1/11/07	4 387,69	43,8769	Stock	7,54	330 806		1000
1/11/07	4 387,69	43,8769	Debtors	7,54	1 323 222		4000
1/11/07	4 387,69	43,8769	Sales	7,54		1 323 222		4000
30/11/07	9 727,86	97,2786
31/12/07	33 080,55	330,8055	P+L - CoS	7,54	330 806		1000
31/12/07	33 080,55	330,8055	Stock	7,54		330 806		1000
31/12/07	33 080,55	330,8055	Sale	7,54	1 323 222		4000
31/12/07	33 080,55	330,8055	P+L - Sales	7,54		1 323 222		4000
31/12/07	33 080,55	330,8055	Net MonetaryLoss	7,54	-
31/12/07	33 080,55	330,8055	P+L - Net Mon Loss	7,54	-
31/12/07	33 080,55	330,8055	Net MonetaryLoss	7,54		-
31/12/07	33 080,55	330,8055	Dividend		992 417		3000
31/12/07	33 080,55	330,8055	Bank			992 417		3000

From the above we can see that:

1.       Under IAS 29 in terms of the monthly CPI – the way IAS 29 has been implemented since 1990 although a monthly CPI is not specifically required in the standard, 54.9% of the real value of whatever capital was still left in Zimbabwe was destroyed, not by hyperinflation, but the stable measuring unit assumption (HCA) during the two months of November and Dezember 2007 in the Zimbabwean economy. That is what happened in the whole economy.

2.       Under ideal Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily CPI with complete coordination (everyone doing it – like in Brazil from 1964 to 1994), 100% of the real value of capital, all receivables and payables and all current year profits would have been maintained. That is, in principle, what happened during the very high and hyperinflation in Brazil from 1964 till 1994 when that country implemented a form of CMCUPP (indexation or monetary correction) in terms of a government supplied Daily Index. 

Nicolaas Smith

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