Inflation ceases to be a concern for wage earners under Daily Indexing

Inflation ceases to be a concern for wage earners under Daily Indexing

Francisco Toro´s reply on The Devil´s Excrement to Implementing Daily Indexing in Venezuela - Part 2 

"extorres Says:

September 20, 2013 at 9:42 am

Nicolaas Smith,

Let me start by framing my response with a statement of respect for your proposal. It seems soundly powerful despite its impressive simplicity. I am again forced to readjust my understanding of it by your reply, which was top notch. Thanks to you, and Gustavo Franco.

It seems clearer now that this proposal is highly focused in method as in purpose, and perhaps I was expecting irrelevant ramifications. If I understand correctly, the Daily Indexing proposal does not seek to correct hyperinflation, only some of its economic effects, until other steps are taken to correct the hyperinflation, itself. This takes me down three different paths of discussion.

1) From the perspective of wage earners, this proposal would adjust their income daily such that inflation ceases to be a concern of theirs, at least as far as their income’s value. This would also be true for most businesses and I dare say anyone whose income is processed through an accounting system. From the perspective of non earners, earners of the informal economy, and anyone whose income is not processed through an accounting system, the price of everything around them increases more quickly and in a worse manner than before. My comment regarding non earners made reference to these folk. If they are receiving income from social programs, clearly their income is indexed by the accounting systems running the social programs.

By the way, I have to bring up again the salaries going down issue. Yes, they “would maintain their constant purchasing power (real value) over time”, but their numerical value would go down if the currency starts becoming stronger with respect to the dollar.

Also by the way, I am not convinced with the reply regarding seigniorage. There is no such thing as a free lunch. The amount of profit from seigniorage would be arithmetically reduced at the end of the day by the amount of adjustment resulting from the daily indexation. The greater the sum of differences in income from daily indexation, the greater the loss for those profiting from seigniorage, unless they make up for it with greater printing, which only worsens the situation for the poor. I think the cause and effect is incorrect: it’s not seigniorage’s profits that are reduced when hyperinflation is lowered; it’s hyperinflation that is lowered when seigniorage is reduced.

Back to the main argument, it seems to me that, without an accompanying belt tightening by the government (e.g., reducing government expenses, attracting foreign investment, increasing reserves), this idea worsens inequality. Would you agree with this, or am I missing something?

2) Given our political reality and the urgency and importance of an election process coming up, I am filtering proposals by those meeting two criteria, leaving all others for later: 1) high chance of winning votes over from the chavista side; 2) low chance of being countered by the chavista side. This proposal seems to be weak on both counts. It would be difficult to explain to those who would benefit from it and difficult to swallow for those who would suffer worse for it, which makes it easy for chavismo to counter through misiones adjustment promises, economic stabilization be damned.

3) Personally, I don’t merely analize whether a proposal is a good or bad action to take, but whether it is a better or worse action to take than another. For this reason, I reiterate the comparison with the proposal of Unconditional Cash Transfer (UCT). As opposed to Daily Indexing (DI), UCT reduces inequality. The way I envision it, UCT is also indexed to the dollar, or as was put in your reply “the NON-MONETARY economy would be stabilised AS IF it is dollarized”. Not only is UCT more likely to flip the citizen:government relationship, making citizens go from supplicants to citizens (see:http://caracaschronicles.com/2007/07/17/torres-in-bethlehem/ ), it seems that DI could in fact make citzens more supplicants than ever.

I disagree with stating that UCT “does not guarantee the sustainable development of the economy” since DI does not either, so no difference there. Also, the statement that “State of the art education, equal opportunity, free competition and abundant availability of investment capital (e.g., via quantitative easing) in the above model I described do a good job of generating sustainable developement in an economy” applies just as much to the UCT model as it does to the DI model, even more so. As per the article in the link, UCT at least forces the government to have the incentive of increasing its taxation income, whereas the DI model continues the petrostate model of the government’s incentive to increase oil income, not citizen success."

________________________________________________________________________________

See my reply: Daily Indexing is free, 2% better than Dollarization and maintains autonomous monetary policy control

Nicolaas Smith

1000th blogpost

Implementing daily indexing in Venezuela - Part 2

Implementing daily indexing in Venezuela - Part 2

(First read) Comment from extorres

“You seem to imply that no one loses, but those who are currently taking advantage of the seigniorage would stop reaping its benefits, which is tantamount to their losing.”

Daily indexing results in the items being indexed daily being maintained constant in real value over time at whatever rate of low inflation, high inflation or hyperinflation. It does nothing to hyperinflation - over the short term. Brazil had daily indexing for 30 years during 30 years of high and hyperinflation. They had a relatively stable non-monetary economy as well as many monetary items inflation-indexed daily, but they continued to have an unstable monetary economy with high and hyperinflation of up to 2000 percent per annum from 1964 till 1994. They only stopped hyperinflation with their Real Plan in 1994.

Gustavo Franco, the Governor of the Central Bank of Brazil and one of the architects of the Real Plan explained it - in very short terms - to me as follows in an email message:

“It was essential, in the Brazilian case, and this may be a general case, that the URV was defined as part of the monetary system. It has a lot to do with jurisprudence regarding monetary correction; URV denominated obligation had to be treated as if they were obligations subject to monetary correction. In the URV law it was defined that the URV would be issued, in the form of notes, and when this would happen, the URV would have its name changed to Real, and the other currency, the old, the Cruzeiro, was demonetised.”

That was the Real Plan. I am not proposing a Real Plan for Venezuela. Only the Venezuelan government together with the Central Bank of Venezuela can do that. The Real Plan was used after daily indexing had already been used in Brazil for 30 years and specifically the last daily index, the URV which was a monetised daily indexed unit of account. The Brazilian NON-MONETARY economy was already stabilised before the Real Plan with the use of different daily indices formulated by different governments over those 30 years. The Real Plan simply stopped hyperinflation overnight with the introduction of the new currency as explained by Dr. Franco. It stopped hyperinflation in an already stabilised non-monetary economy.

I am only proposing the use of the Venezuelan Daily CPI to stabilise the Venezuelan non-monetary economy via an update in IAS 29 Financial Reporting in Hyperinflationary Economies to REQUIRE DAILY INDEXATION in terms of the DAILY CPI. The URV or Unidade Real de Valor was a daily index supplied by the Brazilian goverment based almost entirely on the official - not parallel - daily US Dollar exchange rate with the Brazilian currency. As you can see above it was defined as part of the monetary system. It was a monetised daily indexed unit of account. I am not suggesting the equivalent for Venezuela. I am suggesting a daily index being the Daily CPI since a URV-based daily index would not currently be possible in Venezuela because the US Dollar exchange rate is not an official exchange rate: it is currently still a parallel or black market rate.

Seignoirage is the profit the Venezuelan government makes on increasing the Bolivar money supply. The Venezuelan government would still make large seignoirage profits under daily indexation if they were to continue creating hyperinflation with an excessive increase in the money supply. However, the real value of that profit will decrease as the governemnt´s payees would demand more nominal Bolivars to get paid the correct real value.

Daily inflation is known in advance with the Daily CPI. There are no surprises for anyone. The Daily CPI is a lagged, daily interpolation of the monthly published CPI.

Only when hyperinflation is reduced to low inflation, would the profit from seignoirage be drastically reduced.

“What actions do you think they could take to counter this loss?”

If they were to keep hyperinflation at the current level they would thus receive less seignoirage, but not drastically less.

People in power will always be in a good position to exploit whatever possibilities the new model provides: while they control the money supply increases, they will make seignoirage profits, but at a lower real value level.

In Zimbabwe the same people who destroyed Zimbabwe´s MONETARY economy with hyperinflation are still there after spontaneous Dollarization. The Zimbabwean NON-MONETAR ECONOMY was destroyed by the implementation of IAS 29 in terms of the MONTHLY CPI. IAS 29 had absolutely no positive effect in Zimbabwe. The Zimbabwean economy would never have imploded on 20 November 2008 if IAS 29 were REQUIRED to be implemented in terms of a DAILY INDEX - more correctly an index that recognises ALL changes in the general price level because it can change more than once a day from about 3000% inflation per annum. That was what happened in Angola and obviously much more often in Zimbabwe´s case.

“Even if these people decided not to fight it and instead help stabilize the system, the economy then effectively becomes dollarized which brings a whole branch of other ramifications,”

No, that is not correct. An economy is ony dollarized when the local currency is demonitised and a relatively stable foreign currency - normally the US Dollar - is used in the economy as the functional currency. Implementing daily indexing in Venezuela would be done with the Bolivar continuing being the functional fiat currency.

I think what you mean is that the NON-MONETARY economy would be stabilised AS IF it is dollarized. That is correct.

Real dollarization does have severe ramifications: (1) you have no autonomous monetary policy: your central bank cannot stimulate your economy with quantitative easing like the US Fed is currently doing in the US. Portugal and 15 other European Monetary Union countries are dollarized in terms of the Euro. (2) The US gains the seignoirage from the increase in US Dollar money supply to accomodate the Venezuelan economy. This is not orchastrated by the US: countries decide on their own to dollarize or dollarize spontaneously. The US has nothing to do - directly - with the reasons for dollarization.

“ramifications, including salaries going down…”

That is not correct. Salaries, wages, rents, taxes, trade debtors, trade creditors, etc. would maintain their constant purchasing power (real value) over time.

“I hear what you are saying about Brazil, but that is not the only way to bring down inflation”

As I stated before: daily indexation of NON-MONETARY items is not about bringing down inflation in the MONETARY ECONOMY. Daily indexation of NON-MONETARY ITEMS implements financial capital maintenance in units of constant purchasing power in terms of the Daily CPI.

“Contrast your suggestion against distributing all income from oil directly, daily, and equally to all citizens.”

The wealth of a country can be in many forms: oil, minerals as well as the general wealth created by the population in a diversified economy. The government taxes this wealth and uses these taxes to provide education, health services, security, infrastructure, etc. to the population on a daily basis. Daily indexation of the non-monetary economy greatly improves the above model at any level of inflation and deflation.

The oil wealth of a country would play its proper role in the above model.

Distributing all income from oil directly, daily, and equally to all citizens per se does not guarantee the sustainable development of the economy. State of the art education, equal opportunity, free competition and abundant availability of investment capital (e.g., via quantitative easing) in the above model I described do a good job of generating sustainable developement in an economy.

“while not excluding the non earners, as your suggestion seems to do”

The non earner part of you comments is the most difficult part for me to grasp. Please explain how you see that daily indexing resulting in a stable non-monetary economy including constant purchasing power social grants to non earners as well as the taxes on which they are based being maintained constant in real value, exclude non earners.

Thank you very much for your comments. I really appreciate them. Please ask me any question regarding the subject.



Nicolaas Smith

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

How to implement Daily Indexing in Venezuela - Part 1

How to implement Daily Indexing in Venezuela - Part 1

extorres Says:

From The Devil´s Excrement in response to 

(First read) Daily indexing is a measurement paradigm

September 18, 2013 at 11:19 pm

"Thank you so much for such a detailed reply. I see now that your suggestion is to make a change external to the politics, which, though much more interesting and impressive, brings up a different issue. You seem to imply that no one loses, but those who are currently taking advantage of the seigniorage would stop reaping its benefits, which is tantamount to their losing. What actions do you think they could take to counter this loss? Even if these people decided not to fight it and instead help stabilize the system, the economy then effectively becomes dollarized, which brings a whole branch of other ramifications, including salaries going down…

I hear what you are saying about Brazil, but that is not the only way to bring down inflation, nor do I think Brazil’s story has reached an end, nor was the indexation the only factor helping Brazil those years. One big difference, for example, is the percentage that the oil industry represents of Venezuela’s economy. Contrast your suggestion against distributing all income from oil directly, daily, and equally to all citizens. Since the oil is sold in dollars, that is another form of indexation, while not excluding the non earners, as your suggestion seems to do. It would also achieve a healthy incentive structure of getting the government to focus on the success of the people so that it would reap greater income from taxes."

My response to the above comment.

Nicolaas Smith

Daily indexation is a measurement paradigm

Daily indexation is a measurement paradigm

From The Devil´s Excrement

“The inflation-indexing seems right, though not simple since it seems like it then becomes a political matter to be specifying which things become indexed or not. It also seems to exclude protection for those with no income, while weighing heavily on the responsibility of accounting systems, which is a flag for points of failure in Venezuela.”

“it seems like it then becomes a political matter to be specifying which things become indexed or not.”

Daily indexation is a measurement paradigm totally different from traditional Historical Cost Accounting. It is a national measurement basis / paradigm once it is being implemented in an economy like it was implemented in Brazil and other Latin American countries during high and hyperinflation from 1964 till 1994. It is fundamentally different from the globally implemented, 3000-year-old, traditional nominal Historical Cost paradigm. The stable measuring unit assumption is implemented under the HC paradigm. It is assumed money is perfectly stable whenever economic items are measured in nominal monetary units during inflation and deflation - at whatever rate of inflation or deflation.

The stable measuring unit assumption is NEVER implemented under DAILY INDEXATION, i.e., the Constant Item Constant Purchasing Power paradigm. This is instinctively understood by consumers and business people, including all street traders (some of whom have never been to school) in hyperinflationary economies. However, it is a mystery to the members of the International Accounting Standards Board (IASB), the IASB Interpretations Committee and the IASB staff members who combined have 100s of years of experience of nominal Historical Cost Accounting and the stable measuring unit assumption during LOW inflation as well as combined hundreds of years of training and high level education in nominal HCA and the stable measuring unit assumption during LOW inflation. They are clueless about daily price rises during hyperinflation.

There is no money illusion in a hyperinflationary economy. Everyone knows for a fact that the local currency loses real value daily during hyperinflation. No-one doubts that.

Once DAILY indexation is implemented officially on a national basis as instinctively already happening in Venezuela in the DAILY indexing of many non-monetary prices in terms of the DAILY US Dollar parallel rate, then it is (becomes) a national measurement paradigm which it already currently is only for those prices being updated DAILY in Venezuela in terms of the DAILY US Dollar parallel rate.

So, it is not “a political matter to be specifying which things become indexed or not”. All items are indexed.

This will not stop hyperinflation in the short term. As long as the Central Bank of Venezuela keeps on creating too many Bolivars, there will be hyperinflation.

But, (1) DAILY INDEXATION of all monetary items would stop the real value eroding EFFECT of hyperinflation in all monetary items indexed daily - as it was done in Brazil from 1964 to 1994. It will be as if there is no hyperinflation - during actual hyperinflation. Currently the real value eroding EFFECT of low inflation is stopped in at least USD 2.4 Trillion in DAILY INDEXED government capital inflation-indexed bonds worldwide - during low inflation worldwide.

(2) Measurement of all NON-MONETARY items in units of constant purchasing power based on a DAILY INDEX would maintain their constant purchasing power constant DURING hyperinflation - as was done in Brazil from 1964 to 1994.

Venezuela has been indexing issued share capital, retained profits, accumulated losses, capital reserves, provisions, etc. in terms of the 12  monthly published Consumer Price Indices since 2009. Why? Because the government indicated that these items have to be indexed like this? No. It is done because Venezuela implements International Financial Reporting Standards, namely IAS 29 Financial Reporting in Hyperinflationary Economies since 2009.

Changing IAS 29 to REQUIRE DAILY INDEXING would mean that the DESTRUCTION of current year results in the Venezuelan economy over the last four years as the result of Venezuelan accountants implementing the stable measuring unit assumption - as required in IAS 29 - during the 355 non-month-end days of the year (they only use the 12 month-end CPIs as generally accepted over the last 24 years since its authorization under the current version of IAS 29) would stop.

Once companies start using DAILY INDEXING to maintain the real value (constant purchasing power) of their current year results instead of destroying part of it at the rate of hyperinflation, then DAILY INDEXING would become the national measurement paradigm in Venezuela as A REQUIREMENT of IAS 29 and not as a requirement of the Venezuelan government.

When DAILY INDEXING is done in terms of the Venezuelan Daily CPI (because doing it correctly in terms of the daily US Dollar parallel rate is currently illegal in Venezuela), then DAILY INDEXING of all items would become the national daily measurement paradigm because everyone will experience - see - the economy stabilising.

“It also seems to exclude protection for those with no income.”

DAILY INDEXING of all items means the economy would operate in real values. That means profits would be maintained in real value. That means taxes would be calculated AND PAID in real (constant purchasing power) values. That means social subsidies would be maintained in real values. Thus there would be much better protection for those with no income under DAILY INDEXATION than under the current system.

“while weighing heavily on the responsibility of accounting systems, which is a flag for points of failure in Venezuela.”

You mean the REQUIREMENTS of International Financial Reporting Standards implemented outside the control of the government.

What is happening in Venezuela today - illegal arbitraging low cost items to the Colombian market, the arbitrage between the official and parallel rate, etc. are all because of the invisible hand of self-interest.

Once DAILY INDEXING is the national paradigm in Venezuela as a result of its REQUIREMENT in IAS 29, then that invisible hand of self-interest would ensure that the economy stabilises by everyone striving to maintain his or her values constant over time: Business owners would welcome DAILY INDEXING of all prices, trade debtors, trade creditors and all items in their profit and loss accounts; workers would welcome DAILY INDEXING of salaries and wages and benefits; property owners would welcome DAILY INDEXING of rents and the government would welcome DAILY INDEXING of all taxes. Banks would welcome DAILY INDEXING of all loans made. No-one would lose any real value because of hyperinflation (in the perfect application of this process).

That is what happened in Brazil and many other Latin American countries with DAILY INDEXATION from 1964 till 1994.

It would be the same in Venezuela.

Nicolaas Smith 

Read extorres´s response in How to implement indexation in Venezuela.

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

The IASB´s dismal failure in Venezuela and Belarus - like in Zimbabwe in the past

The IASB´s dismal failure in Venezuela and Belarus - like in Zimbabwe in the past

There are three ways to deal with inflation:

(1) The MONETARY EFFECT of hyperinflation (i.e. the DAILY erosion of the REAL value of the Bolivar - all MONETARY ITEMS in Venezuela not inflation-indexed daily) can be reduced by the Central Bank of Venezuela by reducing the excessive increase in the supply of Bolivars. This is a political matter in Venezuela. The Central Bank of Venezuela can thus reduce inflation by creating fewer new Bolivars.

(2) Dollarization (official or spontaneous) or a currency board will stop hyperinflation overnight. It means the end of the Bolivar. Official dollarization is very costly to the government and you lose ALL your sovereignty over monetary policy. Spontaneous dollarization has no extra cost to the government. You still lose ALL your sovereignty over monetary policy.

(3) The DAILY inflation-indexing of all MONETARY ITEMS in the economy, obviously excluding actual Bolivar bank notes (I don´t know whether you have coins) will do nothing to the rate of hyperinflation (you will still have hyperinflation) but there would be no EFFECT of hyperinflation in the economy. 

Inflation has NO EFFECT on the REAL VALUE of NON-MONETARY ITEMS like taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc.

The REAL VALUE of the NON-MONETARY ITEMS taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc. is destroyed by the STABLE MEASURING UNIT ASSUMPTION, i.e., Historical Cost Accounting - by not maintaining them constant in REAL VALUE on a DAILY basis (the general price level changes DAILY or even more than once a day in high hyperinflation). 

Indexing (measuring them in units of constant purchasing power in terms of a DAILY INDEX) taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc. DAILY in terms of the DAILY CPI in Venezuela - as was done very successfully for 30 years from 1964 to 1994 in Brazil and other Latin American countries in terms of Daily Indices - would maintain the REAL VALUE of taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc constant over time - as was done - to a large extent - in LA in the past.

This can be done by the International Accounting Standards Board for Venezuela if the IASB were to have the common sense and  good judgement to change International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies (which Venezuelan companies have been implementing since 2009) to REQUIRE it to be implemented in terms of a DAILY INDEX instead of the monthly published CPI as it has been done since 1990. 

That would stabilise ONLY the Venezuelan constant real value NON-MONETARY economy - as it was done in Brazil and the rest of LA in the past. It would do nothing to inflation over the short term.  

Unfortunately this will not happen because the IASB does not have the common sense and good judgement to change IAS 29 to REQUIRE daily indexing. Companies in Venezuela or their multinational owners would also not do it because it is not currently REQUIRED in IAS 29 - although it CAN be done because the DAILY CPI is also a consumer price index just like the monthly published CPI as currently used in IAS 29. 

Nicolaas Smith 

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

Cost is a measurement basis under financial capital maintenance in units of constant purchasing power

Cost is a measurement basis under financial capital maintenance in units of constant purchasing power


"Updated Historical Cost to be used under financial capital maintenance in units of constant purchasing power."

Agenda Ref 12, IFRIC meeting September 2013, Appendix B, 2.(b)

Michael Stewart, Director of Implementation Activities at the IASB and Kenichi Yoshimura very unfortunately forgot the above in their submission Applicability of the concept of financial capital maintenance defined in constant purchasing power units.

15. Having made a choice of using the financial capital maintenance concept in constant purchasing power units, the entity would develop accounting policies by referring to an IFRS that addresses a transaction, other event or condition analysed in accordance with paragraph 10 of IAS 8. 

IAS 8 state:

10 In the absence of an IFRS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is:

(a) relevant to the economic decision-making needs of users; and

(b) reliable, in that the financial statements:

(i) represent faithfully the financial position, financial

performance and cash flows of the entity;

(ii) reflect the economic substance of transactions, other events

and conditions, and not merely the legal form;

(iii) are neutral, ie free from bias;

(iv) are prudent; and

(v) are complete in all material respects.

11 In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in

descending order:

(a) the requirements in IFRSs dealing with similar and related issues;

and

(b) the definitions, recognition criteria and measurement concepts

for assets, liabilities, income and expenses in the Framework.

The entity would need to adapt each IFRS for the use under that capital maintenance concept because all IFRSs are written to be applied using nominal monetary units in a non-hyperinflationary situation. 

Michael Stewart and Kenichi Yoshimura clearly lack judgement added to their very clear (self-admitted in the case of Kenichi Yoshimura) lack of understanding of financial capital maintenance in units of constant purchasing power.

Michael Stewart, the Director of Implementation Activities at the IASB, even went so far as to state that financial reporting (accounting) has no effect on the economy. He refuses to publicly state that financial reporting (accounting) affects the economy - something all accountants know. I specifically pointed out to him the lack of such a statement from him - after his previous statement. He still refuses to make that statement. He also refuses to admit that he stated that financial reporting has no effect on the economy. He only admits that "I expressed a view about the effect of financial reporting on the economy." He refuses to repeat exactly what he stated. Michael Stewart is the kind of accountant employed at the IASB who influences decision-making at the IASB.

After my above disagreement with Michael Stewart, the IASB stopped working with me on Project IAS 29 Financial Reporting in Hyperinflationary Economies, Paper topic Applicability of the concept of financial capital maintenance defined in constant purchasing power units even though I am the submitter of this Agenda Item Request to the IASB.

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

Huge lack of understanding of units of constant purchasing power at the IASB

Huge lack of understanding of units of constant purchasing power at the IASB

Oscar Wilde

“He is fond of being misunderstood. It gives him a post of vantage."
― from the stage directions describing Lord Goring, "An Ideal Husband"

There is a huge lack of understanding at the IASB regarding financial capital maintenance defined in terms of units of constant purchasing power.

On 2 January 2013, Kenichi Yoshimura, the author of Agenda Ref 20, Applicability of IAS 29 to financial statements prepared under the concept of financial capital maintenance in constant purchasing power units, stated the following in an email to me while I was still working with the IASB on the above Agenda item:

"Unfortunately, I could not complete the numbers under CMUCPP model (shaded with yellow). This is, I think, due to lack of my understanding of the CMUCPP model."

On 8 January 2013, Michael Stewart, the Director of Implementation Activities at the IASB, very firmly indicated that the IASB is satisfied with the implementation of the failed IAS 29 Financial Reporting in Hyperinflationary Economies which had no positive effect during 8 years of implementation during hyperinflation in Zimbabwe.

When I asked him in a teleconference on 8 January 2013 what the IASB´s response was to the fact that the implementation of the failed IAS 29 had no positive effect during 8 years of implementation during hyperinflation in Zimbabwe, he indicated very firmly that financial reporting (accounting) has no effect on the economy – an indication that is clearly totally wrong. It is very strange and very worrying that a senior director at the IASB makes such an indication. According to him it is what users do with the information in financial reports that affects the economy, not the actual measurement activities happening during financial reporting.

Kenichi Yoshimura clearly demonstrated that lack of understanding when he stated the following in Agenda Ref 20 for the IFRIC Interpretations Committee Meeting on 22-23 January, 2013, in Par 10: 

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

That was a completely wrong statement by Kenichi Yoshimura (who was working under the direct guidance of Michael Stewart) as acknowledged by the IASB by now.

In April 2013 the IASB issued a Draft Discussion Paper: Capital Maintenance in which the IASB stated:

Par. "9.48 The concepts of capital maintenance are used in IAS 29 Financial Reporting in Hyperinflationary Economies."

The IASB did not indicate which concept(s??) of capital maintenance are used in IAS 29.

On 3 September 2013 the IASB finally correctly confirmed that financial capital maintenance in units of constant purchasing power is required in IAS 29, 24 years after its authorization in 1989.

Now the IASB is adding yet another contradiction to IFRS by stating that

"The answer to the submitter’s question is that it is not permitted to use the financial capital maintenance concept" (defined in terms of constant purchasing power units as proposed in IFRS "X" INFLATION ) "when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29."

This is in contradiction to the Conceptual Framework (2010), Par. 4.59 (a) which states: 

"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power." 

US GAAP states:

"Two major concepts of capital maintenance exist, both of which can be measured in units of either money or constant purchasing power: the financial capital concept and the physical capital concept."

US GAAP Concepts Statement Nº 6, Par. 71

Measurement in units of constant purchasing power is used by all accountants worldwide in the updating of salaries, wages, rents, etc. on an annual basis.

The lack of understanding of the above concepts at the IASB is abundantly clear in the contradictory statements by the IASB as indicated above.

The two persons, Michael Stewart and Kenichi Yoshimura, who clearly stated and indicated their lack of understanding of financial capital maintenance in units of constant purchasing power are the authors and driving force behind the statement:

"The answer to the submitter’s question is that it is not permitted to use the financial capital maintenance concept" (defined in terms of constant purchasing power units as proposed in IFRS "X" INFLATION ) "when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29."

Micheal Stewart having gone so far as to state that financial reporting has no effect in the economy in explaining the IASB´s full support of the use of financial capital maintenance in units of constant purchasing power in terms of the monthly published CPI (IAS 29) which had absolutely no positive effect during hyperinflation in Zimbabwe. The IASB refuses to admit - according to Michael Stewart - that IAS 29 had no positive effect in Zimbabwe although all accountants in the world, except those at the IASB, have the common sense to realise that the implementation of IAS 29 was a complete failure in Zimbabwe.

IAS 29 in terms of the monthly published CPI is currently a complete failure in Venezuela and Belarus.

Financial capital maintenance in units of constant purchasing power in terms of a Daily Index - what the IASB fails to understand - was a huge success in Brazil from 1964 till 1994, something steadfastly ignored by the IASB.

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

Arthur Schopenhauer, German philosopher (1788 – 1860)

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