Daily CPI formula
"9.6 Consumer Price Index
The Consumer Price Index is the weighted average index value of a typical basket of consumer goods purchased by a typical consumer statistically stated as an initial index value of 100 at the initial date. The CPI is thus fixed in real terms – not in nominal terms. It changes monthly in nominal terms, but it stays fixed in real terms over time.
An example is the harmonized CPI of the European Monetary Union stated as the index value of 100 in 2005. This fixed internal unit of real value is then compared to the weighted average price of the typical basket of consumer goods and services a year later in order to determine the annual rate at which inflation is eroding the real value of only unstable money and other unstable monetary items in only the monetary economy or deflation is creating real value in only unstable money and other unstable monetary items in only the monetary economy. Inflation and deflation have no effect on the real value of non–monetary items. The same is true for high inflation and hyperinflation.
The stable measuring unit assumption (not low inflation, high inflation and hyperinflation) erodes the real value of constant items never maintained constant during low inflation, high inflation and hyperinflation under the HC paradigm. Similarly, it is not deflation, but the stable measuring unit assumption that creates real value in constant items never maintained constant under HCA during deflation.
The annual percentage change in the CPI indicates the annual rate at which only the real value of the national (or monetary union, e.g., the European Monetary Union) unstable monetary unit (unstable money) and other unstable monetary items is being eroded by the economic processes of low inflation, high inflation and hyperinflation or being increased by the economic process of deflation.
The Daily CPI is the daily index value used to calculate the daily price of a government inflation–indexed bond in a particular country, e.g., the Daily Reference CPI value used to calculate the daily price of TIPS in the US, or can, e.g., be based on the formula used to calculate the UF in Chile.
Every country which issues inflation–indexed government bonds already has a Daily CPI based on the respective monthly published CPI. In practice, a Daily CPI or a monetized daily index would be used to inflation–adjust monetary items, to update historical variable items and to measure constant items in units of constant purchasing power on a daily basis during low inflation, high inflation and deflation under Constant Item Purchasing Power Accounting;
i.e., under financial capital maintenance in units of constant purchasing power as authorized in IFRS in the original Framework (1989), Par. 104 (a).
The UF in Chile is the most successful monetized daily indexed unit of account to date.
A Daily CPI is calculated daily, for example the Daily Reference CPI used to price TIPS on a daily basis. The monthly published CPI for the first day of any month is only available – at the earliest – round–about the tenth of the next month; up to 41 days later. The South African CPI for the first day of a calendar month can become available up to the twenty-fourth day of the next calendar month; i.e., up to 55 days later. This is very impractical for daily financial capital maintenance in units of constant purchasing power.
9.7 UF Formula
‘The formula for computation of the UF on day t is:
UF t = UF t–1 × (1+ π) 1/d
where π 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 π 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 1998:3
The above formula applies 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 + π) 1/d
where π 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 π 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 inflation rate for a calendar month is calculated using the CPI for that month and for the preceding month. The Daily CPI within a given calendar month thus depends on the CPI for each of the three preceding months. For example, the July Daily CPI depends before the day the June CPI is published on the CPI for April and May, and starting with the day the June CPI is published on the CPI for May and June.
A Daily CPI is very similar to, but not exactly the same as a monetized daily indexed unit of account, e.g., the UF in Chile. The UF is monetized; i.e., it is stated in terms of the Chilean peso. That is not the case with a Daily CPI. A
Daily CPI is not automatically monetized.
A Daily CPI is, like the monthly CPI on which it is based, a general price level index value. Monetization depends on generally accepted monetary practices in an economy (e.g., the UF in Chile). A Daily CPI can be monetized and used as a monetized daily indexed unit of account with payments being made in the national monetary unit – depending on users in an economy. Monetization is not a necessity.
A Daily CPI is not a unit of account just like the CPI is not a unit of account for accounting purposes. The US Dollar, Euro, Yen, Yuan, etc. are the nominally fixed monetary units of account, unstable in real value, used in their respective countries as the national unstable monetary unit of account for accounting purposes during low inflation, high inflation, hyperinflation and deflation. The US, EU, Japanese and Chinese CPI are not units of account for accounting purposes. They are general price level indices. So are their Daily CPI. Prices are not quoted in CPI or in Daily CPI – although they can be."
Smith N. J., CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS, 2012
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Saturday 25 January 2014
PART 2: HOW TO MAINTAIN A COMPANY´S CAPITAL CONSTANT IN REAL VALUE IN A HIGH OR HYPERINFLATIONARY COUNTRY
HOW TO MAINTAIN A COMPANY´S CAPITAL CONSTANT IN REAL VALUE IN A HIGH OR HYPERINFLATIONARY COUNTRY - PART 2
PART 2
C. Daily CPI: in the process of being written ....
The Daily CPI to be supplied daily on the internet by (in descending order of preference)
1. Central Bank
2. National Institute of Statistics
3. National Institute of Chartered Accountants
4. Chamber of Commerce and Industry
5. By the company itself using the widely recognized Unidad de Fomento formula if none of the above entities provides the Daily CPI.
6. US Dollar daily parallel rate to be used during or even before severe hyperinflation.
The Daily (or even hourly - in severe hyperinflation) USD black market rate is used either
(i) When capital maintenance in units of constant purchasing power in terms of the Daily CPI falls too far behind the US Dollar parallel rate when the black market rate is, in fact, the correct indicator of the general price level,
or
(ii) When the government stops supplying CPI data when the daily USD parallel rate is the only reliable indicator of the general price level.
To be continued ...
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday 24 January 2014
First prize for The Silliest Statement Regarding Accounting in 2014-to-date
First prize for The Silliest Statement Regarding Accounting in 2014-to-date
First Prize: SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS
Response to Question 26
"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."
See SAICA comment letter Here on Page 2 dated 2014-01-24
THE SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS is well-known for its long-standing lack of knowledge regarding the fundamental role capital maintenance has in the accounting framework.
In 2008 it stated publicly on its website that it is against the rejection of the stable measuring unit assumption and that it would be an insult to users to inflation-adjust financial reports prepared during low inflation.
Now SAICA has gone so far as to suggest that capital maintenance should be completely removed from the Conceptual Framework. This is at the same time when other national accounting standard-setters highlight the importance of sorting out capital maintenance as soon as possible in the Conceptual Framework.
SAICA seems to be the worst national accounting standard-setting authority as far as understanding what capital maintenance is about. This may be ascribed to the fact that South Africa has never been in hyperinflation. The fact that accountants are generally not expected to think for themselves as far as accounting matters are concerned, but rather to follow the letter and word of IFRS is mainly to blame for SAICA´s shocking lack of knowledge about the importance of capital maintenance under all levels of inflation and deflation.
However, it must be admitted that this shocking lack of knowledge of the fundamental role capital maintenance has in the accounting framework is a very general state of affairs in the accounting profession worldwide (especially at the IASB) except in Australia, Russia and most Latin American countries. That does not mean that capital maintenance during low inflation and deflation should be ignored under IFRS as suggested by SAICA.
On the other hand: It is true that capital is 100% maintained in nominal monetary units in every single company in the world which manages to balance its books under Historical Cost Accounting.
So, SAICA is right, in NOMINAL terms. SAICA feels so strongly about its support for the stable measuring unit assumption during inflation and deflation that it stated that it is an insult to users to inflation-adjust financial reports prepared during low inflation.
Related: Third Prize for the Silliest Statement about Accounting for 2013-to-date
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
First Prize: SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS
Response to Question 26
"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."
See SAICA comment letter Here on Page 2 dated 2014-01-24
THE SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS is well-known for its long-standing lack of knowledge regarding the fundamental role capital maintenance has in the accounting framework.
In 2008 it stated publicly on its website that it is against the rejection of the stable measuring unit assumption and that it would be an insult to users to inflation-adjust financial reports prepared during low inflation.
Now SAICA has gone so far as to suggest that capital maintenance should be completely removed from the Conceptual Framework. This is at the same time when other national accounting standard-setters highlight the importance of sorting out capital maintenance as soon as possible in the Conceptual Framework.
SAICA seems to be the worst national accounting standard-setting authority as far as understanding what capital maintenance is about. This may be ascribed to the fact that South Africa has never been in hyperinflation. The fact that accountants are generally not expected to think for themselves as far as accounting matters are concerned, but rather to follow the letter and word of IFRS is mainly to blame for SAICA´s shocking lack of knowledge about the importance of capital maintenance under all levels of inflation and deflation.
However, it must be admitted that this shocking lack of knowledge of the fundamental role capital maintenance has in the accounting framework is a very general state of affairs in the accounting profession worldwide (especially at the IASB) except in Australia, Russia and most Latin American countries. That does not mean that capital maintenance during low inflation and deflation should be ignored under IFRS as suggested by SAICA.
On the other hand: It is true that capital is 100% maintained in nominal monetary units in every single company in the world which manages to balance its books under Historical Cost Accounting.
So, SAICA is right, in NOMINAL terms. SAICA feels so strongly about its support for the stable measuring unit assumption during inflation and deflation that it stated that it is an insult to users to inflation-adjust financial reports prepared during low inflation.
Related: Third Prize for the Silliest Statement about Accounting for 2013-to-date
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Inflation to reach 30% in Argentina this year
Inflation to reach 30% in Argentina this year
The BBC reports:
"Despite efforts to support the economy, inflation has soared and many analysts expect it to reach about 30% this year."
The implemetation of Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily Index by all entities in Argentina would stabilise the countries constant real value non-monetary economy overnight at no cost.
The Argentinian Accounting Federation presented the IASB in 2010 with a proposal to implement capital maintenance in units of constant purchasing power (restatement) in economies with annual inflation greater than 10% or cumulative inflation of 26% over three years.
The IASB, who has a "a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework" and is generally clueless about capital maintenance, has not even started the research process for the Board to determine whether the Argentinian proposal is a good idea or not.
I amended the Argentinian Federation´s proposal in 2012. The amendment is available HERE.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The BBC reports:
"Despite efforts to support the economy, inflation has soared and many analysts expect it to reach about 30% this year."
The implemetation of Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily Index by all entities in Argentina would stabilise the countries constant real value non-monetary economy overnight at no cost.
The Argentinian Accounting Federation presented the IASB in 2010 with a proposal to implement capital maintenance in units of constant purchasing power (restatement) in economies with annual inflation greater than 10% or cumulative inflation of 26% over three years.
The IASB, who has a "a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework" and is generally clueless about capital maintenance, has not even started the research process for the Board to determine whether the Argentinian proposal is a good idea or not.
I amended the Argentinian Federation´s proposal in 2012. The amendment is available HERE.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday 23 January 2014
Preserving Retained Income and Capital Reserves on changeover to CMUCPP
Preserving Retained Income and Capital Reserves on change-over to CMUCPP
When changing from Historical Cost Accounting to Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily Index it is required - in terms of fundamental accounting / financial reporting concepts to simply wipe out hard-earned (over many years) Retained Income and other Capital Reserves appearing in the final HC balance sheet.
No shareholder and no board of directors would normally accept such a requirement from a capital creation and capital maintenance point of view. But, that is what is required - in terms of fundamental accounting concepts.
So, to avoid just wiping out maybe millions or billions of USD in Retained Earnings and other Capital Reserves, simply transfer these amounts to Capital by means of a board resolution just before changing over to CMUCPP in terms of a Daily Index.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
When changing from Historical Cost Accounting to Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily Index it is required - in terms of fundamental accounting / financial reporting concepts to simply wipe out hard-earned (over many years) Retained Income and other Capital Reserves appearing in the final HC balance sheet.
"Restated retained earnings are derived from all the other amounts in the restated statement of financial position."
IAS 29, par. 24
No shareholder and no board of directors would normally accept such a requirement from a capital creation and capital maintenance point of view. But, that is what is required - in terms of fundamental accounting concepts.
So, to avoid just wiping out maybe millions or billions of USD in Retained Earnings and other Capital Reserves, simply transfer these amounts to Capital by means of a board resolution just before changing over to CMUCPP in terms of a Daily Index.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday 21 January 2014
PART 1: HOW TO MAINTAIN A COMPANY´S CAPITAL CONSTANT IN REAL VALUE IN A HIGH OR HYPERINFLATIONARY COUNTRY
A. Stop Historical Cost Accounting
1. The first thing to do is to stop Historical Cost Accounting (HCA) in the company´s business. Stop operating under the Historical Cost paradigm. Stop trying the generally impossible. It is generally impossible to maintain the real value (constant purchasing power) of capital (equity) constant in NOMINAL monetary units during low inflation, high inflation, hyperinflation and deflation. The stable measuring unit assumption (not inflation) erodes / destroys the real value (constant purchasing power) of that portion of capital (equity) never maintained constant during inflation.
Pass a board resolution to that effect and inform all third parties of the change and the date of the change which would be the date of the board resolution. Inform the auditors too. Nothing can be done retrospectively.
2. Pass a board resolution transferring all Retained Income and other transferable Capital Reserves at the end of this last financial period under HCA to Capital. This is necessary to avoid simply deleting these hard-earned (over many years) constant real non-monetary values as required in terms of fundamental financial reporting concepts (to be discussed further) for the opening balance sheet under CMUCPP in terms of a Daily Index.
Start implementing Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of an index that follows all (at least daily) changes in the general price level. Capital can generally only be maintained constant in real value my means of Capital Maintenance in Units of Constant Purchasing Power, but ONLY in terms of an index that follows all (at least daily) changes in the general price level. This is also done with a board resolution. Indicate this change in the company´s GENERAL CONDITIONS OF SALE on the back of every invoice / contract / credit note, etc. State that when any third party does any business with the company, the third party accepts the change in accounting model and agrees to be bound by the new legal consequences as from the date of the change-over.
This is a paradigm change. The company will NEVER go back to the Historical Cost paradigm even under very low inflation or deflation. This is a very important change for the company and the country when all entities change to using a DAILY INDEX, namely the DAILY CPI or the US Dollar daily parallel rate.
Specifically point out to third parties during at least the first year of the change-over:
1. The Daily Index the company is using and on which website it is available on a 24/7, 365 days per year basis.
2. Selling prices may be increased daily in terms of the Daily Index depending on specific marketing strategies adopted by the company on a case by case basis. It may also result in all selling prices being increased daily (or even more than once a day during severe hyperinflation) in terms of the Daily Index or the daily USD parallel rate if need be - depending on the rate of hyperinflation.
Third parties will be informed beforehand if the Daily Index were to be changed and the date of the change under normal conditions. This is not applicable during severe hyperinflation when the rate may change hourly.
3. All prices will always be initially recognised as an initial spot monetary value at an initial Daily Index (or USD parallel rate) value at the initial date. This monetary value will change at least daily thereafter in terms of the Daily Index (USD parallel rate) subject to the provisions in 2 above. The real value will remain constant over time.
4. Trade debtors and all other non-monetary receivables will always be updated at least daily in terms of the Daily Index under all circumstances. They are not monetary items. They are constant real value non-monetary items. Their monetary values will change at least daily in terms of the Daily Index, but their real values will remain constant over time.
5. Trade creditors and all other non-monetary payables (which are also all constant real value non-monetary items) will be updated at least daily generally ONLY when a third party also uses CMUCPP in terms of the same Daily Index, otherwise they will be settled in nominal monetary units with third parties who implement HCA. By doing business with the company, third parties agree to these terms of payment.
The company will update trade creditors and all other non-monetary payables at least daily in terms of the Daily Index whenever such creditors are also debtors whose payables are updated at least daily in terms of the Daily Index - whether such creditors use CMUCPP in terms of a Daily Index or not.
PART 5
F. Update all constant items at least daily
1. The constant purchasing power (real value) of the company´s spot or cash sales / revenue is guaranteed over time at any level of low inflation, high inflation, hyperinflation or deflation once the company updates all selling prices at least daily (every time the general price level changes).
2. The constant purchasing power (real value) of the company´s payables is guaranteed over time at any level of low inflation, high inflation, hyperinflation or deflation once the company updates all trade debtors and all other non-monetary payables at least daily (every time the general price level changes).
3. The constant purchasing power (real value) of the company´s gross margins are guaranteed over time at any level of low inflation, high inflation, hyperinflation or deflation once the company implements 1 and 2 above.
4. The company can thus 100% safely update all costs and expenses at least on a daily basis (every time the general price level changes).
The company thus pays salaries, wages, rents, fees, etc in tems of units of constant purchasing power in terms of the Daily Index, i.e., update them at least daily.
5. The constant purchasing power (real value) of the company´s income before tax is thus guaranteed. The company thus updates taxes payable in units of constant purchasing power in terms of the Daily Index. The company updates taxes paid in terms of the Daily Index.
It is very obvious from the above that a country´s constant real value non-monetary economy would be stabilized over a very short period of time when all entities in a country were to do the above.
PART 6
G. Calculation of net monetary gain or loss (Details following)
H. Calculation of constant real value non-monetary gain or loss (Details following)
When all entities in a country implement CMUCPP in terms of a Daily Index the entire constant real value non-monetary economy will be stabilised during low inflation, high inflation, hyperinflation (like it was done in Brazil from 1964 to 1994) and deflation. This is not something new.
This should also be done during low inflation and deflation. This is authorised in IFRS and US GAAP.
The above is far from a complete description of the CMUCPP in terms of a Daily Index model. See the following Parts coming up.
To be continued...
1. The first thing to do is to stop Historical Cost Accounting (HCA) in the company´s business. Stop operating under the Historical Cost paradigm. Stop trying the generally impossible. It is generally impossible to maintain the real value (constant purchasing power) of capital (equity) constant in NOMINAL monetary units during low inflation, high inflation, hyperinflation and deflation. The stable measuring unit assumption (not inflation) erodes / destroys the real value (constant purchasing power) of that portion of capital (equity) never maintained constant during inflation.
Pass a board resolution to that effect and inform all third parties of the change and the date of the change which would be the date of the board resolution. Inform the auditors too. Nothing can be done retrospectively.
2. Pass a board resolution transferring all Retained Income and other transferable Capital Reserves at the end of this last financial period under HCA to Capital. This is necessary to avoid simply deleting these hard-earned (over many years) constant real non-monetary values as required in terms of fundamental financial reporting concepts (to be discussed further) for the opening balance sheet under CMUCPP in terms of a Daily Index.
3. Prepare final HCA financial reports as at the day before the date of the change-over to CMUCPP in terms of a Daily Index.
B. Implement Capital Maintenance in Units of Constant Purchasing Power
B. Implement Capital Maintenance in Units of Constant Purchasing Power
Start implementing Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of an index that follows all (at least daily) changes in the general price level. Capital can generally only be maintained constant in real value my means of Capital Maintenance in Units of Constant Purchasing Power, but ONLY in terms of an index that follows all (at least daily) changes in the general price level. This is also done with a board resolution. Indicate this change in the company´s GENERAL CONDITIONS OF SALE on the back of every invoice / contract / credit note, etc. State that when any third party does any business with the company, the third party accepts the change in accounting model and agrees to be bound by the new legal consequences as from the date of the change-over.
This is a paradigm change. The company will NEVER go back to the Historical Cost paradigm even under very low inflation or deflation. This is a very important change for the company and the country when all entities change to using a DAILY INDEX, namely the DAILY CPI or the US Dollar daily parallel rate.
PART 3
D. Prepare the opening balance sheet under CMUCPP
PART 4
E. Inform third parties of new conditions of sale and payment terms
D. Prepare the opening balance sheet under CMUCPP
PART 4
E. Inform third parties of new conditions of sale and payment terms
Specifically point out to third parties during at least the first year of the change-over:
1. The Daily Index the company is using and on which website it is available on a 24/7, 365 days per year basis.
2. Selling prices may be increased daily in terms of the Daily Index depending on specific marketing strategies adopted by the company on a case by case basis. It may also result in all selling prices being increased daily (or even more than once a day during severe hyperinflation) in terms of the Daily Index or the daily USD parallel rate if need be - depending on the rate of hyperinflation.
Third parties will be informed beforehand if the Daily Index were to be changed and the date of the change under normal conditions. This is not applicable during severe hyperinflation when the rate may change hourly.
3. All prices will always be initially recognised as an initial spot monetary value at an initial Daily Index (or USD parallel rate) value at the initial date. This monetary value will change at least daily thereafter in terms of the Daily Index (USD parallel rate) subject to the provisions in 2 above. The real value will remain constant over time.
4. Trade debtors and all other non-monetary receivables will always be updated at least daily in terms of the Daily Index under all circumstances. They are not monetary items. They are constant real value non-monetary items. Their monetary values will change at least daily in terms of the Daily Index, but their real values will remain constant over time.
5. Trade creditors and all other non-monetary payables (which are also all constant real value non-monetary items) will be updated at least daily generally ONLY when a third party also uses CMUCPP in terms of the same Daily Index, otherwise they will be settled in nominal monetary units with third parties who implement HCA. By doing business with the company, third parties agree to these terms of payment.
The company will update trade creditors and all other non-monetary payables at least daily in terms of the Daily Index whenever such creditors are also debtors whose payables are updated at least daily in terms of the Daily Index - whether such creditors use CMUCPP in terms of a Daily Index or not.
PART 5
F. Update all constant items at least daily
1. The constant purchasing power (real value) of the company´s spot or cash sales / revenue is guaranteed over time at any level of low inflation, high inflation, hyperinflation or deflation once the company updates all selling prices at least daily (every time the general price level changes).
2. The constant purchasing power (real value) of the company´s payables is guaranteed over time at any level of low inflation, high inflation, hyperinflation or deflation once the company updates all trade debtors and all other non-monetary payables at least daily (every time the general price level changes).
3. The constant purchasing power (real value) of the company´s gross margins are guaranteed over time at any level of low inflation, high inflation, hyperinflation or deflation once the company implements 1 and 2 above.
4. The company can thus 100% safely update all costs and expenses at least on a daily basis (every time the general price level changes).
The company thus pays salaries, wages, rents, fees, etc in tems of units of constant purchasing power in terms of the Daily Index, i.e., update them at least daily.
5. The constant purchasing power (real value) of the company´s income before tax is thus guaranteed. The company thus updates taxes payable in units of constant purchasing power in terms of the Daily Index. The company updates taxes paid in terms of the Daily Index.
It is very obvious from the above that a country´s constant real value non-monetary economy would be stabilized over a very short period of time when all entities in a country were to do the above.
PART 6
G. Calculation of net monetary gain or loss (Details following)
H. Calculation of constant real value non-monetary gain or loss (Details following)
When all entities in a country implement CMUCPP in terms of a Daily Index the entire constant real value non-monetary economy will be stabilised during low inflation, high inflation, hyperinflation (like it was done in Brazil from 1964 to 1994) and deflation. This is not something new.
This should also be done during low inflation and deflation. This is authorised in IFRS and US GAAP.
The above is far from a complete description of the CMUCPP in terms of a Daily Index model. See the following Parts coming up.
To be continued...
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday 19 January 2014
Capital maintenance is rarely used
Capital maintenance is rarely used
In September 2012 I submitted the following request to the IASB:
IFRIC POTENTIAL AGENDA ITEM REQUEST
The Issue:
The Conceptual Framework (2010), Par. 4.59 states:
‘Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.’
Par. 4.59 (a) does not specifically indicate whether financial capital maintenance in units of constant purchasing power is applicable during low inflation, high inflation, hyperinflation or deflation.
IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 8 states:
‘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.’
As a result of the fact that it is currently generally accepted by accountants in countries implementing IFRS that IAS 29 is always required during hyperinflation, please indicate whether the following two statements are valid or not:
1. In terms of The Conceptual Framework (2010), Par. 4.59 (a), financial capital maintenance in units of constant purchasing power is applicable during low inflation, high inflation, hyperinflation and deflation.
2. In terms of IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 8, this standard is only required for the restatement of historical cost and current cost financial statements and not in the case of financial capital maintenance in units of constant purchasing power during hyperinflation since all items in the latter financial statements would already be measured either
(a) in terms of the measuring unit current at the balance sheet date (e.g., the CPI); or
(b) in terms of IFRS-authorized measurement bases current at the end of the reporting period (e.g., fair value, net realizable value, recoverable value, present value, etc.), excluding nominal Historical Cost (updated Historical Cost to be used under financial capital maintenance in units of constant purchasing power), i.e., excluding the stable measuring unit assumption which is never implemented under financial capital maintenance in units of constant purchasing power.
The IASB, having a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework and petty-mindedly refusing to continue working with me on this request after I told Michael Stewart, the IASB´s Director of Implementation Activities, that his statement that "financial reporting has NO EFFECT on the economy" is completely wrong and reminded him that IAS 29 had no positive effect in Zimbabwe after being implemented during the final 8 years of hyperinflation in that country, distorted my request as follows:
"The Interpretations Committee considered the following two questions:
(a) whether an entity is permitted to use the financial capital maintenance concept defined in terms of constant purchasing power units that is described in the Conceptual Framework when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29 Financial Reporting in Hyperinflationary Economies; and
(b) if such use is permitted, whether the entity needs to apply IAS 29 to its financial statements prepared under a specific model of that concept of financial capital maintenance when it falls within the scope of IAS 29."
Note that the IASB - clearly demonstrating their lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework - avoided the detail I stated about financial capital maintenance in units of constant purchasing power, by simply referring to it as "a specific model".
The IASB had to rewrite (distort) my request because they are clueless about capital maintenance as now pointed out directly by CPA Australia and The Institute of Chartered Accountants of Australia. They had to change my request to something they understood and could attempt to answer. Kenichi Yoshimura, the author of all three staff papers (the first - Agenda Ref 20 - of which is total junk and was withdrawn (see Agenda Paper 20 here) after I wrote about it to Hans Hoogervorst, the Chairman of the IASB) on this request - under the direction of "financial reporting has NO EFECT on the economy" Michael Stewart - officially informed me by email that he has a lack of understanding about capital maintenance in units of constant purchasing power. Instead of then withdrawing from the project he carried on authoring all three staff papers and is still on the project.
The IASB then contrived the following guidance for their distorted version of my request:
"Consequently the guidance in the Conceptual Framework relating to the use of a particular capital maintenance concept cannot be used to override the requirements of any individual IFRSs. An entity is not permitted to apply a concept of capital maintenance that conflicts with the existing requirements in a particular IFRS, when applying that IFRS."
I fully agree with CPA Australia and The Institute of Chartered Accountants Australia that the IASB has a lack of understanding about the fundamental
role a capital maintenance concept has within the accounting framework.
In light of the IASB´s clearly demonstrated lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework, the above guidance from the IASB is thus of almost no importance at all.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
In September 2012 I submitted the following request to the IASB:
IFRIC POTENTIAL AGENDA ITEM REQUEST
The Issue:
The Conceptual Framework (2010), Par. 4.59 states:
‘Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.’
Par. 4.59 (a) does not specifically indicate whether financial capital maintenance in units of constant purchasing power is applicable during low inflation, high inflation, hyperinflation or deflation.
IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 8 states:
‘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.’
As a result of the fact that it is currently generally accepted by accountants in countries implementing IFRS that IAS 29 is always required during hyperinflation, please indicate whether the following two statements are valid or not:
1. In terms of The Conceptual Framework (2010), Par. 4.59 (a), financial capital maintenance in units of constant purchasing power is applicable during low inflation, high inflation, hyperinflation and deflation.
2. In terms of IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 8, this standard is only required for the restatement of historical cost and current cost financial statements and not in the case of financial capital maintenance in units of constant purchasing power during hyperinflation since all items in the latter financial statements would already be measured either
(a) in terms of the measuring unit current at the balance sheet date (e.g., the CPI); or
(b) in terms of IFRS-authorized measurement bases current at the end of the reporting period (e.g., fair value, net realizable value, recoverable value, present value, etc.), excluding nominal Historical Cost (updated Historical Cost to be used under financial capital maintenance in units of constant purchasing power), i.e., excluding the stable measuring unit assumption which is never implemented under financial capital maintenance in units of constant purchasing power.
The IASB, having a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework and petty-mindedly refusing to continue working with me on this request after I told Michael Stewart, the IASB´s Director of Implementation Activities, that his statement that "financial reporting has NO EFFECT on the economy" is completely wrong and reminded him that IAS 29 had no positive effect in Zimbabwe after being implemented during the final 8 years of hyperinflation in that country, distorted my request as follows:
"The Interpretations Committee considered the following two questions:
(a) whether an entity is permitted to use the financial capital maintenance concept defined in terms of constant purchasing power units that is described in the Conceptual Framework when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29 Financial Reporting in Hyperinflationary Economies; and
(b) if such use is permitted, whether the entity needs to apply IAS 29 to its financial statements prepared under a specific model of that concept of financial capital maintenance when it falls within the scope of IAS 29."
Note that the IASB - clearly demonstrating their lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework - avoided the detail I stated about financial capital maintenance in units of constant purchasing power, by simply referring to it as "a specific model".
The IASB had to rewrite (distort) my request because they are clueless about capital maintenance as now pointed out directly by CPA Australia and The Institute of Chartered Accountants of Australia. They had to change my request to something they understood and could attempt to answer. Kenichi Yoshimura, the author of all three staff papers (the first - Agenda Ref 20 - of which is total junk and was withdrawn (see Agenda Paper 20 here) after I wrote about it to Hans Hoogervorst, the Chairman of the IASB) on this request - under the direction of "financial reporting has NO EFECT on the economy" Michael Stewart - officially informed me by email that he has a lack of understanding about capital maintenance in units of constant purchasing power. Instead of then withdrawing from the project he carried on authoring all three staff papers and is still on the project.
The IASB then contrived the following guidance for their distorted version of my request:
"Consequently the guidance in the Conceptual Framework relating to the use of a particular capital maintenance concept cannot be used to override the requirements of any individual IFRSs. An entity is not permitted to apply a concept of capital maintenance that conflicts with the existing requirements in a particular IFRS, when applying that IFRS."
I fully agree with CPA Australia and The Institute of Chartered Accountants Australia that the IASB has a lack of understanding about the fundamental
role a capital maintenance concept has within the accounting framework.
In light of the IASB´s clearly demonstrated lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework, the above guidance from the IASB is thus of almost no importance at all.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Deloitte and Canadian AcSB support IASB´s delusional view that IFRSs do not permit financial capital maintenance in units of constant purchasing power during non-hyperinflationary conditions
Deloitte and the Canadian Accounting Standards Board support the IASB´s delusional view that IFRSs do not permit financial capital maintenance in units of constant purchasing power during non-hyperinflationary conditions
The IASB in its interpretation of this matter admitted that:
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The IASB in its interpretation of this matter admitted that:
However the IASB managed to find two supporters - Deloitte and the Canadian Accounting Standards Board - for their delusional view that IFRSs do not permit financial capital maintenance in units of constant purchasing power during non-hyperinflationary conditions.
I suggested to the IASB during these proceedings that they contact top accounting authorities in formerly hyperinflationary countries like Dr Gustavo Franco, the ex-Governor of the Central Bank of Brazil and Dr Cemal Kucusozen from Turkey, but they simply rejected my suggestions. They rather rely on people who had no experience of high and hyperinflation.
In fact, the IASB Interpretations Committee - in a very petty-minded way - stopped communicating with me, the submitter of this IFRIC request, when I pointed out to Michael Stewart, the IASB´s Director of Implementation Activities that his remark (during a 8 January 2013 teleconference regarding this topic) that "financial reporting has NO EFFECT on the economy" was completely wrong.
The above views expressed by the IASB, Deloitte and the Canadia Accounting Standard Board carry little weight since they have previously clearly shown that they are clueless about the critical importance of the capital maintenance concept in the accounting framework as directly stated by Australia CPA and the Institute of Chartered Accountants of Australia, specifically about the IASB as follows:
Canadian accounting authorities demonstrated a similar lack of knowledge about capital maintenance during non-hyperinflationary conditions with the following reply from THE CERTIFIED GENERAL ACCOUNTANTS ASSOCIATION OF CANADA:
Canada has no experience of high or hyperinflation.
Deloitte believes that inflation affects the real value of non-monetary items. Deloitte is similarly clueless about capital maintenance during non-hyperinflationary conditions.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday 15 January 2014
Comment Letter to the Discussion Paper: A Review of the Conceptual Framework for Financial Reporting
Comment Letter to the Discussion Paper: A Review of the Conceptual Framework for Financial Reporting
The IFRS Foundation 14 January 2014
Dear Sirs/Mesdames,
Thank you for the opportunity to comment on the IASB's Discussion Paper: A Review of the Conceptual Framework for Financial Reporting.
Please find my detailed answers in the Appendix.
Yours sincerely,
Nicolaas Smith
I promote Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily CPI or other daily index at all levels of inflation and deflation including hyperinflation as originally authorized in IFRS in the Framework (1989), Par 104 (a) which states: 'Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.'
CMUCPP automatically maintains the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value during inflation and deflation, including hyperinflation - all else being equal.
The comment letter is published by the IFRS Foundation HERE under the name Capital Maintenance in Units of Constant Purchasing Power. The letter is ID number 167 and appears on page 1 of the table if it is sorted alphabetically by organisation (the default), or page 2 if it is sorted by ID number.
APPENDIX
Answers to the IASB's Discussion Paper: A Review of the Conceptual Framework.
Section 6 Measurement
Question 11
How the objective of financial reporting and the qualitative characteristics of useful financial information affect measurement is discussed in paragraphs 6.6–6.35.
The IASB’s preliminary views are that:
a. the objective of measurement is to contribute to the faithful representation of relevant information about:
I. the resources of the entity, claims against the entity and changes in resources and
claims; and
II. how efficiently and effectively the entity’s management and governing board have
discharged their responsibilities to use the entity’s resources.
b. a single measurement basis for all assets and liabilities may not provide the most relevant information for users of financial statements;
c. when selecting the measurement to use for a particular item, the IASB should consider what information that measurement will produce in both the statement of financial position and the statement(s) of profit or loss and OCI;
d. the relevance of a particular measurement will depend on how investors, creditors and other lenders are likely to assess how an asset or a liability of that type will contribute to future cash flows. Consequently, the selection of a measurement:
i. for a particular asset should depend on how that asset contributes to future cash
flows; and
ii. for a particular liability should depend on how the entity will settle or fulfil that
liability.
e. the number of different measurements used should be the smallest number necessary to provide relevant information. Unnecessary measurement changes should be avoided and necessary measurement changes should be explained; and
f. the benefits of a particular measurement to users of financial statements need to be sufficient to justify the cost.
Do you agree with these preliminary views? Why or why not? If you disagree, what alternative approach to deciding how to measure an asset or a liability would you support?
RESPONSE
No, I do not agree with these preliminary views because they are not complete. They only deal with measurement in terms of financial capital maintenance defined in terms of nominal monetary units. IFRSs are also written from the perspective of an entity using the concept of financial capital maintenance that is defined in terms of units of constant purchasing power.
“Par. 14 . The selection of the capital maintenance concept is a choice that is available within the Conceptual Framework that provides a fundamental basis of preparation of financial statements. Paragraph 4.58 of the Conceptual Framework states that “the selection of the appropriate concept of capital by an entity should be based on the needs of the users of its financial statements”. Accordingly, those who support this view argue that the entity is permitted to use the financial capital maintenance concept defined in constant purchasing power units if this concept, among the alternative concepts described in the Conceptual Framework, provides the most useful information to users.
Par. 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. The entity would need to adapt each IFRS for the use under that capital maintenance concept.”
Agenda ref 12 STAFF PAPER 10–11 September 2013 IFRS Interpretations Committee Meeting Project IAS 29 Financial Reporting in Hyperinflationary Economies
Paper topic Applicability of the concept of financial capital maintenance defined in constant purchasing power units
IFRS, excluding (1) IAS 29 Financial Reporting in Hyperinflationary Economies and (2) IFRIC 7 Applying the Restatement Approach under IAS 29, are written from the perspective of an entity using the concept of financial capital maintenance that is defined in terms of nominal monetary units (Historical Cost Accounting). This is however a fallacy.
IAS 29 and IFRIC 7 are written from the perspective of an entity using the concept of financial capital maintenance that is defined in terms of units of constant purchasing power in terms of the measuring unit current at the end of the reporting period, i.e., in terms of the monthly published Consumer Price Index. IAS 29 does not result in capital maintenance in units of constant purchasing power during hyperinflation because of the use of the monthly published CPI. IAS 29 had no positive effect in Zimbabwe: the Zimbabwean economy imploded on 20 November 2008 despite the fact that IAS 29 had been implemented during the final 8 years of hyperinflation in that country. Equity can only be maintained constant in real value with capital maintenance in units of constant purchasing power in terms of an index that follows all (at least DAILY) changes in the general price level. This did not and does not happen under IAS 29.
The majority of entities are based on the concept of equity (capital) being equal to net assets under the double-entry accounting model. I am not referring specifically to the HCA model, but simply to the double-entry accounting model implementing the entity concept. All constant purchasing power of capital (a constant real value non-monetary item) being eroded / destroyed by the stable measuring unit assumption (not inflation) over time during low inflation, high inflation or hyperinflation (for example, in Zimbabwe on 20 November 2008) would mean the end of the entity. Maintaining the constant purchasing power of capital (equity) constant in real value is thus a fundamental objective for an entity.
‘It is essential to the credibility of financial reporting to recognize that the recovery of the real cost of investment is not earnings — that there can be no earnings unless and until the purchasing power of capital is maintained.’
FAS 33 1979: 24
It is generally impossible to maintain the real value (constant purchasing power) of capital (equity) constant in nominal monetary units during low inflation, high inflation, hyperinflation and deflation. Financial capital maintenance in nominal monetary units is thus a fallacy during the above periods. It is, however, the capital maintenance concept most commonly used by entities as a result of historical developments in many areas over the last 3000 years.
The constant purchasing power of capital (equity) is generally automatically maintained constant with capital maintenance in units of constant purchasing power in entities that at least break even in real value - ceteris paribus - in terms of an index that follows all (at least DAILY) changes in the general price level.
Consequently, the IASB may determine that the objectives of general purpose financial reporting / accounting are:
1. "To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.” Conceptual Framework
and
2. To legalise measurement bases that result in automatic capital maintenance in units of constant purchasing power in terms of an index that follows all (at least DAILY) changes in the general price level for an indefinite period of time in entities that at least break even in real value - ceteris paribus - during low inflation, high inflation, hyperinflation and deflation.
The Board may determine that the objectives of measurement thus also include:
(III) To contribute to capital maintenance in units of constant purchasing power as defined in the objectives of general purpose financial reporting / accounting above.
For example, the Board may determine that the three basic economic items are
1. Monetary items
2. Variable real value non-monetary items and
3. Constant real value non-monetary items.
The Board may determine that most IFRSs apply to the measurement of variable items under financial capital maintenance in nominal monetary units and thus require adaptation for use under capital maintenance in units of constant purchasing power in terms of an index that follows all (at least daily) changes in the general price level - where necessary.
The Board may determine that monetary items are all items in the money supply.
The Board may determine that the following are some of the items that are considered monetary items under financial capital maintenance in nominal monetary units, but are constant real value non-monetary items under financial capital maintenance in units of constant purchasing power in terms of an index that follows all (at least daily) changes in the general price level:
Trade debtors, trade creditors, all non-monetary payables, all non-monetary receivables, interest, salaries, wages, rent, fees, pensions, taxes, duties, all employee benefits and all similar items to the items already stated.
The Board may determine that constant real value non-monetary items include, but are not limited to: all items in shareholders equity, provisions, all profits and losses, all items in the profit and loss account and in the Other Comprehensive Income Statement.
The Board may determine that variable items, when they are not measured in terms of IFRS on a daily basis, are to be updated on a daily basis in terms of an index that follows all (at least daily) changes in the general price level till they are again measured in terms of IFRS.
The Board may determine that foreign exchange is a variable real value non-monetary item and that forex gains and losses are constant real value non-monetary items like all other gains and losses to be measured in units of constant purchasing power in terms of an index that follows all (at least daily) changes in the general price level.
The Board may determine that financial reports are to be updated to the current (today´s ) Daily Index (e.g., the Daily CPI) after the end of the financial period. The Board may determine that it would thus be best to keep financial reports in digital form and not to print hard copies that would be out-of-date the day after the end of the financial period.
Question 26
Capital maintenance
Capital maintenance is discussed in paragraphs 9.45–9.54. The IASB plans to include the existing descriptions and the discussion of capital maintenance concepts in the revised Conceptual Framework largely unchanged until such time as a new or revised Standard on accounting for high inflation indicates a need for change.
Do you agree? Why or why not? Please explain your reasons.
In my response to Question 11 above I stated my view that the Conceptual Framework should determine that the objectives of measurement also include:
(III) To contribute to capital maintenance in units of constant purchasing power as defined in the objectives of general purpose financial reporting / accounting above.
Accordingly, I do not support the proposal that leaves the existing descriptions and discussion of this issue largely unchanged until such time as any project on accounting for high inflation indicates a need for change. Capital maintenance is not only critical as from the onset of high inflation - although that is the generally accepted view in most - not all - accounting jurisdictions. For example, it is not viewed like that in Australia.
The IASB´s approach suggests a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework. There is clearly a pressing need to resolve the issues regarding capital maintenance now.
The comment letter is published by the IFRS Foundation HERE under the name Capital Maintenance in Units of Constant Purchasing Power. The letter is ID number 167 and appears on page 1 of the table if it is sorted alphabetically by organisation (the default), or page 2 if it is sorted by ID number.Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Subscribe to:
Posts (Atom)