IAS 29: The IASB´s FANTASY standard

IAS 29 Financial Reporting in Hyperinflationary Economies had NO POSITIVE EFFECT during the 6 years it was implemented in Zimbabwe´s hyperinflationary economy. It was ABSOLUTELY USELESS during that period.

The IASB refuses to admit that. The IASB first has to conduct a special review to investigate what effect IAS 29 had in Zimbabwe, according to Michael Stewart, the IASB´s Director of Implementation Activities. The rest of the world´s accountants and economists generally accept that it is obvious that IAS 29 had no positive effect since the Zimbabwean economy imploded in 2008 during full implementation of IAS 29.

Not a single member of the International Accounting Standards Board and the IFRIC Interpretations Committee today realizes that or would admit that IAS 29 had no positive effect in Zimbabwe.

At IFRIC Interpretations Committee meetings and all other occasions they freely refer to IAS 29 as a fully effective IFRS. IFRIC members are completely oblivious of the fact that IAS 29 had NO POSITIVE EFFECT in Zimbabwe. 

LISTEN to IFRIC members referring to and quoting IAS 29 as if it were a fully effective IFRS at the 23 September 2013 IFRIC meeting discussing Capital Maintenance in Units of Constant Purchasing Power. IAS 29 was ABSOLUTELY USELESS during the 6 years it was implemented in Zimbabwe´s hyperinflationary economy. 

IFRIC and IASB members make decisions in terms of a 24 year old standard that was ABSOLUTELY INEFFECTIVE during the 6 years it was implemented in Zimbabwe. That is how the IASB and IFRIC operate.

The members of the IFRS Interpretations Committee ignorant of the fact that IAS 29 had NO POSITIVE EFFECT in Zimbabwe are:

Wayne Upton Chairman, IFRS Interpretations Committee International Director, IASB
Tony de BellGlobal Accounting Consulting Services Leadership Team PwC United Kingdom	30 June 2016
Luca Cencioni Senior Accounting Manager Eni Adfin S.p.A. Italy	30 June 2014
Reinhard DotzlawGlobal IFRS Panel KPMG Canada	30 June 2016
Feilong Li Executive Director, Executive Vice President & CFO China Oil Services Limited People's Republic of China	30 June 2016
John O'GradyAsia-Pacific IFRS Leader Ernst & Young Australia	30 June 2015
Jean Paré Vice President, Financial Reporting Bombardier Inc. Canada	30 June 2014
Joanna Perry  Professional Non-Executive Company Director New Zealand	30 June 2014
Sandra PetersHead of Financial Reporting Policy CFA Institute United States	30 June 2015
Charlotte PissaridouHead of Accounting Policy for EMEA (Europe, the Middle East and Africa) and Asia Goldman Sachs  United Kingdom	30 June 2014
Laurence Rivat Partner Deloitte & Associes (France) France	30 June 2015
Dr Martin SchloemerAccounting Principles and Policies Bayer AG Germany	30 June 2016
Scott A. Taub Managing Director Financial Reporting Advisors, LLC United States	30 June 2014
Andrew WatchmanExecutive Director of International Financial Reporting Grant Thornton United Kingdom	30 June 2016
Kazuo YuasaGeneral Manager, Corporate Finance Unit, Fujitsu Limited Japan

The members of the IASB ignorant of the fact that IAS 29 had NO POSITIVE EFFECT IN Zimbabwe are:

	Hans Hoogervorst (Chairman) Appointed: 1 July 2011 Term expires: 30 June 2016
	Ian Mackintosh (Vice-Chairman) Appointed: 1 July 2011 Term expires: 30 June 2016
	Stephen Cooper Appointed: 1 August 2007 Second term expires: 31 July 2017
	Philippe Danjou Appointed: 1 July 2006 Second term expires: 30 June 2016
	Martin Edelmann Appointed: 1 July 2012 Term expires: 30 June 2017
	Jan Engström Appointed: 1 May 2004 Second term expires: 30 June 2014
	Patrick Finnegan Appointed: 1 July 2009 Term expires: 30 June 2014
	Gary Kabureck Appointed: 21 February 2013 Term expires: 30 June 2017
	Sue Lloyd Appointed 23 May 2013 Term expires: 30 December 2019
	Amaro Luiz de Oliveira Gomes Appointed from: 1 July 2009 Term expires: 30 June 2014
	Patricia McConnell Appointed: 1 July 2009 Term expires: 30 June 2014
	Takatsugu Ochi Term begins: 1 July 2011 Term expires: 30 June 2016
	Darrel Scott Appointed: 1 October 2010 Term expires: 30 June 2015
	Mary Tokar Appointed: 15 November 2012 Term expires: 30 June 2017
	Chungwoo Suh Appointed: 1 July 2012 Term expires: 30 June 2017
	Zhang Wei-Guo Appointed: 1 July 2007 Second term expires: 30 June 2017

The IASB staff are aware of the fact that IAS 29 had no positive effect in Zimbabwe: I confronted Michael Stewart about it during a teleconference on 8 January 2013. He stated the IASB was not able to give an opinion about the effectiveness of IAS 29 in Zimbabwe. According to Stewart the IASB first has to conduct a special review of what happened in Zimbabwe before the IASB can give its opinion about the matter.

The above people appear not to have the simple common sense and judgement to admit that IAS 29 had NO POSITIVE EFFECT in Zimbabwe´s hyperinflationary economy. This is very worrying when the above people are the members of the IFRIC Interpretations Committee and the International Accounting Standards Board. They are highly qualified and very well paid. They are the people entrusted with the task of defining IFRS, BUT they actually live in a fantasy world where IAS 29 - for them - is a fully effective IFRS when it, in fact, was COMPLETELY INEFFECTIVE in Zimbabwe´s hyperinflationary economy.

Michael Stewart very petty-mindedly stopped working with me on this matter when I told him in January 2013 that his statement that "financial reporting has NO EFFECT in the economy" was completely wrong.

We all make mistakes. The IASB, IFRIC and IASB staff are not aware that capital maintenance in units of constant purchasing power - their "restatement" - in terms of the MONTHLY published CPI is a mistake. It has to be Daily Indexing - actually following all changes in the general price level. 

They are too prepotent and thus not open to proof of facts as confirmed by Hans Hoogervorst, the Chairman of the IASB. He informed me that the IASB  requires "flexibility" to do their work. That is: "flexibility" to believe in their fantasy that IAS 29 is a fully effective IFRS when it, in fact, had NO POSITIVE EFFECT in the Zimbabwean hyperinflationary economy.

Nicolaas Smith

See: How to fix IAS 29

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

PERFECT (not easily attainable) implementation of DAILY INDEXING

The PERFECT (not that easily attainable) implementation of DAILY INDEXING  
a.k.a. 

"correcção monetaria" in terms of a Daily Index, 

restatement in terms of a Daily Index, 

monetary correction in terms of a Daily Index, 

Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily Index or 

CMUCPP in terms of a Daily Index 

is

NOT ONLY

(A) measuring all constant real value non-monetary items, e.g., salaries, wages, rent, fees, pensions, employee benefits, taxes, trade debtors, trade creditors, all non-monetary payables, all non-monetary receivables, issued share capital, all items in the profit and loss account, retained profits, all other items in shareholders equity, provisions, etc in units of constant purchasing power in terms of an index that follows all – at least DAILY – changes in the general price level

BUT ALSO

(B) inflation-indexing ALL local currency monetary items together with keeping all local currency cash – during the same general price level (normally one day) always in the banking system (not 100% possible).

The idea is to

(1) eventually adjust all prices instantaneously every time the Central Bank creates inflation (creates too much local currency in an inflationary way) – so that it would stop doing that since it would realize that it serves no purpose since all prices adjust automatically –

and

(2) the same as (1) would happen in the forex market. (2) would only happen when the internal monetary economy and the internal constant item economy are totally stabilized with indexation every time the general price level changes, i.e., at least DAILY and preferably instantaneously as described above. This would be a very advanced application of DAILY INDEXATION.

Nicolaas Smith 

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

Perfect quick fix available to IASB

Killing two birds with one stone

The destruction of real value by 

(i) high and hyperinflation in only monetary items never inflation-indexed daily 

and 

(ii) the stable measuring unit assumption (HCA) in constant real value non-monetary items never maintained constant in real value by means of daily indexation in terms of an index that follows all - at least daily - changes in the general price level 

in 

1. high and 

2. hyperinflationary economies 

and the consequent very serious economic problems and distortions caused are real concerns to people in high and hyperinflationary economies.

It takes the IASB a very long time to authorise IFRS. A perfect quick fix to solve the problem in both high and hyperinflationary economies would be:

IFRS `X´ Financial Reporting in High Inflationary Economies could be IAS 29 Financial Reporting in Hyperinflationary Economies plus the fixes in "How to fix IAS 29" at inflation greater than 10% per annum or cumulative inflation greater than 26% in three years.

IFRS `X´would thus supersede IAS 29 which would fall away.

This can be done in a very short period of time via the short term process at the IASB. 

Nicolaas Smith 

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

Capital maintenance

1. Capital maintenance is the maintenance of the constant purchasing power of capital.

2. Capital maintenance is an objective of financial reporting.

3. Capital maintenance is measured in units of constant purchasing power in terms of an index that follows all - at least daily - changes in the general price level during inflation and deflation.

Nicolaas Smith 

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

How to fix IAS 29

1. IAS 29 has to require 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. The index has to be the DAILY CPI during low inflation, high inflation, the initial stage of hyperinflation and deflation. The US Dollar DAILY parallel rate has to be used when the DAILY CPI falls too far behind the USD DAILY black market rate which then becomes the general price level. The USD parallel rate can change more than once a day by a huge percentage during severe hyperinflation. All indexed items have to follow ALL changes in the general price level.

2. IAS 29 has to state that trade debtors, trade creditors, all non-monetary payables, all non-monetary receivables, interest, salaries, wages, pensions, taxes, duties, rent, fees, employee benefits, issued share capital, all items in shareholders equity, provisions, all losses and all gains (including foreign exchange losses and gains), etc. are constant real value non-monetary items under capital maintenance in units of constant purchasing power, always and everywhere 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.

3. IAS 29 has to define monetary items as follows: 

Monetary items constitute the money supply.

4. IAS 29 has to state that once an entity made the paradigm change to the Constant Item Purchasing Power paradigm it is not allowed to ever go back to the Historical Cost paradigm at any level of inflation (low, high or hyperinflation) or deflation. 

Nicolaas Smith 

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

Objectives of Financial Reporting

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, Par. OB2

2. To maintain the constant purchasing power of capital.

That is: 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.

"Capital maintenance is a competing objective of financial reporting."

European Accounting Association, Response to Question 26, Comment Letter to the Discussion Paper regarding the Review of the Conceptual Framework, on Page 2 of comment letters, dated 2014-01-24

"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."

US Financial Accounting Standard 33, 1979: 24

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

IT IS NOT CHAVISMO DESTROYING VENEZUELA

Venezuela has 56% official and 333% implied annual inflation (Prof. Steve Hanke estimate) and a sort of imploding economy.

Let us compare Venezuela with Brazil from 1964 to 1994:

Brazil was in hyperinflation of up to 2000% per year for 30 years from 1964 to 1994, BUT they had a relatively stable non-monetary economy because they used “correcção monetaria” which is in principle the same as Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) as follow:

1. Their ACCOUNTANTS, BUSINESS MANAGERS AND BANKERS inflation-adjusted most (I can not say for sure all) monetary items (money loans) in terms of monthly indices and in the end a DAILY INDEX: their Unidade Real de Valor. In this way their ACCOUNTANTS, BUSINESS MANAGERS AND BANKERS overcame (counter-acted or made good) the destruction of the real value of their internal monetary unit of account by hyperinflation: Brazil´s ACCOUNTANTS, BUSINESS MANAGERS AND BANKERS eliminated THE EFFECT OF hyperinflation on the real value of monetary items. So, it did not matter how high hyperinflation went, their ACCOUNTANTS, BUSINESS MANAGERS AND BANKERS simply eliminated THE EFFECT OF hyperinflation by inflation-indexing most monetary items.

AND

2. Their ACCOUNTANTS, BUSINESS MANAGERS AND BANKERS also applied “correcção monetaria” to measure most of their non-monetary items in units of constant purchasing power in terms of, first monthly indices and, in the end, in terms of a DAILY INDEX: their Unidade Real de Valor. 

Their ACCOUNTANTS, BUSINESS MANAGERS AND BANKERS thus overcame (counter-acted or made good) the fact that hyperinflation destroyed the real value of their monetary unit of account (Cruzeiro, Real, etc.) at up to 2000% per annum - a figure much higher than currently in Venezuela. 

So, hyperinflation and mismanagement of their economy (CHAVISMO in the case of Venezuela ) did not destroy their non-monetary economy and where it destroyed their monetary economy, they eliminated its effect by inflation-indexing most monetary items.

So, it is not CHAVISMO per se that is destroying the Venezuelan economy. The combined failure of Venezuela´s ACCOUNTANTS, BUSINESS MANAGERS AND BANKERS to implement “correcção monetaria” in Venezuela has in the past and is currently destroying the Venezuelan economy - and will continue to do so in the future as long as they refuse to implement “correcção monetaria” which is free and widely known in Latin America.

No-one in Venezuela wants to discuss or even know anything about “correcção monetaria” which is another name for Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of a DAILY INDEX.

That is the problem: Venezuelans are not interested: they are only interested in a “political” solution when what is required is, in fact, an accounting solution and their ACCOUNTANTS, BUSINESS MANAGERS AND BANKERS are the ones to blame for the destruction of the Venezuelan economy - not CHAVISMO per se. Proof: it did not happen in Brazil with 2000% annual inflation AND “CORRECÇÃO MONETARIA” implemented by Brazil´s ACCOUNTANTS, BUSINESS MANAGERS AND BANKERS.

For me just to state that CHAVISMO is NOT responsible - PER SE - for the destruction of the Venezuelan economy will upset the opposition in Venezuela so much that they would not even care to find out about the proven advantages of “correcão monetaria” in a situation like in Venezuela.

See: HOW TO MAINTAIN A COMPANY´S CAPITAL CONSTANT IN REAL VALUE IN A HIGH OR HYPERINFLATIONARY COUNTRY

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

PART 3: HOW TO MAINTAIN A COMPANY´S CAPITAL CONSTANT IN REAL VALUE IN A HIGH OR HYPERINFLATIONARY COUNTRY

PART 3

D. Prepare the opening balance sheet under CMUCPP (work in progress ......

Once the company has stopped Historical Cost Accounting in its business and has prepared the final HCA financial reports, the company then has to prepare the first balance sheet under 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 on the day after the final HCA balance sheet.

The broad principles regarding the preparation of the first balance sheet under CMUCPP are set out in IAS 29 Financial Reporting in Hyperinflationary Economies.

By quoting IAS 29 in this blog does under no circumstances mean that I support IAS 29. In my opinion IAS 29 is the worst IFRS ever authorized by the IASB because it does not result in capital maintenance in units of constant purchasing power in a hyperinflationary or high inflationary economy because of the use of the monthly CPI.

IAS 29 had absolutely no positive effect during its 8 years of implementation in the Zimbabwean hyperinflationary economy.

However, most of the general principles regarding preparing the opening balance sheet under CMUCPP are correctly treated in IAS 29. That is why I quote those parts of IAS 29. I do not support IAS 29 at all because it is totally ineffective in a hyperinflationary economy because of the use of the monthly published CPI. Only the use of a DAILY INDEX (actually one that follows all changes in the general price level) can result in actual capital maintenance in units of constant purchasing power during low inflation, high inflation, hyperinflation or deflation.

The IASB uses the term "restatement" because the IASB, since before 1989 when IAS 29 was authorized, has a very great lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework. The IASB´s "restatement" means ´measurement in units of constant purchasing power´ in the case of constant real value non-monetary items. 

IAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES

"RESTATEMENT OF FINANCIAL STATEMENTS

Historical cost financial statements

Statement of financial position

11 Statement of financial position amounts not already expressed in terms of the measuring unit current at the end of the reporting period are restated by applying a general price index."

"Restated" means `measured in units of constant purchasing power´.

"12 Monetary items are not restated because they are already expressed in terms of the monetary unit current at the end of the reporting period. Monetary items are money held and items to be received or paid in money."

Monetary items are not ALL "items to be received or paid in money" as the IASB´s definition of monetary items implies. Most items in the world economy are "to be received or paid in money". Most items in the world economy are not monetary items. A house is to be paid in money when you buy it cash. The house is not a monetary item. You use cash (a monetary item) as a medium of exchange to pay its fair value - a variable real value non-monetary item. You can pay the variable real value non-monetary value of the house in gold too or any other medium of exchange acceptable to the seller.

DEFINITION 

Monetary items constitute the money supply.

If an item were not part the money supply as indicated by the Central Bank then it is not a monetary item. It is a non-monetary item. Trade debtors, trade creditors, salaries payable, wages payable, taxes payable, etc. are not part of the money supply. They are constant real value non-monetary items.

"13 Assets and liabilities linked by agreement to changes in prices, such as index linked bonds and loans, are adjusted in accordance with the agreement in order to ascertain the amount outstanding at the end of the reporting period. These items are carried at this adjusted amount in the restated statement of financial position."

The CAPITAL amounts of inflation-linked loans and bonds are monetary items. The interest is a constant real value non-monetary item under CMUCPP.

"14 All other assets and liabilities are non-monetary."

Non-monetary items are divided in (i) variable real value non-monetary items and (ii) constant real value non-monetary items under CMUCPP.

"Some non-monetary items are carried at amounts current at the end of the reporting period, such as net realisable value and fair value, so they are not restated."

The statement just above refers to variable real value non-monetary items, e.g., property, plant, equipment, foreign exchange, patents, raw material, finished goods, stock, listed and unlisted shares, etc. 

All other non-monetary assets and liabilities are restated.

The statement just above refers to constant real value non-monetary items, e.g., issued share capital, all items in shareholders equity (see the special treatment of opening retained earnings below), trade debtors, trade creditors, all non-monetary payables (e.g., salaries payable, taxes payable), all non-monetary receivables (e.g., salaries receivable, taxes receivable), provisions, etc.

A number of items are treated as monetary items under the Historical Cost paradigm as a result of the implementation of the stable measuring unit assumption (the assumption that money is perfectly stable under all levels of inflation and deflation), e.g., trade debtors, trade creditors, all non-monetary payables, all non-monetary receivables, salaries, wages, rent, pensions, employee benefits, interest, fees, duties, etc. They are all constant real value non-monetary items under CMUCPP.

"Restated" in Par. 14 means ´measured in units of constant purchasing power´ as from the original date to the date of the opening balance sheet.

"15 Most non-monetary items are carried at cost or cost less depreciation; hence they are expressed at amounts current at their date of acquisition." 

The statement just above generally refers to variable real value non-monetary items like property, plant and equipment.

"The restated cost, or cost less depreciation, of each item is determined by applying to its historical cost and accumulated depreciation the change in a general price index from the date of acquisition to the end of the reporting period. For example, property, plant and equipment, inventories of raw materials and merchandise, goodwill, patents, trademarks and similar assets are restated from the dates of their purchase. Inventories of partly-finished and finished goods are restated from the dates on which the costs of purchase and of conversion were incurred.

16 Detailed records of the acquisition dates of items of property, plant and equipment may not be available or capable of estimation. In these rare circumstances, it may be necessary, in the first period of application of this Standard, to use an independent professional assessment of the value of the items as the basis for their restatement.

17 A general price index may not be available for the periods for which the restatement of property, plant and equipment is required by this Standard. In these circumstances, it may be necessary to use an estimate based, for example, on the movements in the exchange rate between the functional
currency and a relatively stable foreign currency."

This relatively stable foreign currency is normally the US Dollar official rate or unofficial parallel or black market rate.

"18 Some non-monetary items are carried at amounts current at dates other than that of acquisition or that of the statement of financial position, for example property, plant and equipment that has been revalued at some earlier date. In these cases, the carrying amounts are restated from the date of the revaluation."

"Non-monetary items" in Par. 18 refer to variable real value non-monetary items.

"19 The restated amount of a non-monetary item is reduced, in accordance with appropriate IFRSs, when it exceeds its recoverable amount. For example, restated amounts of property, plant and equipment, goodwill, patents and trademarks are reduced to recoverable amount and restated amounts of inventories are reduced to net realisable value.

20 An investee that is accounted for under the equity method may report in the currency of a hyperinflationary economy. The statement of financial position and statement of comprehensive income of such an investee are restated in accordance with this Standard in order to calculate the investor’s share of its net assets and profit or loss. When the restated financial statements of the investee are expressed in a foreign currency they are translated at closing rates.

21 The impact of inflation is usually recognised in borrowing costs. It is not appropriate both to restate the capital expenditure financed by borrowing and to capitalise that part of the borrowing costs that compensates for the inflation during the same period. This part of the borrowing costs is recognised as an expense in the period in which the costs are incurred.

22 An entity may acquire assets under an arrangement that permits it to defer payment without incurring an explicit interest charge. Where it is impracticable to impute the amount of interest, such assets are restated from the payment date and not the date of purchase.

23 [Deleted]

24 At the beginning of the first period of application of this Standard, the components of owners’ equity, except retained earnings and any revaluation surplus, are restated by applying a general price index from the dates the components were contributed or otherwise arose. Any revaluation surplus that arose in previous periods is eliminated. Restated retained earnings are derived from all the other amounts in the restated statement of financial position."

"25 At the end of the first period and in subsequent periods, all components of owners’ equity are restated by applying a general price index from the beginning of the period or the date of contribution, if later. The movements for the period in owners’ equity are disclosed in accordance with IAS 1. Statement of comprehensive income

26 This Standard requires that all items in the statement of comprehensive income are expressed in terms of the measuring unit current at the end of the reporting period. Therefore all amounts need to be restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded in the financial statements."

The IFRS Foundation owns copyright over IAS 29

Rest of the CMUCPP DAILY INDEX PLAN

To be continued .........

Nicolaas Smith

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

Daily CPI formula

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.

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 1

A. Stop Historical Cost Accounting

B. Implement CMUCPP in terms of a DAILY INDEX

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 ...

Rest of the CMUCPP DAILY INDEX PLAN

Nicolaas Smith 

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

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.