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Thursday, 27 February 2014

Ukraine and Venezuela can achieve economic stability in the very short run with help from the IASB


The implementation of capital maintenance in units of constant purchasing power in terms of a DAILY index which follows all - at least DAILY - changes in the general price level would GUARANTEE stability in the REAL VALUE  (constant purchasing power) of 

salaries

wages

rents

taxes

trade debtors

trade creditors

all non-monetary payables

all non-monetary receivables

all items in the income statement

all profits

all losses

issued share capital

retained earnings 

capital reserves 

all other items in shareholders´equity

provisions 

etc. 

at any level of high or hyperinflation in Ukraine and Venezuela in the very short run. This requires the calculation and accounting of net monetary losses and gains.

This would stabilize the constant real value non-monetary economies in Ukraine and Venezuela in the very short run.

This was done very successfully in Brazil from 1964 to 1994 with "correcção monetária" or DAILY indexing which is CMUCPP in terms of a DAILY INDEX.


Extending DAILY INDEXING or "correcção monetária" or CMUCPP in terms of a DAILY INDEX to include the daily inflation-adjustment of all monetary items with all cash in the banking system (obviously not 100% possible) and it would GUARANTEE the stability of the REAL VALUE of these inflation-indexed monetary items at all levels of high and hyperinflation in Ukraine and Venezuela in the very short run. There would still be high or hyperinflation in Ukraine and Venezuela but there would be no EFFECT OF high or hyperinflation just like the effect of low and high inflation is eliminated in the global USD 3 trillion in government capital inflation-indexed bonds (e.g. TIPS) currently inflation-adjusted DAILY during low and high inflation in terms of the DAILY CPI in a great number of countries in the world economy.

Chile already inflation-indexes 25% + of all monetary items in its economy on a DAILY basis during low inflation since 2012. Chile started indexing in 1967 in its economy. They adopted DAILY INDEXING since 1990.

Robert Shiller decried governments´ lack of interest in DAILY INDEXING years ago. 

The IASB can achieve that today in a very short time by requiring DAILY INDEXING in IAS 29 Financial Reporting in Hyperinflationary Economies by means of the short turn-around process for correcting an issued IFRS.

Venezuela is implementing IAS 29 since 2009. Ukraine is or would soon be in high inflation. IAS 29 in terms of the monthly published CPI does NOT achieve the above monetary and non-monetary stability as very well proven during the 6 years IAS 29 was implemented at the end of Zimbabwe´s hyperinflation.

Nothing stops the IASB from requiring DAILY INDEXING in IAS 29 and nothing stops the IASB from encouraging it immediately and changing IAS 29 to require it over the very short term.

The above would also stabilize the foreign currency exchange rates of Ukraine and Venezuela with the rest of the world economy - obviously only with all else being equal. DAILY INDEXING would always guarantee internal economic stability no matter what happens with the external exchange rate. Internal economic stability generally always has a stabilizing effect on the external exchange rate - all else being equal.

What a difference DAILY INDEXING of all monetary items and all constant real value non-monetary items would make in Ukraine and Venezuela. Ask Robert Shiller and Gustavo Franco. Franco was one of the architects of the Real Plan in Brazil in 1994.

All of the above also hold true for Argentina and all other countries in high and hyperinflation. The constant purchasing power of constant real value non-monetary items and inflation-indexed monetary items is not only to be maintained constant in real value with the onset of high inflation or only during hyperinflation. CMUCPP in terms of a DAILY INDEX is required at all levels of inflation and deflation: during low inflation and deflation too.

Nicolaas Smith 

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

Wednesday, 19 February 2014

Scotland can unofficially dollarize using the Pound - without London´s consent

According to Forbes:

"In an almost unheard of outbreak of unanimity, the three major political parties in London – the Conservatives, Labor, and the Liberal Democrats – last week concurred in saying that the U.K. would not allow an independent Scotland to use the pound."

Scotland - or any country in the world, for that matter - can unilaterally adopt the British Pound, or any other country´s currency, as its currency. It is called unofficial dollarization. 

No-one can stop a country from using another country´s currency. Many small economies (island-state economies) are unofficially dollarized using the US Dollar as the national currency.

Zimbabwe uses the British Pound as one of the several currencies it uses in its multi-currency dollarization of its economy.

The fact that the Zimbabwean population refused to accept the Zimbabwean Dollar as payment towards November 2008, means that Zimbabwe dollarized spontaneously. The people decided: not the government. 

When Zimbabwe then officially withdrew the Zimbabwean Dollar from circulation as from 20 November 2008, it then unofficially dollarized the Zimbabwean economy allowing the official use of the US Dollar, British Pound, SA Rand, Euro and Botswana Pula. 

Zimbabwe did not ask permission from the US, UK, EU, SA or Botswana. The Zimbabwean government just decided by themselves to follow the Zimbabwean population´s lead.

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

Monday, 10 February 2014

Selection of the capital maintenance concept is a choice that is available within the Conceptual Framework

“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.”

STAFF PAPER Agenda ref 12, 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.                          

I fully support the above view. 

Nicolaas Smith

Friday, 7 February 2014

DAILY GENERAL PRICE LEVEL

DAILY GENERAL PRICE LEVEL

price index is a normalized average of prices for goods and services within an economy over a given period of time. The best known is the Consumer Price Index (CPI).

The general price level is a hypothetical measure of overall prices of goods and services in an economy over time, normalized relative to some base set. The general price level is approximated with the Daily Consumer Price Index (Daily CPI)

During low inflation consumer goods and most other prices, including salaries, wages, rents, transport fees, government-administered prices, electricity prices, water, gas, etc., are generally updated once a year in terms of the change in annual inflation. However, the general price level, in fact, changes at least DAILY. This only becomes evident during LOW inflation when a product is actually priced in terms of the CPI when it is bought and sold on a daily basis and thus has to be priced on a daily basis in terms of the DAILY CPI. This happens daily in the global US Dollar 3 Trillion government capital inflation-indexed bond market in many countries where these sovereign bonds have a different price every day in low and high inflation economies set in terms of the DAILY CPI. This is obviously also true for inflation-indexed bonds during high inflation, hyperinflation and deflation.

During hyperinflation consumer prices are generally updated daily, actually every time the parallel rate changes, in terms of the US Dollar black market rate. Everyone in a hyperinflationary economy knows for a fact that the general price level changes daily (or even more often) as consumer prices are adjusted daily, i.e., every time the US Dollar parallel rate changes. At levels of hyperinflation above 1000 percent per annum, everyone in the economy knows that the previous day´s price is meaningless the next day: it has to be updated at least daily in terms of the change in the black market rate. Everyone involved in business and money matters in a hyperinflationary economy with hyperinflation above 1000 percent per annum knows the general price level changes at least daily. 

All DAILY US Dollar parallel market rates around the world in high and hyperinflationary countries are proxies for the DAILY general price level in those countries as far as the updating of consumer, property and many other prices are concerned. This excludes consumer prices fixed by the government, for example, currently in Venezuela.

The general price level is indicated by a DAILY Non-Monetary Index that follows ALL changes in the general level of prices, normally at least DAILY changes.  It is represented by the Daily CPI during low inflation, high inflation, the initial stage of hyperinflation and deflation. 

The general price level is indicated by the DAILY US Dollar parallel rate as from the stage of hyperinflation when the Daily CPI falls too far behind the Daily USD parallel rate. The DAILY real (parallel or black market) foreign exchange rate is then used as a proxy for the general price level. The daily price level as represented by the DAILY US Dollar parallel rate can change more than once per day by a huge percentage during severe hyperinflation. See Hyperinflation in Zimbabwe, Hungary, Yugoslavia and Germany.

All countries that issue government capital inflation-indexed bonds already calculate a Daily CPI. These bonds trade DAILY. They are priced DAILY in terms of the DAILY CPI.

Here are links to some Daily CPIs which indicate the DAILY general price levels in the respective countries:

Chile - UF: Daily Unidad de Fomento Index. Not a Daily CPI, but a monetized daily indexed unit of account based on the CPI.





Turkey - Daily CPI (Click on Reference Indices under CPI Indexed Government Bonds)



More countries that issue daily inflation-indexed bonds and thus already calculate a Daily CPI to price these bonds daily are:


The constant purchasing power of capital and all other constant real value non-monetary items, e.g., salaries, wages, rent, taxes, trade debtors, trade creditors, all non-monetary payables, all non-monetary receivables, all profits and losses, all items in shareholders equity, etc. can only be maintained constant in real value in terms of a DAILY INDEX during low inflation, high inflation, hyperinflation and deflation.

Nicolaas Smith 

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

Thursday, 30 January 2014

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
 
Appointed: 1 August 2007
Second term expires: 31 July 2017
 
Appointed: 1 July 2006
Second term expires: 30 June 2016
Appointed: 1 July 2012
Term expires: 30 June 2017
  
Appointed: 1 May 2004
Second term expires: 30 June 2014
 
Appointed: 1 July 2009
Term expires: 30 June 2014

 
Appointed: 21 February 2013
Term expires: 30 June 2017

 
Appointed 23 May 2013
Term expires: 30 December 2019
 

Appointed from: 1 July 2009
Term expires: 30 June 2014
 
Appointed: 1 July 2009
Term expires: 30 June 2014
 
Term begins: 1 July 2011
Term expires: 30 June 2016
 
Appointed: 1 October 2010
Term expires: 30 June 2015

 
Appointed: 15 November 2012
Term expires: 30 June 2017
  
Chungwoo Suh

Appointed: 1 July 2012
Term expires: 30 June 2017

 
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.

Wednesday, 29 January 2014

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.

Tuesday, 28 January 2014

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 29at 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.

Monday, 27 January 2014

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.

Sunday, 26 January 2014

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.