Friday, 31 October 2014
Silliest statements in accounting
"Measuring items in units of constant purchasing power makes no difference to the economy."
Prof Geoff Everingham
University of Cape Town __________________________________________________________________
"Financial reporting has no effect on the economy."
Michael Stewart
Director of Implementation Activities at the IASB
__________________________________________________________________
"Historical cost has predictive value."
IASB staff
_____________________________________________________________________________
"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."
South African Institute of Chartered Accountants
_______________________________________________________________________________
Thursday, 30 October 2014
Welcome to the IASB
EVERYONE IN THE WORLD ECONOMY who today implements HISTORICAL COST ACCOUNTING uses the units of constant purchasing power measurement basis to update some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, i.e., to measure these items in units of constant purchasing power in terms of the CPI or a Cost of Living Index on an annual basis under HISTORICAL COST ACCOUNTING.
Basically, they implement the units of constant purchasing power measurement basis under HISTORICAL COST ACCOUNTING.
However, the current members of the IASB and the current members of the IASB staff refuse to acknowledge that.
That is what publicly donated funds are being used for: to pay these peoples´ salaries to come up with junk, low quality IFRSs.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Basically, they implement the units of constant purchasing power measurement basis under HISTORICAL COST ACCOUNTING.
However, the current members of the IASB and the current members of the IASB staff refuse to acknowledge that.
That is what publicly donated funds are being used for: to pay these peoples´ salaries to come up with junk, low quality IFRSs.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
IASB continues to ignore Units of Constant Purchasing Power under HCA
Although all entities that ever used the HISTORICAL COST ACCOUNTING model during the last 100 years (i.e., almost all entities), all entities using HISTORICAL COST ACCOUNTING today (i.e., almost all entities) and all entities who will use HISTORICAL COST ACCOUNTING in the future (i.e., almost all entities), used, use and will use the units of constant purchasing power measurement basis to update some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, the IASB and IASB staff (in my personal opinion) very irresponsibly, continue to ignore it in their current proposals for measurement bases under HCA which only include:
1. Historical cost
2. Current measurement bases, namely:
(a) fair value (see paragraphs A14–A21);
(b) fulfilment value for liabilities and value in use for assets (see
paragraphs A22–A31).
2. Current measurement bases, namely:
(a) fair value (see paragraphs A14–A21);
(b) fulfilment value for liabilities and value in use for assets (see
paragraphs A22–A31).
All current members of the IASB and IASB staff used measurement in units of constant purchasing power under HISTORICAL COST ACCOUNTING during all of their careers to date. However, they refuse point blank and very irresponsibly to acknowledge its 100 year old usage under HISTORICAL COST ACCOUNTING. We cannot, in my personal, private opinion, accept their view regarding measurement bases under HISTORICAL COST ACCOUNTING, in this case. It would be very irresponsible from users to accept their current very irresponsible refusal to acknowledge that measurement in units of constant purchasing power was a generally accepted measurement basis under HISTORICAL COST ACCOUNTING for the last 100 years, still is today used under HISTORICAL COST ACCOUNTING and will forever in the future be used while HISTORICAL COST ACCOUNTING is implemented by entities worldwide.
The low quality of current IFRSs thus continues into the future. See, for example, IAS 29 which had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy. The IASB refuses, again point blank, to acknowledge that IAS 29 had no positive effect in Zimbabwe. How can we keep the current IASB members and IASB staff in office when they are - in my personal, private opinion - clearly very irresponsible?
The current IASB members and IASB staff members are, in my personal opinion (I had personal dealings with a number of IASB staff members in the past), most probably the worst incumbents in the history of the IASB. I have listened to IASB board members during public deliberations.
In my personal opinion, they have unbelievably low levels of knowledge about, for example:
(1) the units of constant purchasing power measurement basis
(2) capital maintenance in units of constant purchasing power in terms of a Daily CPI as was so successfully implemented in Latin America from 1960 till the late 1990´s.
(3) the economy wide stabilizing effect of daily indexing in terms of the Daily CPI.
In my personal opinion, all members of the current IASB as well as all current IASB staff members should be replaced immediately with people who have adequate knowledge about (1) to (3) mentioned above.
A lot of contributors' money is being wasted by keeping the current IASB members and IASB staff members. They should all be replace immediately, in my personal opinion.
See also:
IASB defines measurement bases under Historical Cost Accounting
Nicolaas Smith See also:
IASB defines measurement bases under Historical Cost Accounting
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday, 26 October 2014
Use of Daily CPI in IAS 29 compliant with IFRS
IAS 29 Financial Reporting in Hyperinflationary Economies has been implemented since its authorization in 1989 in terms of the monthly published CPI. This has consistently resulted in IAS 29 not being effective in implementing capital maintenance in units of constant purchasing power which is, in fact, the objective of IAS 29. For example: IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy which imploded on 20 November, 2008 despite the full implementation of IAS 29 during the final 8 years of hyperinflation in that country.
Accountants generally realize that it is common sense that IAS 29 had no positive effect in Zimbabwe.
The requirement that financial statements shall be stated at the "measuring unit current at the end of the reporting period" has - until very recently - always been interpreted by users and auditors as meaning that items like, for example, daily sales, daily cost of sales, daily expenses, daily costs, all daily items accounted from day one till the last day of every month have to be measured in units of constant purchasing power in terms of ONE, SINGLE, monthly published Consumer Price Index at the end of the reporting period (end of the month, for example for the preparation of monthly accounts during hyperinflation) while, in fact, the general price level during hyperinflation can change by 10% to 100% to 100 million per cent (see Zimbabwe during 2008) every day of the month.
During low and high inflation and deflation the general price level also changes at least daily as indicated by the official Daily CPI which is based on the official monthly published CPI.
Monthly accounts have in practice thus been prepared (and audited) over the last 25 years by users (and auditors approving those accounts) who implemented IAS 29 during hyperinflation when they used the respective single, monthly published CPI during the financial year when it was a very well known fact - acknowledged by everyone in the hyperinflationary economy - that the general price level changed at least DAILY. This resulted in ever more meaningless monthly and annual profit or loss results and consequent wrong retained earnings and ever higher erosion of the real value of shareholders' equity (capital) the higher the rate of hyperinflation. It also resulted in the completely unnecessary destruction of tens of billions of US Dollars in real value in shareholders´ equity (see Zimbabwe) and all constant real value non-monetary items, for example, salaries, wages, rents, etc. never updated in terms of every - at least DAILY - change in the general price level during hyperinflation.
It is abundantly clear that IAS 29 does not REQUIRE the use of the monthly published CPI. It simply requires that financial statements "shall be stated in terms of the measuring unit current at the end of the reporting period." Users and auditors developed the practice of using the monthly published CPI over the 25 years since IAS 29 had been required in IFRS during hyperinflation as from April, 1989 because Daily CPIs were only used and are currently only used for the daily pricing (valuation) of government inflation-indexed bonds in many different countries. The use of daily indices from 1960 till the late 1990's in especially South American countries was seen as fundamentally a monetary and not an accounting measure because of the mistaken belief that inflation affects the real value of both monetary and non-monetary items. Inflation only affects the real value of monetary items. It has no effect on the real value of non-monetary items. The implementation of the stable measuring unit assumption affects the real value of constant real value non-monetary items not updated daily in terms of the Daily CPI.
The reason for this practice was and is that users over the last 25 years generally did not and still generally do not understand that ONLY measurement in units of constant purchasing power in terms of ALL - at least DAILY - changes in the general price level is necessary to achieve actual capital maintenance in units of constant purchasing power (as was achieved in Brazil in 1994 with the Unidade Real de Valor Daily Index) that is required in IAS 29, but is not achieved as a result of the use of the monthly CPI instead of the DAILY CPI.
The Daily CPI was very successfully used in Brazil from 1964 till 1994 with the application of various government supplied indices during that period and especially with the final very successful Unidade Real de Valor DAILY INDEX that Brazil used together with their Real Plan monetary reform to stop hyperinflation overnight with a totally free accounting cum monetary practice at no cost.
Unfortunately daily indexing was never recognized in the many - mostly Latin American - countries that widely implemented monetary correction or "correcção monetária" from the 1960's to the 1990's, as the underlying basis of a fundamental accounting model, namely capital maintenance in units of constant purchasing power in terms of the Daily CPI. All those countries saw daily indexing as only a monetary measure and never as an accounting model. This accounts for the lack of understanding of capital maintenance in units of constant purchasing power in terms of the Daily CPI today.
IAS 29 states the following:
"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."
IAS 29, Par. 8
IAS 29 does not REQUIRE the use of the monthly published CPI.
Using the DAILY CPI would also result in "financial statements stated in terms of the measuring unit current at the end of the reporting period."
However, using the DAILY CPI would result in ACTUAL capital maintenance in units of constant purchasing power since it is - in general - the ONLY way it can be achieved during inflation and deflation (and especially during hyperinflation) in a non-dollarized economy.
The use of the Daily CPI in IAS 29 is thus compliant with IFRS. The use of the Daily CPI in IAS 29 during hyperinflation would result in stabilizing the non-monetary or real economy during hyperinflation over a short period of time as it was done in Brazil in 1994.
What happened in Brazil in 1994 with respect to the use of the very successful Unidade Real de Valor DAILY INDEX is often ignored. The reason for this is the fact that very few people understand the economy-wide stabilizing effect of implementing capital maintenance in units of constant purchasing power - as required in IAS 29 - in terms of the DAILY CPI. IAS 29 is and always has been implemented in terms of the monthly published CPI.
The IASB has stated in 2013 that IAS 29 gives guidance on the implementation of capital maintenance in units of constant purchasing power.
IAS 29 can thus correctly be implemented in terms of the Daily CPI which would result in "financial statements stated in terms of the measuring unit current at the end of the reporting period" during hyperinflation since the DAILY CPI on the last day of every month or year would also be "the measuring unit current at the end of the reporting period" when the Daily CPI is chosen as the measuring unit during hyperinflation. IAS 29 does not state which measuring unit must be used. The user has full discretion regarding the choice of measuring unit during hyperinflation.
The Daily CPI is a valid measuring unit since it is based on the official CPI. The Daily CPI is used by all (many) governments issuing sovereign inflation-indexed bonds, for example Treasury Inflation-Index Securities (TIPS) in the United States and the CER in Argentina.
"Descarga de paquetes estandarizados de series estadísticas":
At the bottom of the page you will see: "Coeficiente de estabilización de referencia (CER), serie diaria", then choose a year and open the excel file.
The very simple formula to calculate the Daily CPI based on the official monthly published CPI is widely available on the internet in the few cases where a government does not issue inflation-indexed bonds. All government inflation-indexed bonds are currently priced DAILY in terms of an already existing official Daily CPI.
Links to some Daily CPIs appear on the right of this blog.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Accountants generally realize that it is common sense that IAS 29 had no positive effect in Zimbabwe.
The requirement that financial statements shall be stated at the "measuring unit current at the end of the reporting period" has - until very recently - always been interpreted by users and auditors as meaning that items like, for example, daily sales, daily cost of sales, daily expenses, daily costs, all daily items accounted from day one till the last day of every month have to be measured in units of constant purchasing power in terms of ONE, SINGLE, monthly published Consumer Price Index at the end of the reporting period (end of the month, for example for the preparation of monthly accounts during hyperinflation) while, in fact, the general price level during hyperinflation can change by 10% to 100% to 100 million per cent (see Zimbabwe during 2008) every day of the month.
During low and high inflation and deflation the general price level also changes at least daily as indicated by the official Daily CPI which is based on the official monthly published CPI.
Monthly accounts have in practice thus been prepared (and audited) over the last 25 years by users (and auditors approving those accounts) who implemented IAS 29 during hyperinflation when they used the respective single, monthly published CPI during the financial year when it was a very well known fact - acknowledged by everyone in the hyperinflationary economy - that the general price level changed at least DAILY. This resulted in ever more meaningless monthly and annual profit or loss results and consequent wrong retained earnings and ever higher erosion of the real value of shareholders' equity (capital) the higher the rate of hyperinflation. It also resulted in the completely unnecessary destruction of tens of billions of US Dollars in real value in shareholders´ equity (see Zimbabwe) and all constant real value non-monetary items, for example, salaries, wages, rents, etc. never updated in terms of every - at least DAILY - change in the general price level during hyperinflation.
It is abundantly clear that IAS 29 does not REQUIRE the use of the monthly published CPI. It simply requires that financial statements "shall be stated in terms of the measuring unit current at the end of the reporting period." Users and auditors developed the practice of using the monthly published CPI over the 25 years since IAS 29 had been required in IFRS during hyperinflation as from April, 1989 because Daily CPIs were only used and are currently only used for the daily pricing (valuation) of government inflation-indexed bonds in many different countries. The use of daily indices from 1960 till the late 1990's in especially South American countries was seen as fundamentally a monetary and not an accounting measure because of the mistaken belief that inflation affects the real value of both monetary and non-monetary items. Inflation only affects the real value of monetary items. It has no effect on the real value of non-monetary items. The implementation of the stable measuring unit assumption affects the real value of constant real value non-monetary items not updated daily in terms of the Daily CPI.
The reason for this practice was and is that users over the last 25 years generally did not and still generally do not understand that ONLY measurement in units of constant purchasing power in terms of ALL - at least DAILY - changes in the general price level is necessary to achieve actual capital maintenance in units of constant purchasing power (as was achieved in Brazil in 1994 with the Unidade Real de Valor Daily Index) that is required in IAS 29, but is not achieved as a result of the use of the monthly CPI instead of the DAILY CPI.
The Daily CPI was very successfully used in Brazil from 1964 till 1994 with the application of various government supplied indices during that period and especially with the final very successful Unidade Real de Valor DAILY INDEX that Brazil used together with their Real Plan monetary reform to stop hyperinflation overnight with a totally free accounting cum monetary practice at no cost.
Unfortunately daily indexing was never recognized in the many - mostly Latin American - countries that widely implemented monetary correction or "correcção monetária" from the 1960's to the 1990's, as the underlying basis of a fundamental accounting model, namely capital maintenance in units of constant purchasing power in terms of the Daily CPI. All those countries saw daily indexing as only a monetary measure and never as an accounting model. This accounts for the lack of understanding of capital maintenance in units of constant purchasing power in terms of the Daily CPI today.
IAS 29 states the following:
"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."
IAS 29, Par. 8
IAS 29 does not REQUIRE the use of the monthly published CPI.
Using the DAILY CPI would also result in "financial statements stated in terms of the measuring unit current at the end of the reporting period."
However, using the DAILY CPI would result in ACTUAL capital maintenance in units of constant purchasing power since it is - in general - the ONLY way it can be achieved during inflation and deflation (and especially during hyperinflation) in a non-dollarized economy.
The use of the Daily CPI in IAS 29 is thus compliant with IFRS. The use of the Daily CPI in IAS 29 during hyperinflation would result in stabilizing the non-monetary or real economy during hyperinflation over a short period of time as it was done in Brazil in 1994.
What happened in Brazil in 1994 with respect to the use of the very successful Unidade Real de Valor DAILY INDEX is often ignored. The reason for this is the fact that very few people understand the economy-wide stabilizing effect of implementing capital maintenance in units of constant purchasing power - as required in IAS 29 - in terms of the DAILY CPI. IAS 29 is and always has been implemented in terms of the monthly published CPI.
The IASB has stated in 2013 that IAS 29 gives guidance on the implementation of capital maintenance in units of constant purchasing power.
IAS 29 can thus correctly be implemented in terms of the Daily CPI which would result in "financial statements stated in terms of the measuring unit current at the end of the reporting period" during hyperinflation since the DAILY CPI on the last day of every month or year would also be "the measuring unit current at the end of the reporting period" when the Daily CPI is chosen as the measuring unit during hyperinflation. IAS 29 does not state which measuring unit must be used. The user has full discretion regarding the choice of measuring unit during hyperinflation.
The Daily CPI is a valid measuring unit since it is based on the official CPI. The Daily CPI is used by all (many) governments issuing sovereign inflation-indexed bonds, for example Treasury Inflation-Index Securities (TIPS) in the United States and the CER in Argentina.
Click in sequence: "Estadísticas e Indicadores"
"Monetarias y Financieras""Descarga de paquetes estandarizados de series estadísticas":
At the bottom of the page you will see: "Coeficiente de estabilización de referencia (CER), serie diaria", then choose a year and open the excel file.
The very simple formula to calculate the Daily CPI based on the official monthly published CPI is widely available on the internet in the few cases where a government does not issue inflation-indexed bonds. All government inflation-indexed bonds are currently priced DAILY in terms of an already existing official Daily CPI.
Links to some Daily CPIs appear on the right of this blog.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Saturday, 25 October 2014
IASB defines measurement bases under Historical Cost Accounting
HISTORICAL COST ACCOUNTING
The IASB mistakenly decided to recognize only the following two measurement bases under the Historical Cost Accounting model in the Conceptual Framework in IFRSs:
"A2. Measurement bases can be categorised as:
(a) historical cost (paragraphs A3–A11); or
(b) current measurement bases (paragraphs A12–A35).
1. HISTORICAL COST
A3. Measurements based on historical cost provide monetary information about resources, claims and changes in resources and claims using information about past transactions (for example, transaction prices). The initial measurement of assets or liabilities measured at historical cost is not adjusted to reflect changes in prices. However, the carrying amount is adjusted over time to reflect changes such as consumption, impairment and fulfilment.
2. Current measurement bases
A12. Current measurement bases are updated to reflect conditions at the measurement date. The following paragraphs describe the following current measurement bases:
(a) FAIR VALUE (see paragraphs A14–A21);
(b) fulfilment value for liabilities and value in use for assets (see paragraphs A22–A31)."
It is generally accepted that IFRSs, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies, deal with financial reports prepared under the Historical Cost basis.
The IASB thus, shockingly and very irresponsibly, continues to ignore the more than a 100-year-old and universally used Units of Constant Purchasing Power measurement basis under Historical Cost Accounting.
The third measurement basis used by all entities implementing Historical Cost Accoutning (but ignored by the IASB) is:
3. UNITS OF CONSTANT PURCHASING POWER (ignored by the IASB)
The Units of Constant Purchasing Power measurement basis is used to update some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, i.e., to measure these items in units of constant purchasing power in terms of the CPI or a Cost of Living Index on an annual basis under HISTORICAL COST ACCOUNTING.
It is part of US GAAP. Its use is universal under Historical Cost Accounting, but the IASB refuses to recognize it in the Conceptual Framework. This is a fundamental mistake in the Conceptual Framework and adds to IFRS being of low quality.
Summary
MEASUREMENT BASES UNDER HCA
1. Nominal Historical Cost
2. Fair Value
3. Units of constant purchasing power (ignored by the IASB)
See also:
Historical Cost Accounting versus Capital Maintenance in Units of Constant Purchasing Power™
and
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The IASB mistakenly decided to recognize only the following two measurement bases under the Historical Cost Accounting model in the Conceptual Framework in IFRSs:
"A2. Measurement bases can be categorised as:
(a) historical cost (paragraphs A3–A11); or
(b) current measurement bases (paragraphs A12–A35).
1. HISTORICAL COST
A3. Measurements based on historical cost provide monetary information about resources, claims and changes in resources and claims using information about past transactions (for example, transaction prices). The initial measurement of assets or liabilities measured at historical cost is not adjusted to reflect changes in prices. However, the carrying amount is adjusted over time to reflect changes such as consumption, impairment and fulfilment.
2. Current measurement bases
A12. Current measurement bases are updated to reflect conditions at the measurement date. The following paragraphs describe the following current measurement bases:
(a) FAIR VALUE (see paragraphs A14–A21);
(b) fulfilment value for liabilities and value in use for assets (see paragraphs A22–A31)."
It is generally accepted that IFRSs, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies, deal with financial reports prepared under the Historical Cost basis.
The IASB thus, shockingly and very irresponsibly, continues to ignore the more than a 100-year-old and universally used Units of Constant Purchasing Power measurement basis under Historical Cost Accounting.
The third measurement basis used by all entities implementing Historical Cost Accoutning (but ignored by the IASB) is:
3. UNITS OF CONSTANT PURCHASING POWER (ignored by the IASB)
The Units of Constant Purchasing Power measurement basis is used to update some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, i.e., to measure these items in units of constant purchasing power in terms of the CPI or a Cost of Living Index on an annual basis under HISTORICAL COST ACCOUNTING.
It is part of US GAAP. Its use is universal under Historical Cost Accounting, but the IASB refuses to recognize it in the Conceptual Framework. This is a fundamental mistake in the Conceptual Framework and adds to IFRS being of low quality.
Summary
MEASUREMENT BASES UNDER HCA
1. Nominal Historical Cost
2. Fair Value
3. Units of constant purchasing power (ignored by the IASB)
See also:
Historical Cost Accounting versus Capital Maintenance in Units of Constant Purchasing Power™
and
Three measurement bases in IFRS
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday, 24 October 2014
Historical Cost Accounting versus Capital Maintenance in Units of Constant Purchasing Power™
"Double-entry accounting is one of the greatest inventions of the human mind." Wolfgang Goethe
DOUBLE-ENTRY ACCOUNTING MODELS
I) CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER™
Paradigm: Units of Constant Purchasing Power
Capital Maintenance
The constant purchasing power of shareholders' equity (capital) and all other constant real value non-monetary items are maintained constant in all entities that at least break even in real value, ceteris paribus at all levels of inflation (low, high and hyperinflation) and deflation.
General Price Level fact: the general price level changes at least daily. Thus the use of the Daily CPI. The general price level can change more than once per day during hyperinflation.
The stable measuring unit assumption is never implemented.
MEASUREMENT BASES
There are three economic items in the economy.
1. Monetary items
Measurement basis
(a) During current financial year: Nominal Historical Cost, i.e., in nominal monetary units. These items exist in terms of Historical Cost contracts still being used under the Units of Constant Purchasing Power paradigm.
(b) Prior year monetary items in current year financial reports and all other historical monetary items not part of current year financial reports: daily updated Historical Cost always and everywhere updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level - generally in terms of the Daily CPI. There is no such thing as a nominal historical cost monetary item except for current year items.
2. Variable real value non-monetary items
Measurement basis: Daily updated fair value always and everywhere updated till the current (today´s) real value. There is no such thing as a nominal historical variable real value non-monetary item.
3. Constant real value non-monetary items
Measurement basis
Daily updated units of constant purchasing power always and everywhere updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level, generally in terms of the Daily CPI. There is no such thing as a nominal historical constant real value non-monetary item.
The Units of Constant Purchasing Power Measurement Basis: in terms of all - at least daily - changes in the general price level under all levels of inflation (low, high and hyperinflation) and deflation always and everywhere updated till the current (today´s) real value. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation.
Summary
MEASUREMENT BASES
1. Units of constant purchasing power*
2. Fair value*
3. Updated Historical Cost*
4. Nominal Historical Cost
*Always and everywhere updated in terms of all (at least daily) changes in the general price level - generally in terms of the Daily CPI - up to the current (today´s) real value under all levels of inflation (low, high and hyperinflation) and deflation. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation.
Net Monetary Losses and Gains
Net monetary gains and losses are always calculated and accounted.
Authorization in IFRS: CMUCPP™ was originally authorized in the original 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™ was also authorized in US GAAP in 1989 as well as in other country accounting standards at that time.
Measurement time interval: Every change in the general price level, i.e., daily under low, high and hyperinflation and deflation while the general price level can change more than once per day during hyperinflation.
Classification of Economic Items
1. Monetary items
2. Variable real value non-monetary items
3. Constant real value non-monetary items.
CPI: Daily CPI (in general): all changes in the general price level.
Financial Reports
Financial reports are updated daily generally in terms of the Daily CPI to the current (today´s) date. Financial reports are thus preferably kept only in digital form and not printed on hard (paper) copy.
Effect of inflation/deflation
1. Inflation and deflation only affect the real value of monetary items not inflation- or deflation-adjusted in terms of all (at least daily) changes in the general price level, nothing else.
See Also
II) HISTORICAL COST ACCOUNTING
Paradigm: Nominal Historical Cost
Capital Maintenance
No entity in the world economy ever knew and today knows whether it maintained or maintains the real value (constant purchasing power) of all contributions to shareholders´equity (capital) over the life of the entity. Generally, the real value of capital was and is eroded in that portion of capital (not known by any entity) not backed by the real value of net assets. The result was and is continual erosion of a portion of the real value of capital (equity) or inadequate capital maintenance over time during inflation and the creation of real value in these items not updated daily during deflation resulting in economic instability.
Accounting standard setters, HC accounting educators and HC accountants and people in general mistakenly believe nothing can be done about this matter except the lowering of inflation or deflation by central banks. That is not true.
Daily inflation- or deflation-indexing of the entire money supply in terms of all (at least daily) changes in the general price level would remove the complete effect of low, high and hyperinflation and deflation. Chile inflation-indexes at least 25% of its entire money supply on a daily basis with their Unidad de Fomento Daily Index.
This would do nothing to actual low, high and hyperinflation and deflation. That has to be dealt with by the monetary authorities. Accounting (daily inflation - or deflation-indexing) can only remove the effect of inflation or deflation.
Daily measurement of all constant real value non-monetary items in terms of all (at least daily) changes in the general price level would maintain the constant purchasing power of these items constant in all entities that at least break even in real value, ceteris paribus at all levels of low, high and hyperinflation and deflation. Obviously, this would require the rejection of the HCA model and the adoption of the Capital Maintenance in Units of Constant Purchasing Power™ model at all levels of inflation and deflation always in terms of the Daily CPI.
General Price Level assumption: Under HCA the general price level is assumed to be perfectly stable at all levels of low and high inflation and deflation. Assumption: the general price level changes once per month during hyperinflation. Thus the incorrect use of the monthly published CPI during hyperinflation under the IAS 29 Financial Reporting in Hyperinflationary Economies. Only updating in terms of all - at least daily - changes in the general price level can result in actual capital maintenance in units of constant purchasing power which has never been achieved under the current version of of the IAS 29 which is mistakenly implemented using the monthly published CPI.
Basic underlying principle: the stable measuring unit assumption is implemented for the valuation of some, not all items.
IFRS are based on the HCA model with the exception of IAS 29 although HC principles are even used under this standard too.
Measurement bases
(i) Historical Cost
(ii) Current Measurement Bases
(a) fair value
(b) fulfilment value for liabilities and value in use for assets
(iii) Units of Constant Purchasing Power
The UCPP measurement basis is used to update some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, i.e., to measure these items in units of constant purchasing power in terms of the CPI or a Cost of Living Index on an annual basis under HISTORICAL COST ACCOUNTING. It is part of GAAP under IFRS and US GAAP. Its use is so universal that the IASB refuses to recognize it specifically in the Conceptual Framework. This is a fundamental mistake in the CF and adds to IFRS being of low quality.
Net Monetary Losses and Gains
Net monetary gains and losses are never calculated and accounted.
Authorization in IFRS: Historical Cost Accounting was originally authorized in the original Framework (1989), Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
HCA is the centuries old, traditional, global, generally accepted accounting model used by almost all entities worldwide.
Measurement time interval
(i) Under Nominal Historical Cost measurement: No time interval: it is assumed time does not change. Original date with no change in time after that.
(ii) Under Unupdated Fair Value measurement: The end of the reporting period which can - in general - be the end of (a) the month (b) quarter (c) six months (d) nine months or (e) twelve months.
CPI: Annual CPI used when items like salaries, wages, rents, etc. are updated, normally annually. They are then treated like nominal historical costs for accounting purposes.
Classification of Economic Items
1. Monetary items
2. Non-monetary items
Financial Reports
A HC financial report is generally prepared on hard (paper) copy and in digital format after the end-date of the financial period to which the financial report refers, stated at the balance sheet date and never updated.
HC financial reports are thus always out of date and technically wrong and can be misleading in terms of the, at least, daily changing general price level as indicated by the Daily CPI. HC financial reports are more misleading in terms of real values the higher the rate of cumulative inflation or deflation from the date of the balance sheet to the date that the report is read.
HC accountants assume they overcome this problem when they simply apply the stable measuring unit assumption, i.e., they simply assume money was, is and will always be perfectly stable over any period of time at any level of low and high inflation and deflation. They abruptly change their minds as soon as hyperinflation is reached at 26% per annum inflation for three years in a row; i.e., 100% cumulative inflation over three years which is the IASB´s definition of hyperinflation used by all accountants worldwide. They then try to implement capital maintenance in units of constant purchasing power during hyperinflation. Unfortunately they do it in terms of IAS 29. They do it in terms of the monthly published CPI. This results in IAS 29 not having any positive effect as it had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy in the recent past. Only applying at least the Daily CPI can result in actual capital maintenance in units of constant purchasing power. IAS 29 was implemented in terms of the monthly published CPI during 8 years in Zimbabwe´s hyperinflationary economy with no positive effect at all.
When hyperinflation is overcome and the economy returns to a low inflationary level, HC accountants again suddenly start assuming money is perfectly stable. They again implement the stable measuring unit assumption and implement HCA.
Effect of inflation/deflation
It is mistakenly believed by (taught to) HC accountants, economists, central bankers, bankers, business people and people in general that inflation and deflation affect the real value of both monetary and non-monetary items as mistakenly stated in all HC textbooks ever written and also specifically stated in US GAAP and IFRS.
HC accountants, economists, central bankers, bankers, business people and people in general do not realize that inflation and deflation are monetary phenomena and can only affect monetary items and nothing else. They were and are generally taught incorrectly at all universities that inflation and deflation affect the real value of both monetary and non-monetary items.
See Also
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
DOUBLE-ENTRY ACCOUNTING MODELS
I) CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER™
Paradigm: Units of Constant Purchasing Power
Capital Maintenance
The constant purchasing power of shareholders' equity (capital) and all other constant real value non-monetary items are maintained constant in all entities that at least break even in real value, ceteris paribus at all levels of inflation (low, high and hyperinflation) and deflation.
General Price Level fact: the general price level changes at least daily. Thus the use of the Daily CPI. The general price level can change more than once per day during hyperinflation.
The stable measuring unit assumption is never implemented.
MEASUREMENT BASES
There are three economic items in the economy.
1. Monetary items
Measurement basis
(a) During current financial year: Nominal Historical Cost, i.e., in nominal monetary units. These items exist in terms of Historical Cost contracts still being used under the Units of Constant Purchasing Power paradigm.
(b) Prior year monetary items in current year financial reports and all other historical monetary items not part of current year financial reports: daily updated Historical Cost always and everywhere updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level - generally in terms of the Daily CPI. There is no such thing as a nominal historical cost monetary item except for current year items.
2. Variable real value non-monetary items
Measurement basis: Daily updated fair value always and everywhere updated till the current (today´s) real value. There is no such thing as a nominal historical variable real value non-monetary item.
3. Constant real value non-monetary items
Measurement basis
Daily updated units of constant purchasing power always and everywhere updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level, generally in terms of the Daily CPI. There is no such thing as a nominal historical constant real value non-monetary item.
Summary
MEASUREMENT BASES
1. Units of constant purchasing power*
2. Fair value*
3. Updated Historical Cost*
4. Nominal Historical Cost
*Always and everywhere updated in terms of all (at least daily) changes in the general price level - generally in terms of the Daily CPI - up to the current (today´s) real value under all levels of inflation (low, high and hyperinflation) and deflation. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation.
Net Monetary Losses and Gains
Net monetary gains and losses are always calculated and accounted.
Authorization in IFRS: CMUCPP™ was originally authorized in the original 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™ was also authorized in US GAAP in 1989 as well as in other country accounting standards at that time.
Measurement time interval: Every change in the general price level, i.e., daily under low, high and hyperinflation and deflation while the general price level can change more than once per day during hyperinflation.
Classification of Economic Items
1. Monetary items
2. Variable real value non-monetary items
3. Constant real value non-monetary items.
CPI: Daily CPI (in general): all changes in the general price level.
Financial Reports
Financial reports are updated daily generally in terms of the Daily CPI to the current (today´s) date. Financial reports are thus preferably kept only in digital form and not printed on hard (paper) copy.
Effect of inflation/deflation
1. Inflation and deflation only affect the real value of monetary items not inflation- or deflation-adjusted in terms of all (at least daily) changes in the general price level, nothing else.
See Also
Measurement Bases under the IFRS Units of Constant Purchasing Power Paradigm
Three measurement bases in IFRS
II) HISTORICAL COST ACCOUNTING
Paradigm: Nominal Historical Cost
Capital Maintenance
No entity in the world economy ever knew and today knows whether it maintained or maintains the real value (constant purchasing power) of all contributions to shareholders´equity (capital) over the life of the entity. Generally, the real value of capital was and is eroded in that portion of capital (not known by any entity) not backed by the real value of net assets. The result was and is continual erosion of a portion of the real value of capital (equity) or inadequate capital maintenance over time during inflation and the creation of real value in these items not updated daily during deflation resulting in economic instability.
Accounting standard setters, HC accounting educators and HC accountants and people in general mistakenly believe nothing can be done about this matter except the lowering of inflation or deflation by central banks. That is not true.
Daily inflation- or deflation-indexing of the entire money supply in terms of all (at least daily) changes in the general price level would remove the complete effect of low, high and hyperinflation and deflation. Chile inflation-indexes at least 25% of its entire money supply on a daily basis with their Unidad de Fomento Daily Index.
This would do nothing to actual low, high and hyperinflation and deflation. That has to be dealt with by the monetary authorities. Accounting (daily inflation - or deflation-indexing) can only remove the effect of inflation or deflation.
Daily measurement of all constant real value non-monetary items in terms of all (at least daily) changes in the general price level would maintain the constant purchasing power of these items constant in all entities that at least break even in real value, ceteris paribus at all levels of low, high and hyperinflation and deflation. Obviously, this would require the rejection of the HCA model and the adoption of the Capital Maintenance in Units of Constant Purchasing Power™ model at all levels of inflation and deflation always in terms of the Daily CPI.
General Price Level assumption: Under HCA the general price level is assumed to be perfectly stable at all levels of low and high inflation and deflation. Assumption: the general price level changes once per month during hyperinflation. Thus the incorrect use of the monthly published CPI during hyperinflation under the IAS 29 Financial Reporting in Hyperinflationary Economies. Only updating in terms of all - at least daily - changes in the general price level can result in actual capital maintenance in units of constant purchasing power which has never been achieved under the current version of of the IAS 29 which is mistakenly implemented using the monthly published CPI.
Basic underlying principle: the stable measuring unit assumption is implemented for the valuation of some, not all items.
IFRS are based on the HCA model with the exception of IAS 29 although HC principles are even used under this standard too.
Measurement bases
(i) Historical Cost
(ii) Current Measurement Bases
(a) fair value
(b) fulfilment value for liabilities and value in use for assets
(iii) Units of Constant Purchasing Power
The UCPP measurement basis is used to update some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, i.e., to measure these items in units of constant purchasing power in terms of the CPI or a Cost of Living Index on an annual basis under HISTORICAL COST ACCOUNTING. It is part of GAAP under IFRS and US GAAP. Its use is so universal that the IASB refuses to recognize it specifically in the Conceptual Framework. This is a fundamental mistake in the CF and adds to IFRS being of low quality.
Net Monetary Losses and Gains
Net monetary gains and losses are never calculated and accounted.
Authorization in IFRS: Historical Cost Accounting was originally authorized in the original Framework (1989), Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
HCA is the centuries old, traditional, global, generally accepted accounting model used by almost all entities worldwide.
Measurement time interval
(i) Under Nominal Historical Cost measurement: No time interval: it is assumed time does not change. Original date with no change in time after that.
(ii) Under Unupdated Fair Value measurement: The end of the reporting period which can - in general - be the end of (a) the month (b) quarter (c) six months (d) nine months or (e) twelve months.
CPI: Annual CPI used when items like salaries, wages, rents, etc. are updated, normally annually. They are then treated like nominal historical costs for accounting purposes.
Classification of Economic Items
1. Monetary items
2. Non-monetary items
Financial Reports
A HC financial report is generally prepared on hard (paper) copy and in digital format after the end-date of the financial period to which the financial report refers, stated at the balance sheet date and never updated.
HC financial reports are thus always out of date and technically wrong and can be misleading in terms of the, at least, daily changing general price level as indicated by the Daily CPI. HC financial reports are more misleading in terms of real values the higher the rate of cumulative inflation or deflation from the date of the balance sheet to the date that the report is read.
HC accountants assume they overcome this problem when they simply apply the stable measuring unit assumption, i.e., they simply assume money was, is and will always be perfectly stable over any period of time at any level of low and high inflation and deflation. They abruptly change their minds as soon as hyperinflation is reached at 26% per annum inflation for three years in a row; i.e., 100% cumulative inflation over three years which is the IASB´s definition of hyperinflation used by all accountants worldwide. They then try to implement capital maintenance in units of constant purchasing power during hyperinflation. Unfortunately they do it in terms of IAS 29. They do it in terms of the monthly published CPI. This results in IAS 29 not having any positive effect as it had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy in the recent past. Only applying at least the Daily CPI can result in actual capital maintenance in units of constant purchasing power. IAS 29 was implemented in terms of the monthly published CPI during 8 years in Zimbabwe´s hyperinflationary economy with no positive effect at all.
When hyperinflation is overcome and the economy returns to a low inflationary level, HC accountants again suddenly start assuming money is perfectly stable. They again implement the stable measuring unit assumption and implement HCA.
Effect of inflation/deflation
It is mistakenly believed by (taught to) HC accountants, economists, central bankers, bankers, business people and people in general that inflation and deflation affect the real value of both monetary and non-monetary items as mistakenly stated in all HC textbooks ever written and also specifically stated in US GAAP and IFRS.
HC accountants, economists, central bankers, bankers, business people and people in general do not realize that inflation and deflation are monetary phenomena and can only affect monetary items and nothing else. They were and are generally taught incorrectly at all universities that inflation and deflation affect the real value of both monetary and non-monetary items.
See Also
IASB defines measurement bases under Historical Cost Accounting
Three measurement bases in IFRS
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday, 21 October 2014
Currency can be monetary or non-monetary
FOREIGN CURRENCY
A currency as a foreign currency outside its local, non-dollarized economy is a variable real value non-monetary item and its value is determined in the forex markets compared to other foreign currencies. A currency as a foreign currency´s price (real value) outside its local economy is determined second by second in the forex markets.
Foreign currency losses and gains
Foreign exchange losses and gains are calculated and accounted in terms of IFRS under both the traditional Historical Cost Accounting model under the Historical Cost paradigm and under financial capital maintenance in units of constant purchasing power in terms of IFRs under the Units of Constant Purchasing Power paradigm, the second accounting paradigm authorized under IFRS since April, 1989.
LOCAL CURRENCY
A currency as a local currency - in a non-dollarized economy - is a monetary item and its local real value within its local economy is determined by inflation or deflation.
A local currency´s real value in a non-dollarized economy is determined by the DAILY change in the general price level within its local economy. It changes at least once per day. It is indicated by the change in the DAILY CPI. It can change more than once per day during hyperinflation. During hyperinflation its real local value is determined by the daily US Dollar parallel rate when no Daily CPI is available.
Historical Cost Accounting
Net monetary losses and gains in a local currency in a non-dollarized economy are NOT calculated and accounted under the traditional Historical Cost Accounting model.
The stable measuring unit assumption is implemented under HCA. For example, the real value of issued share capital is never updated and entities do not know whether they have ever maintained or are maintaining the real value (constant purchasing power) of issued share capital over the life of the entity.
FINANCIAL CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER
Totally useless IAS 29 Financial Reporting in Hyperinflationary Economies
Net monetary losses and gains in a hyperinflationary local currency are calculated and accounted during hyperinflation under financial capital maintenance in units of constant purchasing power implemented in terms of the totally useless IAS 29 Financial Reporting in Hyperinflationary Economies.
The stable measuring unit assumption is still implemented on non-month-end days under the totally useless IAS 29 since the monthly published CPI is mistakenly used when only the use of the DAILY CPI will result in actual capital maintenance in units of constant purchasing power. The result of this is that the constant purchasing power (real value) of capital is not maintained under this totally useless standard.
IASB
The International Accounting Standards Board continues to refuse to change the totally useless IAS 29 to REQUIRE the use of the Daily CPI despite the fact that most accountants in the world (excluding the ones at the IASB) acknowledge that it is absolutely clear to any person with common sense that IAS 29 had no positive effect in Zimbabwe. The totally useless IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy since that economy imploded on 20 November 2008 with full implementation of IAS 29 over that period. The IASB is the only entity in the world who refuses to acknowledge that the totally useless IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy. The totally useless IAS 29 is currently having no positive effect in the Venezuelan and Belarus economies.
Capital Maintenance in Units of Constant Purchasing Power
Net monetary losses and gains in a local currency in a non-dollarized economy are calculated and accounted under the Capital Maintenance in Units of Constant Purchasing Power accounting model at all levels of inflation (low, high and hyperinflation) and deflation.
The stable measuring unit assumption is NEVER implemented under CMUCPP. This results in the constant purchasing power (real value) of all constant real value non-monetary items, including all items in shareholders´ equity, always being maintained constant at all levels of inflation (low, high and hyperinflation) and deflation in all entities that at least break-even in real value, ceteris paribus.
BITCOIN
Bitcoin is never a monetary currency. It is never a monetary item. It is never a unit of measure for accounting purposes. It is only a variable real value non-monetary item and its price changes second by second on the various bitcoin exchanges.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
A currency as a foreign currency outside its local, non-dollarized economy is a variable real value non-monetary item and its value is determined in the forex markets compared to other foreign currencies. A currency as a foreign currency´s price (real value) outside its local economy is determined second by second in the forex markets.
Foreign currency losses and gains
Foreign exchange losses and gains are calculated and accounted in terms of IFRS under both the traditional Historical Cost Accounting model under the Historical Cost paradigm and under financial capital maintenance in units of constant purchasing power in terms of IFRs under the Units of Constant Purchasing Power paradigm, the second accounting paradigm authorized under IFRS since April, 1989.
LOCAL CURRENCY
A currency as a local currency - in a non-dollarized economy - is a monetary item and its local real value within its local economy is determined by inflation or deflation.
A local currency´s real value in a non-dollarized economy is determined by the DAILY change in the general price level within its local economy. It changes at least once per day. It is indicated by the change in the DAILY CPI. It can change more than once per day during hyperinflation. During hyperinflation its real local value is determined by the daily US Dollar parallel rate when no Daily CPI is available.
Historical Cost Accounting
Net monetary losses and gains in a local currency in a non-dollarized economy are NOT calculated and accounted under the traditional Historical Cost Accounting model.
The stable measuring unit assumption is implemented under HCA. For example, the real value of issued share capital is never updated and entities do not know whether they have ever maintained or are maintaining the real value (constant purchasing power) of issued share capital over the life of the entity.
FINANCIAL CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER
Totally useless IAS 29 Financial Reporting in Hyperinflationary Economies
Net monetary losses and gains in a hyperinflationary local currency are calculated and accounted during hyperinflation under financial capital maintenance in units of constant purchasing power implemented in terms of the totally useless IAS 29 Financial Reporting in Hyperinflationary Economies.
The stable measuring unit assumption is still implemented on non-month-end days under the totally useless IAS 29 since the monthly published CPI is mistakenly used when only the use of the DAILY CPI will result in actual capital maintenance in units of constant purchasing power. The result of this is that the constant purchasing power (real value) of capital is not maintained under this totally useless standard.
IASB
The International Accounting Standards Board continues to refuse to change the totally useless IAS 29 to REQUIRE the use of the Daily CPI despite the fact that most accountants in the world (excluding the ones at the IASB) acknowledge that it is absolutely clear to any person with common sense that IAS 29 had no positive effect in Zimbabwe. The totally useless IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy since that economy imploded on 20 November 2008 with full implementation of IAS 29 over that period. The IASB is the only entity in the world who refuses to acknowledge that the totally useless IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy. The totally useless IAS 29 is currently having no positive effect in the Venezuelan and Belarus economies.
Capital Maintenance in Units of Constant Purchasing Power
Net monetary losses and gains in a local currency in a non-dollarized economy are calculated and accounted under the Capital Maintenance in Units of Constant Purchasing Power accounting model at all levels of inflation (low, high and hyperinflation) and deflation.
The stable measuring unit assumption is NEVER implemented under CMUCPP. This results in the constant purchasing power (real value) of all constant real value non-monetary items, including all items in shareholders´ equity, always being maintained constant at all levels of inflation (low, high and hyperinflation) and deflation in all entities that at least break-even in real value, ceteris paribus.
BITCOIN
Bitcoin is never a monetary currency. It is never a monetary item. It is never a unit of measure for accounting purposes. It is only a variable real value non-monetary item and its price changes second by second on the various bitcoin exchanges.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday, 19 October 2014
Measurement bases cannot be restricted to Historical Cost Accounting
It is realized by now in the accounting world that International Financial Reporting Standards are almost 100% concerned with financial capital maintenance in nominal monetary units; i.e., with Historical Cost Accounting. It is not 100% because completely useless IAS 29 Financial Reporting in Hyperinflationary Economies has been providing guidance (albeit incorrect and useless guidance) regarding financial capital maintenance in units of constant purchasing power since April 1989; for the last 25 years although the IASB itself only realized it in early 2013 after the elapse of 24 years from the date of authorization of completely useless IAS 29 after I pointed it out to the Board.
There are thus two official paradigms catered for in IFRS:
(i) The centuries old, global, traditional Historical Cost paradigm under which the stable measuring unit assumption is implemented and net monetary gains and losses in monetary items (incorrectly identified and defined in IFRS) are not calculated and accounted.
(ii) The Units of Constant Purchasing Power paradigm authorized as from April, 1989 (for the last 25 years) under which the stable measuring unit assumption is never implemented - currently only required in IFRS during hyperinflation - and under which net monetary gains and losses in monetary items (incorrectly identified and defined in IFRS) are calculated and accounted.
The forthcoming IASB meeting on the Conceptual Framework (22 to 24 October), however, only deals with measurement with regard to HCA in agenda paper 10B. That is consequently a serious mistake if the IFRS Foundation were of the intention to issue high quality IFRSs.
How did this persistent ignoring by the IASB of the Units of Constant Purchasing Power Paradigm come about?
In my opinion, there are various complex reasons.
It was believed at the IASB for 24 years till the first half of 2013 that IFRSs provide NO GUIDANCE regarding the implementation of financial capital maintenance in units of constant purchasing power despite the fact that this had been provided (incorrectly) in the completely useless IAS 29 as from April 1989, i.e., for the last 24 years, at that time. The IASB specifically stated in 2013 that IFRSs provide no such guidance. "10. Under current IFRS, there is no particular guidance on how to prepare financial statements stated in constant purchasing power units." They only realized their error after I pointed it out to them with recourse to a letter to Hans Hoogervorst as last resort. The IASB subsequently (finally) stated - after 24 years - that (the completely useless) IAS 29 deals with financial capital maintenance in units of constant purchasing power.
Thus, no-one at the IASB in the first 24 years that the completely useless IAS 29 was implemented realized that an IFRS had been giving (incorrect and useless) guidance regarding the implementation of financial capital maintenance in units of constant purchasing power for almost the entire existence of the IASB and its predecessor bodies.
Why was that?
The reason was (and is) that no-one at the IASB and its predecessor bodies ever understood and today still do not understand the economy wide beneficial effect of implementing financial capital maintenance in units of constant purchasing correctly IN TERMS OF A DAILY CPI in an economy. The reason for that is that the completely useless IAS 29 has never been implemented correctly to actually result in financial capital maintenance in units of constant purchasing power as I pointed out to Mr Hoogervorst in my letter. Why? Because the completely useless IAS 29 still today requires the use of the monthly CPI when only the use of at least the Daily CPI results in actual financial capital maintenance in units of constant purchasing power as it was used, for example, so successfully in 1994 in Brazil as part of their Real Plan to stop hyperinflation overnight with their use of the DAILY Unidade Real de Valor index used very successfully in the entire Brazilian economy on a daily basis. The Brazilian experience with the use of the very successful Unidade Real de Valor DAILY INDEX was and today still is completely ignored by everyone at the IASB.
The proof of that is the fact that no-one at the IASB is, in fact, capable of publicly admitting (in terms of personal understanding) that the completely useless IAS 29 had no positive effect during the 8 years it had been implemented in Zimbabwe´s hyperinflationary economy (because no-one at the IASB today understands the underlying concept and the effects of correct financial capital maintenance in units of constant purchasing power IN TERMS OF A DAILY CPI) although it is generally accepted worldwide by most accountants (excluding the ones at the IASB) that the completely useless IAS 29 obviously had no positive effect in Zimbabwe during hyperinflation: Zimbabwe's economy imploded on 20 November 2008 after 8 years of full implementation of the completely useless IAS 29. The IASB stated that it can only express an opinion regarding the use of IAS 29 in Zimbabwe after carrying out a special review of its use in Zimbabwe. This special review has not yet been undertaken.
The IASB today thus continues to remain ignorant (they have no knowledge of, they do not understand) of the substantial economy-wide stabilizing effect of financial capital maintenance in units of constant purchasing power IN TERMS OF A DAILY CPI under the UCPP paradigm despite what happened in Brazil from 1964 to 1994 and especially in 1994 (having been extensively reported in the media and in many books/academia) and elsewhere in Latin America during that time and afterwards.
What should happen at the forthcoming Conceptual Framework meeting if the IASB were to issue high quality IFRSs?
Measurement in the Conceptual Framework should be stated in terms of the two paradigms.
The IASB's habitual excuse that measurement in units of constant purchasing power MIGHT be dealt with IF the POSSIBLE FUTURE RESEARCH PROJECT on financial reporting in high inflationary economies MAY indicate a need to review (the completely useless) IAS 29 is not a reasonable reason to exclude dealing with measurement under the second paradigm (the units of constant purchasing power paradigm) used in IFRS when it is taken into account that the completely useless IAS 29 (which is intended to be implemented under the units of constant purchasing power paradigm, but fails completely) has been used over the last 25 years by thousand of companies in many countries and is now in use - again with absolutely no positive effect - in Venezuela and Belarus, for example.
The use of measurement in units of constant purchasing power as one of the measurement bases (the other two being HC and fair value as currently stated in IASB staff paper 10B) as provided for in the CF for use as part of HCA under the HC paradigm under which the stable measuring unit assumption is still implemented as the main underlying concept is NOT the same as measurement in units of constant purchasing power in terms of the DAILY CPI under the second Units of Constant Purchasing Power Paradigm under which the stable measuring unit assumption is NEVER implemented.
In my opinion the IASB continues to be irresponsible in its duties and functions on an international basis with regard to the urgently needed review of the completely useless IAS 29 to change it to REQUIRE the use of the Daily CPI instead of the current (25 year) practice that the monthly published CPI is used which is the single and only reason for IAS 29 being completely useless and ineffective today in Venezuela and Belarus exactly as it had no positive effect in Zimbabwe in the past.
In my opinion it would not be reasonable to restrict dealing with measurement in the CF to the three measurement bases in HCA under the HC paradigm. In my opinion it would be reasonable for the IASB to include measurement in units of constant purchasing power in terms of the Daily CPI under the Units of Constant Purchasing Power Paradigm under which the stable measuring unit assumption is never implemented as part of Measurement in the Conceptual Framework.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
There are thus two official paradigms catered for in IFRS:
(i) The centuries old, global, traditional Historical Cost paradigm under which the stable measuring unit assumption is implemented and net monetary gains and losses in monetary items (incorrectly identified and defined in IFRS) are not calculated and accounted.
(ii) The Units of Constant Purchasing Power paradigm authorized as from April, 1989 (for the last 25 years) under which the stable measuring unit assumption is never implemented - currently only required in IFRS during hyperinflation - and under which net monetary gains and losses in monetary items (incorrectly identified and defined in IFRS) are calculated and accounted.
The forthcoming IASB meeting on the Conceptual Framework (22 to 24 October), however, only deals with measurement with regard to HCA in agenda paper 10B. That is consequently a serious mistake if the IFRS Foundation were of the intention to issue high quality IFRSs.
How did this persistent ignoring by the IASB of the Units of Constant Purchasing Power Paradigm come about?
In my opinion, there are various complex reasons.
It was believed at the IASB for 24 years till the first half of 2013 that IFRSs provide NO GUIDANCE regarding the implementation of financial capital maintenance in units of constant purchasing power despite the fact that this had been provided (incorrectly) in the completely useless IAS 29 as from April 1989, i.e., for the last 24 years, at that time. The IASB specifically stated in 2013 that IFRSs provide no such guidance. "10. Under current IFRS, there is no particular guidance on how to prepare financial statements stated in constant purchasing power units." They only realized their error after I pointed it out to them with recourse to a letter to Hans Hoogervorst as last resort. The IASB subsequently (finally) stated - after 24 years - that (the completely useless) IAS 29 deals with financial capital maintenance in units of constant purchasing power.
Thus, no-one at the IASB in the first 24 years that the completely useless IAS 29 was implemented realized that an IFRS had been giving (incorrect and useless) guidance regarding the implementation of financial capital maintenance in units of constant purchasing power for almost the entire existence of the IASB and its predecessor bodies.
Why was that?
The reason was (and is) that no-one at the IASB and its predecessor bodies ever understood and today still do not understand the economy wide beneficial effect of implementing financial capital maintenance in units of constant purchasing correctly IN TERMS OF A DAILY CPI in an economy. The reason for that is that the completely useless IAS 29 has never been implemented correctly to actually result in financial capital maintenance in units of constant purchasing power as I pointed out to Mr Hoogervorst in my letter. Why? Because the completely useless IAS 29 still today requires the use of the monthly CPI when only the use of at least the Daily CPI results in actual financial capital maintenance in units of constant purchasing power as it was used, for example, so successfully in 1994 in Brazil as part of their Real Plan to stop hyperinflation overnight with their use of the DAILY Unidade Real de Valor index used very successfully in the entire Brazilian economy on a daily basis. The Brazilian experience with the use of the very successful Unidade Real de Valor DAILY INDEX was and today still is completely ignored by everyone at the IASB.
The proof of that is the fact that no-one at the IASB is, in fact, capable of publicly admitting (in terms of personal understanding) that the completely useless IAS 29 had no positive effect during the 8 years it had been implemented in Zimbabwe´s hyperinflationary economy (because no-one at the IASB today understands the underlying concept and the effects of correct financial capital maintenance in units of constant purchasing power IN TERMS OF A DAILY CPI) although it is generally accepted worldwide by most accountants (excluding the ones at the IASB) that the completely useless IAS 29 obviously had no positive effect in Zimbabwe during hyperinflation: Zimbabwe's economy imploded on 20 November 2008 after 8 years of full implementation of the completely useless IAS 29. The IASB stated that it can only express an opinion regarding the use of IAS 29 in Zimbabwe after carrying out a special review of its use in Zimbabwe. This special review has not yet been undertaken.
The IASB today thus continues to remain ignorant (they have no knowledge of, they do not understand) of the substantial economy-wide stabilizing effect of financial capital maintenance in units of constant purchasing power IN TERMS OF A DAILY CPI under the UCPP paradigm despite what happened in Brazil from 1964 to 1994 and especially in 1994 (having been extensively reported in the media and in many books/academia) and elsewhere in Latin America during that time and afterwards.
What should happen at the forthcoming Conceptual Framework meeting if the IASB were to issue high quality IFRSs?
Measurement in the Conceptual Framework should be stated in terms of the two paradigms.
The IASB's habitual excuse that measurement in units of constant purchasing power MIGHT be dealt with IF the POSSIBLE FUTURE RESEARCH PROJECT on financial reporting in high inflationary economies MAY indicate a need to review (the completely useless) IAS 29 is not a reasonable reason to exclude dealing with measurement under the second paradigm (the units of constant purchasing power paradigm) used in IFRS when it is taken into account that the completely useless IAS 29 (which is intended to be implemented under the units of constant purchasing power paradigm, but fails completely) has been used over the last 25 years by thousand of companies in many countries and is now in use - again with absolutely no positive effect - in Venezuela and Belarus, for example.
The use of measurement in units of constant purchasing power as one of the measurement bases (the other two being HC and fair value as currently stated in IASB staff paper 10B) as provided for in the CF for use as part of HCA under the HC paradigm under which the stable measuring unit assumption is still implemented as the main underlying concept is NOT the same as measurement in units of constant purchasing power in terms of the DAILY CPI under the second Units of Constant Purchasing Power Paradigm under which the stable measuring unit assumption is NEVER implemented.
In my opinion the IASB continues to be irresponsible in its duties and functions on an international basis with regard to the urgently needed review of the completely useless IAS 29 to change it to REQUIRE the use of the Daily CPI instead of the current (25 year) practice that the monthly published CPI is used which is the single and only reason for IAS 29 being completely useless and ineffective today in Venezuela and Belarus exactly as it had no positive effect in Zimbabwe in the past.
In my opinion it would not be reasonable to restrict dealing with measurement in the CF to the three measurement bases in HCA under the HC paradigm. In my opinion it would be reasonable for the IASB to include measurement in units of constant purchasing power in terms of the Daily CPI under the Units of Constant Purchasing Power Paradigm under which the stable measuring unit assumption is never implemented as part of Measurement in the Conceptual Framework.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Least understood, but most powerful economic model of all time
The double entry accounting model is the least understood but most powerful as well as everlasting economic model of all time. It is so powerful, so complete, so indestructible; it will endure all eventualities.
Wolfgang Goethe, the German writer and statesman, described it in the 1750's as "one of the greatest achievements of the human mind". I agree 100% with him. There is no and never will be an economic model greater than the double entry accounting model.
Very few people, for example, understand why bitcoin is based on a public "ledger". The double entry accounting ledger being the central part of the double entry accounting model.
In my view we can easily solve a number of our global, fundamental economic problems with the double entry accounting model. Fundamental problems like, for example, monetary value destruction during inflation and hyperinflation; very destabilizing monetary creation via deflation; very destabilizing national currency differences, economic and financial instability, poverty, inequality, etc.
On the other hand: the most destructive economic assumption of all time is undoubtedly the stable measuring unit assumption: in principle, the very destructive, global, traditional, centuries old, generally accepted Historical Cost Accounting model: currently the worst possible accounting model of our time: an accounting model that has now overstayed its welcome: it was the only viable and easily understood accounting model during the last 100 years: now its time has passed. It has to be finally killed off as soon as possible. It is not required anymore. It served its purpose. It certainly is very backward to implement HCA today when the CPI is almost 100 years old and most countries already publish the all important Daily CPI that is the sine qua non of the new Units of Constant Purchasing Power economy.
As a Units of Constant Purchasing Power accountant I live in exciting times.
The flip side of the coin: Historical Cost Accountants live in the worst of times: the basic substance of their nominal historical cost world is being broken down at an accelerating rate. Fact: they do not even know it or understand that is happening: the HC lemming effect. They are too hard-wired in HCA. They are too hard-wired in believing the stable measuring unit assumption. To HC accountants money was, is and always will be perfectly stable at all rates of inflation from zero to 25.99%. How silly can you get!!
Fact: the HCA status quo will most probably continue for the next 200 years!
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wolfgang Goethe, the German writer and statesman, described it in the 1750's as "one of the greatest achievements of the human mind". I agree 100% with him. There is no and never will be an economic model greater than the double entry accounting model.
Very few people, for example, understand why bitcoin is based on a public "ledger". The double entry accounting ledger being the central part of the double entry accounting model.
In my view we can easily solve a number of our global, fundamental economic problems with the double entry accounting model. Fundamental problems like, for example, monetary value destruction during inflation and hyperinflation; very destabilizing monetary creation via deflation; very destabilizing national currency differences, economic and financial instability, poverty, inequality, etc.
On the other hand: the most destructive economic assumption of all time is undoubtedly the stable measuring unit assumption: in principle, the very destructive, global, traditional, centuries old, generally accepted Historical Cost Accounting model: currently the worst possible accounting model of our time: an accounting model that has now overstayed its welcome: it was the only viable and easily understood accounting model during the last 100 years: now its time has passed. It has to be finally killed off as soon as possible. It is not required anymore. It served its purpose. It certainly is very backward to implement HCA today when the CPI is almost 100 years old and most countries already publish the all important Daily CPI that is the sine qua non of the new Units of Constant Purchasing Power economy.
As a Units of Constant Purchasing Power accountant I live in exciting times.
The flip side of the coin: Historical Cost Accountants live in the worst of times: the basic substance of their nominal historical cost world is being broken down at an accelerating rate. Fact: they do not even know it or understand that is happening: the HC lemming effect. They are too hard-wired in HCA. They are too hard-wired in believing the stable measuring unit assumption. To HC accountants money was, is and always will be perfectly stable at all rates of inflation from zero to 25.99%. How silly can you get!!
Fact: the HCA status quo will most probably continue for the next 200 years!
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday, 30 September 2014
Money is not a store of value
The statement that "money is a store of value" is supposed to mean that money is a store of constant real value over time or a perfectly stable store of constant purchasing power over time.
However, the statement that "money is a store of value" is not entirely true and valid. In fact, it is a partly false, partly deceiving and partly misleading statement.
Money is not a store of perfectly stable real value during low and high inflation or hyperinflation.
The world money supply is mainly in a state of inflation.
Money is, on the other hand, a store of increasing real value during deflation. See the Japanese economy.
In principle, the generally accepted statement that "money is a store of value" is never completely true during inflation and deflation.
Why?
Because money is a decreasing store of real value during inflation and an increasing store of real value during deflation.
The CPI is not perfectly stable on a sustainable basis over time.
The longest period I have seen the CPI perfectly stable was during a period of two months. That certainly does not qualify as "perfectly sustainable over an indefinite period of time" or "perfectly stable over a sustainable period of time."
Money is only a perfect store of constant purchasing power (real value) over time when it is either inflation or deflation-indexed on at least a daily basis, i.e., when it is inflation or deflation-adjusted in terms of the change in the general price level - i.e., at least daily in terms of the Daily CPI.
Examples of money in a state of being "a store of real value" is when it is maintained in the form of government daily inflation-indexed bonds, e.g., US Treasury Inflation-Protected Securities (TIPS).
Money in the world economy is only a perfect store of constant purchasing power in the USD 3 trillion + maintained perfectly stable in real value in the global government daily inflation-indexed bond market plus the 25% + of the Chilean money supply that is inflation-indexed on a daily basis plus all mortgage bonds (monetary items) in Colombia which are inflation-adjusted on a daily basis in terms of their Daily Real Value Index.
Summary: Money is not a store of value.
Shares (a variable real value non-monetary item) are - generally - a store of increasing variable real non-monetary value over the long term.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
However, the statement that "money is a store of value" is not entirely true and valid. In fact, it is a partly false, partly deceiving and partly misleading statement.
Money is not a store of perfectly stable real value during low and high inflation or hyperinflation.
The world money supply is mainly in a state of inflation.
Money is, on the other hand, a store of increasing real value during deflation. See the Japanese economy.
In principle, the generally accepted statement that "money is a store of value" is never completely true during inflation and deflation.
Why?
Because money is a decreasing store of real value during inflation and an increasing store of real value during deflation.
The CPI is not perfectly stable on a sustainable basis over time.
The longest period I have seen the CPI perfectly stable was during a period of two months. That certainly does not qualify as "perfectly sustainable over an indefinite period of time" or "perfectly stable over a sustainable period of time."
Money is only a perfect store of constant purchasing power (real value) over time when it is either inflation or deflation-indexed on at least a daily basis, i.e., when it is inflation or deflation-adjusted in terms of the change in the general price level - i.e., at least daily in terms of the Daily CPI.
Examples of money in a state of being "a store of real value" is when it is maintained in the form of government daily inflation-indexed bonds, e.g., US Treasury Inflation-Protected Securities (TIPS).
Money in the world economy is only a perfect store of constant purchasing power in the USD 3 trillion + maintained perfectly stable in real value in the global government daily inflation-indexed bond market plus the 25% + of the Chilean money supply that is inflation-indexed on a daily basis plus all mortgage bonds (monetary items) in Colombia which are inflation-adjusted on a daily basis in terms of their Daily Real Value Index.
Summary: Money is not a store of value.
Shares (a variable real value non-monetary item) are - generally - a store of increasing variable real non-monetary value over the long term.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday, 17 September 2014
Venezuela says: Help! The IASB says: Sorry. It's too much work for us!
An entity in Venezuela has asked the IASB for help.
The IASB, however, has again, in typical IASB fashion, refused to do anything about the effect of financial reporting in Venezuela.
The reasons for this are two-fold:
1. According to the IASB "financial reporting has no effect on the economy".
2. The IASB refuses to change IAS 29 Financial Reporting in Hyperinflationary Economies to require the implementation of the Daily CPI instead of the monthly published CPI as currently required in IAS 29.
The reason for this is the fact that the IASB does not understand the stabilizing effect of implementing Capital Maintenance in Units of Constant Purchasing Power (which is required in IAS 29) in terms of the Daily CPI.
Nicolaas Smith
See the copy of the IASB Staff paper below:
"IASB Agenda ref 12B STAFF PAPER 18–24 September 2014 IASB Meeting
Project IFRS Interpretations Committee issues
Paper topic IAS 21—Foreign exchange restrictions and hyperinflation
CONTACT(S) Hannah King hking@ifrs.org +44 (0) 20 7246 6961
This paper has been prepared by the staff of the IFRS Foundation for discussion at a public meeting of the IASB and does not represent the views of the IASB or any individual member of the IASB. Comments on the application of IFRSs do not purport to set out acceptable or unacceptable application of IFRSs. Technical decisions are made in public and reported in IASB Update. The IASB is the independent standard-setting body of the IFRS Foundation, a not-for-profit corporation promoting the adoption of IFRSs. For more information visit www.ifrs.org
Page 1 of 8
Introduction
1. The IFRS Interpretations Committee (the Interpretations Committee) received a submission requesting guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela when applying IAS 21 The Effects of Changes in Foreign Exchange Rates. The issue arises because of strict foreign exchange controls over the exchange of the Venezuelan Bolivar Fuerte (VEF) combined with Venezuela’s hyperinflationary economy.
2. The Interpretations Committee discussed the issue at its meeting in July 20141. It tentatively decided not to take the issue onto its agenda, as noted in the IFRIC Update reproduced in Appendix A. In addition, after acknowledging the concerns raised by the submitter, the Interpretations Committee specifically asked that the IASB be made aware of the issue.
3. Accordingly, this paper summarises the issue and tentative conclusions reached by the Interpretations Committee, as follows:
(a) Background, which summarises the foreign exchange restrictions in Venezuela, the submission and primary accounting issues identified.
(b) Tentative conclusions reached by the Interpretations Committee.
1 See http://www.ifrs.org/Meetings/MeetingDocs/Interpretations%20Committee/2014/July/AP16%20-
%20IAS%2021%20Foreign%20exchange%20restrictions%20and%20hyperinflation.pdf for agenda paper 16 of the July 2014 meeting of the Interpretations Committee.
Agenda ref 12B
IAS 21 │Foreign exchange restrictions and hyperinflation
Page 2 of 8
(c) Next steps.
4. This paper is for information only.
Background
Foreign exchange controls in Venezuela
5. There are strict Venezuelan government controls over exchanging VEF. The exact nature of these controls has changed, and continues to change, over time. We understand that there are currently three official exchange mechanisms in Venezuela. Each of these has different exchange rates, available to different entities for different types of transactions depending upon specific circumstances. Furthermore, there are restrictions on the amount of currency that can be exchanged though these exchange mechanisms.
6. Entities whose functional currency is that of a hyperinflationary economy are required under IAS 29 Financial Reporting in Hyperinflationary Economies to state their financial statements in terms of the measuring unit current at the end of the reporting period by applying a general price index. Groups consolidating such subsidiaries translate these inflation-adjusted subsidiary financial statements into the group’s presentation currency (for example US$) at the closing exchange rate
in accordance with IAS 21.
Summary of submission
7. The submitter has asked the Interpretations Committee to review the current approach for translating and consolidating foreign operations in Venezuela.
8. Below is a summary of the submitter’s observations based on the submission and our discussions with the submitter:
(a) Prevalent practice is to translate foreign operations into the group’s presentation currency using official exchange rates.
(b) For operations with a VEF functional currency the official CENCOX fixed exchange rate has typically been used as the closing rate when applying IAS 21 on the basis that it was the only official exchange mechanism available to a group.
(c) In the submitter’s experience, such a rate is only available for a relatively limited amount of currency in practice, with the result that a Venezuelan subsidiary may have more cash in VEF than it is able to convert into US$ (and hence repatriate) using the official exchange rate mechanisms.
(d) Because of foreign exchange controls, the official exchange rates for VEF (in particular the fixed CENCOX and variable SICAD I rates) do not, according to the submitter, reflect the local rate of hyperinflation. Hence, in the submitter’s view, a substantial devaluation of the VEF from the official fixed exchange rate in the future is almost certain.
9. As a consequence, the submitter is concerned that, from an economic perspective, the financial statements of group accounts appear not to appropriately reflect:
(a) the Venezuelan operation’s assets and liabilities (including local cash held in VEF);
(b) income from the Venezuelan operations (which is further compounded by the IAS 29 inflation adjustments); and
(c) foreign exchange losses (or gains) in profit or loss arising on US$ (or other non VEF) denominated balances in Venezuela.
Primary accounting issues
10. On the basis of the concerns raised, the accounting issue primarily stems from the closing rate used on the application of IAS 21 on translation of the net investment in the foreign operation, because there are (i) several different exchange rates and (ii) control restrictions over both the exchange rate and the amount of local cash that can be exchanged.
11. The primary issues identified by the Interpretations Committee are therefore:
(a) Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
(b) Issue 2: what rate should be used when there is a longer-term lack of exchangeability?
Tentative conclusions reached by the Interpretations Committee
12. When assessing the accounting issues identified above, the Interpretations Committee considered:
(a) the results of outreach from securities regulators, members of the International Forum of Accounting Standard Setters and the IFRS technical teams of the international networks of large accounting firms; and
(b) the agenda criteria of the Interpretations Committee described in paragraphs 5.16–5.17 of the IFRS Foundation Due Process Handbook.
Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
13. Issue 1 arises because there is no specific guidance in IAS 21 regarding which exchange rate, out of multiple rates, to select for the purposes of translating an entity’s net investment in the foreign operation. However paragraph 26 of IAS 21 does give guidance on which of multiple exchange rates to use when reporting foreign currency transactions in the functional currency in the local entity’s
financial statements.
14. The Interpretations Committee tentatively decided not to take Issue 1 onto its agenda, as outreach indicated little diversity in practice regarding the principle to use when determining which of multiple rates should be used to translate an entity’s net investment in a foreign operation. It observed that general practice is to use the exchange rate at which the entity will be able to remit funds from its foreign operations (ie the rate at which future cash flows could be settled when viewing the net investment as a whole), which is consistent with the principle in paragraph 26 of IAS 21.
Issue 2: what rate should be used when there is a longer-term lack of exchangeability?
15. Issue 2 arises because of the longer-term lack of exchangeability of the local currency, which the Interpretations Committee observed to be:
(a) widespread;
(b) leading to some diversity in practice; and
(c) not addressed by the requirements in IAS 21, so that it is not entirely clear how IAS 21 applies in such circumstances.
16. Outreach indicated that the concerns raised due to foreign exchange restrictions faced by foreign operations in Venezuela are valid. However, the Interpretations Committee noted that Issue 2 could not be addressed through an interpretation of the Standard or an Annual Improvement, as to do so would require an exception to the definition of ‘closing rate’ in IAS 21.
17. The Interpretations Committee considered whether to take the issue onto its agenda with a view to developing a recommendation for an amendment to IAS 21 for the IASB’s consideration, after consulting the IASB. Staff highlighted that developing such a solution might be difficult in practice because it would require a new or different principle from that currently in IAS 21 and could lead to
questions about the basis for all foreign currency translations under IAS 21. Furthermore, this issue cuts across other issues that have been raised to the IASB with respect to IAS 21, which potentially could impact the scope of any proposed solution to the issues raised.
18. Consequently, the Interpretations Committee tentatively decided not to take the issue onto its agenda, but to highlight the issue to the IASB. The IASB’s current agenda includes research projects on foreign currency translation and inflation, with the aim of considering whether there are issues that the IASB should address and, if so, what the scope of such a project should be. Therefore this issue might be more appropriately considered as part of that assessment.
19. The Interpretations Committee also decided to highlight in its tentative agenda decision that some of the existing disclosure requirements in IFRSs apply in such circumstances, as noted in the extract from the IFRIC Update for July 2014 in Appendix A.
Next steps
20. The Interpretations Committee will consider any comments received on its tentative agenda decision at its meeting in November 2014.
21. In addition, a preliminary paper on the IASB’s research project on foreign currency translation will be discussed by the IASB by the end of 2014.
Appendix A—Extract from IFRIC Update for July 2014
Interpretations Committee tentative agenda decisions
IAS 21 The Effect of Changes in Foreign Exchange Rates—Foreign exchange
restrictions and hyperinflation (Agenda Paper 16)
The Interpretations Committee received a request for guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela. The issue arises because of strict foreign exchange controls in Venezuela. This includes the existence of several official exchange rates that may not fully reflect the local rate of hyperinflation and of restrictions over the amount of local currency that can be exchanged. Concerns were raised that using an official exchange rate to translate an entity’s net investment in a foreign operation in Venezuela appeared not to appropriately reflect the financial performance and position of the foreign operation in the group’s consolidated financial statements.
The Interpretations Committee identified two primary accounting issues:
(a) which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
(b) what rate should be used when there is a longer-term lack of exchangeability?
With respect to the first issue, the Interpretations Committee observed very little diversity in practice regarding the principle to use when determining which of multiple rates should be used to translate an entity’s net investment in a foreign operation. The Interpretations Committee noted that predominant practice is to apply by extension the principle in paragraph 26 of IAS 21, which gives guidance on which exchange rate to use when reporting foreign currency transactions in the functional currency when several exchange rates are available.
Hence, despite the widespread applicability, the Interpretations Committee [decided] not to take the first issue onto its agenda.
With respect to the second issue, the Interpretations Committee observed that this issue is widespread and has led to some diversity in practice. A longer-term lack of exchangeability is not addressed by the requirements in IAS 21, and so it is not entirely clear how IAS 21 applies in such situations. However, the Interpretations Committee thought that addressing this issue is a broader-scope project than it could address (because of related cross-cutting issues). Accordingly the Interpretations Committee [decided] not to take this issue onto its agenda.
However, the Interpretations Committee noted that several existing disclosure requirements in IFRS would apply when the impact of foreign exchange controls is material to understanding the entity’s financial performance and position.
Relevant disclosure requirements in IFRS include:
(a) disclosure of significant accounting policies and significant judgements in applying those policies (paragraphs 117–124 of IAS 1);
(b) disclosure of sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, which may include a sensitivity analysis (paragraphs 125–133 of IAS 1); and
(c) disclosure about the nature and extent of significant restrictions on an entity’s ability to access or use assets and settle the liabilities of the group, or its joint ventures or associates (paragraphs 10, 13, 20 and 22 of IFRS 12)."
Copyright 2014 IFRS Foundation
The IFRS Foundation has copyright over the above IASB Staff paper.
The IASB, however, has again, in typical IASB fashion, refused to do anything about the effect of financial reporting in Venezuela.
The reasons for this are two-fold:
1. According to the IASB "financial reporting has no effect on the economy".
2. The IASB refuses to change IAS 29 Financial Reporting in Hyperinflationary Economies to require the implementation of the Daily CPI instead of the monthly published CPI as currently required in IAS 29.
The reason for this is the fact that the IASB does not understand the stabilizing effect of implementing Capital Maintenance in Units of Constant Purchasing Power (which is required in IAS 29) in terms of the Daily CPI.
Nicolaas Smith
See the copy of the IASB Staff paper below:
"IASB Agenda ref 12B STAFF PAPER 18–24 September 2014 IASB Meeting
Project IFRS Interpretations Committee issues
Paper topic IAS 21—Foreign exchange restrictions and hyperinflation
CONTACT(S) Hannah King hking@ifrs.org +44 (0) 20 7246 6961
This paper has been prepared by the staff of the IFRS Foundation for discussion at a public meeting of the IASB and does not represent the views of the IASB or any individual member of the IASB. Comments on the application of IFRSs do not purport to set out acceptable or unacceptable application of IFRSs. Technical decisions are made in public and reported in IASB Update. The IASB is the independent standard-setting body of the IFRS Foundation, a not-for-profit corporation promoting the adoption of IFRSs. For more information visit www.ifrs.org
Page 1 of 8
Introduction
1. The IFRS Interpretations Committee (the Interpretations Committee) received a submission requesting guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela when applying IAS 21 The Effects of Changes in Foreign Exchange Rates. The issue arises because of strict foreign exchange controls over the exchange of the Venezuelan Bolivar Fuerte (VEF) combined with Venezuela’s hyperinflationary economy.
2. The Interpretations Committee discussed the issue at its meeting in July 20141. It tentatively decided not to take the issue onto its agenda, as noted in the IFRIC Update reproduced in Appendix A. In addition, after acknowledging the concerns raised by the submitter, the Interpretations Committee specifically asked that the IASB be made aware of the issue.
3. Accordingly, this paper summarises the issue and tentative conclusions reached by the Interpretations Committee, as follows:
(a) Background, which summarises the foreign exchange restrictions in Venezuela, the submission and primary accounting issues identified.
(b) Tentative conclusions reached by the Interpretations Committee.
1 See http://www.ifrs.org/Meetings/MeetingDocs/Interpretations%20Committee/2014/July/AP16%20-
%20IAS%2021%20Foreign%20exchange%20restrictions%20and%20hyperinflation.pdf for agenda paper 16 of the July 2014 meeting of the Interpretations Committee.
Agenda ref 12B
IAS 21 │Foreign exchange restrictions and hyperinflation
Page 2 of 8
(c) Next steps.
4. This paper is for information only.
Background
Foreign exchange controls in Venezuela
5. There are strict Venezuelan government controls over exchanging VEF. The exact nature of these controls has changed, and continues to change, over time. We understand that there are currently three official exchange mechanisms in Venezuela. Each of these has different exchange rates, available to different entities for different types of transactions depending upon specific circumstances. Furthermore, there are restrictions on the amount of currency that can be exchanged though these exchange mechanisms.
6. Entities whose functional currency is that of a hyperinflationary economy are required under IAS 29 Financial Reporting in Hyperinflationary Economies to state their financial statements in terms of the measuring unit current at the end of the reporting period by applying a general price index. Groups consolidating such subsidiaries translate these inflation-adjusted subsidiary financial statements into the group’s presentation currency (for example US$) at the closing exchange rate
in accordance with IAS 21.
Summary of submission
7. The submitter has asked the Interpretations Committee to review the current approach for translating and consolidating foreign operations in Venezuela.
8. Below is a summary of the submitter’s observations based on the submission and our discussions with the submitter:
(a) Prevalent practice is to translate foreign operations into the group’s presentation currency using official exchange rates.
(b) For operations with a VEF functional currency the official CENCOX fixed exchange rate has typically been used as the closing rate when applying IAS 21 on the basis that it was the only official exchange mechanism available to a group.
(c) In the submitter’s experience, such a rate is only available for a relatively limited amount of currency in practice, with the result that a Venezuelan subsidiary may have more cash in VEF than it is able to convert into US$ (and hence repatriate) using the official exchange rate mechanisms.
(d) Because of foreign exchange controls, the official exchange rates for VEF (in particular the fixed CENCOX and variable SICAD I rates) do not, according to the submitter, reflect the local rate of hyperinflation. Hence, in the submitter’s view, a substantial devaluation of the VEF from the official fixed exchange rate in the future is almost certain.
9. As a consequence, the submitter is concerned that, from an economic perspective, the financial statements of group accounts appear not to appropriately reflect:
(a) the Venezuelan operation’s assets and liabilities (including local cash held in VEF);
(b) income from the Venezuelan operations (which is further compounded by the IAS 29 inflation adjustments); and
(c) foreign exchange losses (or gains) in profit or loss arising on US$ (or other non VEF) denominated balances in Venezuela.
Primary accounting issues
10. On the basis of the concerns raised, the accounting issue primarily stems from the closing rate used on the application of IAS 21 on translation of the net investment in the foreign operation, because there are (i) several different exchange rates and (ii) control restrictions over both the exchange rate and the amount of local cash that can be exchanged.
11. The primary issues identified by the Interpretations Committee are therefore:
(a) Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
(b) Issue 2: what rate should be used when there is a longer-term lack of exchangeability?
Tentative conclusions reached by the Interpretations Committee
12. When assessing the accounting issues identified above, the Interpretations Committee considered:
(a) the results of outreach from securities regulators, members of the International Forum of Accounting Standard Setters and the IFRS technical teams of the international networks of large accounting firms; and
(b) the agenda criteria of the Interpretations Committee described in paragraphs 5.16–5.17 of the IFRS Foundation Due Process Handbook.
Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
13. Issue 1 arises because there is no specific guidance in IAS 21 regarding which exchange rate, out of multiple rates, to select for the purposes of translating an entity’s net investment in the foreign operation. However paragraph 26 of IAS 21 does give guidance on which of multiple exchange rates to use when reporting foreign currency transactions in the functional currency in the local entity’s
financial statements.
14. The Interpretations Committee tentatively decided not to take Issue 1 onto its agenda, as outreach indicated little diversity in practice regarding the principle to use when determining which of multiple rates should be used to translate an entity’s net investment in a foreign operation. It observed that general practice is to use the exchange rate at which the entity will be able to remit funds from its foreign operations (ie the rate at which future cash flows could be settled when viewing the net investment as a whole), which is consistent with the principle in paragraph 26 of IAS 21.
Issue 2: what rate should be used when there is a longer-term lack of exchangeability?
15. Issue 2 arises because of the longer-term lack of exchangeability of the local currency, which the Interpretations Committee observed to be:
(a) widespread;
(b) leading to some diversity in practice; and
(c) not addressed by the requirements in IAS 21, so that it is not entirely clear how IAS 21 applies in such circumstances.
16. Outreach indicated that the concerns raised due to foreign exchange restrictions faced by foreign operations in Venezuela are valid. However, the Interpretations Committee noted that Issue 2 could not be addressed through an interpretation of the Standard or an Annual Improvement, as to do so would require an exception to the definition of ‘closing rate’ in IAS 21.
17. The Interpretations Committee considered whether to take the issue onto its agenda with a view to developing a recommendation for an amendment to IAS 21 for the IASB’s consideration, after consulting the IASB. Staff highlighted that developing such a solution might be difficult in practice because it would require a new or different principle from that currently in IAS 21 and could lead to
questions about the basis for all foreign currency translations under IAS 21. Furthermore, this issue cuts across other issues that have been raised to the IASB with respect to IAS 21, which potentially could impact the scope of any proposed solution to the issues raised.
18. Consequently, the Interpretations Committee tentatively decided not to take the issue onto its agenda, but to highlight the issue to the IASB. The IASB’s current agenda includes research projects on foreign currency translation and inflation, with the aim of considering whether there are issues that the IASB should address and, if so, what the scope of such a project should be. Therefore this issue might be more appropriately considered as part of that assessment.
19. The Interpretations Committee also decided to highlight in its tentative agenda decision that some of the existing disclosure requirements in IFRSs apply in such circumstances, as noted in the extract from the IFRIC Update for July 2014 in Appendix A.
Next steps
20. The Interpretations Committee will consider any comments received on its tentative agenda decision at its meeting in November 2014.
21. In addition, a preliminary paper on the IASB’s research project on foreign currency translation will be discussed by the IASB by the end of 2014.
Appendix A—Extract from IFRIC Update for July 2014
Interpretations Committee tentative agenda decisions
IAS 21 The Effect of Changes in Foreign Exchange Rates—Foreign exchange
restrictions and hyperinflation (Agenda Paper 16)
The Interpretations Committee received a request for guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela. The issue arises because of strict foreign exchange controls in Venezuela. This includes the existence of several official exchange rates that may not fully reflect the local rate of hyperinflation and of restrictions over the amount of local currency that can be exchanged. Concerns were raised that using an official exchange rate to translate an entity’s net investment in a foreign operation in Venezuela appeared not to appropriately reflect the financial performance and position of the foreign operation in the group’s consolidated financial statements.
The Interpretations Committee identified two primary accounting issues:
(a) which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
(b) what rate should be used when there is a longer-term lack of exchangeability?
With respect to the first issue, the Interpretations Committee observed very little diversity in practice regarding the principle to use when determining which of multiple rates should be used to translate an entity’s net investment in a foreign operation. The Interpretations Committee noted that predominant practice is to apply by extension the principle in paragraph 26 of IAS 21, which gives guidance on which exchange rate to use when reporting foreign currency transactions in the functional currency when several exchange rates are available.
Hence, despite the widespread applicability, the Interpretations Committee [decided] not to take the first issue onto its agenda.
With respect to the second issue, the Interpretations Committee observed that this issue is widespread and has led to some diversity in practice. A longer-term lack of exchangeability is not addressed by the requirements in IAS 21, and so it is not entirely clear how IAS 21 applies in such situations. However, the Interpretations Committee thought that addressing this issue is a broader-scope project than it could address (because of related cross-cutting issues). Accordingly the Interpretations Committee [decided] not to take this issue onto its agenda.
However, the Interpretations Committee noted that several existing disclosure requirements in IFRS would apply when the impact of foreign exchange controls is material to understanding the entity’s financial performance and position.
Relevant disclosure requirements in IFRS include:
(a) disclosure of significant accounting policies and significant judgements in applying those policies (paragraphs 117–124 of IAS 1);
(b) disclosure of sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, which may include a sensitivity analysis (paragraphs 125–133 of IAS 1); and
(c) disclosure about the nature and extent of significant restrictions on an entity’s ability to access or use assets and settle the liabilities of the group, or its joint ventures or associates (paragraphs 10, 13, 20 and 22 of IFRS 12)."
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