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Measurement in units of constant purchasing power excluded from IASB and FASB measurement bases list

July 31, 2012 in Uncategorized

Measurement in units of constant purchasing power excluded from IASB and FASB measurement bases list

The FASB and IASB spent several years discussing measurement around the world during the Measurement Chapter of their Joint Conceptual Framework Project.

After several years of discussions around the world they published the following joint list of possible basic measurement bases:

MeasurementBases

“The Boards agreed to the following set of nine measurement basis candidates:

1. Past entry price

2. Past exit price

3. Modified past amount

4. Current entry price

5. Current exit price

6. Current equilibrium price

7. Value in use

8. Future entry price

9. Future exit price.”

It can be seen from the above FASB and IASB list that neither

(i)                 measurement (of monetary items) in terms of the Daily Consumer Price Index nor

(ii)                measurement in units of constant purchasing power

are considered by both the FASB and the IASB as possible basic measurement bases to be included on their list.

Measurement in units of constant purchasing power is thus currently (2012) excluded as a possible basic measurement basis by both the FASB and IASB.

It is to be noted that financial capital maintenance in units of constant purchasing power as an alternative to HCA (see above) automatically maintains the existing constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value – ceteris paribus – at all levels of inflation and deflation.

The omission of measurement in units of constant purchasing power from the FASB´s and IASB´s joint list of possible basic measurement bases is thus noted with concern. It is difficult to come up with a plausible explanation why both the FASB and the IASB exclude measurement in units of constant purchasing power as a possible basic measurement basis.

The fact that financial capital maintenance in units of constant purchasing power is authorized in IFRS in the Framework since 1989 would normally result in it automatically being included in a list of possible basic measurement bases. However, after several years of international discussion both the FASB and IASB do not regard measurement in units of constant purchasing power as a possible basic measurement basis.

A healthy and robust discussion and publication of different viewpoints and research are good for the ongoing development of the understanding of the basic concepts of accounting / financial reporting at the FASB, IASB and elsewhere.

However, excluding measurement in units of constant purhasing power from the current (2012) list of possible basic measurement bases is not compatible with the development of high quality international accounting standards.

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Nicolaas Smith

Copyright (c) 2012 Nicolaas Johannes Smith. All rights reserved. No reproduction without permission.

FORGET INFLATION!?

July 30, 2012 in Uncategorized

FORGET INFLATION!?

MONETARY ITEMS

Definition

Monetary items are units of local currency held and items with an underlying monetary nature being substitutes of the former.

MEASUREMENT BASIS

The measurement basis used to measure monetary items over time under financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Conceptual Framework (2010), Par. 4.59 (a) is the following:

Measurement in terms of the Daily Consumer Price Index.

This requires the calculation and accounting of net monetary losses and gains only while third party entities you deal with still implement Historical Cost Accounting and apply the stable measuring unit assumption.

ADVANTAGE OF DAILY INFLATION-ADJUSTMENT OF ALL MONETARY ITEMS

Inflation-adjustment on a daily basis of the entire money supply under full co-ordination will eliminate the entire cost of inflation (not actual inflation) from the entire economy. In practice (maybe in 100 years´ time) this will result in no-one being concerned about the actual rate of inflation since monetary item balances will maintain their real values over time.

Chile currently (2012) inflation-adjusts 20 to 25 per cent of its entire broad M3 money supply on a daily basis in terms of their Unidad de Fomento which is a monetized daily indexed unit of account used in the country since 1967 according to the Central Bank of Chile.

At least USD 3 trillion is currently (2012) being inflation-adjusted on a daily basis in terms of country-specific Daily Consumer Price Indices in the world economy. USD 798 billion is today (29-07-2012) being inflation-adjusted on a daily basis in terms of the US Daily CPI in the US economy.

Yes, under complete inflation-adjustment of the entire money supply with complete co-ordination (everyone doing it) we can forget about inflation. Unfortunately that may only happen in 100 years´ time.

We are still a long way away from that. However, I have no doubt that it will happen one day.

We had a form of it in Angola in 1996 in Auto-Sueco (Angola), the company where I worked. We had it during hyperinflation of 3200 per cent per annum because I implemented accounting-dollarization as from 1 January 1996 in the company. We updated all our trade debtors, new car, new truck, spare parts prices and workshop service rates daily in term of the daily US Dollar black market or parallel rate.

We stopped our fear of hyperinflation with daily updating of all non-monetary items.

Low inflation countries can do the same with daily inflation-adjusting the entire money supply and the implementation of financial capital maintenance in units of constant purchasing power in terms of a Daily CPI as authorized in IFRS.

This will take a very long time to come about, but I am sure we will all eventually do it.

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Nicolaas Smith Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction

IASB unanimously support a research programme on financial reporting in high-inflation and hyperinflationary economies

July 26, 2012 in Uncategorized

IASB unanimously support a research programme on financial reporting in high-inflation and hyperinflationary economies

 

At its May 2012 meeting the International Accounting Standards Board unanimously supported initiating a research programme focusing initially on, amongst other items, financial reporting in high-inflation and hyperinflationary economies.

 

This is an important decision as far as financial capital maintenance in units of constant purchasing power (Constant Item Purchasing Power Accounting which is implemented at all levels of inflation and deflation) is concerned.

 

In the 2011 Agenda Consultation comment letter request document the IASB stated the following:

 

‘Inflation accounting (revisions to IAS 29 Financial Reporting in Hyperinflationary Economies)

 

IAS 29 provides guidance on the preparation of financial statements in a functional currency that is suffering from hyperinflation. Concerns have been raised from some countries whose economies suffer from high inflation, but which are not hyperinflationary. Those concerns are that the effects of high inflation on an entity’s financial results are not adequately reflected in IFRS financial statements. A research paper was prepared on this issue and submitted to the IASB by the Federación Argentina de Consejos Profesionales de Ciencias Económicas. A future project could use this research paper to consider revisions to IAS 29 to include guidance for entities whose functional currency is that of an economy subject to high inflation, but not to hyperinflation.’

 

The Federación Argentina de Consejos Profesionales de Ciencias Económicas submitted a research report to the IASB in 2010 entitled IFRS ‘X’ INFLATION. The IASB made the FACPCE´s reseach report available to me on my request.

 

In an unsolicited comment letter in Jan 2012 I pointed out to the IASB that inflation has no effect on the real value of non-monetary items and I comprehensively amended the FACPCE´s proposal to IFRS ‘X’ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.

 

Both IFRS X’ INFLATION and the amended version IFRS ‘X’ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER are available in full in the ebook CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS here.

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Nicolaas Smith

 

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Acknowledgements

July 24, 2012 in Uncategorized

I wish to thank the following people and entities for helping me in this project either directly or indirectly:

David Mosso, Vice Chairman (retired) at the Financial Accounting Standards Board (1978-1987) and Chairman (retired) at the US Federal Accounting Standards Advisory Board (1997-2006) for reading an abstract of my work and for his comment: ‘Good work.’

Prof. Robert Shiller from Yale University for his clarifications to me regarding the formula for calculating the Unidad de Fomento in Chile.

Prof. Rachel Baskerville from The School of Accounting and Commercial Law at the Victoria University in Wellington, New Zealand for taking the time in 2010 to confirm the authorization of a third concept of capital maintenance in IFRS with her colleague Prof. Kevin Simpkins, the Chairman of the New Zealand Accounting Standards Review Board and for her statement: ‘‘There is much to be gained from moving away from reporting on the basis Financial Capital Maintenance in Nominal Monetary Units.’

Sir David Tweedie, Ex-Chairman of the International Accounting Standards Board, and Prof. Geoffrey Whittington, ex-member of the IASB, for their valued input in 2005 regarding that year’s version of the manuscript.

The South African Institute of Chartered Accountants for their valued exchange of ideas regarding the project in 2008.

Prof. Geoff Everingham, Emeritus Professor of Accounting at the University of Cape Town, for his valued exchange of ideas regarding the project in 2008.

Without SAICA´s and Prof. Everingham’s input in 2008 the project would not be where it is today.

Prof. Steve Hanke from the Cato Institute and JohnHopkins University for his detailed assistance regarding currency boards to me prior to 2005 and his assistance with the definition of severe hyperinflation more recently.

Dr Gustavo Franco, Ex-Governor of the Banco Central do Brazil for his contribution to confirm that trade debtors and trade creditors are non-monetary items which have to be measured in units of constant purchasing power during inflation and hyperinflation.

Ron Lott, FASB Research Director and Kevin McBeth, FASB Project Manager for clearing up my doubts regarding the treatment of capital maintenance during the IASB and FASB´s Joint Conceptual Framework Project.

Dr Cemal KUCUKSOZEN, the Ex-Head of the Accounting Standards Department at the Capital Markets Board of Turkey in Ankara, for reading the 2005 version of the manuscript and for his comments including: ‘Theoretically, I totally agree with you. But, as you know, there is a trend towards acceptance of International Accounting Standards and IFRS issued by the IASB all over the world. In this regard, we can change over to Real Value Accounting when there is a change in IAS / IFRS toward Real Value Accounting or there is a trend toward Real Value Accounting all over the world.’ Constant Item Purchasing Power Accounting was called Real Value Accounting in 2005.

Prof. Dr Aylin POROY ARSOY from the Uludag University in Turkey for her information regarding her article where she and Prof. Dr Umit GUCENME state in 2005 that inflation has no effect on the real value of non-monetary items.

Dr Fermín del Valle, Chairman of the Special Commission created by the Federación Argentina de Consejos Profesionales de Ciencias Económicas (FACPCE) in 2009, for making FACPCE´s 2010 research paper to the IASB regarding the replacement of IAS 29 available to me in 2012.

Prof. Stephen Zeff from Rice University for his detailed assistance with inflation accounting to me in 2008.

The Canadian Institute of Chartered Accountants for providing copies of IAS 6 and IAS 15.

April Pitman, Technical Manager at the IASB for liaising with FACPCE regarding my access to their 2010 research paper.

Graham Terry, Vice President at The South African Institute of Chartered Accountants for his assistance in getting my article Financial Statements, Inflation & The Audit Report published in Accounting SA, SAICA´s accounting journal, in 2007.

Riana Julies, editor at Accounting SA, SAICA´s accounting journal for publishing my article Financial Statements, Inflation & the Audit Report in 2007 after I initially stated that I doubted very much that it would be published.

Prof. Ignacio Rodríguez from the Escuela de Administración, Pontificia Universidad Católica de Chile for clarifying the use of the Unidad de Fomento in Chile to me in 2011.

Prof. Ignacio Velez-Pareja from the Universidad Tecnologica de Bolivar, Department of Finance and International Business in Colombia for his extensive discussions with me in 2009 regarding the effect of inflation.

Robert Burgess, Resident IMF Representative in South Africa in 2007 and Norbert Funke from the IMF for their assistance in dealing with my questions regarding stabilization programs in high inflation situations during Zimbabwe’s hyperinflation.

Miguel Octavio, the owner of the Venezuelan blog The Devil’s Excrement and the commentators on his blog for sharing their experience of hyperinflation under President Hugo Chávez in Venezuela.

Banco Central de Chile for supplying me with detail of the extent of daily inflation-adjustment of the money supply in Chile.

Banco Central do Brasil for supplying me with detail regarding daily indexing of non-monetary items during 30 years of hyperinflation in Brazil.

Statistics South Africa for clarifications to me regarding the CPI in South Africa.

Motley Fool, the owner of the Fool’s Paradise blog for bringing the Unidad de Fomento to my attention in 2011.

Newzimbabwe.com Forum members for sharing with me the daily developments during the last two years of Zimbabwe’s period of hyperinflation under President Robert Mugabe and Gideon Gono, governor of the Reserve Bank of Zimbabwe.

Terry Clague, Publisher for Business, Management & Accounting books at Routledge Publishers for his assistance in my attempt to get published and his comment: ‘The quality of the book is not in question.’

Jonathan Norman, Publisher at Gower Publishing for his role in my attempt to get published and his comment: ‘You make a convincing case for the book.’

Juta Academic Publishers in Cape Town for offering me a publishing contract in 2005. Unfortunately we could not agree on terms at the time.

Harriet, my daughter, for her enduring support for the project.

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Copyright (c) 2012 Nicolaas Smith All rights reserved. No reproduction without permission.