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DEFINITION OF FINANCIAL CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER

September 28, 2012 in Uncategorized

DEFINITION OF FINANCIAL CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER

DEFINITION OF FINANCIAL CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER
Financial capital maintenance in units of constant purchasing power is the automatic maintenance of the real value (constant purchasing power) of capital (equity), based on the principle that the real value (constant purchasing power) of equity is always equal to the real value of net assets for an indefinite period of time in all entities that at least break even in real value – all else being equal – at all levels of inflation and deflation, including during hyperinflation as authorised in current IFRS in The Conceptual Framework (2010), Par. 4.59 (a) in terms of a Daily Consumer Price Index or other daily index.
STABLE MEASURING UNIT ASSUMPTION NEVER IMPLEMENTED
The stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power.
Financial capital maintenance in units of constant purchasing power is not Constant Purchasing Power Accounting, i.e., it is not the restatement of non-monetary items in Historical Cost or Current Cost financial statements during hyperinflation.
Financial capital maintenance in units of constant purchasing power is the same as to CONSTANT ITEM PURCHASING POWER ACCOUNTING as described in the Kindle e-book CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS.  You can download a free Kindle Reading Application here.
VALUE DATE
The value date under financial capital maintenance in units of constant purchasing power is always the current date, i.e., today, namely today´s Daily CPI or today´s market price or other daily index. All items are always stated, viewed, accessed, printed, published and presented at today´s real value. Tomorrow all the prices are different.
They are valued of updated daily.
The Daily CPI is normally a one or two month lagged, daily interpolation of the monthly published CPI used in all countries issuing government capital inflation-indexed bonds to price these bonds on a daily basis.

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

Managerial Accounting under Financial Capital Maintenance in Units of Constant Purchasing Power

September 27, 2012 in Uncategorized

Financial capital maintenance in units of constant purchasing power is the same as Constant Item Purchasing Power Accounting at all levels of inflation and deflation, including during hyperinflation.

It is a departure from Historical Cost Accounting. The fundamental difference is that the stable measuring unit is never implemented under financial capital maintenance in units of constant purchasing power. Everything is done at real value: in Managerial Accounting too. I equate Managerial Accounting to Cost and Management Accounting.

Simply take any item in Managerial Accounting and update it to its current real value, i.e. it´s value today at today´s Daily CPI.
First you will have to find the Daily CPI for your country. If your government issues government capital inflation-indexed bonds, then you already have a Daily CPI in your country. The Daily CPI for your country is the one or two month lagged daily interpolated index that is used in your country to price your government inflation-indexed bonds on a daily basis: these bonds are bought and sold on a daily basis in your country´s capital markets.

If your country, like Venezuela, does not issue government inflation-indexed bonds, then you have to calculate the Daily CPI in your country from your country´s monthly published CPI using the formula for the calculation of the Unidad de Fomento in Chile as described by Prof. Robert Shiller. It is detailed as follows:

‘The formula for computation of the UF on day t is:

UFt = UF t–1 × (1+ π) 1/d

where π is the inflation rate for the calendar month preceding the calendar month in which t falls if t is between day ten and the last day of the month (and d is the number of days in the calendar month in which t falls), and π is the inflation rate for the second calendar month before the calendar month in which t falls if t is between day one and day nine of the month (and d is the number of days in the calendar month before the calendar month in which tfalls).’

Shiller 1998:3

The above formula applies to the UFin Chilewhere the CPI for the current calendar month used to be available on the tenth of the next calendar month. The general case formula for a UF–based Daily CPI is stated as follows:

On day t

DI t = DI t–1 X (1 + π)1/d

where π is the monthly inflation rate for the second calendar month before the calendar month in which tfalls if tis on or between day one and the day of publication of the CPI of the previous calendar month (and d is the number of days in the calendar month before the calendar month in which tfalls), and π is the inflation rate for the calendar month preceding the calendar month in which tfalls if tis on or between the day the CPI for the previous calendar month is published and the last day of the month (and d is the number of days in the calendar month in which tfalls).

You have to use the general case formula.
All you do then is multiply any item in your Managerial Accounts by the update factor you derive from dividing the value of your Daily CPI today, with the value of the Daily CPI on the date the item was purchased / came about / was contributed / etc. Then you have its real value today.

Since the Daily CPI changes daily, all your Managerial Accounts (and financial accounting) values change daily in terms of the daily changing Daily CPI.

There you have it.

Obviously you have to abandon the Historical Cost Accounting model and change over to the Financial Capital Maintenance in Units of Constant Purchasing Power model (which is the same as Constant Item Purchasing Power Accounting) in your financial accounting.
This is authorised at all levels of inflation and deflation, including during hyperinflation, in The Conceptual Framework (2010), Par. 4.59 (a).

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

Nicolaas Smith

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

Financial capital maintenance in units of constant purchasing power during hyperinflation is authorized in current IFRS

September 24, 2012 in Uncategorized

Financial capital maintenance in units of constant purchasing power during hyperinflation is authorized in current IFRS

Under IAS 29 Financial Reporting in Hyperinflationary Economies, financial capital maintenance in nominal monetary units is implemented; i.e., the Historical Cost Accounting model which includes the application of the stable measuring unit assumption during hyperinflation.

‘‘Inflation-adjusted financial statements are an extension to, not a departure from, historical cost accounting.’

PricewaterhouseCoopers, Understanding IAS 29, 2006, Page 5.

IAS 29 was implemented during the last six years of hyperinflation in Zimbabwe with noeffect at all.

IAS 29 is only required for the restatementof Historical Cost or Current Cost financial statements during hyperinflation.

IAS 29, Par. 8 states:

‘The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period.’

IAS 29 is thus not required when an entity implements financial capital maintenance in units of constant purchasing power during hyperinflation as authorized at all levels of inflation and deflation, including hyperinflation, in current IFRS in The Conceptual Framework (2010), Par. 4.59 (a) which states:

‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

Financial capital maintenance in units of constant purchasing powerduring hyperinflation is thus authorized in terms of currentIFRS.

The stable measuring unit assumption is, in principle, never implemented under financial capital maintenance in units of constant purchasing power. When it is implemented in practice, e.g., with the measurement of monetary items in nominal monetary units, then the net monetary loss or gain is calculated and accounted under financial capital maintenance in units of constant purchasing power accounting.

Financial capital maintenance in units of constant purchasing power is not Constant Purchasing Power Accounting, i.e., it is not the restatement of non-monetary items in Historical Cost or Current Cost financial statements.

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

 

Nicolaas Smith

 

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

Historical Cost financial statements technically always wrong

September 21, 2012 in Uncategorized

Historical Cost financial statements technically always wrong

All HC financial reports are out of date the day after the date of the financial report because the Daily Consumer Price Index is generally different every day. HC financial statements are generally never published on the date of the financial statements.

This fact is very easily understood during hyperinflation as stated by the South African Institute of Chartered Accountants in 2008. Under IAS 29, HC or CC financial statements are “restated” in terms of the monthly published CPI at the balance sheet date. The stable measuring unit assumption is applied during hyperinflation in terms of IAS 29. IAS 29 is an extension to not a departure from HCA as stated by PwC and required by IFRS. All financial reports prepared in terms of IAS 29 are out of date the day after the date of the financial reports.

Under the CIPP paradigm all finacial reports are updated daily to the current, i.e., today´s, date in terms of the Daily CPI or other daily index during low and high inflation and deflation and hard currency parallel rate or other daily index during hyperinflation.

Digital CIPP financial reports are never out of date: they are always updated to the current, i.e., today´s, daily index or rate.

All digital CIPP non-monetary accounts in the ledger are never out of date: they are always updated to the current, i.e., today´s, daily index or rate. They are updated daily. It is better not to print hardcopy CIPP financial reports since hard copy financial reports are out of date the day after the date of the financial report.

HC financial reports are generally never valid in terms of the current, i.e., today´s real values or Daily CPI. All HC financial reports are thus technically always wrong in that sense while all CIPP financial reports are technically always right in that sense.

All financial reports perpared in terms of IAS 29 have very little use at all as a result of always being very out of date.

Digital CIPPA financial reports are never out of date.

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

Nicolaas Smith

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

IAS 29 is not an alternative accounting model to HCA

September 19, 2012 in Uncategorized

IAS 29 is not an alternative accounting model to HCA

What capital maintenance concept is implemented under IAS 29?

Answer: Financial capital maintenance in nominal monetary units, i.e., Historical Cost Accounting – during hyperinflation!!

In my opinion HCA should be specifically banned by law during hyperinflation.

A certain multinational state in its 2011 annual report that it implements HCA for management control purposes -during hyperinflation!! The last thing you want to implement during hyperinflation is HCA. This multination thinks it is very useful to implement HCA during hyperinflation – for management control purposes!!

The lack of understanding of the real value eroding effect of the stable measuring unit assumption and the real value maintaining effect of financial capital maintenance in units of constant purchasing power is astonishing.

PricewaterhouseCoopers state in their publication: Understanding IAS 29(2006), Page 5:

‘Inflation-adjusted financial statements are an extension to, not a departure from, historical cost accounting.’

Both the IASB and PricewaterhouseCoopers thus promote and support HCA during hyperinflation. Unbelievable, but true.

Financial capital maintenance in nominal monetary units is a popular accounting fallacy not yet extinct: it is impossible to maintain the real value of capital constant with financial capital maintenance in nominal monetary units per se during inflation and deflation.

‘It is essential to the credibility of financial reporting to recognize that the recovery of the real cost of investment is not earnings — that there can be no earnings unless and until the purchasing power of capital is maintained.’

FAS 33 1979: 69

The constantpurchasing power (real value) of capital can only automatically be maintained constant for an indefinite period of time in all entities that at least break even in real value – all else being equal – at all levels of inflation and deflation, including during hyperinflation, with financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Conceptual Framework (2010), Par. 4.59 (a) which states:

‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

IAS 29 is not required when an entity implements financial capital maintenance in units of constant purchasing power during hyperinflation. IAS 29, Par. 8 states:

‘The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period.’

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

Nicolaas Smith

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

Difference between Historical Costs under HCA and CIPPA

September 13, 2012 in Uncategorized

Difference between Historical Costs under HCA and CIPPA

Historical Cost Accounting

The stable measuring unit assumption is implemented under financial capital maintenance in nominal monetary units (HCA). Historical Costs under HCA are thus always nominal Historical Costs, i.e., always wrong in terms of today´s real value, namely in terms of today´s Daily CPI.

There is not even one set of HC financial statements technically correct in terms of today´s real value. All HC financial statements are wrong in this sense: they are all wrong in terms of real value since they are all based on nominal Historical Costs during inflation and deflation. The higher the accumulated rate of inflation or deflation since the original date of the Historical Cost and the date it is accessed (read) in the financial statements, the greater the degree of error. HC financial statements prepared during hyperinflation is generally completely useless.

Constant Item Purchasing Power Accounting

The stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power (CIPPA). Historical Costs under CIPPA are thus never nominal Historical Costs: they are always Historical Costs updated to the current, i.e., today´s, real value in terms of today´s Daily CPI or other daily index when the financial statements are in a digital format, i.e., automatically updated daily.

This would result in daily updated real gross and net margins. It would result in daily updated real profit before tax, real tax payable, real dividends payable and real profit after tax, i.e. real net income; all continuously maintained constant in real value by means of financial capital maintenance in units of constant purchasing power and automatically updated to the current, i.e., today´s, Daily CPI or other daily index. This would result in the automatic maintenance of the constant purchasing power of capital in all entities that at least break even in real value – ceteris paribus – at all levels of inflation and deflation.

This would maintain (instead of erode) hundreds of billions of US Dollars in real value in the world´s capital investment base each and every year at the current level of world inflation.

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

Nicolaas Smith

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

Exception to the implementation of IAS 29 during hyperinflation

September 6, 2012 in Uncategorized

Exception to the implementation of IAS 29 during hyperinflation

It is not true that International Financial Reporting Standards always require the implementation of IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation.

IAS 29 states in Par. 8:

‘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 current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period.’

IAS 29 states nothing about an entity whose financial statements are based on financial capital maintenance in units of constant purchasing.

The Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010) Par. 4.59 (a)] states:

‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

Par. 4.59 (a) applies at all levels of inflation and deflation, including hyperinflation.

An entity whose financial statements are based on financial capital maintenance in units of constant purchasing power is thus not required to implement IAS 29 during hyperinflation.

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Nicolaas Smith

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

NATURAL LAWS OF ACCOUNTING

September 5, 2012 in Uncategorized

NATURAL LAWS OF ACCOUNTING

  1. For every debit there is a corresponding credit.
  2. The constant purchasing power of capital is equal     to the real value of net assets.
  3. The three basic economic items are

(a)      monetary items,

(b)       variable real value non-monetary items and

(c)       constant real value non-monetary items.

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

The three parts of the economy are the

(i)                 monetary economy,

(ii)                variable item economy and

(iii)               constant item economy.

  1. Inflation only erodes the real value of (and     deflation only creates real value in) money and other monetary items.

Inflation and deflation have no effect on the real value of non-monetary items. Measuring all monetary items on a daily basis in terms of a Daily Consumer Price Index under complete co-ordination removes the entire cost of inflation from the economy.

  1. Money is never (assumed to be) perfectly stable     during inflation and deflation.

Measurement of constant items is required in units of constant purchasing power in terms of a Daily Consumer Price Index during inflation and deflation.

In the above:

Inflation includes low inflation, high inflation and hyperinflation.

Daily Consumer Price Index includes other daily index (or daily parallel rate during hyperinflation).

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Nicolaas Smith

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

IFRS apply to two paradigms

September 4, 2012 in Uncategorized

IFRS apply to two paradigms

IFRS apply to the following two paradigms:

  1. Historical     Cost (HC) paradigm
  2. Constant     Item Purchasing Power (CIPP) paradigm

The reason for this is the fact that both financial capital maintenance in nominal monetary units (the Historical Cost Accounting model) and financial capital maintenance in units of constant purchasing power (the Constant Item Purchasing Power Accounting model) were authorized in IFRS in the original Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010), Par. 4.59 (a)] which states: ‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

The fact that IFRS authorized three instead of the generally accepted two concepts of capital maintenance already in 1989 was only identified on this blog in 2008: still quite a revelation to the accounting profession in general. The Framework actually state that there are ‘two’ concepts of capital maintenance, but, in fact, authorize three: physical capital maintenance plus the two authorized in the Framework (1989), Par. 104 (a) (see above). The three capital maintenance concepts authorized in IFRS are now becoming generally accepted as a result of the power of the internet: especially via Wikipedia, Amazon.com, various blogospheres and reflections via millions of other sites.

The underlying principle of the HC paradigm is the HC principle which is not based on fact. It is based on an assumption, namely, the stable measuring unit assumption under which changes in the purchasing power of money (and consequently the monetary unit of account) are not considered sufficiently important to require financial capital maintenance in units of constant purchasing power during inflation and deflation. Under the HC paradigm it is assumed, in practice, that money was, is and will always be perfectly stable in real value. It is assumed, in practice, that there never was, is or ever will be inflation and deflation in the economy. They are obviously all wrong assumptions.

The underlying principle of the CIPP paradigm is the measurement in units of constant purchasing power principle which is based on fact, namely, the fact that money (the monetary unit of account) is never stable in real value on a sustainable basis. The stable measuring unit assumption is never applied under the CIPP paradigm.

In science, a fact will eventually prevail over a wrong assumption regarding that fact.

The capital concept applied under the HC paradigm is the Nominal Financial Capital concept.

The capital concept applied under the CIPP paradigm is the Constant Item Purchasing Power Financial Capital concept.

Financial Capital Maintenance is measured in Nominal Monetary Units under the HC paradigm. It is impossible to maintain the real value of capital constant in nominal monetary units per seduring inflation and deflation despite the fact that the Framework states that it can be done. Financial capital maintenance in nominal monetary units is a popular accounting fallacy authorized in IFRS.

‘It is essential to the credibility of financial reporting to recognize that the recovery of the real cost of investment is not earnings— that there can be no earnings unless and until the purchasing power of capital is maintained.’

FAS 33 1979: 24

Financial Capital Maintenance is measured in Units of Constant Purchasing Power in terms of a Daily CPI or other daily index under the CIPP paradigm. Under financial capital maintenance in units of constant purchasing power the constant purchasing power of capital is automatically maintained 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.

Under the HC paradigm there are only two basic economic items in the economy, namely, monetary and non-monetary items and the economy is divided in the monetary and non-monetary or real economy.

Under the CIPP paradigm there are three basic economic items in the economy, namely, monetary items, variable real value non-monetary items and constant real value non-monetary items and the economy is divided in the monetary, variable and constant item economy.

Under the HC paradigm the accounting equation is applied in nominal monetary units, namely, the nominal value of capital is always equal to the nominal value of net assets.

Under the CIPP paradigm, the accounting equation is applied in units of constant purchasing power, namely, the constant purchasing power of capital is always equal to the real value of net assets.

The CIPP paradigm equals the natural laws of accounting. The HC paradigm equals the assumed laws of accounting.

Under the HC paradigm, the original nominal Historical Cost values of HC items (e.g. inventory items measured at cost) are measured in fixed nominal monetary units, i.e. they are not updated in real value. The stable measuring unit assumption (not inflation) thus results in the overstatement of profits and dividends under the HC paradigm and the erosion of that portion of capital not maintained constant with the real value of net assets.

Under the CIPP paradigm, the original nominal Historical Cost reference values of HC items (e.g. inventory items measured at cost) are updated in real value to the current (today’s) value in terms of the Daily CPI or other daily index value.

Under the HC paradigm, the real value of that portion of capital not maintained by the real value of net assets is eroded by the stable measuring unit assumption (not inflation) at a rate equal to the annual rate of inflation because the real value of the monetary unit of account is eroded by inflation. This erosion amounts to hundreds of billions of US Dollars per annum in the world economy.

Under the CIPP paradigm, the constant purchasing power of capital is automatically maintained 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 including hyperinflation.

The implementation of the CIPP paradigm would stop the erosion mentioned above and would instead maintain hundreds of billions of US Dollars per annum in the world’s constant item economy (capital investment base) at the current world inflation rate.

Under the HC paradigm, it is incorrectly believed that the erosion of companies´ capital and invested profits is caused by inflation. Inflation has no effect on the real value of non-monetary items. Capital and invested profits are non-monetary items. Inflation only affects the real value of money and other monetary items.

Under the CIPP paradigm, there is no erosion of companies´ capital and invested profits because the stable measuring unit assumption is never applied under this paradigm.

The CIPP paradigm is obviously a better paradigm than the HC paradigm.

The possible changeover from the current 3000-year old, globally implemented, generally accepted, traditional HC paradigm to the IFRS-authorized CIPP paradigm would take at least another hundred to two hundred years to come about in the world economy (2012) – or it may also never happen.

‘Relative to most changes in financial reporting, the changes required by Statement 33 were monumental. Because most accountants and users of financial statements have been inculcated with a model of financial reporting that assumes stability of the monetary unit, accepting a change of this consequence would take a lengthy period of time under the best of circumstances.’

FAS 89 1986: Par. 4

Authors stated about a hundred years ago that HCA is not an appropriate accounting model, but it is still the only accounting model implemented today (2012). It appears that the authorization of financial capital maintenance in units of constant purchasing power in IFRS in 1989 was not meant to be the authorization of a second paradigm, but simply a technical back up for attempted measurement in units of constant purchasing power in IAS 29 (totally ineffective: see its implementation in Zimbabwe) – also authorized in 1989.

The IASB has now (2012) unanimously voted to submit the replacement of IAS 29 to research. If the IFRS to replace IAS 29 were to continue with any form of HCA, then the replacement of the HC paradigm with the CIPP paradigm would suffer a severe setback.

Any individual company can immediately implement financial capital maintenance in units of constant purchasing power because it was authorized in IFRS in the original Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010), Par. 4.59 (a)].

No person understanding the above would start a new company implementing the HC paradigm.

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

Nicolaas Smith

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

Definition of hyperinflation

September 3, 2012 in Uncategorized

Definition of hyperinflation

Hyperinflation only affects the real value of money and other monetary items – and nothing else. Hyperinflation has no effect on the real value of non-monetary items.

The stable measuring unit assumption (not hyperinflation, as generally accepted) as it is implemented as part of the 3000-year-old, generally accepted, globally implemented, traditional Historical Cost Accounting model even during hyperinflation (as supported by the IASB and Big Four accounting firms like PricewaterhouseCoopers), erodes that portion of companies´ equity in only the non-monetary or real economy not backed by the equivalent real value of their net assets during hyperinflation (exactly the same as during low inflation).

So, who needs the definition of hyperinflation:

  1. Millions of accountants worldwide – representing almost the     entire world economy – who have to value and account economic items in the     world economy on a daily basis. These accountants generally implement     International Financial Reporting Standards as authorized by the     International Accounting Standards Board. American accountants, valuing     and accounting economic activity in the world´s biggest economy follow US     GAAP. IFRS and US GAAP are in a definite process of convergence (2012).
  2. Some academics who write research papers and books about     hyperinflation.

The millions of accountants in the world economy implementing IFRS follow the IASB´s definition of hyperinflation, namely:

 

‘Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:

 

(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%.’

 

IAS 29 Par. 3 (e)

 

The above is the widely-accepted definition of hyperinflation since 1 April 1989, the date IAS 29 Financial Reporting in Hyperinflationary Economies was authorized by the IASB.

 

Some academics follow Philip Cagan´s definition of hyperinflation which has never been implemented in practice in any company or country since 1 April 1989:

 

´A price-level increase of at least 50% per month.´ (Cagan 1956)

 

The IASB´s definition is the generally accepted definition:

 

(1) as a result of its current (2012) worldwide acceptance

 

(2) and practical application as from 1989 and

 

(3) due to the fact that Cagan´s definition has never been implemented in practice in any company or country since that date

 

(4) and would almost certainly not be implemented in practice in a company or country in the future because of

 

(a) the wide acceptance of the IASB definition and

 

(b) the devastating effect of hyperinflation in only the monetary economy and the equally devastating effect of the stable measuring unit assumption in only the constant item economy during hyperinflation: no country in the world would currently (2012) wait for hyperinflation of 50 per cent per month before declaring that the country is in hyperinflation and taking preventative actions: the IASB´s definition would be followed.

 

The US government, the Federal Reserve Bank, the US Financial Accounting Standards Board and the Securities Exhange Commission would almost certainly not apply Cagan´s definition if hyperinflation should ever come about in the US economy (extremely unlikely). They would apply the IASB´s definition. US GAAP and IFRS are in convergence (2012).

 

The Argentinean Accounting Federation (2010) and I (2012) suggested preventative actions to the IASB at 10 per cent annual inflation or 26 per cent cumulative inflation over three years. The 10 and 26 per cent limits, however, do not relate to hyperinflation: they relate to high inflation. The IASB has unanimously voted to submit these suggestions regarding the replacement of IAS 29 to research (2012).

 

Thus the IASB´s widely-accepted definition of hyperinflation is the following in 2012:

 

Hyperinflation is indicated when the cumulative inflation rate over three years is approaching, or exceeds, 100 per cent.

 

Steve Hanke and Nicholas Krus use Cagan´s definition in their latest research paper World Hyperinflations.

 

The IASB’s definition – despite the use of the term ‘approaching’- has resulted, in practice, in a generally accepted precisely defined limit as from when an economy enters into hyperinflation: cumulative inflation equal to 100 per cent over three years.

 

The term ‘approaching’makes it appear vague. However, what happened in practice since 1989 resulted in the IASB´s definition now (2012) being widely accepted by millions of accountants in the world economy, namely that an economy enters into hyperinflation at 100 per cent cumulative inflation over three years as happened in the case of Venezuela in 2009.

 

It appears vague because of the term ‘approaching’. However, in practice, it is strictly applied as hyperinflation coming into effect at 100 per cent cumulative inflation over three years. Its actual application is thus not vague: hyperinflation is, in practice, confirmed in companies and countries, only at 100 per cent cumulative inflation over three years. See hyperinflation in Venezuela in 2009.

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