The failed IAS 29 Financial Reporting in Hyperinflationary Economies is the IASB´s greatest failure. Here is just one example why: it was implemented during the last 8 years of hyperinflation in Zimbabwe – which ended in 2008 – with no positive effect in the economy. The implementation of the failed IAS 29 resulted in maintaining the very negative effect of implementing HCA during hyperinflation in Zimbabwe, because “Inflation-adjustment of financial statements is an extension to, not a departure from historical cost accounting,” as stated by PricewaterhouseCoopers in their publication Understanding IAS 29 (2006). The implementation of the failed IAS 29 thus did affect the Zimbabwean economy: very negatively. It affected the Zimbabwean hyperinflationary economy very negatively because it resulted in maintaining HCA during hyperinflation.
When the failed IAS 29 has no positive effect during hyperinflation, why is the failed IAS 29 still an IFRS in 2013? The failed IAS 29 restatement model in terms of the monthly published CPI (when the general price level generally changes daily during hyperinflation) is still an IFRS in 2013 because the IASB is satisfied with the failed IAS 29 since financial reporting has no effect in the economy, according to Michael Stewart, Director of Implementation Activities at the IASB, as very firmly indicated by him during a teleconference on 8 January 2013.
The above very firm indication by Michael Stewart is completely wrong: financial reporting does affect the economy. The fact that financial reporting affects the economy is one of the fundamental – basic – reasons why International Financial Reporting Standards are authorised by the International Accounting Standards Board. It is one of the fundamental reasons why the IASB exists.
Implementing Historical Cost Accounting during hyperinflation has a very negative effect in a hyperinflationary economy which is one of many proofs that financial reporting does affect the economy.
The implementation of the failed IAS 29 during the last 8 years of hyperinflation in Zimbabwe had no positive effect because “Inflation-adjustment of financial statements is an extension to, not a departure from historical cost accounting,” per PricewaterhouseCoopers in their publication Understanding IAS 29. Zimbabwean entities implemented HCA during hyperinflation before the failed IAS 29 was implemented in the country. The implementation of HCA during hyperinflation affected the Zimbabwean economy very negatively. When the failed IAS 29 was implemented in Zimbabwe during hyperinflation, Zimbabwean companies simply carried on with HCA during the financial year during hyperinflation because the failed IAS 29 requires the restatement of Historical Cost and Current Cost financial statements during hyperinflation. This continued to affect the Zimbabwean hyperinflationary economy very negatively: see its final collapse in 2008.
It is thus very strange and very worrying that Michael Stewart, a senior director at the IASB, very firmly indicates that financial reporting has no effect in the economy.
All views regarding the failed IAS 29 and all other aspects of financial reporting are welcome and are treated with respect. This is part of the scientific process. Very wrong indications (I made a few in the past – and learnt a lot from correcting them) – from whoever – should be quickly acknowledged as such and corrected. This is for the benefit of advancing with the long-lasting endeavour of finding the correct solution to
(1) the very negative effects of the Generally Accepted Accounting Practice of implementing the stable measuring unit assumption in the measurement of constant real value non-monetary items in the constant item economy during inflation, deflation and hyperinflation and
(2) the very negative effects of the Generally Accepted Accounting Practice of implementing the stable measuring unit assumption in the measurment of monetary items in the monetary economy during inflation, deflation and hyperinflation.
In this respect, it is to be noted that Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily Index as authorised in IFRS in 1989 automatically maintains the constant purchasing power of equity constant for an indefinite period of time at all levels of inflation and deflation (including during hyperinflation) in all entities that at least break even in real value – all else being equal. The stable measuring unit assumption is never implemented under Capital Maintenance in Units of Constant Purchasing Power.
Defending IAS 29 is defending a failed IFRS: see its implementation in Zimbabwe.
I strongly support open discussion of all aspects of financial reporting.
I actively promote Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily Index as authorised in IFRS in 1989 at all levels of inflation and deflation, including during hyperinflation.
Opinions expressed on this blog are my personal opinions.
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.