Open letter to Hans Hoogervorst, Chairman of the IASB

January 21, 2013 in Uncategorized

Open letter to Hans Hoogervorst, Chairman of the IASB

Dear Mr. Hoogervorst,
I am the executive director of Sustainable Development without Borders, a newly formed NGO. The most important part of our mission – currently – is to visit national accounting standard-setters in hyperinflationary and high inflationary countries like Belarus, Venezuela, Ethiopia, etc., to assist them to authorise a national accounting standard requiring IFRS-authorised Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in their countries now, long before the IASB is going to require it internationally in a future IFRS. The IASB always encourages early implementation of a future IFRS. CMCUPP was authorised in IFRS in 1989 as an option to HCA at all levels of inflation and deflation, including during hyperinflation.
I hope to continue contributing to the future IFRS requiring CMUCPP although this is now in doubt (see below).
This is what the World Bank stated when I unsuccessfully contacted them for funding for Sustainable Development Without Borders.
“The research that you propose would indeed be of great interest to developing countries experiencing high inflation rates.”
The World Bank is under the impression that we want the funding for research. I have finished the research started 18 years ago in Angola´s hyperinflationary economy.
I am an expert in IFRS-authorised CMUCPP in terms of a Daily Index. I implemented a version of it very successfully in a company in Angola where I worked in that hyperinflationary economy from 1994 to 1997. I then studied the principles of CMUCPP over the next 18 years.
IFRS-authorised CMUCPP is the business practiceof daily measurement of all items at all levels of inflation and deflation, including during hyperinflation, to accompany the daily change in the general price level / (USD free market exchange rate during hyperinflation) and recorded in daily accounting. This is very similar – during hyperinflation – to what was done during 30 years of very high and hyperinflation in Brazil from 1964 to 1994. It is not something new. It was widely used in the whole Brazilian economy for 30 years as well as widespread in other Latin American countries.
CMUCPP equals Dollarization
IFRS-authorised CMUCPP is guaranteed to stabilise an economy overnightat no cost. It is, in principle, the same as very costly Dollarization or an equally costly currency board, both of which stabilises an economy overnight– but at a huge cost as well asthe loss of
(1) Autonomous monetary policy capability by the local Central Bank and
(2) Seignorage, the almost 100% profit the Central Bank (country) makes whenever new bank notes and coins are introduced into the economy. The seignorage accrues to the USA in the case of Dollarization in US Dollars.
American economics professor, Steve Hanke, personally stopped 11 hyperinflations with currency boards and Dollarizations.
Current Dollarization Options
(i) Official Dollarization
(ii) Spontaneous Dollorization or
(iii) A currency board
II. Dollarization using the Russian ruble was recently suggested in Belarus.
Hyperinflationary countries implementing IFRS-authorised CMUCPP in terms of a Daily Index would stop their hyperinflations overnightat no cost – with a freeIFRS from the IASB.
You may not know the above, especially that CMUCPP is, in principle, the same as Dollarization. Neither may other IASB members and IASB staff members know this.
Lack of understanding CMUCPP at the IASB
There is currently a lack of understanding at the IASB of the CMUCPP model authorized in IFRS twenty three years ago. For example: Kenichi Yoshimura´s email to me (dated 2 January 2013) during our recently finished completely unsuccessful collaboration in my agenda item request:
“Unfortunately, I could not complete the numbers under the CMUCPP model due to lack of my understanding of the CMUCPP model.”
This was after a conference call and pages and pages of emails of questions from him and detailed explanations from me about the CMUCPP model during several weeks. Hyperinflation is a very different economic environment to understand when you are only used to low inflation and nominal Historical Cost Accounting.
Ken is one of the authors of the Staff Paper Applicability of IAS 29 to financial statements prepared under the concept of financial capital maintenance in constant purchasing power units, the model he admits he lacks understanding of. He nevertheless still published the Staff Paper with 16 errors / problems / disagreements with the submitter, under Michael Stewart´s directorship – on a model he admits he lacks understanding of. I am the submitter being referred to in the Staff Paper.
TheStaff Paper in its current version will not help in conveying the unique benefits of CMUCPP to the IASB. IFRS will not be improved in this very important issue with the current version of the Staff Paper. Action that might result from what is stated in Par. 17 in the Staff Paper (see below) wil be detrimental to what has already been achieved in this regard: if the action indicated were to be taken it will result in a step backwards instead of forwards in IFRS.
[A] I submitted an amendment to the Argentinian standard-setter´s 2010 proposal for the replacement of IAS 29, to you in January 2012, in which I proposed CMUCPP. I was thanked for my submission and informed that it would be passed on to the people concerned.
  1. Kindly indicate the reason or reasons why it is now stated that an analysis of the Argentinian proposal would be included in the research project regarding Financial Reporting in High Inflationary Economies, while it is indicated that it is not certain that an analysis of my proposal would also be included? It is stated in the Staff Paper, Agenda Ref 20, Par. 17:
“We think that in that project the IASB would analyse past experiences in hyperinflationary and high inflationary economies and various views held by constituents, which would include the proposal for amendments to IAS 29 prepared by the Argentinian standard-setter. This analysis mightalso include the analysis of the submitter´s commentary on the Argentinian proposal.”
  1. Kindly inform me whether I will be given a reasonable chance of securing the inclusion of an analysis of my commentary and amended proposal in which I could collaborate using an efficient method of analysis agreed on beforehand or not?
  1. If your answer to (2) is affirmative, kindly inform me
(a) what the criteria are to be used to decide whether my commentary and amended proposal would be included or not and
(b) by when I have to fulfil these criteria?
[B] I submitted an agenda item request to the IASB in September 2012.
I kindly wish to bring to your attention:
The IASB´s method and style of collaboration used – as I personally experienced as a submitter over the last several weeks –is very inefficient. The final Staff Report Agenda Ref 20 authored by Kenichi Yoshimura under Michael Stewart´s directorship, contains 16 errors / problems / disagreements. The Staff Paper will not convey the unique benefits of CMUCPP to the IASB.
[C] I suggest the agenda item is moved to a future meeting to allow time to
  1. For the IASB to develop an efficient collaboration model that agrees beforehand with the submitter how decisions will be reached, that every disagreement to the final decision by the submitter will be indicated in the Staff Report, how disagreements will be resolved, etc., etc., etc.
  2. Allow the new method developed (mentioned in the previous paragraph) to be used to correct the 16 errors / problems / disagreements in a way that will improve IFRS.
Attached please find
Appendix 1 List of 16 problems/errors in Staff Report Agenda Ref 20
Appendix 2 List of Inefficiencies during the agenda item request collaboration.
In summary:
I would appreciate it very much if you could be so kind as to assure me that:
  1. My proposalwould be given the same treatment as the Argentinian Federation´s proposal – applying the new method.
  2. The IASB will develop a new method for collaboration with constituents as briefly indicated above.
  3. The Staff Report Agenda Ref 20 will be moved forward to a future Interpretations Committee meeting – not necessarily the next one to allow time to develop the new method.
As this is of public interest, I am publishing my email communication with you on my main blog Capital Maintenance in Units of Constant Purchasing Power and on my South African blog Capital Maintenance in Units of Constant Purchasing Power.
Yours sincerely,
Nicolaas Smith
Executive Director
Appendix 1 List of 16 Errors / Problems / Disagreements
Agenda ref 20
STAFF PAPER 22–23 January 2013
IFRS Interpretations Committee Meeting
Project IAS 29 Financial Reporting in Hyperinflationary Economies
Paper topic Applicability of IAS 29 to financial statements prepared under
the concept of financial capital maintenance in constant purchasing power units
3. This agenda paper is structured as follows:
(a) background information on the issue;
(b) technical analysis;
[1] The Excel hyperinflation example is not included here.
6. The submitter thinks that IAS 29 would not be applicable if the financial
statements are prepared under the concept of financial capital maintenance
defined in terms of constant purchasing power units. This is because all items in
such financial statements could
[2] It is ignored that I clearly showed that all items are always different under the two models in this example.
already be stated at the measuring unit current at the end of the reporting period (refer to paragraph 8 of IAS 29). The submitter also insists
[3] This is not true: I do not “insist” on anything: You refuse to accept the facts as proven in this example that all the items are always different as they necessarily have to be when they are always stated in terms of different indices. You refuse to accept simple logic.
that financial statements under the CMUCPP are so different from the financial statements prepared under the historical accounting system and current cost accounting system that IAS 29 could not be applied to the financial statements prepared under the CMUCPP model.
7. On the basis of our discussions with the submitter, we understand that major differences between the IAS 29 model and the CMUCPP are:
(a) the scope of monetary items. For example, trade receivables and payables that would be classified as monetary items under IAS 29 could
[4] (are)
not be classified as monetary items under the CMUCPP. This difference gives rise to a difference in the amount of net monetary gain or loss.
(b) the difference in a general price index
[5] (URV-based Daily Index)
referred to when preparing the financial statements.
[5] continued (Any reasonable accountant who reads what is stated in (b) so far would know that all items always have to be different at different indicesand may realise that no-one needs to “insist” that the values are differentwith different indices used as you stated above.)
Under the CMUCPP, numbers (values) in financial statements are adjusted for changes in a general price index (URV-based Daily Index) even after a reporting date.
[6] (Under “Financial capital maintenance … in units of constant purchasing power” as defined in the CF, Par. 4.59 (a), the stable measuring unit assumption is never implemented. All historical financial statement values are thus always updated in terms of the current index.)
That is, the numbers (values) in the financial statements as of the reporting date are continuously and automatically updated on a daily basis before and after the reporting date.
10. Under current IFRS, there is no particular guidance on how to prepare financial
statements stated in constant purchasing power units.
[7] Incorrect: IAS 29 contains guidance on how to prepare financial statements in constant purchasing power units: many paragraphs in IAS 29 contain that guidance: they state which are monetary and non-monetary items, according to IAS 29, and how to measure items in units of constant purchasing power at the measuring unit current at the period-end date, but, IAS 29 does not result in “Financial capital maintenance … in units of constant purchasing power” as defined in the CF, Par. 4.59 (a) because it is only possible to maintain a constant item constant when its constant real value is updated every time the URV-based Daily Index (or USD daily free-market rate) changes during hyperinflation. Values under IAS 29 are not continuously updated every time the URV-based Daily Index changes. The time variable (interval) should be: every time the URV-based Daily Index changes and not every time the monthly CPI changes. If IAS 29 were to be changed as such it would become “Financial capital maintenance … in units of constant purchasing power” as defined in the Conceptual Framework, Par. 4.59 (a).
However, with regard to the scope of IAS 29, paragraph 1 of IAS 29 states that “this standard shall be applied to the financial statements, including the consolidated financial statements, of any entity whose functional currency is the currency of a hyperinflationary economy.” Accordingly, we are of the view that an entity needs to apply IAS 29 to financial statements prepared in accordance with IFRSs if its functional currency is the currency of a hyperinflationary economy, regardless of the concepts of capital employed by the entity.
[8]This statement ignores the fact proven many times during my collaboration on the agenda item request that all items in financial statements prepared under “Financial capital maintenance … in units of constant purchasing power” (CF Par. 4.59 (a)) are always stated at the measuring unit current at the end of the reporting period and then further updated to the measuring unit current at the current date and thus cannot be restated when they are already there.
11. Some may argue that it is not clear whether IAS 29 is applicable in this situation,
because there is no Standard under IFRS that prescribes how to prepare financial
statements under the concept of financial capital maintenance defined in terms of
constant purchasing power units.
[9]This validly held view is incorrect: IAS 29 prescribes, but unsuccessfully (updating every time the URV-based Daily Index changes is required – not every time the monthly CPI changes) how to prepare financial statements under the concept of financial capital maintenance defined in terms of constant purchasing power units as described in the previous paragraph.
They think that all the requirements under current IFRS are developed on the basis of the assumption that financial statements are stated in nominal monetary units.
[10] This validly held view is incorrect: IAS 29 unsuccessfully prescribes the model authorised in the CF, Par. 4.59 (a). See above.
12. However, in the absence of an IFRS that specifically applies to a transaction, other
event or condition, paragraph 11 of IAS 8 requires an entity to develop and apply
an accounting policy by referring to the requirements in IFRSs dealing with
similar and related issues. In our view, the requirements in IAS 8 would result in
the entity applying IAS 29 to financial statements under the concept of financial
capital maintenance defined in terms of constant purchasing power units if the
conditions in IAS 29 are met.
[11] IAS 29 requires the restatement of only HC and CC financial statements and financial statements prepared under the concept of financial capital maintenance defined in terms of constant purchasing power units are not HC or CC financial statements and IAS 29 would thus logically not be required.
13. If financial statements are stated in constant purchasing power units, the entity
may conclude that all or part of ‘restatements’of the financial statements under
the requirements in IAS 29 are not necessary.
[12] This is not correct. Financial statements stated in constant purchasing power units are not based on HC or CC. IAS 29 is only required for these two models.
You stated in your email dated 3 January 2013
‘ I thought that the new language of agenda request “IAS 29 is not required during hyperinflation when an entity implements CMUCPP because this model is not a HCA model and only HC or CC financial statements can be restated as required in IAS 29” really summarises that point.’
This is because the accounting model under IAS 29 is generally viewed as one of the models used in financial statements stated in constant purchasing power units.
[13]
[A] You thus agree what I state above that IAS 29 prescribes how to prepare financial statements under “Financial capital maintenance … in units of constant purchasing power,” as defined in the CF, Par. 4.59 (a). HC and CC financial statements are restated during hyperinflation in terms of IAS 29 because it is required in IFRS and countries in hyperinflation implement it for that reason, but with complete failure as comprehensively proven in Zimbabwe. No-one can deny that and a specific review is not required to prove that IAS 29 had no positive effect in the Zimbabwe economy in this respect during hyperinflation. IAS 29´s implementation in Zimbabwe completely proved that the implementation of IAS 29 does not result in “Financial capital maintenance … in units of constant purchasing power” as defined in the CF, Par. 4.59 (a).
[B] If IAS 29 were to be changed to require financial capital maintenance … in units of constant purchasing power as defined in the CF, Par. 4.59 (a) in terms of every change in a URV-based Daily Index then the entity (or a country in hyperinflation implementing this model) would depart from HCA as from the moment this model is implemented. IAS 29 would not be required after that because there would be no HC or CC based financial statements to restate in such a hyperinflationary economy.
In this regard, figures for all, or some, financial information might not be changed even after the application of the requirements in IAS 29. However, we think that this does not mean that IAS 29 is not required under current IFRS.
[14] It is impossible to restate items when they are all already at the measuring unit current at the end of the reporting period and always updated to the current date.
14. Consequently, under current IFRS, an entity in a hyperinflationary economy would need to apply the requirements in IAS 29 even if a concept of financial capital maintenance defined in terms of constant purchasing power units, including the CMUCPP, is employed.
[15] Financial statements prepared under “Financial capital maintenance … in units of constant purchasing power” as defined in the CF, Par. 4.59 (a) are not based on HC or CC and only HC or CC financial statement can be restated under IAS 29.
16. However, under current IFRS, there is no authoritative guidance on how to
prepare financial statements under the concept of financial capital maintenance
defined in terms of constant purchasing power units.
[16] IAS 29 provides such guidance, but it does not have a positive effect in the economy as proven in Zimbabwe and as explained above for the reasons explained above.
Appendix 2 List of Inefficiencies
During the agenda item request in which I requested:
“As a result of the fact that it is currently generally accepted by accountants in countries implementing IFRS that IAS 29 is always required during hyperinflation, please indicate whether the following two statements are valid or not:
  1. In terms of The Conceptual Framework (2010), Par. 4.59 (a), financial capital maintenance in units of constant purchasing power is applicable during low inflation, high inflation, hyperinflation and deflation.
  2. In terms of IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 8, this standard is only required for the restatement of historical cost and current cost financial statements and not in the case of financial capital maintenance in units of constant purchasing power since all items in the latter financial statements would already be measured either
(a) in terms of the measuring unit current at the balance sheet date (e.g., the CPI);or
(b) in terms of IFRS-authorised measurement bases current at the end of the reporting period (e.g., fair value, net realizable value, recoverable value, present value, etc.), excluding nominal Historical Cost (updated Historical Cost to be used under financial capital maintenance in units of constant purchasing power), i.e., excluding the stable measuring unit assumption which is never implemented under financial capital maintenance in units of constant purchasing power.”
the following happened:
  1. I received an email from April Pitman asking confirmation that a short summary of my request (see above) would be that
“The submitter raises queries about when it is appropriate to use units of constant purchasing power as a measurement basis and not apply the measuring unit current at the end of the reporting period as required by IAS 29.”
I confirmed the following after a full explanation and other corrections:
“The submitter raises queries about whether it is correct that IAS 29 is not required during hyperinflation when financial statements are prepared in terms of financial capital maintenance in units of constant purchasing power since all items in such financial statements would already be stated at the measuring unit current at the end of the reporting period.
Theinefficiencyresulting from IASB staff´s difficulty to understand the agenda item request is very evident in the above.
  1. During the first conference call I had with Michael Stewart and Kenichi Yoshimura, I very clearly stated and emphasized that the accounting result and the financial reports under CMUCPP are totally different from IAS 29.
(i) A recording of the conference call was not made available to me. (Inefficient)
(ii) No agreed upon minutes of the conference call were prepared – as far as I know. (Very inefficient)
(iii) There was / is no verifiable method of knowing what was agreed or stated during the conference call. There was no case of: This is stated: Is it correct or wrong? What is the correct answer? How can we prove it? What is proof? What do we agree? What do we do when we cannot agree? How do we resolve disagreements? This is the biggest weakness of the IASB method. It is impossible to solve a complex issue like a totally different accounting model without this type of very precise, verifiable detail of what is agreed and what is not agreed. What is correct and what is wrong. What is accepted and what is rejected. What is the effect of this and that. What is factual and what is not factual. (Very inefficient with this not being done)
This is not just required during a conference call: it is required during the whole process. The IASB has to develop a very precise method of doing this. There must be many sources of information regarding how to develop such a method. It is the only way of getting the correct result and improving IFRS in a collaboration as I had with IASB staff. People have to specifically agree that they agree. The whole process must be written down and be continuously verifiable by all parties.
Actually, there was such a process: with the example. I showed in the final example that the two models are never the same: that nothing ever agrees.
Very unfortunately, the example, available on my blog here, was simply ignored. (Very inefficient) This is totally unaccceptable. No-one can justify not using the example, but, it was not used.
(iv) I stated in my agenda item request document that I amended the Argentinian Federation´s proposal in my commentary titled IFRS ´X` CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER. Neither Michael nor Ken had read the amendment which is a full copy of the proposed draft IFRS requiring CMUCPP, before the call. (Very inefficient) I told them that if they had not read the amendment then there was a big gap in our communication.
(v) Although I very clearly stated (on 29 November 2012) that the accounting results under CMUCPP and IAS 29 are totally different, Ken sent me the following email on 11 December:
In order to help myself better understand the issue, I prepared a case study using a simple example as attached. This illustration is intended to show that the accounting result of the use of constant purchasing power units would generally result in the same accounting resultapplying IAS 29 requirements. I thought this could support the view that an entity in a hyperinflationary economy which employs a capital maintenance concept in terms of constant purchasing power units would not need to apply IAS 29 requirements because in both casesthe entity could achieve the same result.”
Ken mounted a big effort to prove the exact opposite to what I stated in the conference call. (Very inefficient) It would have been better (efficient) if he had asked me right at the start for an example to show what I very emphatically stated during the first conference call. I am an expert in this issue. Some credibility for my views – all to be fully tested – would have been efficient. I was very respectful and very pleased working with the IASB. I said nothing at the time.
(vi) Ken stated above both cases but his example only had an IAS 29 balance sheet and income statement as can be seen here. There was no comparison of both cases. There were no CMUCPP balance sheet and income statement. (Very inefficient for what the excercise was about)
I had to add the CMUCPP balance sheet and income statement.
(vii) We were doing an example of accounting during hyperinflation. Ken used inflation rates of 5% and 10% in his example. (Very inefficient in the case of a hyperinflationary example. It was not a hyperinflationary example). I was very respectful and very pleased working with the IASB. I said nothing at the time.
(viii) It is not stated in the Staff Report in all the cases where I disagreed and what my view is
(ix) The IASB staff had preconceived HC ideas and they were just steamrolled into the Staff Report.
(x) IASB staff demonstrate an inability to normally correct badly stated views.
(xi) A wrong title for the model was used even when I never mentioned it.
(xii) IASB staff could not balance a 10 line CMUCPP balance sheet with 100% inflation.
(xiii) Low inflation rates were only changed after I said I would withdraw my contribution to the original example unless hyperinflationary rates were used.
(xiv) Many of the 16 disagreements in the Staff Report can be quoted from my emails. They were simply ignored.
(xv) Views/ facts / proofs, etc. repeated many times simply ignored.
Lack of time makes it not possible to complete this list.

Nicolaas Smith
Opinions on this blog expressed by me are my personal opinions.
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