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$89 Billion Christmas present to Putin

December 18, 2014 in Uncategorized

$89 Billion Christmas present to Putin

Apparently Putin wants to use $89 billion in a Russian sovereign wealth fund to fight inflation that almost certainly will be increased by the Russian Central Bank during (not by) the Ruble plunge.

Daily updating all Ruble monetary items within the Russian economy in terms of the Daily CPI would remove only the effect of inflation at no cost. It would do nothing to actual inflation.

If he, consequently, so wishes, Putin can stabilize the Russian constant real value non-monetary item economy (wages, salaries, capital, profits, taxes, trade debtors, trade creditors, issues share capital, all other items in shareholders´ equity, rents, etc., etc.) by abandoning Historical Cost Accounting and adopting Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI.

The two measures together would reverse the Ruble plunge.

Nicolaas Smith

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Don´t be fooled by Swiss negative interest rate

December 18, 2014 in Uncategorized

Don´t be fooled by Swiss negative interest rate

Swiss National Bank introduces NOMINAL negative interest rate of -0.25% during deflation of 0.10% which is a POSITIVE REAL interest rate of +0.15% under such an economic environment.

During deflation EVERYTHING financial is the opposite in order to get back to real from nominal.

Nicolaas Smith

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Stop inflation with an IFRS

November 20, 2014 in Uncategorized

Stop inflation with an IFRS

That was the headline that got Iran interested in Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily CPI some months ago. Accountants there are already familiar with IFRS. That you could use it to stop their high inflation at the time was really interesting to them. I responded enthusiastically to the request to explain how that can be done.

 

Yes, it is possible. But, and there is always a but, you have to go all the way as well as accept economic concepts/reality/facts.

First of all: what would normally stop inflation? Various possible actions: an increase in the money supplyexactly equal to the required level to guarantee zero inflation. Is that known at the time of the money supply increase? No. Etc, etc, etc.

However, there is an interesting additional fact: daily indexing the entire money supply to all (at least daily) changes in the general price level would remove only the effect of inflation: it does nothing to actual inflation.

This is quite interesting and worth looking into. Imagine: removing the entire effect of inflation. Well, it is being done – in part – right now in Chile, Colombia and the majority of countries in the world economy in government inflation-linked bonds.

How can the entire effect of inflation be removed from the entire money supply?

You have to start off with abandoning traditional Historical Cost Accounting (by the way, that would be the best thing you could ever do for your company or country) and implement the alternative authorized in IFRS, namely Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI. The IASB´s 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.” So, it is authorized in IFRS (since 1989). It is also authorized in US GAAP and individual country national accounting standards.

Changing over to CMUCPP in its generally accepted form only solves two of the three problems (there are three fundamentally different economic items: monetary items, variable real value non-monetary items and constant real value non-monetary items): (1) it would maintain the constant purchasing power of all constant real valuenon-monetary items constant in all entities that at least break even in real value, ceteris paribus, and (2) it would in only keep all historical  non-monetary items – variable and constant items – updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level. The stable measuring unit assumption would still be implemented in the case of nominal monetary items during the current financial period. Thus the effect of inflation would still result in the erosion of the real value of these monetary items over time.

It is generally accepted ( a Generally Accepted Accounting Principle) that selecting IFRS-authorized CMUCPP only does what is stated in (1) and (2) above. It is not yet generally accepted that the rejection of the stable measuring unit assumption includes updating all monetary items (the entire money supply) in terms of all (at least) daily changes in the general price level, i.e., in terms of the Daily CPI.

So, implementing CMUCPP – in its generally accepted form – is the same as never implementing the stable measuring unit assumption in any form in the valuation of only variable and constant real value non-monetary items. That does not stop the effect of inflation at all because the stable measuring unit assumption would still be implemented for the valuation of nominal monetary items under CMUCPP in its generally accepted form.

So, to actually stop only the effect of inflation (it would be as if there is no inflation) you have to daily inflation-index all monetary items (the entire money supply) in terms of all (at least daily) changes in the general price level, i.e., in terms of the Daily CPI. This would do nothing to actual inflation. There would, however, be no effect of inflation in the economy.

Implementing CMUCPP is part of GAAP. However, it only solves the valuation problems (created by the implementation of the stable measuring unit assumption under HCA) related to non-monetary items (variable and constant real value non-monetary items).

Actual daily inflation-adjustment of the entire money supply is not yet a GAAP. However, the principle is. The principle of rejecting the stable measuring unit assumption (abandoning HCA) applies to monetary items too, in princle, not yet generally in practice. Although, a 2% inflation target can be seen as 98% inflation-indexing the entire money supply.

Chile has been daily inflation-indexing more than 25% of its entire money supply for a number of years. Colombia daily inflation-adjusts all mortgage bonds, also for a number of years already. The majority of countries in the world economy daily inflation-index their respective sovereign inflation-linked bonds to the global total of more than USD 3 trillion (US TIPS included).

So, you can actually use an IFRS to stop the entire effect of inflation (or deflation) in the entire economy. It is authorized in IFRS, in principle. The above application of IFRS is generally accepted  in Chile, Colombia and most countries in the world economy that daily inflation-index government inflation-linked bonds in terms of the Daily CPI.

Consequently, the question can be asked: is the IASB potentially more powerful than the Fed? Has the IASB the power to require daily inflation-indexing of all monetary items? That would stop the effect of inflation and deflation worldwide.

Don´t worry. The IASB would never do that. They are too incompetent/inefficient/hard headed/ stubborn /resistant to new ideas/clueless about CMUCPP/openly hostile to CMUCPP and the units of constant purchasing power in terms of the Daily CPI measurement basis/stuck in HCA, to even discuss publicly the possibility of requiring daily indexing in IAS 29 Financial Reporting in Hyperinflationary Economies – a requirement that would assure the stabilization of at least the non-monetary economy over a short period of time in any hyperinflationary economy.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

 

Inflation and deflation would have no effect on the economy …

November 16, 2014 in Uncategorized

Inflation and deflation would have no effect on the economy …

Inflation (low, high and hyperinflation) and deflation would have no effect on the economy when all items expressed in terms of money are indexed in terms of all (at least daily) changes in the general price level in terms of the Daily Consumer Price Index. There would still be inflation or deflation, but there would be no effect of inflation or deflation. It would be as if there were no inflation or deflation.

 

Every economic item is expressed in terms of a fiat monetary unit of measure in a non-dollarized economy: a salary, a wage, capital, interest, a tax, rent, money, a debt, a loan, property, plant, equipment, inventory, shares and every other item: all expressed in terms of local currency fiat money. In a dollarized economy all items within the economy are expressed in terms of a foreign currency which is a relatively stable variable real value non-monetary item; in the vast majority of cases, the US Dollar.

The Daily CPI is based on the monthly published CPI. When the monthly published CPI is not available, for example, when a government refuses to publish it during hyperinflation, then the daily US Dollar parallel rate would be used as the Daily Index, i.e., all items would be Dollar-indexed daily.

Chile daily indexes more than 25% of its money supply in terms of their Unidad de Fomentodaily index. All mortgages are indexed daily in Colombia. More than three trillion US Dollars in government inflation-indexed bonds are daily indexed world wide. Inflation has no effect on the real value of the capital amounts of these daily inflation-adjusted items.

The Brazilian economy was indexed from 1964 to 1994. The most successful daily index was their Unidade Real de Valor Daily Index used in 1994 as part of their Real Plan to stop hyperinflation overnight at no cost.

The IFRS authorized Capital Maintenance in Units of Constant Purchasing Power accounting model requires the use of the Daily CPI during all levels of inflation (low, high and hyperinflation) and deflation.

Nicolaas Smith

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

 

Three measurement bases in IFRS

November 9, 2014 in Uncategorized

 

Three measurement bases in IFRS

Very interestingly the same three measurement bases are used under both Historical Cost Accounting and its alternative authorized in IFRS, namely, Capital Maintenance in Units of Constant Purchasing Power.

1. Historical Cost
2. Fair Value
3. Units of Constant Purchasing Power

Click below for the application of these three measurement bases under

Historical Cost Accounting 

II Capital Maintenance in Units of Constant Purchasing Power

The implementation of one of the accounting models results in a paradigm completely different from the other.

There is only one reason for that. The stable measuring unit assumption: the assumption accountants make that money was, is and always will be perfectly stable in real value; that there never were, are or ever will be inflation and deflation.

The stable measuring unit assumption is always implemented under HCA:

(i) net monetary gains or losses up to hyperinflation and during deflation were/are never calculated and accounted

plus

(ii) nominal equity is assumed to be equal to net assets in nominal value. No entity ever knew or now knows whether it kept or keeps or will keep the real value of all contributions to equity constant over the lifetime of the entity.

The stable measuring unit assumption is never implemented under CMUCPP:

(a) net monetary gains or losses are always calculated and accounted

plus

(b) all historical (for example, yesterday´s) economic values (all items) are always updated till the current (today´s) real value in terms of the Daily CPI because the general price level changes at least daily resulting in the constant purchasing power (real value) of equity being maintained constant in all entities that at least break even in real value over time .

Nicolaas Smith

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Measurement Bases under the IFRS Units of Constant Purchasing Power Paradigm

November 8, 2014 in Uncategorized

Measurement Bases under the IFRS Units of Constant Purchasing Power Paradigm

MEASUREMENT BASES

There are three economic items in the economy.
1. MONETARY ITEMS

 

Definition: Monetary items are all items in the money supply.

Examples: Money (local fiat currency, cash, bank notes, bank coins), capital amount of money loans, capital amount of bonds, capital amount of bunds, capital amount of bank deposits, capital amount of money and capital market instruments, etc.

MEASUREMENT BASIS

(a) Nominal Historical Cost

i.e., in nominal monetary units only during current financial year for monetary items not inflation-indexed daily in terms of the Daily CPI. These items exist in terms of Historical Cost contracts still being used under the Units of Constant Purchasing Power paradigm.

(b) Daily Updated Historical Cost

for prior year monetary items in current year financial reports and all other historical monetary items not part of current year financial reports:  

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 monetary items that are not inflation-adjusted daily.

NON-MONETARY ITEMS

Definition: Non-monetary items are all items that are not monetary items.

They are divided in two sub-groups:

2. VARIABLE REAL VALUE NON-MONETARY ITEMS

Definition: Variable items are non-monetary items with variable real values over time.

Examples: Property, plant, equipment, foreign exchange (foreign currencies), inventories, raw materials, work-in-progress, finished goods, listed and unlisted shares, trademarks, patents, bitcoins, etc

MEASUREMENT BASIS

Fair value always and everywhere updated at least daily 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

Definition: Constant items are non-monetary items with constant real values over time.

Examples: Salaries, wages, rents, bank charges, interest paid, interest received, interest payable, interest receivable, issued share capital, retained earnings, capital reserves, all other items in shareholders´equity, all items in the profit and loss account, all items in the comprehensive income statement, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary receivables, all other non-monetary payables, etc.

MEASUREMENT BASIS

Units of constant  purchasing power always and everywhere updated at least daily 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.

The above measurement bases are used in general purpose accounting / financial reporting under the IFRS authorized UCPP paradigm.

General Price Level

The general price level (indicated by the Daily CPI) changes at least daily. It can change more than once a day during hyperinflation. The only place this is understood (not the Daily CPI part) by every adult member (as well as all child street vendors) of the general public, is in a hyperinflationary economy. Consequently, all items, except current year monetary items (in “live” bank accounts, nominal HC monetary contracts, etc.) have to be updated daily in terms of all (at least daily) changes in the general price level, updated to the current (today´s) real value (in terms of today´s Daily CPI value).

Real value of all historical values change at least daily

The real value of all historical (for example, all yesterday´s) economic values expressed in terms of a monetary unit of measure (i.e., the real value of all historical items), generally change in terms of all (at least daily) changes in the general price level. Simply stated: the real value of all historical (yesterday´s) items change at least on a daily basis.

The net monetary gain or loss in nominal monetary items – as qualified above – is calculated and accounted only during the current financial period only under IFRS authorized Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily CPI, i.e., only under the IFRS authorized Units of Constant Purchasing Power paradigm.

UCPP paradigm authorized in IFRS 25 years ago

Capital Maintenance in Units of Constant Purchasing Power was authorized in IFRS in the original Framework (1989), Par. 104 (a) which stated: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power”.  This paragraph appears unaltered in the current Conceptual Framework (2010), Par. 4.59 (a).

Irresponsible IASB

CMUCPP is required in IFRS in IAS 29 Financial Reporting in Hyperinflationary Economies. The guidance for CMUCPP given in IAS 29 unfortunately does not result in the achievement of actual CMUCPP in a hyperinflationary economy as a result of the use of the monthly published CPI. Only the use of the Daily CPI can result in actual CMUCPP. The IASB very irresponsibly refuses to change IAS 29 to require the use of the Daily CPI.

The IASB very irresponsibly also refuses to deal with the Units of Constant Purchasing Power measurement basis as it has always been used under HCA in its current discussions regarding Measurement in the Conceptual Framework although all HC entities (almost all entities) used it over the last 100 years, all HC entities (almost all entities) use it today and all HC entities (almost all entities) will use it in the future. This is a very good example of the fact that all members of the current IASB and IASB staff have very little knowledge and almost no understanding of the effect of Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI authorized in IFRS 25 years ago. This continues to result in the issuance of low quality IFRSs by a very stubborn and boldly disrespectful IASB, mainly almost completely ignorant of the economic effects of financial capital maintenance in units of constant purchasing power in terms of the Daily CPI.

Nicolaas Smith

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

 

SAICA’s members use IFRS as an excuse to hide inefficiencies

November 6, 2014 in Uncategorized

SAICA’s members use IFRS as an excuse to hide inefficiencies

“South African Institute of Chartered Accountants (Saica) executive president, Ignatius Sehoole has
expressed concern about the number of companies criticising financial reporting standards in SA.
Several companies have said that International Financial Reporting standards as applied in SA did
not give a true reflection of financial performance. ‘It is perplexing to see that companies do this
every year. Not only is it a way of explaining why their results have not met expectations, but it is
also a fine decoy for focusing attention away from more sensitive corporate issues,’ Sehoole said
yesterday.”
How do you feel about this comment? The president of SAICA says that his members are deceitful. Hey, Mr President, who pays your salary? Are CEOs of listed companies supposed to submit to the stupidities of IFRS without a fight? I am surprised that more has not been written about this in the past. No, I am not surprised! SAICA will not tolerate any criticisms of IFRS. My articles were rejected by them because of my outspoken objection to some of the issues in the standards. When I tried to get the weekly financial journals to publish some of the issues I was told: “These issues are of no interest to our readers.”
Accounting standards are supposed to be written with the objective of enabling management of
companies to report fairly on the performance of the companies under their stewardship. Because
of stupidities in IFRS and because auditors in SA have an attitude that regardless of how stupid
IFRS is, you must comply at all costs, we have the situation in SA today that companies are reporting nonsense figures. How can any logical accountant justify the following accounting treatments:
1. Charging the cost of buying back one’s shares to profit.
2. Writing off investments held on behalf of creditors to the company’s own equity.
3. Charging future year’s rental expenses to the current year or crediting future year’s rental income in the current year.
4. Creating liabilities for future operating rental payments or assets for future operating rental
receipts.
5. Charging the capital cost of creating a BEE scorecard to headline earnings.
6. Charging the cash cost of rewarding staff directly to equity.
7. Raising liabilities that have absolutely no chance of ever materialising.
8. Capitalising intangible assets bought but not being allowed to capitalise identical assets
developed.
9. Providing for deferred tax at the full income tax rate on assets that are valued after tax.
10. Depreciating buildings that appreciate.
11. Taking profits before selling the goods.
12. Revaluing fixed asset directly to income.
13. Including in headline earnings capital gains on equity investments but not capital gains on
investment properties.
14. Capitalising assets of suppliers, which the entity does not own.
15. Recognising gains and losses on foreign exchange when the company is fully hedged.
And we won’t even talk about the all-time ludicrous effect that expensing embedded derivates has on the profits of some entities. I have listed over 150 adjustments analysts have to make to financial statements to arrive at economic reality!
Mr Sehoole has no idea how the above stupidities wreck havoc on relationships between auditors and clients. I know, because often I am called in to assist. However, SAICA and the IASB will not listen to or tolerate any criticism of IFRS. They want the world to believe that they have created a thing of beauty and perfection. If anyone questions the validity of some standard, they retaliate.
What I want to know is: How are they going to handle the situation when they are eventually forced to change a standard that has been causing chaos it the past? For example, after ten years the IASB has realised that its standard on deferred tax is wrong (they would not listen to us at the time).
Practice Review has been penalising members for not apply this wrong standard and SAICA has been threatening disciplinary action against practitioners who have not complied. Will there be an apology for all the chaos caused?
The standard setters will save much embarrassment to themselves if they listen to their constituents instead of retaliating with accusations of deceit.
January 2008

Criticisms of IFRS

November 5, 2014 in Uncategorized

Criticisms of IFRS

1. IASB refusal to require Daily Indexing in IAS 29

IAS 29 Financial Reporting in Hyperinflationary Economies, which gives guidance regarding the implementation of capital maintenance in units of constant purchasing power during hyperinflation, does not actually result in such capital maintenance being achieved in practice. This was clearly demonstrated during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy with no positive effect at all. The reason being that IAS 29 does not require the use of the Daily CPI which is the only way such capital maintenance can be achieved. The IASB refuses to urgently review IAS 29 to require the use of the Daily CPI despite consistent requests for such a review and despite the fact that such a change would help countries like Venezuela and Belarus to stabilize their non-monetary economies very similar to the way it was done in Brazil from 1964 to 1994 with the use of a Daily Index: especially the Unidade Real de Valor Daily Index used in Brazil in 1994.

 

2. IASB refusal to recognize the 100-year-old use of the Units of Constant Purchasing Power Measurement Basis under HCA

The IASB ignores measurement in units of constant purchasing power as a measurement basis to update certain expenses (e.g., salaries, wages, etc.) and certain prices (e.g., utilities) under the Historical Cost Accounting model (under the HC paradigm) in the Measurement section of the Conceptual Framework despite the fact that all entities (including the IFRS Foundation) that used HCA over the last 100 years, implemented it, all HCA entities (including the IFRS Foundation) use it today and all HCA entities (including the IFRS Foundation) will use it in the future.

3. IASB refusal to deal with the UCPP paradigm under Measurement in the CF

The IASB refuses to deal with the Units of Constant Purchasing Power paradigm under the Measurement section in the Conceptual Framework despite the fact that it has been used for 25 years in IFRS in IAS 29 and despite the fact that it is specifically defined in the Capital Maintenance section of the Conceptual Framework.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Bitcoin´s Achilles´ heel

November 2, 2014 in Uncategorized

Bitcoin´s Achilles´ heel

The bitcoin dream: if only it could be money. Imagine!

Why is bitcoin not money? Because its price in terms of real currencies is not relatively stable.

Let´s assume for some unknown reason bitcoin´s price would become relatively stable with a 2% decrease in real value per annum. That would make it a medium of exchange with a relatively stable price that could be used as a relatively stable store of value, very similar to the US Dollar, Euro, British Pound, etc.

What would happen in a country with high inflation like Argentina?

People would start keeping their savings in bitcoin, they would start pricing their products in bitcoin, they would start doing business only in bitcoin, all prices would be stated in bitcoin. The CPI could be calculated from items priced only in bitcoin. Bitcoin would be able to be used as a unit of account for accounting purposes.

Result: it would be as if the Argentinean economy were dollarized: i.e., the economy would stabilize. However, the stabilizing currency would not be the US Dollar, but bitcoin.

Unfortunately this will never happen because bitcoin is not money. It is not a medium of exchange with a relatively stable price.

Bitcoin´s inherent quality of never being able to have a relatively stable price is thus its Achilles’ heel.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Silliest statements in accounting

October 31, 2014 in Uncategorized

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

_______________________________________________________________________________