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Tuesday, 7 February 2012

Comment Letter: IFRS 'X' Capital Maintenance in Units of Constant Purchasing Power


Submitter                                     Organization                                                       Date

Nicolaas Smith           Constant Item Purchasing Power Accounting          26 January 2012

International Accounting Standards Board

30 Cannon Street

London EC4M 6XH

United Kingdom





Dear Mr Hoogervorst,



I wish to thank the IASB and the Special Commission created by the Federación Argentina de Consejos Profesionales de Ciencias Económicas for giving me access to the Commission´s Research Paper: Inflation.



I would kindly like to make the following comments regarding this excellent research paper.



The Argentinean Federation states that:



The proposal is for International Financial Reporting Standards to be ‘in a position to provide an adequate answer to the effects of inflation on financial reporting;’



‘An inflation rate of 100% over three years (the limit currently included in IAS 29) equals 26% per year, but much lower rates are sufficient to distort financial statements, if inflation effects are not properly recognized,’ and



‘The main effects of inflation on financial statements’ relate to items such as capital contributed and comprehensive income.



The Federation indicates in the Basis for Conclusions, Effects of the omission of inflation restatements that inflation affects revenues, expenses, inventories, property, plant, equipment, intangible assets, investment properties, goodwill, dividends and interest.

It is noted that:



‘Inflation is always and everywhere a monetary phenomenon,’ per Milton Friedman.



Purchasing power of non monetary items does not change in spite of variation in national currency value.’







Gucenme, U. and Arsoy, A. P. (2005). Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 – 2005. Special Issue Accounting for the Global and the Local: The Case of Turkey. Critical Perspectives on Accounting, Volume 20, Issue 5, July 2009, p. 568–590.



Inflation and deflation have no effect on the real value of non-monetary items.



Comprehensive income, revenues, expenses, contributions from and distributions to owners and interest, for example, are constant real value non-monetary items. Inventories, property, plant, equipment, intangible assets, investment properties and goodwill are variable real value non-monetary items. IAS 29 defines them as non-monetary items. The definition of a constant real value non-monetary item is derived in IFRS.



It is not inflation and deflation affecting the real value of constant real value non-monetary items not maintained constant over time. It is the implementation of the stable measuring unit assumption as part of the traditional Historical Cost Accounting model during inflation and deflation.



Inflation erodes the real value of only monetary items not inflation-adjusted in terms of a Daily Consumer Price Index. Deflation creates real value in only monetary items not deflation-adjusted in terms of a Daily Consumer Price Index. It is currently (2012) impossible to inflation-adjust or deflation-adjust bank notes and coins. Their real values are always affected by inflation and deflation.



Inflation in many different countries has no effect on the real value of monetary items inflation-adjusted in terms of a Daily CPI, for example the more than 2.68 trillion US Dollars (2009)1 of government inflation-indexed bonds currently inflation-adjusted daily in the world economy in terms of a Daily CPI which is a lagged, daily interpolation of the monthly published CPI.



1 (Standard Life Investments. (2012). An Investor´s Guide to Inflation–Linked Bonds. Retrieved 7 January 2012, from Standard Life Investments’s Web site.)



According to the Banco Central de Chile, 20 to 25 per cent of the broad M3 money supply in Chile is currently inflation-adjusted daily in terms of the Unidad de Fomento (Written communication. (2011)) which is a monetized daily indexed unit of account started in 1967 and published daily by the Banco Central de Chile since 1990.



The above are all monetary items that exist in a zero cost of inflation (not zero inflation) space. They are all monetary items, but, their real values are not affected by inflation. Inflation-adjusting the entire money supply (excluding bank notes and coins of the fiat functional currency created by means of fractional reserve banking within an economy) under complete co-ordination would result in zero cost of inflation (not zero inflation) in only the complete money supply (as qualified) in an economy.



The requirement in IAS 29, Par. 9 that ‘the gain or loss on the net monetary position shall be included in profit or loss and separately disclosed,’ deals with the ‘effects of inflation’ on only monetary items not inflation-adjusted in terms of a Daily CPI only during hyperinflation.



However, the definitions of monetary items in IAS 29, Par. 12 and IAS 21, Par. 8 need to be improved because non-monetary items are all items that are not monetary items. The definition of monetary items thus determines which items are non-monetary items per IFRS. When the definition of monetary items is incorrect then the division of monetary and non-monetary items is incorrect as it currently is in terms of IFRS.



IAS 29 is ineffective2 regarding the effect of the stable measuring unit assumption (not the ‘effects of inflation’) on constant real value non-monetary items, e.g. capital contributed and comprehensive income, not maintained constant during hyperinflation.



2 See my comment letter on the Agenda Consultation 2011.



A monetary item is one of the three basic economic items:



(a) Monetary items

(b) Variable real value non-monetary items

(c) Constant real value non-monetary items



Definition



Monetary items are units of money held and items with an underlying monetary nature which are substitutes for units of money held.



Examples of units of money held are bank notes and coins of the fiat currency created within an economy by means of fractional reserve banking. Examples of items with an underlying monetary nature which are substitutes for money held include the capital amount of: bank loans, bank savings, credit card loans, car loans, home loans, student loans, consumer loans, commercial and government bonds, Treasury Bills, all capital and money market investments, notes payable, notes receivable, etc. when these items are not in the form of money held.



The concept of a constant real value non-monetary item is derived in IFRS



IFRS are principles based standards. The definition of a constant real value non-monetary item is derived from the authorization of financial capital maintenance in units of constant purchasing power as the third capital maintenance concept at all levels of inflation and deflation 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.’



When financial capital maintenance is measured in units of constant purchasing power it means, in principle, that capital (all items in shareholders´ equity) is a constant real value non-monetary item and that the real value of capital is equal to the real value of net assets.



Definition



A constant real value non-monetary item is a non-monetary item with a constant real value over time whose value within an entity is not generally determined in a market on a daily basis.



Examples include borrowing costs, comprehensive income, interest paid, interest received, bank charges, royalties, fees, short term employee benefits, pensions, salaries, wages, rentals, all other income statement items, issued share capital, share premium accounts, share discount accounts, retained earnings, retained losses, capital reserves, revaluation surpluses, all accounted profits and losses, all other items in shareholders´ equity, trade debtors, trade creditors, dividends payable, dividends receivable, deferred tax assets, deferred tax liabilities, all taxes payable, all taxes receivable, all other non-monetary payables, all other non-monetary receivables, provisions, etc.



On the other hand: a non–monetary item which is not a constant real value non–monetary item is a variable real value non–monetary item.



Examples include quoted and unquoted shares, property, plant, equipment, inventory, intellectual property, goodwill, foreign exchange, finished goods, raw material, etc.



Definition



A variable real value non-monetary item is a non-monetary item with a variable real value over time.



The Argentinean Federation states:



‘It is also a basic principle, an implicit but an obvious one, that the measurement unit, i.e. the currency, must have a constant value over time.’



‘It is not acceptable either that accounting uses as the common denominator a measurement unit whose value is variable.’



‘The use of different currencies in different times or circumstances during a period would be unreasonable. However, the current IFRSs allow preparing the financial statements by using a currency that may have a very different value at the beginning and the end of the period.’



All functional currencies within free and open internal economies, with no governmental interference in monetary policy, generally do not have a constant real value over time for more than a month or two. A functional currency is generally unstable in real value over time within a free and open internal economy.



One of the underlying principles of the globally implemented, generally accepted, traditional Historical Cost Accounting model is the stable measuring unit assumption whereby it is assumed that changes in the purchasing power of money are not sufficiently important to require financial capital maintenance in units of constant purchasing power during inflation and deflation. HCA was originally authorized in IFRS in the Framework (1989), Par. 104 (a) as an optional accounting model. The other option authorized in Par. 104 (a) in 1989 was financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation under which there is no stable measuring unit assumption. Financial capital maintenance in units of constant purchasing power is fundamentally different from financial capital maintenance in nominal monetary units (HCA).



‘In the opinion of the Commission, the application of the proposed standard will significantly improve the financial reporting by requiring that all the components in

a set of financial statements be expressed in the same unit of measurement.’ Covering letter, p. 8



The Argentinean Federation thus requires financial capital maintenance in units of constant purchasing power in the application of the proposed standard. I agree with the Federation´s choice.



‘The financial statements from the application of the mechanism proposed will recognize both gains and losses produced by the effects of inflation on monetary items.’ p. 8



The Argentinean Federation thus recognizes that inflation and deflation only affect the real value of monetary items not inflation-adjusted and deflation-adjusted daily, respectively, in terms of a Daily Consumer Price Index and not non-monetary items.



‘The financial statements will recognize losses produced by impairment losses that remain concealed when financial statements are not adjusted.’ p. 8



The Argentinean Federation thus recognizes that there are two totally different processes of real value erosion involved in an economy during inflation: 



(1) One eroding the real value of only monetary items not inflation-adjusted daily in terms of a Daily CPI, namely, the economic process of inflation and



(2) A totally different one eroding only the real value of constant real value non-monetary items not maintained constant daily, namely, the implementation of the Generally Accepted Accounting Practice of applying the stable measuring unit assumption during inflation under HCA as authorized in IFRS in 1989.



Everybody who implements IFRS has to choose a capital concept which will indicate the capital maintenance concept as well as the measurement bases which determine the accounting model to be used. There are three capital and capital maintenance concepts authorized in IFRS:



(a) Three concepts of capital



The concepts of capital in the Conceptual Framework (2010), paragraph 4.57 give rise to the following three fundamentally different concepts of capital during inflation and deflation:



(i) Physical capital. See Par. 4.57 & 4.58.

(ii) Nominal financial capital. See Par. 4.59 (a).

(iii) Constant purchasing power financial capital. See Par. 4.59 (a).



(b) Three concepts of capital maintenance



The concepts of capital in Par. 4.57 give rise to the following three fundamentally different concepts of capital maintenance during inflation and deflation:



(i) Physical capital maintenance. Optional during inflation and deflation. The Current Cost Accounting model is prescribed in IFRS when the physical capital maintenance concept is implemented. See Par. 4.61.



(ii) Financial capital maintenance in nominal monetary units (HCA). Authorized in IFRS but not prescribed—optional during inflation and deflation. See Par. 4.59 (a).



(iii) Financial capital maintenance in units of constant purchasing power. Authorized in IFRS but not prescribed—optional at all levels of inflation and deflation. See Par. 4.59 (a).



It is clear from the Argentinean Federation´s covering letter that they propose to implement the third capital maintenance concept authorized in IFRS, namely, financial capital maintenance in units of constant purchasing power, in the proposed new IFRS.



Certain rules for financial capital maintenance in units of constant purchasing power are defined in IAS 29 which makes it a very important IFRS.



It is clear that the Argentinean Federation proposes a change of the fundamental accounting model: a departure from HCA.



‘Restatement of financial statements’ as required in IAS 29 is not a departure from HCA.



IAS 29 Par. 39 (b) states:



‘The following disclosures shall be made:



(b) whether the financial statements are based on a historical cost approach or

a current cost approach.’



PricewaterhouseCoopers states:



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



PricewaterhouseCoopers. (2006). Financial Reporting in Hyperinflationary Economies, Understanding IAS 29, p. 3.



It is clearly the intention of the Argentinean Federation to affect a fundamental change in the financial capital maintenance concept implemented, namely, from financial capital maintenance in nominal monetary units (HCA) to financial capital maintenance in units of constant purchasing power: a departure from what is done in terms of IAS 29.



Taking all of the above into account:



When entities implement a fundamental change in their accounting model, namely, financial capital maintenance in units of constant purchasing power when annual inflation is equal to or greater than 10 per cent or cumulative inflation over three years is equal to or greater than 26 per cent, as the proposed new IFRS would require them to do, it would, in my opinion, not be reasonable to require them to change back to a fundamentally different accounting model, namely, financial capital maintenance in nominal monetary units (HCA) when inflation returns to lower levels.



(1) Primarily when it is taken into account that financial capital maintenance in units of constant purchasing power as proposed by the Argentinean Federation would automatically maintain the constant purchasing power of shareholder´s equity constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus – whether they own any revaluable fixed assets or not.



When entities follow the Argentinean Federation´s proposal and when they then experience and see and realize in practice for themselves and when the automatic, indefinite-period, real value maintaining effect of financial capital maintenance in units of constant purchasing power in terms of a Daily CPI at all levels of inflation and deflation as qualified above is specifically pointed out to them, then it would not be reasonable to require them to go back to HCA: to require them to go back to implementing the very erosive stable measuring unit assumption again.





(2) It also has to be noted that the Argentinean Federation stated:



‘Most of the Commission members have considered that such decision would involve a drastic change in the accounting practices, particularly, for those countries without an inflationary track-record.’



(3) It would also be very costly to an entity and to a country´s economy as it has always been in the past and as it still is today:



Although nominal financial capital is always equal to nominal net assets measured in nominal monetary units under financial capital maintenance in nominal monetary units (HCA) as authorized in IFRS, it is only true in real value during inflation in the single case where an entity always invests 100 per cent of the original updated real value of all contributions to shareholders´ equity in revaluable fixed assets (revalued or not) with an equivalent updated fair value which is most probably only the case in hotel, hospital and other property-intensive entities.



In the vast majority of cases the stable measuring unit assumption (not inflation - as generally accepted) erodes the real value of that portion of shareholders´ equity (e.g. total retained earnings) never maintained constant under HCA with sufficient revaluable fixed assets (revalued or not) currently amounting to vast amounts of constant item real value eroded in the world´s capital investment base each and every year for as long as HCA is implemented as the global, traditional accounting model. (See the ongoing financial crisis).



(4) Financial capital maintenance in units of constant purchasing power as proposed by the Argentinean Federation would automatically stop this erosion for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus – whether they own any revaluable fixed assets or not, and instead would maintain vast amounts per annum for an unlimited period of time in constant item real value in the world´s capital investment base at current levels of world inflation - if it were to be implemented worldwide.



Prof. Rachel Baskerville, Associate Professor, School of Accounting and Commercial Law at the Victoria University in Wellington, New Zealand, changed her publication 100 Questions (and Answers) about IFRS (question 38) on the Social Science Research Network to confirm that there are three concepts of capital maintenance authorized in IFRS after I pointed it out to her. Prof. Baskerville discussed the change with her colleague Prof. Kevin Simpkins before changing her article. He is the Chairman of the New Zealand Accounting Standards Review Board. She then added this conclusion to her article:



‘There is much to be gained from moving away from reporting on the basis Financial Capital Maintenance in Nominal Monetary Units.’ (Baskerville, 2010)







The Deutsche Bundesbank very wisely stated:



‘The benefits of price stability, on the other hand, can scarcely be overestimated, especially as these are, in principle, unlimited in duration and accrue year after year.’



Deutsche Bundesbank. (1996). Annual Report, p. 83.



Financial capital maintenance in units of constant purchasing power as proposed by the Argentinean Federation would mean automatic complete ‘price stability’ for an indefinite period of time in the constant purchasing power of an entity´s shareholder´s equity as qualified above and consequently in that part of a country´s and the world´s capital investment base if it were to be applied worldwide.



In my opinion entities should be required to carry on with financial capital maintenance in units of constant purchasing power at all future levels of inflation and deflation once they have made the fundamental change from financial capital maintenance in nominal monetary units (HCA) to financial capital maintenance in units of constant purchasing power.



The understanding of the very erosive effect (the cost) of the stable measuring unit assumption (not inflation) on the real value of only constant real value non-monetary items never maintained constant under HCA during inflation (currently still generally confused with or seen as the same as the cost of inflation in monetary items not inflation-adjusted daily in terms of a Daily CPI which is not calculated and accounted under HCA during low inflation and deflation) as well as the automatic, indefinite, real value maintaining effect on constant real value non-monetary items of financial capital maintenance in units of constant purchasing power in terms of a Daily CPI at all levels of inflation and deflation as qualified above (authorized in IFRS in 1989) are  not yet generally accepted, but easy to understand.



Entities implementing the stable measuring unit assumption (HCA) operating in economies with inflation rates below 10 per cent per annum or below 26 per cent cumulative inflation over three years should be very strongly encouraged to change over to financial capital maintenance in units of constant purchasing power as proposed by the Argentinean Federation. They should then not be required to change back to HCA at any future rate of inflation or deflation.



Financial capital maintenance in units of constant purchasing power requires a daily rate



I agree with the Argentinean Federation that the Consumer Price Index should be used as a general price level index.



It is noted that:



(1) When it is intended to maintain the real value of an item, for example, a government inflation-indexed bond, it is immediately realized that a Daily Consumer Price Index is required since these bonds trade on a daily basis. Many countries use Daily CPIs to value these bonds on a daily basis.



(2) During hyperinflation a daily US Dollar (or other relatively stable foreign currency) parallel rate is always spontaneously used by the population and in the consumer markets.



(3) Brazil, for example, used government supplied daily indices from 1964 to 1994 to index non-monetary items on a daily basis in the entire economy during 30 years of very high inflation and hyperinflation of up to 2000 per cent per annum.



(4) Chile has been using a monetized daily indexed unit of account, the Unidad de Fomento, since 1977. Its daily value is calculated and published daily by the Banco Central de Chile since 1990.



(5) Prof. Robert Shiller stated:



‘Another coordination problem is that we must decide, and agree, on a way to smooth the CPI. We should not define prices just in terms of the latest CPI because the CPI is vulnerable to sudden jumps from month to month. This is particularly true when we are talking about indexing financial contracts to the CPI. A unit of account like the UF would smooth out the CPI movements, otherwise there would be important jumps in deposit balances on the dates of new announcements of the CPI. Thus, the smoothing of the CPI in producing the UF has also been a fundamental part of the functioning of the UF as an analogue of money.’






A Daily CPI is thus a fundamental requirement when implementing financial capital maintenance in units of constant purchasing power in terms of a daily rate as the basic accounting model in the economy.



Many countries issue government and commercial inflation-indexed bonds. The most liquid markets are US Treasury Inflation Protected Securities (TIPS), the UK Index–linked Gilts and the French OATi/OAT€I market. Japan, Germany, Italy, Canada, Australia, Sweden, Iceland, Portugal, Greece, Finland, Netherlands, Spain, Saudi Arabia, Qatar, Kuwait, UAE, South Korea, New Zealand and Hong Kong also issue inflation–indexed government bonds, as well as a number of Emerging Markets such as Brazil, Turkey, Chile, Mexico, Colombia, Argentina and South Africa.



The British government began issuing inflation–linked Gilts in 1981.



Most of these countries use a Daily CPI to value these bonds on a daily basis. A Daily CPI is a one or two month lagged, daily interpolation of the monthly published CPI.



A country which issues inflation–indexed government bonds and uses a one or two month lagged interpolated Daily CPI to determine the daily prices of these bonds can use the Daily CPI (already in use in many countries for many years) for the implementation of financial capital maintenance in units of constant purchasing power in terms of a daily index at all levels of inflation and deflation as proposed by the Argentinean Federation.



A country with no inflation–indexed sovereign bond market can use a Daily CPI based on the formula used to calculate the Unidad de Fomento in Chile.



The Central Bank of Chile translates the Unidad de Fomento on their website as An Inflation–Indexed Accounting Unit and CPI–Indexed Unit of Account (UF).



The UF´s nominal value in Chilean escudos was originally (1967) updated every quarter which would be the official rate for the following quarter. The nominal index was updated monthly from October 1975, with the currency changeover to pesos, till 1977. Since July 1977 the change in the nominal value was calculated daily by interpolation between the tenth of each month and the ninth of the following month, according to the monthly variation of the Indice de Precios al Consumidor (IPC), the Chilean Consumer Price Index. The Banco Central de Chile has calculated and published the UF´s value daily since 1990. The UF is a monetized lagged daily interpolation of the monthly published Chilean CPI. The IPC is independently calculated and published monthly by the Chilean National Statistical Institute.



The UF daily rate is available on the Chilean Central Bank´s website.



Using the CPI published monthly may result in sudden increases or decreases in values on the date the new monthly CPI is published. A Daily CPI solves this problem: it smooths the CPI. There are no surprises. The UF is a very successful monetized daily indexed unit of account used in Chile during the last 45 years (2012) and was copied by Colombia, Ecuador, Mexico, and Uruguay.



A Daily CPI is the daily index used to calculate the daily price of a government inflation–indexed bond in a particular country or is based on the formula used to calculate the UF in Chile.



Formula



‘The UF is now a lagged daily interpolation of the monthly consumer price

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



UF t = 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 t falls).’ (Shiller, 1998, p.3)



The above formula applies to the UF in Chile where 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 t falls if t is 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 t falls), and π is the monthly inflation rate for the calendar month preceding the calendar month in which t falls if t is 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 t falls).



A Daily CPI is very similar to, but not exactly the same as a monetized daily indexed unit of account, e.g. the UF in Chile. The UF is monetized; i.e. it is stated in terms of the Chilean peso. A Daily CPI is not automatically monetized.



A Daily CPI is, like the monthly CPI on which it is based, a non–monetary general price level index value. Monetization depends on generally accepted monetary practices in an economy (see the UF in Chile). A Daily CPI can be monetized and used as a monetized daily indexed unit of account with payments being made in the national monetary unit – depending on users in an economy. Monetization is not a necessity.



A Daily CPI is not a unit of account just like the CPI is not a unit of account for accounting purposes. The US Dollar, Euro, Yen, Yuan, etc. are the internal nominally fixed monetary units of account, unstable in real value, used in their respective countries as the national unstable monetary unit of account for accounting purposes during low inflation, high inflation, hyperinflation and deflation. The US, EU, Japanese and Chinese CPIs are not units of account for accounting purposes. They are non–monetary general price level indices. So are their Daily CPIs. Prices are not quoted in CPIs or in Daily CPIs – although they can be.



Conclusion



IFRS are principles based standards. The Argentinean Federation´s proposed new IFRS should thus state the principles involved in financial capital maintenance in units of constant purchasing power in terms of a Daily CPI at all levels of inflation and deflation.



They include:



1 The real value of capital is always equal to the real value of net assets.



2 The capital concept to be implemented: Constant purchasing power capital.



3 The capital maintenance concept to be implemented: Financial capital maintenance in units of constant purchasing power in terms of a Daily CPI at all levels of inflation and deflation.



4 The stable measuring unit assumption is never implemented under capital maintenance in units of constant purchasing power in terms of a Daily CPI.



5 Monetary items are units of money held and items with an underlying monetary nature which are substitutes for units of money held.



6 Non-monetary items are all items that are not monetary items



7 Non-monetary items are sub-divided in:



(a) Variable real value non-monetary items and



(b) Constant real value non-monetary items.



A variable real value non-monetary item is a non-monetary item with a variable real value over time.



A constant real value non-monetary item is a non-monetary item with a constant real value over time whose value within an entity is not generally determined in a market on a daily basis.



8 Daily measurement is required of all items in terms of:



(a) a Daily Consumer Price Index or monetized daily indexed unit of account, e.g. the Unidad de Fomento in Chile, during low inflation, high inflation and deflation and



(b) in terms of a relatively stable foreign currency parallel rate (normally the US Dollar daily parallel rate) or a Brazilian-style Unidade Real de Valor daily index rate during hyperinflation. Hyperinflation is defined in IAS 29 as cumulative inflation being equal to or approaching 100 per cent over three years, i.e. 26 per cent annual inflation for three years in a row.



Measurement



9 Historic and current period monetary items are required to be inflation-adjusted on a daily basis as detailed above. When they are not inflation-adjusted on a daily basis during the current financial period then the net monetary loss or gain as defined in IAS 29 is required to be calculated and accounted. All monetary items of the fiat currency created within an economy by means of fractional reserve banking except actual bank notes and coins of this currency can be inflation-adjusted on a daily basis within an economy. This would remove the total cost of inflation (not inflation) from the entire money supply except from actual bank notes and coins which generally make up about seven per cent of the money supply in advanced economies.



10 Current period variable real value non-monetary items are required to be measured on a daily basis in terms of IFRS excluding the stable measuring unit assumption and the cost model in the valuation of property, plant, equipment and investment property after recognition. When they are not valued on a daily basis in terms of IFRS as qualified, then they as well as historic variable real value non-monetary items are required to be updated daily in terms of a Daily CPI as indicated above. Current period impairment losses in variable real value non-monetary items are required to be treated in terms of IFRS. They are constant real value non-monetary items once they are accounted. All accounted losses and profits are constant real value non-monetary items.



11 Historic and current period constant real value non-monetary items are always and everywhere required to be measured in units of constant purchasing power in terms of a Daily CPI as detailed above.



12 The calculation and accounting of the net constant item loss or gain is required when constant real value non-monetary items are not measured daily in terms of a Daily CPI in units of constant purchasing power.



13 Once an entity has started financial capital maintenance in units of constant purchasing power in terms of a Daily CPI, it is required to continue with that model at all future levels of inflation and deflation.



14 Entities in economies with inflation rates below 10 per cent per annum or cumulative inflation over three years below 26 per cent should be very strongly encouraged to implement financial capital maintenance in units of constant purchasing power as proposed by the Argentinean Federation. Countries should be strongly encouraged to do this on a national basis.



15 Inflation and deflation only affect the real value of monetary items not inflation-adjusted and not deflation-adjusted, respectively, on a daily basis in terms of a Daily CPI.



16 The stable measuring unit assumption affects the real value of only constant real value non-monetary items not maintained constant daily by means of measurement in units of constant purchasing power in terms of a Daily CPI at all levels of inflation and deflation.



17 The terms ‘restatement’, ‘restated’, ‘inflation restatements’ and ‘inflation-adjustment of financial statements’ are not be used in the proposed new IFRS.



18 The proposed new IFRS is a departure from Historical Cost Accounting at all levels of inflation and deflation.



I support the Argentinean Federation´s excellent proposal as qualified in this comment letter as well as in the attached appendix in which I suggest some improvements to the Argentinean Federation´s proposal which would, in my opinion, result in effective comprehensive financial capital maintenance in units of constant purchasing power in terms of a Daily CPI at all levels of inflation and deflation which would automatically maintain the constant real value of shareholders´ equity constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus – whether they own any revaluable fixed assets or not.



An ideal title for the new IFRS would be Capital Maintenance in Units of Constant Purchasing Power.



Please do not hesitate to contact me if you need any further clarifications regarding the concepts stated or any aspect of this comment letter and appendix.



Yours sincerely,



Nicolaas Smith




I promote financial capital maintenance in units of constant purchasing power as authorized in the original Framework (1989), Par. 104 (a) in terms of a Daily Consumer Price Index at all levels of inflation and deflation.



CIPPA automatically maintains the constant purchasing power of shareholders´ equity constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus – whether they own any revaluable fixed assets or not.































Appendix: Suggested improvements to the draft IFRS prepared by the Special Commission created by the Federación Argentina de Consejos Profesionales de Ciencias Económicas (September 2010) to replace IAS 29 Financial Reporting in Hyperinflationary Economies.



My suggested improvements are in italics.



Reasons for issuing the [Preliminary Draft] IFRS

IN2

The International Accounting Standards Board (IASB) undertook this project for these reasons:

(a) at present, IAS 29 applies only to the financial statements of an entity whose functional currency is the currency of a hyperinflationary economy;

(b) in financial reporting statements:

(i) only monetary items not inflation-adjusted in terms of a daily index or rate may be materially affected by changing prices inflation and

(i) only constant real value non-monetary items not maintained constant by means of capital maintenance in units of constant purchasing power in terms of a daily index or rate during inflation may be materially affected by the stable measuring unit assumption in economies that are inflationary but not “hyperinflationary”, as this term is characterized in IAS 29;

 (c) currently, there is neither requirement nor encouragement to disclose and to stop the effect of:

(i) (high) inflation on only monetary items not inflation-adjusted in terms of a daily index or rate and

(ii) the effect of the stable measuring unit assumption on only constant real value non-monetary items not maintained constant by means of capital maintenance in units of constant purchasing power in terms of a daily index or rate during inflation before an economy becomes hyperinflationary and IAS 29 must be applied;

(d) it is difficult to justify a different accounting treatment when high inflation but not hyperinflation exists;

(e) Inflation restatements Measures to remedy the effects of:

(i) inflation on only monetary items not inflation-adjusted in terms of a daily index or rate and

(ii) the stable measuring unit assumption on only constant real value non-monetary items not maintained constant in terms of a daily index or rate during inflation are already required in some countries where IFRSs are mandatory or are expected to be mandatory for some issuers of financial statements.

Main features of the [Preliminary Draft] IFRS

IN3

The main objective of this [Preliminary Draft] IFRS is to require that, when the inflation rate accumulated in certain periods reaches certain limits, comprehensive inflation restatements capital maintenance in units of constant purchasing power in terms of a daily index or rate be performed.

Significant changes to previous IFRS

IN4

This [Preliminary Draft] IFRS:

(a) requires inflation restatements capital maintenance in units of constant purchasing power in terms of a daily index or rate  in environments where they are not mandatory according to IAS 29;

(b) explicitly specifies that inflation restatements are once an entity has adopted  capital maintenance in units of constant purchasing power in terms of a daily index or rate, a return to capital maintenance in nominal monetary units is prohibited unless certain conditions are met.  

Benefits and costs

IN5

The application of this [Preliminary Draft] IFRS in financial reporting will significantly enhance the usefulness of financial statements maintain the constant purchasing power of shareholder´s equity constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus – and will initially increase the accounting costs of each issuer of financial statements only by a small percentage of its annual total.

Effective date

IN6

An entity shall apply this [Preliminary Draft] IFRS for annual periods beginning on or after 1 January 201X. Earlier application is encouraged. An entity that applies this [Preliminary Draft] IFRS for a period beginning before 1 January 201X shall disclose this fact.

Invitation to comment

The IASB invites to make comments on all matters included in this [Preliminary Draft] IFRS, particularly on the questions set out below. Comments are most helpful if they:

(a) Refer to the questions as stated;

(b) Indicate the specific paragraph or paragraphs to which each comment relates;

(c) Contain a clear rationale;

(d) Include any alternative the Board should consider, if applicable.

Respondents should submit comments in writing for them to be received no later than [date to be determined by IASB]

Question 1) – [to be developed by IASB]

Question 2) – [to be developed by IASB]

Question …







[Preliminary Draft] International Financial Reporting Standard X Inflation Capital Maintenance in Units of Constant Purchasing Power ([Preliminary Draft] IFRS X) is set out in paragraphs 1-50. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time they appear in the [Preliminary Draft] IFRS. Definitions of other terms are given in the Glossary for International Financial Reporting Standards. [Preliminary Draft] IFRS X should be read in the context of its Core Principle and the Basis for Conclusions, the Preface to International Financial Re-porting Standards and the Conceptual Framework for the Preparation and Presentation of Financial Statements Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.



[PRELIMINARY DRAFT] INTERNATIONAL FINANCIAL REPORTING STANDARD X INFLATION CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER

Core Principles

1

General level of prices may increase (inflation) or decrease (deflation). For convenience purposes, this [Preliminary Draft] IFRS refers to inflation effects, but the concepts included below are also applicable to deflation effects2.

2

An entity shall recognize the effects of inflation of its functional currency on its financial statements implement capital maintenance in units of constant purchasing power in terms of a daily index or rate in financial reporting , if and only if when the conditions described in paragraph 5 are met.



Scope

3

This [Preliminary Draft] IFRS shall be applied by all entities when preparing consolidated or separate financial statements for a financial year or an interim period.

4

This [Preliminary Draft] IFRS does not deal with translations of measurements made in a functional currency to a different presentation currency. This issue is covered by IAS 21 The Effects of Changes in Foreign Exchange Rates.

Inflation restatements Capital maintenance in units of constant purchasing power

5

An entity shall perform comprehensive inflation restatements capital maintenance in units of constant purchasing power in terms of a daily index or rate when:

(a) The cumulative inflation rate of its functional currency for the last 12 months is equal or higher than 10%; or

(b) The cumulative inflation rate of its functional currency for the last 36 months is equal or higher than 26%.   ; or

(c) Its preceding financial statements were restated by applying this [Preliminary Draft] IFRS and paragraph 47 does not apply.

Entities in economies with inflation rates below 10 per cent per annum or cumulative inflation over three years below 26 per cent are strongly encouraged to implement financial capital maintenance in units of constant purchasing power in terms of this IFRS.

6

An entity, once it has adopted capital maintenance in units of constant purchasing power in terms of a daily index or rate as defined in this IFRS shall not perform any inflation restatement discontinue it when none of the conditions described in paragraph 5 is subsequently met.

7

Therefore, the following decision tree should be considered:

2 Generally, deflation effects are not material. If so, deflation adjustments may be omitted.



                                  START                       

                                      |                                                                                                                                                                                                                                                   

       Is the cumulative inflation rate for the last   |     Yes                                                                                                                         

        12 months equal or higher than 10%?          |-----------------------| 

                             No   |                                                                               |

        Is the cumulative inflation rate for the last  |     Yes                    |

        36 months equal or higher than 26%?          |------------------------|

                             No   |                                                                                |

         Were the preceding financial statements    |                               |  

          prepared in terms of capital maintenance  |     Yes                    |

          in units of constant purchasing power in    |------------------------|

          in terms of this IFRS?                                       |                                |

                           No    |                                                                                  | 

         Entity is strongly encouraged to implement|                                |

         capital maintenance in units of constant      |------------------------| 

         purchasing power in terms of this IFRS.        |                                |

                                                                                                                         |

                                                                                                                         |

                                                                                                                         |

                                                                                                                         V

                                                                                   Implement capital maintenance in units

                                                                                   of constant purchasing power in terms

                                                                                   of this IFRS. 



Method

Main rule

8

An accounting measure of an item in a set of financial statements reporting, shall be restated measured in terms of capital maintenance in units of constant purchasing power in terms of a daily index or rate as defined in this IFRS by using a coefficient obtained by dividing:

(a) the daily price index or rate (e.g. a relatively stable foreign currency daily parallel rate during hyperinflation) corresponding to the current (today´s) date of for the item or financial statements by

(b) the daily price index or rate corresponding to the date of the purchasing power in which the measure is stated prior to the restatement process  the current (today´s) date.

Financial statements should ideally never be printed on hard copy. They should ideally always be available only in electronic format with automatic daily inflation-adjusting of monetary items, daily updating of variable items and daily measurement of constant items in units of constant purchasing power in terms of a daily index or rate always at the current (today´s) date.

9

The date of the purchasing power in which a measure is stated prior to the restatement process measurement in terms of capital maintenance in units of constant purchasing power in terms of a daily index or rate may be the date of a transaction, the date of the last said measurement or the date of a previous restatement for inflation (i.e. the previous day or the date of the previous financial statements or, when the restatements said measurements are computed on a monthly basis, the end of the previous month) provided that items in daily accounting entries, accounting records and financial reports are always measured in terms of the current (today´s) daily index or rate when accessed or viewed at the current date (today) in any way or form.



10

For the purpose of applying paragraph 8, restatements daily transactions shall be accounted in terms of capital maintenance in units of constant purchasing power in terms of a daily index or rate as defined in this IFRS. Financial reports can be performed and recorded  prepared each month (see [not yet developed] Appendix B), or they can be performed at the date of the interim or annual financial statements shall be prepared in terms of capital maintenance in units of constant purchasing power in terms of a daily index or rate and accessed and viewed on the date of the report in terms of the daily rate on that day and thereafter always updated at the current (today´s) daily index or rate. In this last case, transactions shall be generally grouped by month, and monthly price indexes shall be used. However:

(a) longer grouping periods may be used, provided that the resulting restated measurements are not materially affected;

(b) shorter grouping periods shall be used if restated measurements resulting from monthly grouping are materially affected.

When daily price indexes related to the grouping periods are not available, they shall be estimated calculated by averaging, means of a lagged daily interpolation or extrapolation of the monthly published Consumer Price Index, e.g. based on the formula used to calculate the Unidad de Fomento in Chile 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 t falls if t is 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 t falls), and π is the monthly inflation rate for the calendar month preceding the calendar month in which t falls if t is 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 t falls).



11

Before applying rule 8, financial statements of other entities used as basis for measurement when using the equity method or the proportionate consolidation method, shall be prepared according to this [Preliminary Draft] IFRS.

12

Restated Accounting measures valued in terms of capital maintenance in units of constant purchasing power it terms of a daily index or rate shall be treated by applying the corresponding IFRSs excluding the stable measuring unit assumption and the cost model in the measurement of property, plant, equipment and investment property after recognition.





The daily price index or rate

13

The daily price index or rate used to compute the inflation restatements measurements in terms of capital maintenance in units of constant purchasing power  required by this [Preliminary Draft] IFRS shall:

(a) be the same for all financial statements reporting issued in a particular country;

(b) give a reliable representation of the daily changes in the purchasing power of the functional currency of the issuer of the financial statements;

(c) be prepared on the basis of a broad basket of goods and services;

(d) be prepared and issued on a regular daily basis by an entity with recognized independence and seriousness;

(e) be available daily when it is needed.

14

Inflation restatements Capital maintenance in units of constant purchasing power in terms of a daily index or rate should be made implemented using the best daily price index or rate available, whichever its denomination. Once selected, the same daily index or rate should be used consistently while the conditions remain mainly unchanged. In some the majority of cases, a lagged daily interpolation of the monthly published consumer price index shall be used. For example, the Daily Consumer Price Index already used to calculate the daily price of government inflation-indexed bonds or a Daily CPI based on the formula used to calculate the Unidad de Fomento in Chile.

In some others, a lagged daily interpolated wholesale price index will be more representative.

A relatively stable foreign currency daily parallel rate, normally the US Dollar parallel rate, should be used in hyperinflationary economies where the government does not make a Brazilian-style Unidade Real de Valor index available to the population on a daily basis.

15

When the functional currency of the entity is the legal currency of two or more countries, the daily price index to be used shall represent a weighted average of the changes in the purchasing power of that currency in all those countries. If an average daily index is not available, the daily index to be used shall be the most representative of the inflation in the nation where the currency has been issued.

16

The Board suggests that the daily index to be used in each country or region be selected by each standard setter. When choosing the daily price index, special consideration should be given to the fact that some consumer price indexes are affected by governmental price controls.

Application of the main rule

17

Carrying amounts measured in terms of the daily purchasing power of the functional currency at the closing date of the financial statements shall not be restated remeasured when the financial statements and the related notes are accessed or viewed on that date. Thereafter they are measured in terms of this IFRS on a daily basis in terms of the current (today´s) rate.



18

The preceding rule applies usually to accounting measures of:

(a) cash and cash equivalents (including the closing balance shown in the statement of cash flows);  

(b) assets or liabilities measured at their fair values, their fair values less costs to sell, their present values or by applying the effective interest method;

(c) interests in other entities measured by using the equity method or the proportionate consolidation method, when applied on amounts stated in terms of the purchasing power of the functional currency at the closing date of the financial statements or the reporting entity;

(d) assets stated at their recoverable amounts calculated at the closing date.

19

Accounting measures stated in terms of the purchasing power of the functional currency at a previous date shall be restated measured in terms of this IFRS by applying paragraph 8.

20

The preceding rule applies usually to accounting measures of:

(a) contributions from (or distributions to) owners;

(b) revenue;

(c) cost of assets;

(d) expenses;

(e) interests in other entities measured by using the equity method or the proportionate consolidation method, when applied on amounts stated in terms of the purchasing power of the functional currency at a date prior to the closing date of the financial statements or the reporting entity;

(f) comparative information in respect of previous periods;

(g) the opening balance of cash and cash equivalents shown in the statement of cash flows;

(h) increases and decreases of cash and cash equivalents shown in the statement of cash flows.

21

The purchasing power of a previous measure may correspond to the date of its recording or to a previous date. For example, the purchasing power of a (non-adjusted) charge to income for the depreciation of a machine is the purchasing power in which its cost is expressed, regardless of the period in which the depreciation is recognized as an expense.

[This applies to Historical Cost Accounting.]

22

When IFRSs are applied for the first time, the consequences of any partial inflation restatement  revaluation included in any measurement must be eliminated before applying paragraph 8, unless such inflation restatement measurement is a component of a deemed cost determined under IFRS 1.

23

When a previous inflation restated measurement in terms of capital maintenance in units of constant purchasing power in terms of a daily index or rate is available, the corresponding adjusted figure at the date of the financial statements may be obtained by restating measuring the previous accounting measure from the date of its previous restatement measurement in terms of capital maintenance in units of constant purchasing power in terms of a daily index or rate  to the closing date of the financial statements when they are accessed or viewed on the closing date. Thereafter they are always accessed or viewed at the current (today´s) rate. This is the standard procedure when adjusting comparative information in respect of previous periods.

24

Accounting measures resulting from the addition of two or more measures shall be restated valued as follows:

(a) each individual measure shall be restated valued in terms of capital maintenance in units of constant purchasing power in terms of a daily index or rate by applying paragraph 8;

(b) a new addition shall be made using the restated measurements obtained in the previous step.

25

The preceding rule applies principally to accounting measures that accumulate amounts originated in several periods, such us:

(a) finished goods;

(b) construction in progress;

(c) property, plant and equipment;

(d) contributions from owners;

(e) income;

(f) expenses;

(g) cash flows.

26

When required, comparisons between carrying amounts and recoverable amounts of assets shall be made after restating measuring carrying amounts in accordance with this [Preliminary Draft] IFRS.

27

Holding gains and losses shall be computed and accounted after restating measuring carrying amounts, respectively, in accordance with this [Preliminary Draft] IFRS.

28

Accounting measures resulting from the comparison of two or more measures shall be restated valued as follows:

(a) each measure compared shall be restated valued by applying paragraph 8;

(b) a new comparison shall be made using the restated measurements obtained in the previous step.

29

The preceding rule applies mainly to accounting measures of:

(a) interest earned;

(b) exchange differences;

(c) borrowing costs recognized as expenses or capitalized in accordance with IAS 23 Borrowing Costs;

(d) inflation losses or gains on cash balances or other net monetary item assets or net monetary item liabilities  not inflation-adjusted on a daily basis in terms of a daily index or rate (that have a nil amount in the non-adjusted financial statements); 

[There are no ‘non-adjusted’ financial statements under capital maintenance in units of constant purchasing power. The stable measuring unit assumption is not implemented under this IFRS. Current period monetary items not inflation-adjusted daily are stated at their nominal values and the net monetary gain or loss is calculated. The same is true for constant items not measured daily in units of constant purchasing power. The constant item loss or gain is calculated. ]

(e) impairment losses;

(f) reversals of impairment losses;

(g) gains or losses from the reclassification of assets to the class of non-current assets held for sale;

(h) gains or losses from the disposal of assets;

(i) other gains or losses recognized in comprehensive income.

(j) net constant real value non-monetary item losses or gains.

30

In order to reflect financial revenues, exchange differences and borrowing costs in real terms, these items may be restated by applying paragraph 28. However, they can also be restated by:

(a) applying paragraph 8 to the nominal amounts of financial revenues, exchange differences and borrowing costs;

(b) determining the inflation losses or gains attributable to the assets or liabilities that caused the financial revenues, the exchange differences or the borrowing costs;

(c) offsetting the figures calculated in (a) and (b).

[Financial revenues, interest earned, impairment losses, gains or losses from the disposal of assets, other gains or losses recognized in comprehensive income, gains or losses from the reclassification of assets to the class of non-current assets held for sale, reversals of impairment losses, exchange differences and borrowing costs are not monetary items. They are constant real value non-monetary items. Inflation has no effect on the real value of non-monetary items.]

31

Accordingly, borrowing costs capitalized under IAS 23 shall be net of inflation effects.

32

Some  Net monetary item assets  or net monetary item liabilities (i. e. e.g. cash and short-term employee benefits) do not cause nominal are subject to real financial gains or losses during inflation. Therefore, their related the  inflation gains or losses in their real values caused by inflation must be calculated and accounted directly considering the effects of inflation on the real value of the balances of only the said net monetary item assets or net monetary item liabilities not inflation-adjusted daily in terms of a daily index or rate.

Presentation and disclosure

33

All items in a set of financial statements presented using the functional currency shall be stated measured in terms of the daily purchasing power of that currency at the end of the reporting period when the financial statements are accessed or viewed at the closing date. Thereafter monetary items shall be inflation-adjusted, variable items shall be updated and constant items shall be measured in units of constant purchasing power daily in terms of the current (today´s) daily index or rate.

34

The preceding rule applies to comparative information.

35

Disclosure of non-adjusted amounts of items in the financial statements and the related notes, with the exception of monetary items not inflation-adjusted on a daily basis in terms of a daily index or rate during the current financial period, is prohibited, unless required by a law or regulation. When such a requirement exists:

(a) the adjusted amount measured in terms of this IFRS of an item shall be disaggregated between the amount required by the law or regulation and the difference with the restated amount measured in terms of this IFRS; or

(b) the amount required by the law or regulation shall be reported using brackets.

36

Inflation Net monetary gains and losses referred to in paragraph 32 shall be presented separately or, if not material, grouped with other items presented in the statement of comprehensive income or the separate income statement (if presented).

37

When an entity presents its financial statements using a currency other than its functional currency, the measures made in terms of the purchasing power of the functional currency shall be translated to the presentation currency by applying IAS 21.

38

An entity that applies the comprehensive method of inflation restatement capital maintenance in units of constant purchasing power in terms of a daily index or rate shall disclose:

(a) this fact;

(b) when financial statements and the related notes are presented using the functional currency, the fact that all their items were restated measured in terms of capital maintenance in units of constant purchasing power in terms of a daily index or rate for to reflect the daily changes in the general purchasing power of the functional currency and, as a result, are stated in terms of the daily purchasing power at the end of the reporting period updated at the current (today´s) rate;

(c) when financial statements are presented using another currency:

(1) the fact that all their items were restated measured in terms of capital maintenance in units of constant purchasing power in terms of a daily index or rate for to reflect the daily changes in the general purchasing power of the functional currency; and

(2) an explanation of the rules applied to translate the resulting figures to the presentation currency;

(d) the identification of the daily price index or rate used to compute the inflation restatements measurements in terms of capital maintenance in units of constant purchasing power in terms of a daily index or rate as defined in this IFRS and its percent change along all the periods covered by the financial statements.

39

The disclosures required by this Standard shall make clear the basis of dealing with the effects of:

(i)                 inflation on only monetary items not inflation-adjusted daily in terms of a daily index or rate and



(ii)               the stable measuring unit assumption on only the constant real values of constant real value non-monetary items not measured daily in units of constant purchasing power in terms of a daily index or rate in terms of this IFRS in the financial statements.

They are also intended to provide other information necessary to understand that basis and the resulting amounts.

Effective date and transition

40

An entity shall apply this [Preliminary Draft] IFRS to its annual or interim financial statements for periods beginning on or after 1 January 201X. Earlier application is permitted. If an entity applies this [Preliminary Draft] IFRS to its financial statements for a period before 1 January 201X, it shall disclose this fact.

First application of this [Preliminary Draft] IFRS

41

An entity shall perform comprehensive inflation restatements capital maintenance in units of constant purchasing power in terms of a daily index or rate to as reported in the financial statements of an annual or interim period in which the conditions described in paragraph 5 are met, except as permitted by the next paragraph.

42

When preparing interim financial statements, an entity may depart from the requirement in paragraph 41, if the conditions described in paragraph 5 are met in the closing month and the timely completion of the restatements is impracticable. If so, the fact will be disclosed in the affected financial statements and the following financial statements of the entity shall be prepared according to this [Preliminary Draft] IFRS.

43

An entity shall apply this [Preliminary Draft] IFRS retrospectively in accordance with the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, except as permitted by paragraph 46.

44

As required by paragraph 10(f) of IAS 1 Presentation of Financial Statements, the first financial statements prepared by applying this [Preliminary Draft] IFRS shall include a statement of financial position as at the beginning of the earliest period for which it presents comparative information, which is the date of transition to this [Preliminary

Draft] IFRS.

45

When preparing the statement of financial position at the date of transition to this [Preliminary Draft] IFRS and the subsequent statements of financial position, an entity shall:

(a) remeasure deferred tax assets and liabilities recognized under IAS 12 Income Taxes by comparing (at the closing date of each period updated at the current (today’s) rate) the restated carrying amounts measured in terms of this IFRS of assets and liabilities with their related taxable basis;

(b) assess if comparisons of the restated carrying amounts of assets measured in terms of this IFRS with their recoverable values are needed and, if so, apply IAS 36.

46

When preparing the statement of financial position at the date of transition to this [Preliminary Draft] IFRS, an entity may:

(a) for inventories, use their replacement cost as their deemed historical cost restated measured in terms of this IFRS at the date of transition for this [Preliminary Draft] IFRS, provided that the inflation restatement measurement in terms of this IFRS of the real historical costs is impracticable;

(b) for items in property, plant and equipment carried using the cost model in the previous Historical Cost or Current Cost financial statements, use their fair value as their deemed historical cost restated measured in terms of this IFRS at the date of transition, provided that the inflation restatement measurement in terms of this IFRS of the real historical costs is impracticable;

(c) for investment property carried using the cost model in the previous HCA or CC financial statements, use their fair values as their deemed historical cost restated measured in terms of this IFRS at the date of transition, provided that the inflation restatement measurement in terms of this IFRS of the real historical costs is impracticable;

(d) for cumulative translation differences recognized in other comprehensive income under IAS 21, assume that their restated amount is nil apply good judgement in determining a current amount, provided that its recalculation is impracticable.

Ceasing and restarting of inflation restatements capital maintenance in units of constant purchasing power in terms of a daily index or rate

47

An entity that performed comprehensive inflation restatements capital maintenance in units of constant purchasing power in terms of a daily index or rate in terms of this IFRS when preparing the financial statements of the preceding annual (or part thereof or greater than) period shall continue that implementation at all future levels of inflation and deflation. discontinue the restatements if, at the beginning of the current annual period, the cumulative inflation rate of its functional currency has been lower than 15% during the last 36 months.

48 When inflation restatements are discontinued, the amounts expressed in the measuring unit prevailing at the end of the previous reporting period shall be used as the basis for the carrying amounts in its subsequent financial statements.

49

If, after the ceasing of inflation restatements, the conditions described in paragraph 5 are met again, the entity shall apply the rules in paragraphs 41-46.

Withdrawal of IAS 29 and IFRIC Interpretation 7

50

This [Preliminary Draft] IFRS supersedes IAS 29 Financial Reporting in Hyperinflationary Economies and IFRIC Interpretation 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies.



Appendix A – Defined terms

This appendix is an integral part of the IFRS.

amortized cost

The amount at which a financial asset or a financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility.

capital

The real value of capital is always equal to the real value of net assets.

capital maintenance in units of constant purchasing power



Maintenance of the constant purchasing power of capital in units of constant purchasing power in terms of a daily index or rate at all levels of inflation and deflation which maintains the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus – whether they own any revaluable fixed assets or not.



carrying amount

The amount at which an asset or a liability is measured in the accounting records.

constant purchasing power capital

Capital measured in units of constant purchasing power in terms of a daily index or rate.

constant real value non-monetary item



A non-monetary item with a constant real value over time whose value within an entity is not generally determined in a market on a daily basis.



daily consumer price index



A lagged, daily interpolation of the monthly published Consumer Price Index.



date of transition to this [Preliminary Draft] IFRS

The beginning of the earliest period for which an entity presents full comparative information prepared using this [Preliminary Draft] IFRS.

deemed historical cost

An amount used as a surrogate for historical cost or depreciated historical cost at a given date.

deflation effect

The creation of real value in only monetary items not deflation-adjusted in terms of a daily index rate.

effective interest method

A method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.

fair value

The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

fair value less costs to sell

The amount obtainable from the sale of an asset or cash-generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.

functional currency

The currency of the primary economic environment in which the entity operates, according to IAS 21.

impracticable

Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so.

inflation effect

The erosion of the real value of only monetary items not inflation-adjusted daily in terms of a daily index or rate.

inflation rate

Percentage of increase in the figure of the chosen consumer price index between two dates.





monetary items

Units of money held and items with an underlying monetary nature which are substitutes for units of money held.

money held

Bank notes and coins of the fiat currency created within an economy by means of fractional reserve banking.

non-monetary items

All items that are not monetary items.

price index

A number that shows the variations in the prices of a set of products and services over time.

present value

A current estimate of the present discounted value of the future net cash flows in the normal course of business.

recoverable amount

The higherst of an asset’s (or cash-generating unit’s) fair value less costs to sell and its value in use.

stable measuring unit assumption

Assumes that changes in the purchasing power of money are not sufficiently important to require capital maintenance in units of constant purchasing power in terms of a daily index or rate at all levels of inflation and deflation. The stable measuring unit assumption is never implemented under capital maintenance in units of constant purchasing power in terms of a daily index or rate.

value in use

The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

variable real value non-monetary item



A non-monetary item with a variable real value over time.





Elaborations on the Defined Terms

cost of inflation

The cost of the erosion of the real value of only monetary items not inflation-adjusted daily in terms of a daily index or rate.



cost of the stable measuring unit assumption



The cost of the erosion of the real value of only constant real value non-monetary items not measured in units of constant purchasing power in terms of a daily index or rate currently still generally confused with or seen as the same as the cost of inflation which is not calculated and accounted under Historical Cost Accounting during low inflation and deflation.



Daily measurement is required of all items in terms of



(a) a Daily Consumer Price Index or monetized daily indexed unit of account, e.g. the Unidad de Fomento in Chile, during low inflation, high inflation and deflation and



(b) in terms of a relatively stable foreign currency parallel rate (normally the US Dollar daily parallel rate) or a Brazilian-style Unidade Real de Valor daily index during hyperinflation. Hyperinflation is defined in IAS 29 as cumulative inflation being equal to or approaching 100 per cent over three years, i.e. 26 per cent annual inflation for three years in a row.



Monetary items



Examples of units of money held are bank notes and coins of the fiat currency created within an economy by means of fractional reserve banking. Examples of items with an underlying monetary nature which are substitutes of money held include the capital amount of: bank loans, bank savings, credit card loans, car loans, home loans, student loans, consumer loans, commercial and government bonds, Treasury Bills, all capital and money market investments, notes payable, notes receivable, etc. when these items are not in the form of money held.



Measurement



Historic and current period monetary items are required to be inflation-adjusted on a daily basis in terms of a daily index or rate. The net monetary loss or gain as defined in IAS 29 is required to be calculated and accounted when they are not inflation-adjusted on a daily basis during the current financial period. Inflation-adjusting the total money supply (excluding bank notes and coins of the fiat functional currency created by means of fractional reserve banking within an economy) in terms of a daily index or rate under complete co-ordination would result in zero cost of inflation (not zero inflation) in only the entire money supply (as qualified) in an economy.



Variable real value non-monetary items



Examples include quoted and unquoted shares, property, plant, equipment, inventory, intellectual property, goodwill, foreign exchange, finished goods, raw material, etc.



Measurement



Current period variable real value non-monetary items are required to be measured on a daily basis in terms of IFRS excluding the stable measuring unit assumption and the cost model in the valuation of property, plant, equipment and investment property after recognition. When they are not valued on a daily basis, then they as well as historic variable real value non-monetary items are required to be updated daily in terms of a daily rate as indicated above. Current period impairment losses in variable real value non-monetary items are required to be treated in terms of IFRS. They are constant real value non-monetary items once they are accounted. All accounted losses and profits are constant real value non-monetary items.



Constant real value non-monetary items



Examples include borrowing costs, comprehensive income, interest paid, interest received, bank charges, royalties, fees, short term employee benefits, pensions, salaries, wages, rentals, all other income statement items, issued share capital, share premium accounts, share discount accounts, retained earnings, retained losses, capital reserves, revaluation surpluses, all accounted profits and losses, all other items in shareholders´ equity, trade debtors, trade creditors, dividends payable, dividends receivable, deferred tax assets, deferred tax liabilities, all taxes payable, all taxes receivable, all other non-monetary payables, all other non-monetary receivables, provisions, etc.



Measurement



Historic and current period constant real value non-monetary items are always and everywhere required to be measured in units of constant purchasing power in terms of a daily rate as indicated above.

















[Not yet developed] Appendix B – Methods to perform restatements capital maintenance in units of constant purchasing power in terms of a daily index or rate.

[Not yet developed] Appendix C – Illustrative examples

Appendix D – Modifications to other IFRSs

This appendix is an integral part of the IFRS.

D1

In IAS 1 Presentation of Financial Statements, paragraphs 51(d)-(e) are replaced by the following:

(d) the presentation currency, as defined in IAS 21;

(e) whether the financial statements reflect

(i) the inflation effects (cost) of inflation on only monetary items not inflation-adjusted daily in terms of a daily index or rate

and

(ii) the effects (cost) of the stable measuring unit assumption on only constant real value non-monetary items not measured in terms of financial capital maintenance in units of constant purchasing in terms of a daily index or rate

and, if so, the method used and the other disclosures required by [Preliminary Draft] IFRS X Inflation Capital Maintenance In Units of Constant Purchasing Power; and

(f) the level of rounding used in presenting amounts in the financial statements.

D2

In IAS 7 Statement of Cash Flows, the following paragraphs are added:

10A. When an entity performs the inflation restatements capital maintenance in units of constant purchasing power in terms of a daily index or rate described in IFRS X Inflation Capital Maintenance in Units of Constant Purchasing Power, all the amounts presented in the face of the statement of cash flows or in the related notes shall be measured in terms of the purchasing power of the functional currency at the date of the financial statements when they they are accessed or viewed on that date and thereafter updated at the current date´s (today´s) daily rate.

19A. When an entity performs the inflation restatements capital maintenance in units of constant purchasing power in terms of a daily index or rate described in IFRS X Inflation Capital Maintenance in Units of Constant Purchasing Power, and the statement of cash flows is presented using the direct method, the inflation gains and losses on cash and cash equivalents shall be disclosed separately and assigned to cash flows of operating activities.

D3

In IAS 23 Borrowing Costs, the second sentence of paragraph 9 is amended as follows:

When an entity performs the comprehensive the inflation restatements described in IFRS X Inflation, the measure of borrowing costs shall be net of inflation.



[Borrowing Costs is not a monetary item. It is a constant real value non-monetary item. Inflation has no effect on the real value of non-monetary items.]



D4

In the rest of the components of the IFRSs:

(a) references to IAS 29 Financial Reporting in Hyperinflationary Economies are

3 This appendix was prepared considering the IFRSs issued up to July 31, 2010.

changed to [Preliminary Draft] IFRS X Inflation Capital Maintenance in Units of Constant Purchasing Power;

(b) the word “hyperinflationary” is changed to “inflationary”;

(c) the word “hyperinflation” is changed to “inflation”.

D5

In The Conceptual Framework for Financial Reporting (2010)



Concepts of capital maintenance and the determination of Profit



Paragraph 4.59, 4.62 and 4.63 are amended as follows:



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



The concepts of capital in paragraph 4.57 give rise to the following three concepts of capital maintenance:



(a)               Financial capital maintenance in nominal monetary units



Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.



(b)                Financial capital maintenance in units of constant purchasing power



Under this concept a profit is earned only if the constant purchasing power of the net assets at the end of the period exceeds the constant purchasing power of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.



(c)               Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.



4.62 The principal difference between the three concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity. In general terms, an entity has maintained the constant purchasing power of its capital if it has as much constant purchasing power capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the constant purchasing power of its capital at the beginning of the period is profit.



D6



Paragraph OB2 of the Conceptual Framework for Financial Reporting is amended as follows:



OB2 The objectives of general purpose financial reporting* are



(a)   maintaining the constant purchasing power of capital in units of constant purchasing power in terms of a daily index or rate and



(b)   to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.

D7



In the Measurement Chapter in the Conceptual Framework for Financial Reporting ‘units of constant purchasing power in terms of a Daily Consumer Price Index’ is added as a fundamental measurement basis.













Appendix E – Modifications to material accompanying other IFRSs

E1

Paragraph 18 of appendix A to IAS 12 Income Taxes and the preceding title are amended as follows:

Inflation The Stable Measuring Unit Assumption

18. Some Assets and equity accounts are restated measured by implementing capital maintenance in units of constant purchasing power in terms of a daily index or rate in terms of the purchasing power of the functional currency at the date of the financial statements when they are accessed or viewed on that day and afterwards updated at the current (today´s) rate (see IFRS X Inflation Capital Maintenance in Units of Constant Purchasing Power) for accounting purposes but not for tax purposes. (Note: The Standard requires an entity to account for the tax consequences of transactions and other events in the same way as it accounts for the transactions and other events themselves. Thus, for transactions and other events recognized in profit or loss, any related tax effects are also recognized in profit or loss. For transactions and other events recognized outside profit or loss, either in other comprehensive income or directly in equity, any related tax effects are also recognized outside profit or loss, either in other comprehensive income or directly in equity, respectively).

E2

In paragraph BC40 of the basis for conclusions of IAS 39 Financial Instruments: Recognition and Measurement, the phrase “(see IAS 29 Financial Reporting in Hyperinflationary Economies)” is deleted.

E3

In the rest of the material accompanying IFRSs:

(a) references to “IAS 29 Financial Reporting in Hyperinflationary Economies” are changed to “[Preliminary Draft] IFRS X Inflation Capital Maintenance in Units of Constant Purchasing Power”;

(b) the word “hyperinflationary” is changed to “inflationary”;

(c) the word “hyperinflation” is changed to “inflation”.

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I comprehensively amended  the Argentinean Accounting Federation´s 2010 proposal IFR 'X' INFLATION to IFRS 'X' CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER in 2012. It is now available in the ebook CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS.

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