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Sunday, 22 February 2009

Accountants can choose Constant Item Purchasing Power Accounting

The IASB´s Framework, Par. 104 (a) states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

The word can means it is a choice open to all accountants since 1989 to measure financial capital maintenance (not variable real value non-monetary items) in units of constant purchasing power.

Several IFRS statements correctly prevent the use of price-level accounting methods of measurement for the valuation of variable real value non-monetary items, e.g. IAS16 Property, Plant and Equipment, intangible assets( IAS38) and inventories (IAS2) during the accounting period including at the financial report date - in non-hyperinflationary economies. IAS29 requires restatement of all non-monetary items in units of constant purchasing power during hyperinflation.

I agree that IAS16, IAS38 and IAS2 take precedence over the Framework - since these Standards relate to variable real value non-monetary items.

The Scope of the Framework includes:

Par. 5. The Framework deals with:

.........

(c) the definition, recognition and measurement of the elements from which financial statements are constructed; and

(d) concepts of capital and capital maintenance.

Capital is not a variable real value non-monetary item. Capital is a constant real value non-monetary item - like e.g. all the items in Shareholders Equity, etc.

The Framework, Par. 110 states: "The selection of the measurement bases and concept of capital maintenance will determine the accounting model used in the preparation of the financial statements."

When accountants choose to measure financial capital maintenance in units of constant purchasing power, they choose to implement the real value maintaining Constant Item Purhasing Power Accounting model instead of the real value destroying traditional Historical Cost Accounting model. This choice is open to all accountants since April 1989 as stated in the Framework, Par. 104 (a).

There is no applicable IFRS statement regarding the valuation of constant real value non-monetary items, e.g. all elements in Shareholders Equity, etc. Par. 104 (a) of the Framework is thus valid as an IFRS basis for accountants to choose to measure financial capital maintenance in units of constant purchasing power thus implementing the constant purchasing power financial capital concept and capital maintenance concept instead of the Historical Cost capital concept and capital maintenance concept.

The IASB approved option of measuring financial capital maintenance in units of constant purchasing power has nothing to do with the valuation of variable real value non-monetary items. It is all about "concepts of capital and capital maintenance" [par. 5 (d)] which " will determine the accounting model used in the preparation of the financial statements" [par. 110]. Nothing at all about the valuation of variable real value non-monetary items like PPE, intangible assets and inventory. It is stated under the section: Concepts of Capital and Capital Maintenance in the Framework.

As a result of the Framework, Par. 104 (a) all accountants in the world (who implement IFRS) choose - knowingly or unknowingly - either the Historical Cost or the Constant Item Purchasing Power accounting model. They all choose the very destructive HCA model because

(1) it is the traditional accounting model,

(2) they and accounting authorities do not undestand the real value destroying effect of the stable measuring unit assumption during low inflation and

(3) they and accounting authorities do not understand the real value maintaining effect of choosing financial capital maintenance in constant purchasing power units in terms of the IASB´s Framework, Par. 104 (a) which states that "Financial capital maintenance can be measured in nominal monetay units or in units of constant purchasing power."

The IASB requires them to implement IAS 29 which is based on the inflation accounting CPPA model - during hyperinflation.

The Framework, Par. 104 (a) empowers accountants to implement the real value maintaining Constant Item Purchasing Power Accounting model during non-hyperinflationary periods which requires only constant items to be inflation-adjusted by means of the CPI during non-hyperinflationary periods.