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Thursday, 15 July 2010

Units of constant purchasing power

We use the change in the CPI as a measure to calculate the destruction of real value in monetary items (which cannot be indexed) and constant items never maintained (thus being treated as monetary items) over time in an inflationary economy implementing the Historical Cost Accounting model as all companies in SA do. We also use the change in the CPI as a measure to calculate the creation of real value in monetary items (never indexed) and constant items never maintained (never decreased) over time in a deflationary economy that uses the HCA model – as all companies in Japan do.

The CPI can be used to measure financial capital maintenance in units of constant purchasing power and thus index (adjust nominal values for inflation’s destruction of or deflation´s increase in the real value of money which is the monetary unit of account) wages, salaries, pensions, all income statement items, issued share capital, retained profits, capital reserves, other shareholders´ equity items, trade debtors, trade creditors, taxes payable, taxes receivable and all other balance sheet constant items.


Copyright © 2010 Nicolaas J Smith