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Sunday, 5 September 2010

CIPPA implements financial capital maintenance in units of constant purchasing power

Constant ITEM Purchasing Power Accounting - CIPPA - is not an inflation accounting model the same as 1970-style Constant Purchasing Power Accounting (CPPA) under which all non-montary items (variable and constant items) are inflation adjusted during very high and hyperinflation. CIPPA is an alternative basic accounting model to HCA under which only constant items (not variable items) are inflation adjusted during low inflation and deflation.

The specific choice of measuring financial capital maintenance in units of constant purchasing power (the CIPPA model) during non-hyperinflationary periods as authorized in the Framework, Par 104 (a), was approved by the IASB’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.

Deloitte states:

"In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8."

IAS8, 11:

“In making the judgement, management shall refer to, and consider the applicability of, the following sources in descending order: (a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.”

There is no applicable IFRS or Interpretation regarding the capital concept, the capital maintenance concept and the valuation of constant real value non-monetary items. The Framework is thus applicable.

The IASB did not approve CIPPA in 1989 as an inflation accounting model. It did that with CPPA in IAS 29 also in 1989. CIPPA by measuring financial capital maintenance in units of constant purchasing power incorporates an alternative constant purchasing power capital concept, constant purchasing power financial capital maintenance concept and constant purchasing power profit determination concept to the HC capital concept, HC financial capital maintenance concept and HC profit determination concept.

CIPPA only requires all constant real value non-monetary items to be valued in units of constant purchasing power - not variable items. Variable items are valued in terms of IFRS or GAAP and are not required in terms of the Framework, Par 104 (a) to be valued in units of constant purchasing power during low inflation or deflation.

Copyright © 2010 Nicolaas J Smith