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Saturday, 4 June 2011

Hurdles to CIPPA

Hurdles to CIPPA


Financial capital maintenance in units of constant purchasing power during low inflation and deflation (CIPPA) which automatically maintains the constant purchasing power of financial capital constant in all entities that at least break even for an indefinite period of time – ceteris paribus - is not yet generally accepted and accounting students are not yet taught to select the real value maintaining IFRS–approved alternative to the 3000 year old very erosive generally accepted traditional Historical Cost Accounting model because:
(1) The CIPPA due process is an on-going process although the principle of financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation has been authorized in IFRS since 1989.

(2) It is still generally assumed that any price–level accounting model refers to the CPPA inflation accounting model to be used only during hyperinflation.

(3) It is not yet generally realized that the implementation of the traditional Historical Cost Accounting model – in general - unknowingly, unintentionally and unnecessarily erodes real value on a significant scale (hundreds of billions of US Dollars per annum) in the world´s constant item economy when the stable measuring unit assumption is implemented and financial capital maintenance is measured in nominal monetary units during inflation in entities when the constant purchasing power of constant items is never maintained.

(4) It is not yet generally realized that this massive annual erosion of existing constant real value in existing constant real value non–monetary items never maintained constant can be stopped by simply selecting the alternative approved by the IASB predecessor body, the IASC Board in 1989.

(5) The fallacy that "financial capital maintenance can be measured in nominal monetary units" is also approved in IFRS in the original Framework (1989), Par 104 (a).

(6) The stable measuring unit assumption that is based on the fallacy that changes in the real value of the monetary unit of account is not sufficiently important to require financial capital maintenance in units of constant purchasing power during low inflation and deflation is implemented by most entities world-wide.

(7) The fallacy that "the erosion of business profits and invested capital is caused by inflation" as stated by the FASB in FAS 89 is still generally accepted.

(8) The cost of the stable measuring unit assumption (a generally accepted accounting practice) is mistakenly still generally accepted to be the same as the cost of inflation (the net monetary loss from holding a net balance of monetary item assets) and needs to be limited by central banks´ monetary policies: it is not realized that it is the implementation of the stable measuring unit assumption and not inflation that is eroding the real value of constant items never maintained constant.


Nicolaas Smith

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