Pages

Wednesday 27 July 2011

No stable measuring unit assumption (stop HCA) and the entire cost of inflation is removed from the economy

No stable measuring unit assumption (stop HCA) and the entire cost of inflation is removed from the economy

Inflation-adjusting all monetary items (all monetary item assets and all monetary item liabilities) in the economy eliminates the cost of or gain from inflation completely from the economy when all monetary items are in the banking system: there is no net monetary gain or loss when all monetary items are inflation-adjusted daily as they are apparently doing in Chile with the Unidad de Fomento (UF) and all monetary items are in the banking system.


This has been authorized in International Financial Reporting Standards in the original Framework (1989), Par 104 (a) which states "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power" for the last 22 years since financial capital maintenance in units of constant purchasing power - as authorized in IFRS - means there is no stable measuring unit assumption at all in the economy under Constant Item Purchasing Power Accounting.

All three basic economic items are thus free from the stable measuring unit assumption:

1. Monetary items are inflation-adjusted on a daily basis in terms of the daily CPI (UF in Chile) under financial capital maintenance in units of constant purchasing power during inflation and deflation (Constant Item Purchasing Power Accounting) as authorized in IFRS: no stable measuring unit assumption.

Non-monetary items are split in

(a) constant real value non-monetary items (e.g. shareholders´ equity, trade debtors, trade creditors, salaries, wages, rents, all other items in shareholders´ equity, all other items in the income statement, etc.) and

(b) variable real value non-monetary items (e.g. property, plant, equipment, shares, stock, foreign exchange, etc.)

2. Constant items are measured in units of constant purchasing power in terms of the CPI under financial capital maintenance in units of constant purchasing power during inflation and deflation (CIPPA) as authorized in IFRS: no stable measuring unit assumption.

3. Variable items are measured in terms of IFRS. Historical variable items are updated in terms of the CPI during inflation and deflation (CIPPA) as authorized in IFRS: no stable measuring unit assumption


Inflation-adjusting all monetary items daily does not stop inflation since inflation is always and everywhere a monetary phenomenon (Friedman). However, it eliminates the entire cost of or gain from inflation and deflation from the economy when all monetary items are in the banking system.

I am sure Chilean accountants do not account the net monetary loss or gain from inflation because there is no net monetary loss or gain from inflation when they inflation-adjust all monetary items in Chile on a daily basis in terms of the UF.

Nicolaas Smith

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

No comments:

Post a Comment