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Monday, 12 September 2011

Variable Items under CIPPA

Variable Items under CIPPA

    Variable items are valued and accounted in terms of IFRS. Variable item revaluation losses and gains are treated in terms of IFRS. Variable items when not valued daily in terms of IFRS would be updated in terms of a Daily Consumer Price Index or a monetized daily indexed unit of account because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power.

Selling prices of items in shops and restaurants, etc. are not updated on a daily basis during low inflation and deflation. They are not historical prices. They are set in a free market.  Keeping them the same during a period is a marketing strategy. Selling prices depend on demand and supply. McDonalds´ prices would not be updated daily in terms of a DCPI or a monetized daily indexed unit of account during low inflation and deflation.

They would be updated daily under financial capital maintenance in units of constant purchasing power during hyperinflation which requires daily updating of all non-monetary items (variable and constant items) in terms of a daily parallel rate (normally the daily US Dollar parallel rate), a Brazilian-style Unidade de Valor Real daily index or a monetized daily indexed unit of account like the UF in Chile. That happened at McDonalds in Harare, Zimbabwe; i.e., the daily updating, not the implementation of financial capital maintenance in units of constant purchasing power during hyperinflation. Implementing IAS 29 Financial Reporting in Hyperinflationary Economies did not result in financial capital maintenance in units of constant purchasing power in Zimbabwe.

IAS 29 simply requires the restatement of period end HC or Current Cost financial statements in terms of the CPI to supposedly make these statements more useful during hyperinflation. The implementation of IAS 29 had no effect on the economic collapse in Zimbabwe.


Nicolaas Smith

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