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Thursday, 17 November 2011

Unique attributes of Constant Item Purchasing Power Accounting

Unique attributes of Constant Item Purchasing Power Accounting

1.    It is the first work on the topic: IFRS authorized financial capital maintenance in units of constant purchasing power during LOW inflation and deflation in which the following new accounting concepts and terms are first identified, named, defined and described:

2.   The name of the new accounting model, namely, Constant Item Purchasing Power Accounting.

3.    The split of non-monetary items in the two new accounting concepts and terms: (i) Variable real value non-monetary items  and

4.   (ii) Constant real value non-monetary items resulting in the new terms

5.   Variable item economy and

6.   Constant item economy and giving origin to the two new accounting entries never before made:

7.   Net Constant Item Loss.

8.   Net Constant Item Gain.

9.   The fact that IFRS authorize not only the stated (in IFRS) and generally accepted two capital and capital maintenance concepts, namely, (A) physical and (B) financial capital and capital maintenance, but three (which is a big revelation to the accounting profession), namely (a) physical capital and capital maintenance, (b) financial capital and capital maintenance measured in nominal monetary units (traditional HCA) and (c) financial capital and capital maintenance measured in units of constant purchasing power during LOW inflation and deflation (CIPPA) since it was authorized in the original Framework (1989), Par 104 (a) [now Conceptual Framework (2010), Par 4.59 (a)] which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power”, is first stated in this work.

10.             Inflation Illusion, namely the mistaken belief that inflation causes the erosion of companies´ capital and profits as taught to and believed by all accountant and specifically stated in US Financial Accounting Standards by the US Financial Accounting Standards Board when it is in fact caused, not by inflation, but, by the very destructive stable measuring unit assumption since inflation has no effect on the real value of non-monetary items as specifically stated by two top Turkish academics and easily deduced from Milton Friedman´s now famous statement that inflation is always and everywhere a monetary phenomenon, is first defined and described in this work.

11.             The fact that the implementation of the Historical Cost Accounting model, more specifically the stable measuring unit assumption (and not inflation) causes the unknowing, unintended and unnecessary erosion of that portion of companies´ shareholders´ equity never maintained constant by sufficient revaluable fixed assets (revalued or not) during LOW inflation amounting to hundreds of billions of US Dollars eroded in constant item real value per annum in the world´s constant item economy is first stated in this work.

12.             The fact that CIPPA automatically maintains the constant real value of capital and profits constant forever in all entities that at least break even in real value during inflation – ceteris paribus – whether they own any revaluable fixed assets or not and that it would maintain hundreds of billions of US Dollars in constant real value per annum in the world´s constant item economy when implemented worldwide, is first stated in this work.

The single most important factor making all the above possible is the authorization of financial capital maintenance in units of constant purchasing power during LOW inflation and deflation in IFRS in the original Framework (1989), Par 104 (a) which means that there are three instead of the stated two concepts of capital authorized in IFRS - was first identified in this work in 2008.

The second most important factor is the split of non-monetary items in variable and constant items which was first defined in this work in about 2005. Financial capital maintenance in units of constant purchasing power during LOW inflation and deflation would not be accepted by the business community and accounting profession without the split. That is one of the main reasons why this model to be used during LOW inflation was not developed before. In this project I define variable and constant items directly. They are not identified and named in IFRS , but, they are, in fact, indirectly implied (defined) in IFRS.

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