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Monday, 12 December 2011

CIPPA is a departure from HCA and inflation in non-cash monetary items

CIPPA is a departure from HCA and inflation in non-cash monetary items

CIPPA is a departure from

(1) HCA, i.e. the erosion of real value in constant items caused by the stable measuring unit assumption during inflation and

(2) the erosion of the real value of monetary items that are not bank notes and coins caused by inflation.

CIPPA eliminates the erosion of real value in constant items caused by the stable measuring unit assumption during inflation by means of financial capital maintenance in units of constant purchasing power as authorized in IFRS in terms of a Daily Consumer Price Index or a daily monetized unit of account, e.g. the Unidad de Fomento in Chile.

This automatically maintains the real value of shareholders´ equity constant forever in all entities that at least break even in real value during inflation and deflation – ceteris paribus. A company can do this while dealing with all third parties still implementing HCA.

Entities can only stop the erosion of the real value of their monetary items that are not bank notes and coins caused by inflation (no 2 above) when all third parties they deal with agree to inflation-adjust non-cash monetary items (complete coordination in an economy). Under CIPPA they would currently account the net monetary loss caused by inflation in their net monetary item debit balances in the profit and loss account during low inflation.

$2.68 trillion of global government bonds were daily inflation-indexed bonds as at the end of 2009. Chile currently inflation-adjusts 20 to 25% of its broad M3 money supply according to the Central Bank of Chile.


Nicolaas Smith

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