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Monday, 5 December 2011

Differences between CIPPA and CPPA

Differences between CIPPA and CPPA

"Constant Purchasing Power Accounting (CPP) is a consistent method of indexing accounts by means of a general index which reflects changes in the purchasing power of money.  It therefore attempts to deal with the inflation problem in the sense in which this is popularly understood, as a decline in the value of the currency. It attempts to deal with this problem by converting all of the currency unit measurement in accounts into units at a common date by means of the index." Geoffrey Whittington, Inflation Accounting – An Introduction to the Debate, 1983. (My bold text).

          It is very clear from the above quote that Prof Whittington also consideredat that time – that “indexing accounts by means of a general index” would “deal with the inflation problem” and not the stable measuring unit assumption problem.

         CPPA is dealt with in this book as it is implemented in terms of IAS 29 Financial Reporting in Hyperinflationary Economies.

        CIPPA automatically maintains the constant purchasing power of shareholders´ equity constant for an indefinite period of time in entities that at least break even in real value during low inflation and deflation – ceteris paribus – whether they own any revaluable fixed assets or not, by measuring financial capital maintenance in units of constant purchasing power in terms of a Daily CPI. The net monetary loss or gain and the net constant item loss or gain are calculated and accounted in the income statement. CIPPA is not an inflation accounting model. CIPPA is a price–level basic accounting alternative to HCA authorized in IFRS during low inflation and deflation. The stable measuring unit assumption is rejected under CIPPA.

            Differences
                                                                          
1.  When implemented

 CIPPA
Implemented during low inflation and deflation.

CPPA  
Only implemented during very high and hyperinflation as required by IAS 29.

2. Stable measuring unit assumption

          CIPPA
No stable measuring unit assumption.
 
CPPA
The stable measuring unit assumption is implemented in the preparation of Historical Cost or Current Cost financial reports which are then restated in terms of the period-end monthly CPI during hyperinflation. 

          3. Capital concept

           CIPPA
Constant purchasing power financial capital concept implemented. 

CPPA
Nominal financial capital concept  implemented in HC or CC financial reports then restated in terms of the period-end monthly CPI.

4. Capital maintenance concept
             CIPPA
Financial capital maintenance in units of constant purchasing power concept
implemented; e.g. shareholders´ equity is measured in units of constant
purchasing power daily in terms of a Daily Consumer Price Index.
                                                                                                           
           CPPA
          Financial captial maintenance in nominal monetary units concept implemen-
          ted; shareholders´ equity is measured in nominal monetary untis in HC or CC fin-
           ancial reports and restated at the period-end monthly CPI.

         5. Inflation accounting model
            CIPPA
Not an inflation accounting model.
         
CPPA
An inflation accounting model only implemented during very high and hyperinflationn.

6. IFRS authorization

            CIPPA
Originally authorized in IFRS in the Framework (1989), Par 104 (a). 

CPPA
Authorized in IFRS in IAS 29.          

7. Daily or period-end measurement

            CIPPA
 All historic and current items are measured daily in terms of a DCPI as detailed below.
                                                             
CPPA
Only non-monetary items are restated (not measured daily in units of constant purchasing power at the time of a transaction or event) at the end of the financial period in terms of the period-end monthly CPI.
                                                                     
8. Measurement of monetary items

CIPPA
Historic and current period monetary items are inflation-adjusted daily in     
terms of the DCPI. When not inflation-adjusted daily during the current period, the net monetary loss or gain is calculated and accounted. 
        
              CPPA
              Monetary items are measured in nominal monetary units. They are not inflation -adjusted or restated. The net monetary loss or gain is calculated and accounted.

             9. Measurement of variable items

                  CIPPA
      Variable items are measured in terms of IFRS and updated daily in terms of the Daily CPI.
                                              
CPPANo split of non-monetary items  in variable and constant items. All non-monetary items in  period-end HC or CC financial reports are restated in terms of the period-end monthly CPI.

10. Measurement of constant items

                  CIPPA
     Constant items are measured in units of constant purchasing power on a daily basis in terms of the DCPI.

     CPPA
No split of non-monetary items in variable and constant items. All non-monetary items in period-end HC or CC financial reports are restated in terms of the period-end CPI.
                                             
11. Net constant item loss or gain
                  CIPPA
    Net constant item loss or gain calculated and accounted. This is a new accounting concept.

      CPPA
A net constant item loss or gain concept does not exist under HCA, CPPA or IFRS (IAS 29).

                12. Measurement of trade debtors and trade creditors
                 
                  CIPPA
          Constant real value non-monetary payables and receivables (e.g. trade debtors and trade creditors) are measured in units of constant purchasing power daily in terms of a DCPI.
                CPPA                                                                   
                Trade debtors and trade creditors and other payables and receivables are treated as monetary items and measured in nominal monetary units in HC or CC financial reports. They are not restated.

            13. Consumer Price Index 

               CIPPA
  Daily Consumer Price Index used during low inflation and deflation.  
        
            CPPA
            Monthly consumer price index used during hyperinflation.
Nicolaas Smith Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.