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Monday, 16 January 2012

No stable measuring unit assumption under financial capital maintenance in units of constant purchasing power

No stable measuring unit assumption under financial capital maintenance in units of constant purchasing power

There is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.

Thus it is required that

A All items have to be valued daily.

1 Historical and current period monetary items have to be inflation-adjusted daily.

2 Historical and current period variable real value non-monetary items are valued daily in terms of IFRS. When not valued daily in terms of IFRS they are required to be updated daily.

3 Historical and current period constant real value non-monetary items are measured in units of constant purchasing power daily.

Daily inflation-adjustment (of only monetary items), updating (of only variable items) and measurement in units of constant purchasing power (of only constant items) are done

(a) During low and high inflation and deflation in terms of:

(i) The Daily Consumer Price Index, which is simply a lagged, daily interpolation of the CPI, now (today) used in most of the important economies in the world to price government inflation-indexed bonds in those particular countries, or

(ii) A monetized daily indexed unit of account, e.g. the 45 year old Unidad de Fomento in Chile. A Daily CPI does not need to be monetized.

(iii) A Daily CPI based on the very successful Unidad de Fomento formula when a country does not currently issue government inflation-indexed bonds or commercial inflation-indexed bonds.

(b) During hyperinflation in terms of

(i) A Brazilian-style Unidade Real de Valor daily index, or

(ii) A daily relatively stable foreign currency parallel rate, normally the US Dollar daily parallel rate.

B All financial reports have to be updated daily

When a financial report of any kind is prepared and finalized on the final day of the period, then it is out of date the next day because there is a new Daily CPI, monetized daily indexed unit of account, daily index or parallel rate.

Financial reports should ideally never be printed on hard copy, but always in electronic format with daily updating of all values daily.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.