IFRS and US GAAP authorised CMUCPP maintains the constant purchasing power of constant real value non-monetary items (e.g. capital, all items in shareholders´ equity, provisions, salaries, wages, pensions, taxes, trade debtors/creditors, etc) in terms of a Daily CPI in entities that at least break even in real value during low and high inflation, hyperinflation and deflation - ceteris paribus. European Accounting Assoc: "Capital maintenance is a competing objective of financial reporting."
Principles involved in financial capital maintenance in units of constant purchasing power
The principles involved in
financial capital maintenance in units of constant purchasing power in terms of
a daily rate at all levels of inflation and deflation include: 1 The constant purchasing
power of capital is always equal to the real value of net assets.
capital concept to be implemented: Constant purchasing power capital.
capital maintenance concept to be implemented: Financial capital maintenance in
units of constant purchasing power at all levels of inflation and deflation in
terms of a daily rate.
stable measuring unit assumption is never implemented.
Monetary items are units of currency held and items with an underlying monetary
nature. Monetary items with an underlying monetary nature are substitutes for
units of currency held.
items are all items that are not monetary items
Non-monetary items are sub-divided in:
Variable real value non-monetary items and
Constant real value non-monetary items.
Variable real value non-monetary items are
non-monetary items with variable real values over time.
Constant real value non-monetary items are
non-monetary items with constant real values over time.
Daily measurement is required of all items in terms of
Daily Consumer Price Index or monetized daily indexed unit of account, e.g. the
Unidad de Fomento in Chile, during
low inflation, high inflation and deflation and
in terms of a relatively stable foreign currency parallel rate (normally the US
Dollar daily parallel rate) or a Brazilian-style Unidade Real de Valor daily index rate during hyperinflation.
Hyperinflation is defined in IAS 29 as cumulative inflation being equal to or
approaching 100 per cent over three years, i.e. 26 per cent annual inflation
for three years in a row.
Historic and current period monetary items are required to be
inflation-adjusted on a daily basis. When they are not inflation-adjusted on a
daily basis during the current financial period then the net monetary loss or
gain as defined in IAS 29 is required to be calculated and accounted. All
monetary items except actual bank notes and coins can be inflation-adjusted on
a daily basis. This would remove the total cost of inflation from the entire
money supply except from actual bank notes and coins which generally make up
about seven per cent of the money supply in advanced economies.
Current period variable items are required to be measured on a daily basis in
terms of IFRS excluding the stable measuring unit assumption. When they are not
valued on a daily basis, then they as well as historic variable items are
required to be updated daily in terms of a daily rate as indicated above.
Current period impairment losses in variable items are treated in terms of IFRS.
They are constant items once they are accounted. All accounted losses and
profits are constant items.
Historic and current period constant real value non-monetary items are always
and everywhere required to be measured in units of constant purchasing power in
terms of a daily rate as indicated above.
When constant items are not measured daily in units of constant purchasing
power, then the calculation and accounting of the net constant item loss or
gain is required.
Once an entity has started financial capital maintenance in units of constant
purchasing power it is required to continue with that model at all future
levels of inflation and deflation.
Entities in economies with inflation rates below 10 per cent per annum or
cumulative inflation over three years below 26 per cent should be very strongly
encouraged to implement financial capital maintenance in units of constant
purchasing power in terms of a daily rate as proposed by the Argentinean
Inflation and deflation only affect the real value of monetary items not
inflation-adjusted and deflation adjusted respectively
The stable measuring unit assumption affects the real value of constant items
not maintained constant during inflation and deflation.
The terms ‘restatement’, ‘restated’, ‘inflation restatements’ and
‘inflation-adjustment of financial statements’ should not be used in a proposed
new IFRS regarding capital maintenance in units of constant purchasing power.
The proposed new IFRS is a departure from Historical Cost Accounting at all
levels of inflation and deflation.
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.