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Thursday, 8 March 2012

Two paradigms in IFRS

Two paradigms in IFRS
 IFRS are almost 100 per cent issued for the only accounting paradigm the world has ever known, namely, the Historical Cost paradigm. The stable measuring unit assumption is applied under the HC paradigm. In terms of the stable measuring unit assumption it is assumed that changes in the purchasing power of money are not sufficiently important to require capital maintenance in units of constant purchasing power during inflation. It is basically assumed that there is no such thing as inflation. It is assumed that there has never been inflation in the past, there is no inflation now and there will never be inflation in the future.

This assumption is mainly applied to the valuation of shareholder´s equity items, all items in the income statement, trade debtors, trade creditors and other non-monetary item payables and receivables under the HC paradigm. These items are thus simply treated as the same as monetary items.

IFRS also authorized a second paradigm, namely the Constant Item Purchasing Power paradigm in the original Framework (1989), Par. 104 (a) [now Conceptual Framework (2010), Par. 4.59 (a)] as follows:

‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

There is no stable measuring unit assumption under the CIPP paradigm.  The six words ‘or units of constant purchasing power’ are the only part of IFRS directed at the second paradigm, i.e. the CIPP paradigm.

IFRS are principles-based standards. The CIPP paradigm is truly principle based: only the principle is stated for financial capital maintenance in units of constant purchasing power – nothing else.

Almost 100 per cent of IFRS are thus directed at the HC paradigm.

For example, the two definitions of monetary items:

In IAS 21, Par 8

‘Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency’

 and in IAS 29, Par. 12

‘Monetary items are money held and items to be received or paid in money.’

The above two definitions are obviously directed at the HC paradigm and not at the CIPP paradigm.

Under the CIPP paradigm monetary items are defined as follows:

‘Monetary items are units of internally created currency held and other items with an underlying monetary nature, the latter being substitutes for units of internally created currency held.’

The IFRS treatment of borrowing costs and the cost model for property, plant and equipment are some of the numerous items (basically 100% of IFRS)  that are only directed to the HC model.

There is nothing in IFRS besides the six words ‘or units of constant purchasing power’ directed to the second paradigm authorized in IFRS, namely the Constant Item Purchasing Power paradigm.


Nicolaas Smith

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