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Friday, 27 April 2012

Absolute price stability in constant items


Absolute price stability in constant items



Constant Item Purchasing Power Accounting is a price–level accounting model where under financial capital maintenance in units of constant purchasing power is implemented at all levels of inflation and deflation.



Continuous financial capital maintenance in units of constant purchasing power was authorized by the IASC Board thirteen years after Harvey Kapnick´s 1976 prediction. The IASC Board approved the original Framework (1989), Par 104 (a), now Conceptual Framework (2010), Par. 4.59 (a), which state:



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



However, the enormous real value eroding effect of implementing the very erosive stable measuring unit assumption when entities choose, also in terms of the original Framework (1989), Par. 104 (a), IASB–approved financial capital maintenance in nominal monetary units (the HCA model) and apply it in the valuing of constant real value non–monetary items never maintained constant, e.g., retained earnings, in low inflationary economies is not generally realized at all. This is clearly verified by the fact that both financial capital maintenance in nominal monetary units (a very popular accounting fallacy) and real value maintaining continuous financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation were approved by the IASB in the original Framework, Par 4.59 (a) in 1989 – in one and the same sentence.



Hundreds of billions of US Dollars is eroded in constant items never maintained constant in the world’s constant item economy per annum by the implementation of the stable measuring unit assumption as part of HCA during low inflation in this manner.



Entities can choose the one or the other and state that they have prepared primary financial statements in terms of IFRS. However, when they choose the traditional HCA model they unknowingly, unintentionally and unnecessarily erode real value on a significant scale in the real or non–monetary economy during low inflation when they implement the very erosive stable measuring unit assumption. When they choose IASB–approved continuous financial capital maintenance in units of constant purchasing power they would maintain the real values of all constant real value non–monetary items during inflation and deflation in companies which at least break even in real value, empowering and enriching those companies, their shareholders and the economy in general with the accompanying benefits to workers and employment for an unlimited period of time – ceteris paribus.



As the Deutsche Bundesbank stated:



‘The benefits of price stability, on the other hand, can scarcely be overestimated, especially as these are, in principle, unlimited in duration and accrue year after year.’



Deutsche Bundesbank, 1996 Annual Report, P 83.



Financial capital maintenance in units of constant purchasing power would result in absolute price stability under complete co-ordination in constant real value non–monetary items for an unlimited period of time in companies that at least break even in real value at all levels of inflation and deflation – all else being equal – without the need for extra capital from capital providers or more retained earnings simply to maintain the existing constant real value of existing constant real value non–monetary capital constant. The IASB predecessor body, the IASC Board, approved absolute price stability in income statement and balance sheet constant real value non–monetary items when they authorized the original Framework (1989), Par 104 (a) approving the option of continuously measuring financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.


Nicolaas Smith

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