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Monday, 2 April 2012

Hurdles to financial capital maintenance in units of constant purchasing power

Hurdles to financial capital maintenance in units of constant purchasing power
Financial capital maintenance in units of constant purchasing power (CIPPA) which automatically maintains the constant purchasing power of capital constant for an indefinite period of time in all entities that break even in real value during inflation and deflation – ceteris paribus – is not yet generally accepted by companies for the following reasons:

1        The CIPPA due process is not yet complete in 2012; it is an on–going process although authorization of the principle of financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation in IFRS in 1989 was a major milestone.

2        It is still (2012) initially assumed that any price–level accounting model refers to either (a) the inflation accounting model authorized in IAS 29 to be used only during hyperinflation or (b)  to the CPPA inflation accounting model used during the high inflation 1970s and 80s.

3        It is not yet generally understood that the implementation of the traditional Historical Cost Accounting model – in general – unknowingly, unintentionally and unnecessarily  erodes real value on a significant scale (hundreds of billions of US Dollars per annum) in the world´s  constant item economy when  the stable measuring unit assumption is implemented and financial capital maintenance is measured in nominal monetary units during inflation in entities when the constant purchasing power of constant items is never maintained.

4        It is not yet generally understood that this massive annual erosion of existing constant real value in existing constant items never maintained constant can be stopped by simply selecting the alternative approved in IFRS in 1989.

5        The fallacy that financial capital maintenance can be measured in nominal monetary units (HCA) was also approved in IFRS in the original Framework (1989), Par. 104 (a).

6        The HCA model that includes the stable measuring unit assumption is implemented by most entities world–wide.

7        The fallacy that the erosion of business profits and invested capital is caused by inflation is still (2012) generally accepted.

8        The cost of the stable measuring unit assumption (the net constant item loss in constant items not maintained constant over time under HCA) is mistakenly still (2012) generally accepted to be the same as the cost of inflation (the net monetary loss from holding a net balance of monetary item assets over time) and needs to be limited by central banks´ monetary policies because it is not realized that it is the implementation of the stable measuring unit assumption and not inflation that is eroding the real value of constant items never maintained constant.

9        The concept of a constant item with a constant real non-monetary value to be maintained constant over time by means of financial capital maintenance in units of constant purchasing power in terms of a daily rate is still a very new accounting concept in 2012.


Nicolaas Smith

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