IFRS and US GAAP authorised CMUCPP automatically 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) only when updated in terms of the Daily CPI during low and high inflation, hyperinflation and deflation - ceteris paribus. European Accounting Association: "Capital maintenance is a competing objective of financial reporting."
generally choose to measure financial capital maintenance in nominal monetary
units and thus apply the very erosive stable measuring unit assumption as part
of the traditional HCA model. They generally value all balance sheet constant
items, e.g., owners´ equity, trade debtors, trade creditors, etc. as well as
most income statement items, which are all constant items, at Historical Cost.
They value them in nominal monetary units as a result of the fact that they
assume that changes in the purchasing power of the unstable monetary unit are
not sufficiently important to require financialcapital maintenance in units of constant purchasing power during low
inflation and deflation.
in practice, assume unstable money is perfectly stable for this purpose. They,
in practice, assume there has never been inflation or deflation in the past,
there is no inflation and deflation in the present and there never will be
inflation and deflation in the future as far as the valuation of most constant real
value non-monetary items is concerned. They only value certain income statement
constant items, e.g. salaries, wages, rentals, etc. in real value maintaining
units of constant purchasing power annually by means of the annual CPI during
low inflation. They then pay these items monthly in fixed nominal amounts,
again implementing the stable measuring unit assumption.
29 Financial Reporting in Hyperinflationary Economies does not require the
valuation of non–monetary items in units of constant purchasing power at the
time of the transaction or event. IAS 29 simply requires the restatement of Historical
Cost or Current Cost financial statements in terms of the period–end monthly
published CPI in order to make them ‘more useful’ during hyperinflation. The
non–monetary or real economy of a hyperinflationary economy can only be
maintained relatively stable by applying the daily parallel US Dollar exchange
rate or a Brazilian–style URV daily
index to the valuation of all non–monetary items instead of simply restating HC
or CC financial statement in terms of the period–end monthly published CPI as
required by IAS 29.
The concepts of capital, the capital maintenance
concepts and the profit / loss determination concepts are not covered in IAS,
IFRS or Interpretations. These concepts were covered in the original Framework
for the Preparation and Presentation of Financial Statements (1989), now The Conceptual Framework for Financial Reporting (2010),Chapter 4: The Framework (1989): the remaining text. There are no
specific IAS or IFRS relating to these concepts. TheFramework is thus applicable as per IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors, Par.11.
‘In the absence
of a Standard or an Interpretation that specifically applies to a transaction,
management must use its judgement in developing and applying an accounting
policy that results in information that is relevant and reliable. In making
that judgement, IAS 8.11 requires management to consider the definitions,
recognition criteria, and measurement concepts for assets, liabilities, income,
and expenses in the Framework. This elevation of the importance of the
Framework was added in the 2003 revisions to IAS 8.’
IAS 8, Par. 11 states:
‘In making the
judgement, management shall refer to, and consider the applicability of, the
following sources in descending order: (a) the requirements and guidance in
Standards and Interpretations dealing with similar and related issues; and (b)
the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Framework.’
of the constant items issued share capital, retained earnings, other items in owners´
equity and other constant items was thus
covered in IFRS in the original Framework (1989), Pa. 104 (a), now the
Conceptual Framework (2010), Par. 4.59 (a).
Kapnick in the Sax Lecture in 1976 correctly predicted the course of the
development of International Financial Reporting Standards:
‘Confusion constantly arises
between changes in value and changes in purchasing power. The fact is both are
occurring and, while there may be an interrelationship, the effects of each
should be accounted for separately. Thus, the debate concerning whether value
accounting or price–level accounting should prevail is not on point, because in
the long run both should prevail. The real changes in value should be
segregated from changes resulting only from changes in price levels.’
Kapnick, Chairman, Arthur Andersen & Company, “Value Based Accounting –
Evolution or Revolution”, Sax Lecture, 1976.
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.