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Friday, 4 May 2012

Four reasons why CIPPA automatically maintains the constant purchasing power of capital constant for an indefinite period of time



Four reasons why CIPPA automatically maintains the constant purchasing power of capital constant for an indefinite period of time



Financial capital maintenance in units of constant purchasing power in terms of a Daily CPI (CIPPA) automatically maintains the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value during inflation and deflation – ceteris paribus – as a result of the following reasons:



1.      Double entry accounting: For every credit (e.g., capital) there is an equivalent debit (e.g., fixed assets, stock, trade debtors, cash, etc.).

2.      There is no stable measuring unit assumption under this model: (a) monetary items are inflation adjusted daily at the current Daily CPI with the net monetary gain or loss accounted during the current accounting period; (b) variable items are valued daily in terms of IFRS excluding the stable measuring unit assumption and updated daily at the current Daily CPI when not valued daily with revaluations and impairments treated in terms of IFRS and (c) constant items are measured daily in units of constant purchasing power in terms of the current Daily CPI with the net constant item loss or gain accounted during the current accounting period.

3.      The constant real non–monetary value of equity is equal to the real value of net assets in all entities that at least break even in real value during inflation and deflation – ceteris paribus.

4.      A company, in principle, has an unlimited lifetime.


Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.