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."
are two processes of systemic real value erosion in the economy although almost
everybody thinks there is only one economic enemy. The one enemy is very well known. It is inflation. Inflation manifests itself in money´s store of value function and only
erodes the real value of money and other monetary items in the monetary economy
(the money supply). Inflation is the enemy in only the
monetary economy and the governor of the central bank is the enemy of
Inflation has no effect on the real value of non–monetary items.
power of non monetary items does not change in spite of variation in national
(Gucenme and Arsoy,
Inflation cannot erode the real value of variable real value
non–monetary items or constant real value non–monetary items.It is impossible. Inflation eroded the real
value of money and other monetary items only in the SA monetary economy at the
rate of 6 per cent per annum (March, 2012). The actual amount of value eroded
in the real value of Rand notes and coins and other monetary items (capital
amounts of capital and money market investments, bank loans, other monetary
loans and deposits, etc.) over the twelve months to the end of March, 2012
amounted to about R132 billion.
The second process of systemic real value erosion – the second enemy –
is a Generally Accepted Accounting Practice (GAAP), namely the stable measuring
unit assumption: the unknowing, unintentional and unnecessary erosion by the
stable measuring unit assumption (the HCA model) of the existing constant real
value of only constant items never maintained constant only in the constant
‘The Measuring Unit principle: The unit of measure in
accounting shall be the base money unit of the most relevant currency. This
principle also assumes the unit of measure is stable; that is, changes in its
general purchasing power are not considered sufficiently important to require
adjustments to the basic financial statements.’
(Walgenbach, Dittrich and Hanson, 1973: p. 429)
Increases in the general price level (inflation) erode the real value
of only money and other monetary items with an underlying monetary nature
(e.g., loans and bonds) only in the internal monetary economy. Inflation has no
effect on the real value of variable items (e.g., land, buildings, goods,
commodities, cars, gold, real estate, inventories, finished goods, foreign
exchange, etc.) and constant items (e.g., issued share capital, retained
profits, capital reserves, other shareholder equity items, salaries, wages,
rentals, pensions, trade debtors, trade creditors, taxes payable, taxes
receivable, deferred tax assets, deferred tax liabilities, etc.).
Entities generally choose the traditional HCA model which includes the
stable measuring unit assumption during inflation and deflation.They value constant items in nominal monetary
units; i.e., they choose to measure financial capital maintenance in nominal
monetary units which is a popular accounting fallacy authorized in IFRS. In
fact, it is impossible to maintain the constant purchasing power of financial
capital constant in nominal monetary units per
se during inflation. Entities´ choice of implementing financial capital
maintenance in nominal monetary units instead of in units of constant
purchasing power, also authorized in IFRS, results in the real values of
constant items never maintained constant being eroded by the stable measuring
unit assumption at a rate equal to the annual rate of inflation.
It is not inflation doing the eroding as the IASB, the FASB and most
people mistakenly believed. It is entities´ free choice of the very erosive
stable measuring unit assumption during inflation as it forms part of the
Historical Cost Accounting model – authorized in IFRS in the original Framework
(1989), Par. 104 (a).
Entities would knowingly maintain the real value of all constant items
constant for an indefinite period of time when they at least break even in real
value – ceteris paribus – when they
reject the stable measuring unit assumption and implement financial capital
maintenance in units of constant purchasing power at all levels of inflation
and deflation (CIPPA). The stable measuring unit assumption is, in principle,
never implemented under financial capital maintenance in units of constant
purchasing power (CIPPA).
Constant items never maintained constant are treated like monetary
items when their nominal values are never updated as a result of the
implementation of the stable measuring unit assumption during inflation and
In practice, it is assumed that the unit of measure (money) is perfectly
stable during low inflation and deflation; that is, it is assumed that changes
in money´s general purchasing power are not sufficiently important to require
financial capital maintenance in units of constant purchasing power during
inflation and deflation. In so doing, the implementation of the HCA model
unknowingly, unintentionally and unnecessarily erodes the real values of
constant items never maintained constant during low inflation to the amount of
hundreds of billions of US Dollars in the world´s constant item economy each
and every year while the stable measuring unit assumption is being implemented
as part of the traditional HCA model.
The stable measuring unit assumption is a stealth enemy very effectively
camouflaged by GAAP, IASB and FASB authorization as well as the generally
accepted accounting fallacy that the erosion of companies´ capital and profits
is caused by inflation. Hardly anyone knows or understands that when the very
erosive stable measuring unit assumption is implemented, the HCA model is
unknowingly, unintentionally and unnecessarily eroding the real values of
constant items never maintained constant at a rate equal to the annual rate of
Almost everybody thinks the accounting profession can do nothing about
it. They still believe that inflation is doing the eroding and financial reporting
can do nothing about inflation: the monetary authorities, not the accounting
profession, are responsible for controlling inflation. They do not realize that
it is the very erosive stable measuring unit assumption doing the eroding in
the real value of constant items never maintained constant during inflation.
There are thus two enemies eroding real value systematically in the
economy. The first enemy, inflation, is a complex economic process. The second
enemy, the stable measuring unit assumption, is a Generally Accepted Accounting
Practice authorized in IFRS and US GAAP under the current Historical Cost
This Generally Accepted Accounting Practice of systemic real value
erosion operates only in the constant item part of the non–monetary or real
economy when it is freely chosen to measure financial capital maintenance
in nominal monetary units when entities implement the traditional HCA model
during inflation as approved in IFRS in the originalFramework (1989), Par. 104 (a).
Almost everyone makes the mistake of blaming the erosion of companies´
profits and capital by the stable measuring unit assumption on inflation.
The problem is known and identified: namely, the real value of
companies´ profits and capital is being eroded over time when implementing
the HCA model during inflation. The mistake is made of blaming inflation
instead of the free choice of the stable measuring unit assumption. It is
impossible for inflation to erode the real value of any non–monetary item.
Companies´ issued share capital and retained profits (as well as all other
items in owners´ equity) are constant real value non–monetary items. This erosion
is very effectively camouflaged by IFRS approval in the originalFramework (1989), Par. 104 (a) which
states ‘Financial capital maintenance can be measured in either nominal
monetary units or units of constant purchasing power.’The stable measuring unit assumption is a stealth enemy in the constant
item economy maybe wreaking more havoc than inflation in the monetary economy.
The stable measuring unit assumption as authorized in IFRS and US GAAP - its
The US Financial Accounting Standards Board blamed inflation:
accounting measurements fail to capture the
erosion of business profits and invested capital caused by inflation.’
(FAS 33, Par. 69)
Almost veryone only sees one enemy being responsible for all of the
invisible and untouchable systemic real value erosion in the economy. It is
mistakenly thought that inflation is responsible for all real value erosion in
the economy. It is mistakenly thought that the cost of the stable measuring
unit assumption - the erosion by the stable measuring unit assumption of the
real value of constant items never maintained constant - is the same as the net
monetary loss from holding an excess of monetary items assets over monetary
item liabilities, i.e., the cost of inflation.
This second enemy is a stealth enemy almost perfectly camouflaged by
IFRS and FASB approval since the way it operates is not generally understood.
If it were understood, it would have been stopped by now (2012) with financial
capital maintenance in units of constant purchasing power as authorized in IFRS
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.