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Monday, 13 August 2012

Measurement of inventories under financial capital maintenance in units of constant purchasing power


Measurement of inventories under financial capital maintenance in units of constant purchasing power



The difference between financial capital maitenance in nominal monetary units (traditional Historical Cost Accounting) and financial capital maintenance in unit of constant purchasing power, i.e. Constant Item Purchasing Power Accounting (CIPPA), is that the stable measuring units assumption is always implemented under HCA but is never implemented under CIPPA.



The fact that the real value of money (and thus the monetary medium of exchange) was and is never perfectly stable on a sustainable basis within an economy during inflation and deflation is reflected in an entity in the way the three basic economic items, i.e., monetary, variable and constant items, are measured /valued  (for example variable items in terms of daily fair value and constant items in terms of daily constant purchasing power) over time under financial capital maintenance in units of constant purchasing power.



The reason for and the advantage of financial capital maintenance in units of constant purchasing power in terms of a Daily CPI is the fact that the constant purchasing power of equity (capital) is automatically maintained constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus.



Everything is done (and accounted daily) and all historical financial information is stated at the current, i.e. today´s, real value which generally changes every day. The concept of a nominal Historical Cost or a nominal historical value is abolished because the stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power. Tomorrow today´s real values will be historical reference amounts and must be valued (measured) at tomorrow´s real value, e.g. tomorrow´s market price, Daily Consumer Price Index, etc.



Financial capital maintenance in units of constant purchasing power is authorized in IFRS in the Conceptual Framework (2010), Par. 4.59 (a) and includes Historical Cost as a measurement basis, but excludes the stable measuring unit assumption.



Since both financial capital maintenance in units of constant purchasing power (CIPPA) as well as financial capital maintenance in nominal monetary units (HCA) are authorized in the Conceptual Framework (2010), Par. 4.59 (a) it means that IFRS are implemented under two paradigms, namely the HC paradigm and the Constant Item Purchasing Power paradigm.



IAS 2 Inventories, Par. 9 Measurement of Inventories states:



‘Inventories shall be measured at the lower of cost and net realisable value.



An inventory item measured at Historical Cost in terms of IAS 2 shall be measured in terms of the current, i.e. today´s, Daily Consumer Price Index and continuously updated day after day thereafter because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power.



Par. 10 Cost of Inventories states:



‘The cost of inventories shall comprise all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.’



All historical costs of purchases, historical costs of conversion and other historical costs incurred in bringing the inventories to their present location and condition shall be measured in terms of the current, i.e. today´s, Daily Consumer Price Index and continuously updated day after day thereafter because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power.



Par. 23 Cost Formulas states:



The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.’



The above individual historical costs shall be measured in terms of the current, i.e. today´s, Daily Consumer Price Index and continuously updated day after day thereafter because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power.



Par. 25 states:



‘The cost of inventories, other than those dealt with in paragraph 23, shall be assigned by using the first-in, firts-out (FIFO) or weighted average cost formula.’



The cost of inventories, other than those dealt with in IAS 2, paragraph 23, assigned using the first-in, firts-out (FIFO) or weighted average cost formula shall be measured in terms of the current, i.e. today´s, Daily Consumer Price Index and continuously updated day after day thereafter because the stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power.



Par. 34 Recognition as an expense states:



‘When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised.’



When inventories are sold, the carrying amount of those inventories shall be measured in terms of the current, i.e. today´s, Daily Consumer Price Index and continuously updated day after day thereafter and shall be recognised as an expense in the period in which the related revenue is recognised because the stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power.





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