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Monday, 27 August 2012

No net monetary losses and gains (in 100 years time)


No net monetary losses and gains (in 100 years time)

 

Constant Item Purchasing Power Accounting (CIPPA) is financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation as authorized by the IASB in IFRS in the original Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010), Par. 4.59 (a)] in terms of a Daily Consumer Price Index.

The stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power.

Perfect financial capital maintenance in units of constant purchasing power would thus mean the following:

The complete money supply in an economy would be inflation-indexed on a daily basis in terms of the Daily Consumer Price Index with financial capital maintenance in units of constant purchasing power also in terms of a Daily CPI, both with complete co-ordination (everyone doing it).

This would result in no net monetary losses and gains in the entire economy: no cost of inflation. There would still be inflation in the monetary unit but there will be no cost of inflation: all monetary items would be inflation-indexed daily in terms of the Daily CPI in the entire economy.

Why?

Because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power as authorized in IFRS.

There would also be no constant items losses and gains under perfect financial capital maintenance in units of constant purchasing power with complete co-ordination.

Perfect financial capital maintenance in units of constant purchasing power during low inflation would take at least 100 years to come about even in one economy let alone in the world economy.

I implemented a form of financial capital maintenance in units of constant purchasing power in 1996 in Auto-Sueco (Angola) when I implemented accounting-dollarization in terms of the daily US Dollar parallel rate in that company during hyperinflation in Angola.

Brazil also implemented a form of financial capital maintenance in units of constant purchasing power during 30 years of very high and hyperinflation from 1964 to 1994 in terms of their government-supplied Unidade Real de Valor daily index. Brazil then went back to financial capital maintenance in nominal monetary units implementing the stable measuring unit assumption as it forms part of traditional Historical Cost Accounting in 1994 when they introduzed their current Real currency.

A form of financial capital maintenance in units of constant purchasing power was also implemented in Chile from 1967 until 2008 in terms of their Unidad de Fomento, which is a monetized daily indexed unit of account published daily since 1977.  That form of financial capital maintenance in units of constant purchasing power was stopped in Chile when “correción monetaria” was stopped in 2008 ‘to comply with IFRS’. Chile now implements financial capital maintenance in nominal monetary units (HCA) ‘to comply with IFRS’. Chile did not realize in 2008 that financial capital maintenance in units of constant purchasing power had already been authorized in IFRS in 1989.

Chile currently (2012) inflation-indexes 20 to 25 per cent of the country´s entire broad M3 money supply on a daily basis in terms of their Unidad de Fomento according to the Banco Central de Chile.They started this process at a much lower scale in 1967.

More than USD 3.5 trillion in government inflation-indexed bonds are currently (2012) being inflation indexed daily in most countries in the world economy in terms of country specific Daily CPIs.

Financial capital maintenance in units of constant purchasing power during low inflation and deflation was authorized in April 1989 in the original Framework (1989), Par. 104 (a).

We will be very lucky if even just financial capital maintenance in units of constant purchasing power in terms of a Daily CPI during low inflation without complete inflation-indexing of the entire money supply is implemented on a national basis in one complete economy by April 2089.

This will happen during low inflation some time in the future. No-one knows when.

Welcome on the long journey to perfect financial capital maintenance in units of constant purchasing power in terms of a Daily CPI during low inflation and deflation in 100 years time.


Nicolaas Smith

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