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Monday, 29 April 2013

Capital Maintenance in Units of Constant Purchasing Power is quite and old capital maintenance concept


Capital Maintenance in Units of Constant Purchasing Power is quite and old capital maintenance concept
 

A form of Capital Maintenance in Units of Constant Purchasing Power is implemented whenever capital (equity) is measured in units of constant purchasing power; i.e., whenever indexation or monetary correction or restatement is used. Indexation, under the name “monetary correction” was used mainly in Latin America from the early 1960´s till 2010 when Chile stopped monetary correction. It has been used in Venezuela in the form of IAS 29 from 2009 till the present (2013).

Indexation was not understood as an accounting model, which it, in fact, is. Brazil used measurement in units of constant purchasing power in the form of monetary correction in the form of a government supplied daily index from 1964 till 1994.

Chile used monetary correction (indexation or capital maintenance in units of constant purchasing power) from 1967 till 2010 in terms of their Unidad de Fomento. Chile stopped monetary correction in 2010 in order to conform with IFRS which is almost 100 per cent Historical Cost based during low inflation, high inflation and deflation. IFRS are Capital Maintenance in Units of Constant Purchasing Power based during hyperinflation. Chile did not and still does not understand and realize that they stopped Capital Maintenance in Units of Constant Purchasing Power in favour of Historical Cost Accounting in 2010.


 


Capital Maintenance in Units of Constant Purchasing Power was originally authorized in IFRS in the original Framework (1989), Par 104 (a) which states: ‘Financial capital maintenance can be measured in either nominal monetary units or units of constant of constant purchasing power? It is currently being implemented in Venezuela and Belarus. Capital Maintenance in Units of Constant Purchasing Power is implemented under IAS 29 in the form of restatement of HC or Current Cost financial statements at the measuring unit current at the end of the reporting period in terms of the monthly published CPI. Unfortunately this does not result in 100 per cent Capital Maintenance in Units of Constant Purchasing Power.

This would be remedied with the use of the generally available Daily CPI. No-one is currently using the Daily CPI for this purpose during hyperinflation or any other level of inflation or deflation. The use of a daily index to measure all non-monetary items and some monetary items in units of constant purchasing power was widely used in Latin American countries from 1964 till 2010.

The IASB regards the use of a daily index which resulted in Capital Maintenance in Units of Constant Purchasing Power in Latin America as irrelevant. The IASB is clueless about Capital Maintenance in Units of Constant Purchasing Power. Although it is required and gives particular guidance on how to prepare financial statements stated in constant purchasing power units in IAS 29, the IASB Staff Paper 20 for the IFRIC meeting on 22-23 January 2013 states:

"10. Under current IFRS, there is no particular guidance on how to prepare financial statements stated in constant purchasing power units."


Nicolaas Smith

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