IFRS and US GAAP authorised CMUCPP 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) in terms of a Daily CPI in entities that at least break even in real value during low and high inflation, hyperinflation and deflation - ceteris paribus. European Accounting Assoc: "Capital maintenance is a competing objective of financial reporting."
statements with (a) net monetary losses and gains (resulting
from inflation – hyperinflation - and deflation) not accounted and (b) constant
real value non-monetary items measured in nominal monetary units implementing
the very destructive stable measuring unit assumption in most countries are prepared on the basis of historical cost without
regard to (i) changes in the general level of prices and without regard to (ii)
the fact that constant real value non-monetary items are measured in nominal monetary
units during inflation (hyperinflation) and deflation.
Inflation only affects the real value of monetary
items. Inflation has no effect on the real value of non-monetary items. It is
thus misleading and incorrect to state that financial
statements are unadjusted for inflation. Financial statements are never ‘adjusted for inflation’ since monetary
items are not ‘adjusted for inflation.’
The net monetary loss or gain in monetary items is calculated and accounted
under IAS 29, i.e., under capital maintenance in units of constant purchasing
Constant real value non-monetary items cannot be ‘adjusted for inflation’ because
inflation has no effect on the real value of non-monetary items. Constant real
value non-monetary items are measured in units of constant purchasing power in
terms of the monthly published CPI in terms of IAS 29.
Financial statements are not ‘adjusted for inflation’ under IAS 29. (a) The net monetary loss or
gain as a result of hyperinflation in only monetary items is calculated and
accounted under IAS 29 and (b) constant real value non-monetary items are
measured in units of constant purchasing power in terms of the monthly
published CPI in terms of IAS 29.
IAS 29 is thus based on capital maintenance in units
of constant purchasing power principles. However, implementing IAS 29 in terms
of the monthly published CPI does not result in the maintenance of the constant
purchasing power of capital during hyperinflation, specifically with respect to
the current year´s profit (eventually retained income, i.e., part of capital).
A part of current year profits is eroded (destroyed) as a result of the
implementation of the monthly CPI (one single price-level change per month)
when the price level changes at least 28 to 31 times per month or even more
often (sometimes twice a day) generally at above 3000 per cent inflation per
IAS 29 can also have absolutely no positive effect in
a hyperinflationary economy. That is what happened in Zimbabwe where IAS 29 was
implemented during the last 8 years of hyperinflation. The Zimbabwe economy
imploded on 20 November 2008 with full implementation of IAS 29.
Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.