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Thursday, 5 September 2013

IASB attempting to prohibit capital maintenance in units of constant purchasing power during low and high inflation

IASB attempting to prohibit capital maintenance in units of constant purchasing power during low and high inflation

Both US GAAP and IFRS authorise Capital Maintenance in Units of Constant Purchasing Power at all levels of inflation and deflation.

US GAAP

"Two major concepts of capital maintenance exist, both of which can be measured in units of either money or constant purchasing power: the financial capital concept and the physical capital concept (which is often expressed in terms of maintaining operating capability, that is, maintaining the capacity of an enterprise to provide a constant supply of goods or services)."

US GAAP Concepts Statement Nº 6, Par. 71 (Dec 1985)


IFRS

"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

Initially authorised in the original Framework (1989), Par. 104 (a), now the Conceptual Framework (2010), Par. 4.59 (a).

Now an IASB staff paper states:


23. Consequently, we are of the view that IFRSs prohibit an entity from preparing its financial statements under the concept of financial capital maintenance defined in constant purchasing power units unless the entity falls within the scope of IAS 29.

STAFF PAPER Agenda ref 12 PROJECT IAS 29 Financial Reporting in Hyperinflationary Economies PAPER TOPIC Applicability of the concept of financial capital maintenance defined in constant purchasing power units

The IASB staff are completely mistaken in this respect.

Cost or historical cost is also a measurement basis under capital maintenance in units of constant purchasing power. It is not nominal cost as under HCA, but updated historical cost.

The Conceptual Framework also states:

4.65 At the present time, it is not the intention of the Board to prescribe a particular model other than in exceptional circumstances, such as for those entities reporting in the currency of a hyperinflationary economy.


The IASB staff´s nominal cost argument as stated in Agenda Ref 12 is thus not valid.


Nicolaas Smith

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