Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI: CPI

Saturday 25 May 2013

Example of Daily versus monthly CPI under IAS 29

Example of Daily versus monthly CPI under IAS 29

The following are data showing a derived monthly CPI and Daily CPI for Zimbabwe from 1 November 2007 till 31 December 2007 based on actual monthly inflation percentages. Only the monthly inflation information is actual data from the Central Bank of Zimbabwe. The rest are all theoretically derived data.

Application of IAS 29 and CMUCPP using data from Zimbabwe
Monthly inflation rates reported by the CB of Zimbabwe from Mar 2007 till July 2008 (Steve Hanke article)

Date	Derived relatively stable foreign curreny rate	Mnthly	Derived Monthly CPI on month-end
	ZimDollars per 1 US Dollar	Inflation %	*URV* based Daily Index on other days
	Zim$/USD rate based on derived CPI		Month-end Daily Index assumed = CPI
01/nov/07	43,8769		4 387,69
02/nov/07	45,7184		4 571,84
03/nov/07	47,5598		4 755,98
04/nov/07	49,4012		4 940,12
05/nov/07	51,2427		5 124,27
06/nov/07	53,0841		5 308,41
07/nov/07	54,9256		5 492,56
08/nov/07	56,7670		5 676,70
09/nov/07	58,6084		5 860,84
10/nov/07	60,4499		6 044,99
11/nov/07	62,2913		6 229,13
12/nov/07	64,1327		6 413,27
13/nov/07	65,9742		6 597,42
14/nov/07	67,8156		6 781,56
15/nov/07	69,6570		6 965,70
16/nov/07	71,4985		7 149,85
17/nov/07	73,3399		7 333,99
18/nov/07	75,1813		7 518,13
19/nov/07	77,0228		7 702,28
20/nov/07	78,8642		7 886,42
21/nov/07	80,7056		8 070,56
22/nov/07	82,5471		8 254,71
23/nov/07	84,3885		8 438,85
24/nov/07	86,2300		8 623,00
25/nov/07	88,0714		8 807,14
26/nov/07	89,9128		8 991,28
27/nov/07	91,7543		9 175,43
28/nov/07	93,5957		9 359,57
29/nov/07	95,4371		9 543,71
30/nov/07	97,2786	131,42	9 727,86
01/dez/07	104,8117		10 481,17
02/dez/07	112,3448		11 234,48
03/dez/07	119,8779		11 987,79
04/dez/07	127,4111		12 741,11
05/dez/07	134,9442		13 494,42
06/dez/07	142,4773		14 247,73
07/dez/07	150,0105		15 001,05
08/dez/07	157,5436		15 754,36
09/dez/07	165,0767		16 507,67
10/dez/07	172,6098		17 260,98
11/dez/07	180,1430		18 014,30
12/dez/07	187,6761		18 767,61
13/dez/07	195,2092		19 520,92
14/dez/07	202,7423		20 274,23
15/dez/07	210,2755		21 027,55
16/dez/07	217,8086		21 780,86
17/dez/07	225,3417		22 534,17
18/dez/07	232,8749		23 287,49
19/dez/07	240,4080		24 040,80
20/dez/07	247,9411		24 794,11
21/dez/07	255,4742		25 547,42
22/dez/07	263,0074		26 300,74
23/dez/07	270,5405		27 054,05
24/dez/07	278,0736		27 807,36
25/dez/07	285,6067		28 560,67
26/dez/07	293,1399		29 313,99
27/dez/07	300,6730		30 067,30
28/dez/07	308,2061		30 820,61
29/dez/07	315,7392		31 573,92
30/dez/07	323,2724		32 327,24
31/dez/07	330,8055	240,06	33 080,55

Example

Zimbabwean company formed on 1 November 2007 with USD 1000 in capital invested on day one in stock and sold on day one with a 300 percent markup. IAS 29 applied in terms of the monthly CPI and the Daily CPI.

					Hist Cost
Date		Dr		Cr	Dr	Cr
		USD		USD	Zim$	Zim$
1/11/07	Capital			1000		43 877
1/11/07	Stock	1000			43 877

1/11/07	Bank		4000		175 508
1/11/07	Sales			4000		175 508
30/11/07
31/12/07	P+L – CoS		1000		43 877
31/12/07	Stock			1000		43 877

31/12/07	Sale		4000		175 508
31/12/07	P+L – Sales			4000		175 508

31/12/07	Net Monetary Loss		-	-	-	-

31/12/07	P+L - Net Mon Loss		-	-	-	-
31/12/07	Net Monetary Loss		-	-	-	-

31/12/07	Ret Profit/Loss			3000		131 631
31/12/07	P+L - Ret Profit/Loss		3000
				Profit		Profit

				IAS 29 with monthly CPI
Date	Daily CPI	Z$/USD		Conv	Dr	Cr
	Derived	Derived		Factor	Zim$	Zim$
1/11/07	4 387,69	43,8769	Capital	3,40		149 208
1/11/07	4 387,69	43,8769	Stock	3,40	149 208

1/11/07	4 387,69	43,8769	Bank	1,00	175 508
1/11/07	4 387,69	43,8769	Sales	3,40		596 831
30/11/07	9 727,86	97,2786		3,40
31/12/07	33 080,55	330,8055	P+L – CoS	3,40	149 208
31/12/07	33 080,55	330,8055	Stock	3,40		149 208

31/12/07	33 080,55	330,8055	Sales	3,40	596 831
31/12/07	33 080,55	330,8055	P+L - Sales	3,40		596 831

31/12/07	33 080,55	330,8055	Net Monetary Loss		421 322

31/12/07	33 080,55	330,8055	P+L - Net Mon Loss		421 322
31/12/07	33 080,55	330,8055	Net Monetary Loss			421 322

31/12/07	33 080,55	330,8055	Ret Profit/Loss			26 301
31/12/07	33 080,55	330,8055	P+L - Ret Profit/Loss		26 301
					1 939 700	1 939 700
						Profit

				IAS 29 with Daily CPI
Date	Daily CPI	Z$/USD		Conv	Dr	Cr
	Derived	Derived		Factor	Zim$	Zim$
1/11/07	4 387,69	43,8769	Capital	7,54		330 806
1/11/07	4 387,69	43,8769	Stock	7,54	330 806

1/11/07	4 387,69	43,8769	Bank	1,00	175 508
1/11/07	4 387,69	43,8769	Sales	7,54		1 323 222
30/11/07	9 727,86	97,2786
31/12/07	33 080,55	330,8055	P+L - CoS	7,54	330 806
31/12/07	33 080,55	330,8055	Stock	7,54		330 806

31/12/07	33 080,55	330,8055	Sales	7,54	1 323 222
31/12/07	33 080,55	330,8055	P+L - Sales	7,54		1 323 222

31/12/07	33 080,55	330,8055	Net Monetary Loss	7,54	1 147 714

31/12/07	33 080,55	330,8055	P+L - Net Mon Loss	7,54	1 147 714
31/12/07	33 080,55	330,8055	Net Monetary Loss	7,54		1 147 714

31/12/07	33 080,55	330,8055	Ret Profit/Loss		155 298
31/12/07	33 080,55	330,8055	P+L - Ret Profit/Loss			155 298
					4 611 067	4 611 067
					Loss

From the above examples we can see that the results under IAS 29 with a Daily CPI is different from IAS 29 with the monthly CPI. The Daily CPI data show what really happened.

When all sales are for cash, net equity will be the same under both the monthly and Daily CPI. This is only the case when all sales are only for cash.

Under IAS 29 applying HC principles, sales for cash and on credit would have the same result. Debtors are monetary items under HCA and as IAS 29 is implemented. Not under CMUCPP in terms of a Daily CPI. Debtors are constant real value non-monetary items under CMUCPP since they are always linked to non-monetary items and the result would be the same as in USD: no loss at all in the real value of Debtors, i.e., no Net Constant Purchasing Power Loss that is calculated in the same way as the Net Monetary Loss. Profit would be better than in USD. Ideal CMUCPP results in zero erosion of real value, i.e., the same as under zero inflation. There is still erosion of real value in USD since USD accounts assumes the low inflation in the USD does not exist, i.e., the HC stable measuring unit assumption is applied.

Ideal CMUCPP in terms of a Daily Index would result in actual zero erosion of real value in all entities that at least break even in real value – ceteris paribus – at all levels of inflation and deflation.

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Saturday 25 May 2013

Example of Daily versus monthly CPI under IAS 29