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Friday 28 August 2009

Constant purchasing power

Variable Items during low inflation and deflation

Variable items, eg. property, plant, equipment, inventories, quoted and unquoted shares, foreign exchange, etc are valued in terms of IFRS or SA GAAP during low inflation and deflation at, for example, market value, fair value, present value, recoverable value, net realizable value, etc.

They are not valued by anyone in units of constant purchasing power during low inflation and deflation.

Variable items during hyperinflation

Variable items are required by the IASB to be valued in units of constant purchasing power during hyperinflation in terms of IAS 29 Financial Reporting in Hyperinflationary Economies by inflation-adjusting their nominal values in terms of the change in the CPI.

Does this affect the nature of the underlying resources? Yes it does.

Turkey was in hyperinflation in 2004.

“In 2004, financial statements were restated and taxes were taken based on restated values.” Dr Cemal KÜÇÜKSÖZEN, Head of Accounting Standards Department, Capital Markets Board of Turkey.

Brazilian accountants valued non-monetary items in the entire Brazilian economyin units of constant purchasing power by inflation-adjusting them by means of variosindeces during various different governments during the 30 years from 1964 to 1994 thus maintaining their real values constant according to the Central Bank of Brazil.

Yes, to represent value in terms of constant purchasing power does affect the nature of the underlying resources.

The choices accountants make do change those values and do affect the economy: see Brazil and Trukey above.

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