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Friday, 30 October 2009

How to maintain your capital

The specific choice of measuring financial capital maintenance in units of constant purchasing power (the Constant Item Purchasing Power Accounting model) during non-hyperinflationary periods as contained in the Framework, Par. 104 (a) , was approved by the IASB’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.

Deloitte

“In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8."

IAS8, 11:

“In making the judgement, management shall refer to, and consider the applicability of, the following sources in descending order:

(a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and

(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.”

There is no applicable IFRS or Interpretation regarding the capital concept, the capital maintenance concept and the valuation of constant items. The Framework is thus applicable.

Despite being applicable as a result of the absence of specific IFRS CIPPA is completely ignored by accountants and accounting authorities even though they would maintain the real value of constant items with it instead of currently unknowingly destroying the real values of not only all income statement constant items but also all balance sheet constant items never maintained when they implement the traditional HCA model.

This is because the CIPPA model is mistakenly viewed by almost all accountants and accounting authorities, but excluding the IASB, as the same as the 1970-style failed CPPA inflation accounting model that requires all non-monetary items - variable and constant items - to be inflation-adjusted by means of the CPI. They - including the IASB - fail to introduce the substantial real value maintaining benefits, which last for an unlimited period of time (all else being equal), of measuring financial capital maintenance in units of CPP in companies and the economy in general.

The IASB did not approve CIPPA in 1989 as an inflation accounting model. It did that with CPPA in IAS29. CIPPA by measuring financial capital maintenance in units of CPP incorporates an alternative CPP capital concept, CPP financial capital maintenance concept and CPP profit determination concept to the HC capital concept, HC financial capital maintenance concept and HC profit determination concept. CIPPA only requires all constant items to be valued in units of CPP. Variable items are valued in terms of IFRS or GAAP and are not required in terms of the Framework to be valued in units of CPP.

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