Thursday, 8 October 2009

International Financial Reporting Standards

Constant Item Purchasing Power Accounting is authorized by the IASB during low inflation

The statement that financial capital maintenance can be measured in either constant purchasing power units or in nominal monetary units in the IASB´s Framework, means that CIPPA has been authorized by the IASB since 1989 as an alternative to the traditional HCA model during periods of low inflation.

This means that the international accounting profession has been in agreement regarding the use of CIPPA for financial capital maintenance in units of constant purchasing power during low inflation since 1989. The standards thus reject the stable measuring unit in this option and in IAS29 Financial Reporting in Hyperinflationary Economies.

Income statement constant real value non-monetary items like salaries, wages, rentals, utilities, transport fees, etc are normally valued by accountants in terms of units of constant purchasing power during low inflation in most economies including South Africa.

Payments in money for these items are normally inflation-adjusted by means of the CPI to compensate for the destruction of the real value of the unstable monetary medium of exchange by inflation. Inflation is always and everywhere a monetary phenomenon and can only destroy the real value of money (the functional currency inside an economy) and other monetary items. Inflation can not and does not destroy the real value of non-monetary items.

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