The IASB may be to blame

The IASB may be to blame since 1989 for financial capital maintenance in nominal monetary units which is a complete fallacy during inflation and deflation by simply stating in the Framework, Par 104 (a) that financial capital maintenance can be measured in nominal monetary units without qualifying that statement. It is only possible per se during zero inflation. We have never had sustainable zero inflation in the past and we are not likely to have sustainable zero inflation any time soon in the future. It is, in fact, only possible under the HCA model during low inflation and deflation when an entity invests 100% of the real value of all contributions to Shareholders´ Equity in revaluable fixed assets. It is impossible to maintain the real value of capital constant with financial capital maintenance per se during inflation and deflation.

All economic items are valued by accountants and the values are stated in terms of the functional currency (money) as the unit of account. All functional currencies are unstable in real value: either their real values are being destroyed by inflation or, in the case of Japan lately, the Yen’s real value is being increased internally by deflation. It is thus impossible to maintain the real value of financial capital constant in nominal monetary units – per se – during low inflation and deflation - unless qualified as above.

The IASB did not approve financial capital maintenance in units of constant purchasing power in the Framework, Par 104 (a) in 1989 as an inflation accounting model. They did that with the CPP inflation accounting model in IAS 29 – also in 1989. Constant ITEM Purchasing Power Accounting as approved in the Framework, Par 104 (a), by measuring financial capital maintenance in units of constant purchasing power constitutes an IASB authorized alternative to the Historical Cost financial capital concept, HC financial capital maintenance concept and HC profit or loss determination concept, namely a constant purchasing power financial capital concept, constant purchasing power financial capital maintenance concept and constant purchasing power profit or loss determination concept during low inflation and deflation.

CIPPA as approved in the Framework only requires all constant real value non-monetary items to be valued in units of constant purchasing power. Variable real value non-monetary items, e.g. property, plant, equipment, listed and unlisted shares, inventory, etc are valued in terms of IFRS or SA GAAP and are not required in terms of the Framework, Par 104 (a) to be valued in units of constant purchasing power to determine their values during the accounting period during non-hyperinflationary periods.

Kindest regards

Nicolaas Smith

Copyright © 2010 Nicolaas J Smith