Monday, 5 July 2010

Time line for a Unit of Constant Purchasing Power


The Consumer Price Index (CPI) was first used in 1707.


The Market Gage Plan for stabilizing the purchasing power of the dollar was originated in 1896.


The article “The Market Gage Dollar: A Unit of Constant Purchasing Power” was published in The American Economic Review.

The Market Gage Dollar: A Unit of Constant Purchasing Power
D.J. Tinnes
The American Economic Review, Vol. 8, No. 3 (Sep., 1918), pp. 579-584


In 1925 the CPI became institutionalized when the Second International Conference of Labour Statisticians, convened by the International Labour Organization, promulgated the first international standards of measurement.


The International Accounting Standards Board Committee authorized financial capital maintenance in units of constant purchasing in The Framework for the Preparation and Presentation of Financial Statements, Paragraph 104 (a) which states:

“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”


“In October 2004, the FASB and IASB added to their agendas a joint project to develop an improved, common conceptual framework that builds on their existing frameworks (that is, the IASB’s Framework for the Preparation and Presentation of Financial Statements and the FASB’s Statements of Financial Accounting Concepts).” *


The Boards held roundtable discussions on measurement during January and February 2007. *

Capital maintenance mentioned once in the summary.

“Measurement Basis Candidates (April 2007)

The Boards discussed issues related to the following primary measurement basis candidates:

1.Past entry price
2.Past exit price
3.Modified past amount
4.Current entry price
5.Current exit price
6.Current equilibrium price
7.Value in use
8.Future entry price
9.Future exit price.” *

Please note: A unit of constant purchasing power was not stated as a primary measurement basis candidate.


“New Approach (November 2008)

The Boards discussed the beginnings of an approach to making standards-level decisions about measurement of assets and liabilities.

Five factors that might be considered in selecting from among alternative measurement bases are:

1.Value/flow weighting and separation.
2.Confidence level.
3.The measurement of items that generate cash flows together.
4.Cost-benefit” *

Please note: Nothing about a unit of constant purchasing power as a measurement basis.


Possible Measurement Approaches (January 2009)

On January 14, 2009, the Board discussed which possible measurement methods should be included in the conceptual framework and tentatively decided to include the following categories:

1.Actual or estimated current prices (which will become past prices in future periods if an item is not remeasured)
2.Actual past entry prices adjusted for interest accruals, depreciation, amortization, impairments, and similar things
3.Other prescribed computations based on discounted or undiscounted estimates of future cash flows (which would include value in use and fair-value-based measurements, among other things).” *

Please note: Nothing about a unit of constant purchasing power as a measurement basis.

“Draft Measurement Chapter of the Conceptual Framework (June 2009)

At the June 10, 2009, meeting, the Board discussed a draft measurement chapter for the conceptual framework that is based on measurement factors the Board has discussed in earlier meetings. Those factors are:

1.Method of value realization
2.Cost of preparing and using measures
3.Relative level of confidence in different measures
4.Use of consistent measures for similar items and items used together
5.Separability of changes in measures.” *

Please note: Nothing about a unit of constant purchasing power as a measurement basis.

*As per The Joint Conceptual Framework Project Update.


On 1st July 2010 the US Financial Accounting Standards Board finally stated in email correspondence that the Concepts of Capital and Capital Maintenance will be discussed under the Measurement Phase of The Joint Conceptual Framework Project:

“We do not know yet whether there will be a section in the yet-to-be-completed measurement concepts chapter labeled capital maintenance, but the concepts will almost certainly be discussed.”

Units of constant purchasing power have not been stated once as a measurement basis during the first six years of The Joint Conceptual Framework Project, but, there is reason to expect that they will be discussed in the Measurement Phase in the future.

Kindest regards
Nicolaas Smith
Copyright © 2010 Nicolaas J Smith

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