IAS 2 (Technical Summary) states:
Inventories shall be measured at the lower of cost and net realisable value.
The Historical Cost of inventories is inflation-adjusted during low inflation because there is no stable measuring unit assumption under Constant ITEM Purchasing Power Accounting. Implementing CIPPA means an entity is applying financial capital maintenance in units of constant purchasing power during low inflation and deflation.
That means
Firstly that all constant real value non-monetary items (all items in the income statement, equity, trade debtors, trade creditors, etc.) are measured in units of constant purchasing power (inflation-adjusted every time the CPI changes);
Secondly that variable real value non-monetary items (property, plant, equipment, inventories, foreign exchange, etc.) are valued in terms of IFRS or GAAP on a primary basis and
Thirdly that monetary items are measured in nominal monetary units during the current financial period which includes the calculation and accounting of the net monetary gain or loss for the financial period.
Variable items, e.g. inventories, that are valued on a primary basis at HC in terms of IFRS are inflation-adjusted every time the CPI changes because there is no stable measuring unit assumption.
Measurement at HC does not mean or imply that the stable measuring unit assumption is applied. The stable measuring unit assumption is rejected under CIPPA. HC valuation is simply the measurement of an item at its original nominal historical cost in terms of IFRS or GAAP which is then inflation-adjusted every time the CPI changes: i.e. monthly.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
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