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, Par 104 (a) means that CIPPA has been authorized by the IASB since 1989 as an alternative to the traditional HCA model during periods of low inflation and deflation. This means that the international accounting profession has been in agreement regarding the use of financial capital maintenance in units of constant purchasing power during low inflation and deflation for the last 22 years.
Measurement in constant monetary units (e.g. constant Dollars), i.e. in units of constant purchasing power by inflation-adjusting constant real value non-monetary items during low inflation and deflation as an alternative paradigm is authorized not only in IFRS, but, also in particular country´s accounting regulations. An alternative measurement in constant monetary units paradigm has been authorized in Portuguese accounting in the Plano Offical de Contas (POC) also since 1989.
“Os registos contabilísticos devem basear-se em custos de aquisição ou de produção, quer a escudos nomonais, quer a escudos constantes.”
Carlos Baptista da Costa and Gabriel Correia Alves, Contabilidade Financeira, Rei dos Livros, 1996, P 79
Income statement constant real value non-monetary items like salaries, wages, rentals, utilities, transport fees, etc are normally valued by accountants in units of constant purchasing power during low inflation in most economies. Payments in money for these items are normally inflation-adjusted by means of the CPI to compensate for the erosion of the real value of the unstable monetary medium of exchange by inflation. Inflation is always and everywhere a monetary phenomenon and can only erode the real value of money (the functional currency inside an economy) and other monetary items. Inflation cannot and does not erode the real value of non-monetary items. See GUCENME and ARSOY above.
Constant real value non-monetary items´ real values can knowingly be maintained by accountants choosing the CIPPA model as per the IASB´s Framework during low inflation as authorized in 1989 instead of currently unknowingly being eroded by the implementation of the traditional HCA model when they apply the very erosive stable measuring unit assumption for an unlimited period of time during indefinite inflation. It is thus the choice of accounting model and not inflation that maintains or erodes the real value of constant real value non-monetary items like Retained Earnings, Issued Share capital, capital reserves, other shareholder equity items never maintained, etc. when accountants choose to implement the very erosive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Implementing the low inflation CIPPA model as approved in the Framework, Par 104 (a) means accountants choose to reject the stable measuring unit assumption which they implement when they choose to measure financial capital maintenance in nominal monetary units – also in terms of the Framework, Par 104 (a).
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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