The IFRS-authorized alternative to HCA which automatically stops the erosion of capital by the stable measuring unit assumption forever.
Constant Item Purchasing Power Accounting (CIPPA) completes the process which was prematurely stopped when disclosure of constant purchasing power information in terms of FAS 89 Financial Reporting and Changing Prices, which completely superseded FAS 33, was made voluntary in 1986. IFRS authorized the principle of financial capital maintenance in units of constant purchasing power during low inflation and deflation in the Framework (1989), Par 104 (a) which states “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.” That authorized the completion of the process, namely, Constant Item Purchasing Power Accounting.
The IASB, FASB and accountants mistakenly blame this erosion on inflation and act as if they are powerless to do anything about it. That is not correct. Inflation has no effect on the real value on non-monetary items.
Inflation is always and everywhere a monetary phenomenon: Milton Friedman.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof. Dr. Ümit GUCENME, Dr. Aylin P. ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 – 2005 (Bursa: Uludag University, 2005), p 9.
The authors were invited to present their paper at the Ohio State University in 2005.
CIPPA would automatically maintain the real value of all constant real value non-monetary items – e.g. banks´ and companies´ shareholders´ equity – constant forever in all entities that at least break even – ceteris paribus – whether they own revaluable fixed assets or not and without the requirement of more capital from capital providers in the form of more money or additional retained profits to simply maintain the existing constant real value of existing shareholders´ equity constant thus boosting the world economy with hundreds of billions of US Dollars each and every year during inflation when the stable measuring unit assumption is freely rejected, that is, when financial capital maintenance in units of constant purchasing power during low inflation and deflation (CIPPA) is chosen.
The critical difference in this change of IFRS-authorized accounting model compared to previous attempts to replace the HCA model is that it is clearly and undeniably proven that the stable measuring unit assumption – not inflation – unnecessarily erodes a significant amount of real value in the world´s constant item economy with traditional HCA during low inflation each and every year.
It is known and admitted that real value is being eroded in companies’ capital and profits. This is mistakenly blamed on inflation. “The basic proposition underlying Statement 33—that inflation causes historical cost financial statements to show illusory profits and mask erosion of capital—is virtually undisputed.” FAS 89, p5. Fortunately, the perpetual automatic remedy during inflation and deflation was authorized in IFRS in the Framework (1989), Par 104 (a).
Copyright (c) 2005-2011 Nicolaas Smith. All rights reserved. No reproduction without permission.