IFRS and US GAAP authorised CMUCPP maintains the constant purchasing power of constant real value non-monetary items (e.g. capital, all items in shareholders´ equity, provisions, salaries, wages, pensions, taxes, trade debtors/creditors, etc) in terms of a Daily CPI in entities that at least break even in real value during low and high inflation, hyperinflation and deflation - ceteris paribus. European Accounting Assoc: "Capital maintenance is a competing objective of financial reporting."
(1) Accountants value and account monetary items at their original historical cost nominal values in nominal monetary units during the current accounting period under all accounting models and under all economic models: during low inflation, hyperinflation and deflation. Low inflation, deflation and hyperinflation determine the always current real value of the monetary unit (US Dollar, Euro, British Pound, Bolívar, Yen, Yuan, etc.) and other monetary items within a monetary economy or monetary union like the European Monetary Union. This is the result of the fact that the real value of money and other monetary items cannot be updated or inflation-adjusted or valued in units of constant purchasing power during the current accounting period because of the monetary nature of money. The real value of the monetary unit and other monetary items in the monetary economy changes equally (all monetary units are affected evenly) normally on a monthly basis during low inflation and deflation. The change is confirmed or quantified with the monthly publication of the new CPI value. Currently, the applicable CPI value can become available up to a month and a half after the date of a transaction in many low inflationary economies. The daily black market or parallel US Dollar exchange rate or street rate is generally constantly (24/7, 365 days a year) available in a hyperinflationary economy. The CPI is the internal exchange rate between the real value of a unit of the monetary unit and real value in an economy. The daily parallel US Dollar (or other hard currency) exchange rate or a Brazilian-style daily index rate fulfils this role in a hyperinflationary economy.
(2) Variable real value non-monetary items in a national economy are valued and accounted in terms of IFRS or GAAP at, for example, fair value, market value, net realizable value, recoverable value, present value, etc. These prices change all the time: even minute by minute in many markets.
Constant real value non-monetary items
(3) The real values of constant real value non-monetary items in the constant real value non-monetary item economy have to be continuously maintained constant under Constant Item Purchasing Power Accounting during low inflation and deflation by means of continuous financial capital maintenance in units of constant purchasing power, i.e. valuing / measuring them in units of constant purchasing power monthly during low inflation and deflation by means of the CPI as originally authorized in IFRS in the Framework (1989), Par 104 (a). Annual measurement in units of constant purchasing power is only currently being done under the Historical Cost Accounting model, generally in the case of certain (not all) income statement items, e.g., salaries, wages, rentals, etc. in non-hyperinflationary economies.
Harvey Kapnick was correct when he stated in the Saxe Lecture in 1976: “In the long run both value accounting and price-level accounting should prevail.”
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.