Saturday, 21 May 2011

Constant Item Purchasing Power Accounting is not inflation accounting

Constant Item Purchasing Power Accounting is not inflation accounting

The world only goes round by misunderstanding. Charles Baudelaire

Inflation accounting describes an accounting model used during hyperinflation. The Constant Item Purchasing Power Accounting model is only used during low inflation and deflation. CIPPA is not an inflation accounting model.

Hyperinflation is defined in IFRS as cumulative inflation approaching or equal to 100% over three years; i.e., 26% annual inflation for three years in a row. Inflation accounting is implemented in order to stop the erosion of real value in all non-monetary items (both variable and constant real value non-monetary items) caused by the implementation of the very erosive stable measuring unit assumption during hyperinflation.

Implementing the stable measuring unit assumption implies that changes in the purchasing power of money are not considered as sufficiently important to require financial capital maintenance in units of constant purchasing power.

Most entities in low inflationary and deflationary economies implement the Historical Cost Accounting model that is based on the stable measuring unit assumption. This means that all balance sheet constant real value non-monetary items (e.g. shareholders´ equity, trade debtors, trade creditors, provisions, other non-monetary payables, other non-monetary receivables, etc.) and most (not all) income statement items are measured at their historical cost, i.e. financial capital maintenance is measured in nominal monetary units. Some income statement items, e.g. salaries, wages, rentals, etc. are updated annually in terms of the CPI, but, are then paid on a monthly basis implementing the stable measuring unit assumption under HCA.

IAS 29 Financial Reporting in Hyperinflationary Economies defines the inflation accounting model authorized in IFRS.

Nicolaas Smith

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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