CIPPA is authorized during low inflation

CIPPA is authorized during low inflation


The statement that financial capital maintenance can be measured in either constant purchasing power units or in nominal monetary units in the IASB´s original Framework (1989), Par 104 (a) means that CIPPA has been authorized in IFRS 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 since 1989.

Measurement in constant monetary units (e.g. constant Dollars), i.e. in units of constant purchasing power by updating 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 Official 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 updated annually in units of constant purchasing power during low inflation in most economies. Payments in money for these items are normally updated annually by means of the CPI to compensate for the annual 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 monetary unit 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. These items are then, however, paid on a monthly basis in the new accounting year applying the stable measuring unit assumption, i.e. they are only updated annually, not monthly under the HC paradigm.

Constant real value non–monetary items´ real values can automatically be maintained constant in all entities that at least break even by choosing the CIPPA model as per the IASB´s Framework during low inflation as authorized in 1989 instead of currently unknowingly, unintentionally and unnecessarily being eroded by the implementation of the traditional HCA model when the very erosive stable measuring unit assumption is applied during 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 the very erosive stable measuring unit assumption is implemented for during inflation.

Implementing the CIPPA model means the stable measuring unit assumption is rejected which is implemented when it is instead chosen to measure financial capital maintenance in nominal monetary units – also in terms of the original Framework (1989), Par 104 (a).


Nicolaas Smith

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