Tuesday, 23 August 2011

The Unidad de Fomento and CIPPA

The Unidad de Fomento and CIPPA

The Unidad de Fomento is without a doubt an important contribution to the implementation of the financial capital maintenance in units of constant purchasing power concept as authorized in IFRS in the original Framework (1989), Par 104 (a) as maintained in the current Conceptual Framework (2010), Par 4.59 (a) which states:

"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power".

Financial capital maintenance in units of constant purchasing power (CIPPA) automatically maintains the constant purchasing power of capital constant forever in entities that at least break even in real terms during low inflation and deflation - ceteris paribus - whether they own any revaluable fixed assets or not. It thus is a very useful and very profitable accounting model authorized in IFRS especially during the current period of financial crises resulting from under-capitalized banks and companies. Using it instead of the Historical Cost Accounting model world-wide would stop the erosion of hundreds of billions of US Dollars per annum in the real value of constant real value non-monetary items never maintained constant in the world´s constant item economy. It would thus maintain hundreds of billions of US Dollars in the world economy per annum.

A Daily Index is required to implement it. The UF is a monetized daily indexed unit of account first calculated and published in 1967. It has been published daily since 1977. The Central Bank of Chile publishes it daily since 1990. It is based on a formula that can easily be used by all countries publishing a Consumer Price Index at very little cost. The formula is so simple that there is only one result when the formula is applied to any CPI from the beginning; i.e. from the starting value of 100. It is thus a perfect formula for a Daily Index which is simply a lagged daily interpolation of the CPI. Whoever calculates it will always get the same value. There is no doubt about its value.

A Daily Index is not automatically monetized like the UF. It does not need to be. The UF´s monetization is a result of its historical development in Chile.

The UF is a very important fully developed daily index. Its proven success can advance the acceptance of financial capital maintenance in units of constant purchasing power (CIPPA) as authorized in IFRS to a great extent.

Nicolaas Smith

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

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