Friday, 18 November 2011

Time line for CIPPA

Time line for CIPPA

CIPPA concludes the process of how to automatically eliminate the very destructive effect of the stable measuring unit assumption (mistakenly believed to be caused by inflation) in entities´ constant real value non-monetary items, e.g. shareholders´ equity, forever in all entities that at least break even in real value during low inflation – ceteris paribus. This process was prematurely stopped in 1986 when the implementation of a form of financial capital maintenance in units of constant purchasing power required by US Financial Accounting Standard 89 was made voluntary.

The high inflationary 1970´s and 80´s

During the 1970´s and 80´s the monetary units of the major world economies were subject to very high inflation. Constant Purchase Power Accounting (CPPA) [not CIPPA] under which all non-monetary items (variable and constant items) are measured in units of constant purchasing power in terms of the monthly Consumer Price Index during very high and hyperinflation was attempted in many of these economies. There was no split of non-monetary items in variable and constant items and the CPPA model thus failed during that period.
Businesses were affected by the specific price changes of the products with which they were dealing; changes that bore little relationship to a general price index like the CPI. It therefore made little practical sense to introduce CPI-based adjustments. Eventually, with inflation abating in the UK and US, the use of CPI-adjusted numbers was abandoned.

1986   FAS 89 made voluntary.

The US FASB issued FAS 33 Financial Reporting and Changing Prices in 1979 which was superseded by FAS 89 Financial Reporting and Changing Prices in 1986, the application of which was made voluntary.

David Mosso, Chairman of the US Federal Accounting Standards Advisory Board (1997-2006) and US Financial Accounting Standards Board member (1979-1986) and two other FASB members dissented to this ruling.

FAS 89 stated: “Relative to most changes in financial reporting, the changes required by Statement 33 were monumental.  

FAS stated regarding David Mosso: “He believes that accounting for the interrelated effects of general and specific price changes is the most critical set of issues that the Board will face in this century.”

1989   The Framework (1989) and IAS 29 published

The International Accounting Standards Committee Board then authorized financial capital maintenance in units of constant purchasing power during LOW inflation and deflation in the Framework (1989). The Board also authorized IAS 29 Financial Reporting in Hyperinflationary Economies in 1989 which requires the restatement of all non-monetary items in Historical Cost and Current Cost financial statements in terms of the period end CPI during hyperinflation.

There was no split of non-monetary items in variable and constant items; all accountants believed there were only two concepts of capital, namely physical and financial capital (HCA) and measuring items in units of constant purchasing power was generally regarded as inflation-accounting: only implemented during hyperinflation.

1994 to 1997

I went to work in Angola´s hyperinflationary economy. In 1996 I implemented accounting-dollarization in the company where I worked in Angola and I started my research regarding changing prices in financial reporting. It started as simply explaining how I accounting-dollarized our company´s operations during hyperinflation. The project then changed completely over the next 16 years of researching the effect of the stable measuring unit assumption in the economy.

2005 Non-monetary items split

By 2005 I identified and defined the split of non-monetary items in variable real value non-monetary items and constant real value non-monetary items.

Dr. Cemal Kucuksozen, Head of the Turkish International Accounting Standards Department in 2005 read that year´s version of the project and stated publicly:

“Theoretically I totally agree with you."

2007  Blog started plus Accounting SA article published

I started my blog Constant Item Purchasing Power Accounting on which I published all my work on this topic in 2007.

The South African Institute of Chartered Accountant´s journal Accounting SA published my article Financial Statements, Inflation and the Audit Report in September, 2007. The article was peer reviewed by Chartered Accountants three times due to delays in publication. The terms variable real value non-monetary item and constant real value non-monetary item were first published in this article.


By 2008 I identified the fact that there are not just two, but, three concepts of capital and capital maintenance already authorized in IFRS.


In 2010 Prof Rachel Baskerville, Associate Professor, School of Accounting and Commercial Law at the Victoria University in Wellington, New Zealand, changed her publication 100 Questions (and Answers) about IFRS on the Social Science Research Network to confirm that there are there concepts of capital maintenance authorized in IFRS after I pointed it out to her. Prof Baskerville discussed this with her colleague Prof Kevin Simpkins. He is the current Chairman of the New Zealand Accounting Standards Review Board. She then also pointed her readers to my SA blog and added this conclusion: “There is much to be gained from moving away from reporting on the basis Financial Capital Maintenance in Nominal Monetary Units."

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

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