Constant
Item Purchasing Power Accounting is a price–level accounting model where under
financial capital maintenance in units of constant purchasing power is
implemented at all levels of inflation and deflation.
Continuous
financial capital maintenance in units of constant purchasing power was authorized
by the IASC Board thirteen years after Harvey Kapnick´s 1976 prediction. The
IASC Board approved the original Framework (1989), Par 104 (a), now Conceptual
Framework (2010), Par. 4.59 (a), which state:
‘Financial capital maintenance
can be measured in either nominal monetary units or units of constant purchasing power.’
However,
the enormous real value eroding effect of implementing the very erosive stable
measuring unit assumption when entities choose, also in terms of the original
Framework (1989), Par. 104 (a), IASB–approved financial capital maintenance in
nominal monetary units (the HCA model) and apply it in the valuing of constant real
value non–monetary items never maintained constant, e.g., retained earnings, in
low inflationary economies is not generally realized at all. This is clearly verified
by the fact that both financial capital maintenance in nominal monetary units (a
very popular accounting fallacy) and real value maintaining continuous financial
capital maintenance in units of constant purchasing power at all levels of
inflation and deflation were approved by the IASB in the original Framework, Par
4.59 (a) in 1989 – in one and the
same sentence.
Hundreds
of billions of US Dollars is eroded in constant items never maintained constant
in the world’s constant item economy per annum by the implementation of the
stable measuring unit assumption as part of HCA during low inflation in this
manner.
Entities
can choose the one or the other and state that they have prepared primary
financial statements in terms of IFRS. However, when they choose the traditional
HCA model they unknowingly, unintentionally and unnecessarily erode real value
on a significant scale in the real or non–monetary economy during low inflation when they implement the very erosive
stable measuring unit assumption. When they
choose IASB–approved continuous financial capital maintenance in units of
constant purchasing power they would maintain the real values of all constant real
value non–monetary items during inflation and deflation in companies which at
least break even in real value, empowering and enriching those companies, their
shareholders and the economy in general with the accompanying benefits to
workers and employment for an unlimited period of time – ceteris paribus.
As
the Deutsche Bundesbank stated:
‘The benefits of price
stability, on the other hand, can scarcely be overestimated, especially as
these are, in principle, unlimited in duration and accrue year after year.’
Deutsche
Bundesbank, 1996 Annual Report, P 83.
Financial
capital maintenance in units of constant purchasing power would result in
absolute price stability under complete co-ordination in constant real value
non–monetary items for an unlimited period of time in companies that at least
break even in real value at all levels of inflation and deflation – all else
being equal – without the need for extra capital from capital providers or more
retained earnings simply to maintain the existing constant real value of
existing constant real value non–monetary capital constant. The IASB
predecessor body, the IASC Board, approved absolute price stability in income
statement and balance sheet constant real value non–monetary items when they
authorized the original Framework
(1989), Par 104 (a) approving the option of continuously measuring financial
capital maintenance in units of constant purchasing power at all levels of
inflation and deflation.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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