IFRS and US GAAP authorised CMUCPP maintains the constant purchasing power of constant real value non-monetary items (e.g. capital, all items in shareholders´ equity, provisions, salaries, wages, pensions, taxes, trade debtors/creditors, etc) in terms of a Daily CPI in entities that at least break even in real value during low and high inflation, hyperinflation and deflation - ceteris paribus. European Accounting Assoc: "Capital maintenance is a competing objective of financial reporting."
A balance sheet
is prepared periodically reporting the real net asset value (not the real market
value or the real intrinsic value) of an entity on a specific day, e.g. the end
of a month, the end of a quarter, the end of six months, the end of a financial
year or sometimes a longer financial period.
A balance sheet
under financial capital maintenance in units of constant purchasing power (CIPPA)
is a financial report relating to an instant in an entity´s economic life: a report
about the real net asset value of an entity on a specific day; i.e., the date
of the financial report in terms of the Daily Consumer Price Index or other daily
rate on that day when the financial report is accessed or viewed on that day.
The next day and
every day thereafter, the real net asset value of an entity is generally different
because the daily valuations of variable real value non-monetary items have
changed, the entity has created more constant real value in the form of constant
real value non-monetary after tax net income or has suffered a constant real
value non-monetary net loss or extra capital or other resources have been
contributed by shareholders or other third parties. The entity is a going
concern and its real net asset value generally changes day after day.
In the event of
the real net asset value remaining the same from the one day to the next, the nominal
net asset value would generally change during inflation and deflation under
financial capital maintenance in units of constant purchasing power (CIPPA)
because the stable measuring unit assumption is not implemented under this
accounting model. Inflation and deflation change the real value of money, the
monetary unit of account, over time.
The real net
asset value of the entity as reported in the balance sheet on the date of the balance
sheet stays constant in real value (not in nominal value during inflation and
deflation) for an indefinite period of time with reference to the date of the
financial report. But, the real value of the functional currency (the unstable
monetary unit of account) generally changes daily as indicated by the change in
the Daily CPI or monetized daily indexed unit of account in a non-dollarized
economy at all levels of inflation and deflation. Thus, all items in a historic
balance sheet and all historic financial reports have to be valued at the
current, i.e. today´s, Daily CPI or other daily rate under financial capital
maintenance in units of constant purchasing power (CIPPA).
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.