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."
It is clear from the above that the objectives of general
purpose financial reporting are:
(a)Maintaining the constant purchasing power of
(b)Provision of continuously updated
decision–useful financial information about the reporting entity to capital
providers and other users.
is the overall objective of reporting for price changes to ensure the
maintenance of the business as an entity.’
(Coenenberg and Macharzina, 1976)
capital maintenance can be measured in either nominal monetary units or units
of constant purchasing power.’
is essential to the credibility of financial reporting to recognize that the
recovery of the real cost of investment is not earnings — that there can be no
earnings unless and until the purchasing power of capital is maintained.’
(FAS 33, 1979)
Only existing constant real non-monetary value capital can
be maintained. Double–entry accounting does not and cannot create real value
out of nothing as a result of simply passing update entries when no real value
capital maintenance in units of constant purchasing power at all levels of
inflation and deflation (CIPPA) automatically maintains the constant purchasing
power of (existing) capital constant for an indefinite period of time in all
entities that at least break even in real value at all levels of inflation and
deflation – ceteris paribus.
Maintaining the constant purchasing power of capital at all levels of inflation
and deflation is a basic objective of financial reporting.
An entity has maintained the existing constant purchasing
power of its capital if it has as much equity – expressed in units of constant
purchasing power – at the end of the reporting period as it had at the
beginning of the period, after excluding any distributions to, and contributions
from, owners during the period. Consequently, a profit is earned only if the
constant purchasing power of equity at the end of the period exceeds the
constant purchasing power of equity at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the
The German economist Werner Sombart (1863–1941) wrote in Medieval and Modern Commercial Enterprise:
very concept of capital is derived from this way of looking at things; one can
say that capital, as a category, did not exist before double entry bookkeeping.’
The objectives of general purpose financial reporting are supposed
to answer the question, what is financial reporting supposed to do? The only
accounting model an entity can use to implement a capital concept is
double–entry accounting. Every fundament concept of capital logically gives
rise to its respective fundamental capital maintenance concept.
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