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."
Accounting cannot and does not create real value out of nothing
Accounting cannot and does not create
real value out of nothing
must be clearly understood that accounting per
se cannot and does not create real value out of nothing – out of thin air. Accounting
cannot and does not create real value or wealth by simply passing some update or
financial capital maintenance in units of constant purchasing power accounting
entries when no real value actually exists. Constant real value non-monetary items
first have to actually exist for the accounting model (CIPPA) to be able to automatically
maintain the real values of those existing constant items constant for an
indefinite period of time in all entities that at least break even in real
value during inflation and deflation – ceteris
paribus. This is achieved by continuously measuring financial capital
maintenance in units of constant purchasing power as authorized in IFRS in
terms of a daily index or other daily rate. Maintaining the constant purchasing
power of capital constant is consequently a basic objective of financial
authorized very erosive financial capital maintenance in nominal monetary units
(HCA) during inflation and deflation, as well as its real value maintaining
remedy, financial capital maintenance in units of constant purchasing power
(CIPPA), in one and the same sentence in 1989.
at sustainable zero inflation constant items will maintain their real values constant
in all companies that at least break even in real value during inflation and
deflation – all else being equal- under both HCA and CIPPA. Sustainable zero
inflation has never been achieved in the past and is not likely soon to be
achieved in the future. Sustainable zero inflation is thus simply a theoretical
IASB confirms the fact that the Historical Cost paradigm is firmly in place
when it states in IAS 29and in the
original Framework (1989) that most
companies´ primary financial reports are prepared based on the traditional Historical
Cost Accounting model without taking changes in the general price level or specific
price changes of assets into account, with the exception that investments,
equipment, plant and properties (all variable real value non-monetary items) can
be revalued. The IASB does not mention the other exception, namely, that
salaries, wages, rentals, etc. (all constant real value non-monetary items) are
generally measured in units of constant purchasing power on an annual basis.
IASB does not mention the erosion of the real value of balance sheet constant
items never maintained constant when the stable measuring unit assumption (a Generally
Accepted Accounting Practice) is implemented during low
inflationary periods in companies with insufficient revaluable fixed assets
(revalued or not) because this process of erosion of the real value of constant
items never maintained constant is not generally understood. The IASB, like the
FASB and most others, mistakenly believe that the erosion of companies´ capital
and profits is caused by inflation, as specifically stated by the FASB. They also
support the stable measuring unit assumption which is based on the fallacy that
money is perfectly stable. They both authorized HCA based on the fallacy of financial
capital maintenance in nominal monetary units per se during inflation and deflation.
erosion of the real value of constant items by the implementation of the stable measuring unit assumption is very
well understood and remedied by measuring them in units of constant purchasing power by applying
the annual CPI in the case of the income statement constant items salaries,
wages, rentals, etc. The real value maintaining effect on balance sheet constant
items is not understood of freely choosing to continuously measure financial
capital maintenance in units of constant purchasing power instead of in nominal
monetary units – both models being approved in IFRS in the originalFramework (1989), Par 104 (a).
International Accounting Standards Committee (the IASB predecessor body) blamed
changing prices in IAS 15 Information
Reflecting the Effects of Changing Prices for affecting an enterprise’s
results of operation and financial position. They defined changing prices as
(1) specific price changes and (2) changes in the general price level which changed
the general purchasing power of money, i.e. they blamed specific price changes
and inflation for affecting companies´ results and financial position.
FASB mentioned the stable measuring unit assumption in FAS 33 and FAS 89.
most accountants and users of financial statements have been inculcated with a
model of financial reporting that assumes stability of the monetary unit,
accepting a change of this consequence would take a lengthy period of time under
the best of circumstances.’
FAS 89, Par.
‘The integrity of the
historical cost / nominal dollar system relies on a stable monetary system.’
FAS 33, 1979
IASB never mentioned the stable measuring unit assumption in either IAS 6 Accounting
Response to Changing Prices (approved in March, 1977 for publication in June,
1977) or IAS 15 (approved in June, 1981 for publication in November, 1981 and
became effective on 1 January, 1983). IAS 15 completely superseded IAS 6. IAS
15 was withdrawn in December, 2003.
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