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."
‘Inflation is always and everywhere a monetary phenomenon.’
Inflation is a sustained
increase in the general price level of goods and services
in an economy over a period of time. Inflation is generally accepted to refer
to annual inflation. All prices are normally quoted in terms of unstable money.
During inflation each unit of the unstable monetary unit buys fewer goods and
services. Inflation has no effect on the real value of non–monetary items.
Inflation erodes real value evenly in money and other monetary items.
Under the Historical Cost paradigm there are, consequently, real hidden
monetary costs to some and real hidden monetary benefits to others from this
erosion in purchasing power in unstable monetary items that are assets to some
while – a the same time – liabilities to others, e.g., the capital amount
ofa monetary loan. Under the HC
paradigm the debtor generally gains during inflation since he, she or it (a
company) has to pay back the nominal value of the loan, the real value of which
is being eroded by inflation. The debtor pays back less real value during
inflation. The creditor loses out because he, she or it receives the nominal
value of the loan back, but, the real value paid back is lower as a result of
inflation. Efficient lenders attempt to recover this loss in real value by
charging interest at a rate they hope will be higher than the inflation rate during
the period of the loan.