IFRS and US GAAP authorised CMUCPP automatically 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) only when updated in terms of the Daily CPI during low and high inflation, hyperinflation and deflation - ceteris paribus. European Accounting Association: "Capital maintenance is a competing objective of financial reporting."
Money derives its nominal value from being declared by
government to be legal tender. It does not mean economic entities will accept it as
money. Zimbabwe declared 100
trillion Zimbabwe Dollar notes as legal tender, but the population in Zimbabwe
refused to accept them as legal tender after a very short time because
hyperinflation in the hundreds of millions per cent per annum made the notes
almost worthless. The Zimbabwe Government withdrew the ZimDollar from
circulation when the Zimbabwean economy dollarized spontaneously with
multi–currencies after the Reserve Bank of Zimbabwe wiped out most of the real
value represented by the Zimbabwe Dollar in their economy by printing excessive
amounts of extremely high nominal value bank notes till the currency had
exchangeability with only one foreign currency, namely the British Pound via
the Old Mutual
Implied Rate. This happened on 20 November,
2008 when the Reserve Bank of Zimbabwe
closed the Zimbabwe Stock Exchange and with it the trade in Old Mutual shares
which led to the end of the last form of exchangeability with a foreign
currency for the Zimbabwe Dollar.
Fiat money´s nominal value is determined by government fiat or
decree. Fiat money’s real value is determined by all the underlying value
systems in the economy. Changes in fiat money’s real value over time are
indicated by the rate of annual inflation or deflation.
Money has the legal backing of being legal tender.
Legal tender is an offered payment that, by law, cannot be refused in
settlement of a debt. Credit cards, personal cheques and
similar non–cash methods of payment are not legal tender. The law does not
relieve the debt until payment is accepted which explains the practice in some
economies of making out receipts for most payments. Bank notes and coins are
defined as legal tender.
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.