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."
Definition: Money illusion is the mistaken belief that money is stable in real
value over time.
illusion is primarily evident in low inflation countries. In hyperinflationary
countries there is absolutely no money illusion as far as the hyperinflationary
national currency is concerned. Everyone knows as a fact that the local
hyperinflationary currency loses real value day by day and even hour by hour.
In low inflationary economies people are vaguely aware that money loses real
value over a long period of time. Money in a low inflationary economy is often
used as if its real value is completely stable over the short term. That is
illusion is evident everywhere in low inflationary economies. TV presenters
reporting on historical events regularly quote Historical Cost values as the
most natural thing to do. For example: ‘Marble Arch was built for 10 000
Pounds’ a TV reporter may state with sincere knowledge that his audience is
being well entertained with correct facts and figures. It is a figure very difficult
to instantaneously value today. 10 000 British Pounds may have been the
original cost in historical terms but we live today and absolutely no–one can
immediately imagine what the construction cost of Marble Arch is in current
terms. It is the same as saying that something cost one Pound 300 years ago. It
is impossible to immediately value it now. We live now and not 300 years in the
past. We do not know what some–one bought for a Pound 300 years ago. People in
the United Kingdom know what a person can buy for one Pound now – and the
Pound’s real value changes day by day within the UK economy as indicated by the
change in the UK Daily CPI.
report an unending stream of information about their performance and results.
Sales increased by eight per cent over last year’s figures, for example. These
are normally nominal rates. A person has to remember the inflation rate for
last year and mentally adjust the reported figures to real rates to understand
what the real rate of increase or decrease was.
illusion is very common in our low inflationary economies. Another example: The
BBC ran a program about the fantastic E–Type Jaguar. The presenter stated that
one of the many reasons why the E–type Jag – the best car ever, according to
the presenter – was such a success, was its original nominal price of 2 500
Pounds at the time of its first introduction into the market. Towards the end
of the program it is then stated that a number of years later these same
original E–Type Jags sold at a nominal price at that time of 25 000 Pounds. It
is thus implied to be 10 times more than the original price of 2 500 Pounds. In
nominal terms, yes. We all agree. Certainly not in real terms and we are
interested in real values. Nominal profits – however fantastic they may look –
are misleading the longer the time period and the higher the rate of inflation
or hyperinflation in the transaction currency during the time period involved.
example we are all led to believe that the E–Type Jag was sold at a real value
10 times its original real value. It is notorious money illusion at work. The
real value in a sale like that certainly would not be 10 times the original
real value once the original nominal price is adjusted for the effect of
inflation on the British Pound over the years in question.
illusion is so pervasive in our low inflation societies that we do not even
notice it any more. It is a complete state of mind – a way of thinking.
We have to
stop thinking in nominal terms and start thinking in real terms. As long as
there is inflation in an economy, the national currency created and used in
that inflationary economy is not a store of perfectly stable real value. It is
a store of decreasing real value. Money is losing real value all the time when
an economy is in a state of inflation. Two per cent annual inflation is not
price stability. Two per cent annual inflation is a high degree of price
stability. It is some countries´ definition of price stability. All currently
existing bank notes and coins will actually be completely worthless sometime in
the future when an economy remains in an inflationary mode for a long enough
period of time.
hyperinflationary economy notes become worthless very quickly. I saw 100 Kwanza
notes lying in the street in 1996. The street boys would not even pick them up
when hyperinflation in Angola was 3200 per cent per annum while they would
fight to pick up a One USD note. In 2010 I held a 100 Trillion Zimbabwe Dollar
note which landed up in Portugal via various family connections. It was also
worth nothing just like the 100 Kwanza notes lying in the street in Luanda in
developed upon the mistaken belief that it is stable – as in fixed – in real
value in the short to medium term in economies with low inflation. The term
stable money is seen as meaning that money’s real value stays intact over the
short to medium term in low inflationary economies. Money illusion is still
very evident today in most economies in money, other monetary items and
constant real value non–monetary items that are mistakenly considered to be
monetary items under the Historical Cost paradigm, for example, trade debtors,
trade creditors, dividends payable, dividends receivable, taxes payable, taxes