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."
accounting as Harvey Kapnick hoped for in 1976 clearly does not prevail for balance
sheet constant real value non–monetary items (e.g., owners´ equity) and most
income statement items during low inflation. Income statement items are all
constant real value non–monetary items. Price–level accounting does prevail as
far as the income statement constant items salaries, wages, rentals, etc. are
concerned since they are generally measured annually in units of constant
purchasing power in terms of the annual change in the Consumer Price Index,
but, they are then paid monthly applying the stable measuring unit assumption.
terms of the HCA model the stable measuring unit assumption is implemented
under which balance sheet constant items are valued at historical cost, i.e., in
nominal monetary units thus eroding the existing constant real value of these
constant items when they are not maintained constantduring low inflation.
accounting generally did prevail in the Brazilian economy during the 30 years
from 1964 to 1994 when Brazil indexed all non–monetary items (variable and
constant items) in their non–monetary or real economy with a daily index value
supplied by the different governments during that period. Brazil stopped that
with the full implementation of the traditional HCA model, financial capital
maintenance in nominal monetary units and the stable measuring unit assumption when
they changed the Unidade Real de Valor
into their latest currency, the Real, in 1994. They should have changed from
daily indexation of all non–monetary items (variable and constant items) during
hyperinflation to financial capital maintenance in units of constant purchasing
power during low inflation by applying their Daily CPI.
William Paton noted:
‘the value of the dollar — its general purchasing power — is subject to
serious change over a period of years... Accountants... deal with an unstable,
variable unit; and comparisons of unadjusted accounting statements prepared at
intervals are accordingly always more or less unsatisfactory and are often
As quoted in FAS 33, p. 29.
There is no substance in the claim that the existence
and value of economic resources, for example owners´ equity items, exist independently
of how we measure them – and that the choice of the measuring unit does not
affect their fundamental value, only how we choose to represent that value –
and that we can use any monetary unit, US Dollars of constant purchasing power,
US Dollars, whatever we think best represents that value and will make sense to
whoever is using the information produced. See Paton above. There is no substance in the
claim that it is fine to represent value in terms of constant purchasing power
and to argue that that would be a better method than using historic cost and
maintaining a fiction as to the stability of the measuring unit – but that
doesn't affect the nature of the underlying resources. There is no substance in
the claim that the choices made in accounting will not change that value and
will not affect the economy. Measuring constant real value non–monetary items
in units of constant purchasing power over time does affect the economy. That
is generally known and a fact.
HCA model would have been rejected by now if it were generally understood that
the implementation of the stable measuring unit assumption during low inflation
results in the unknowing, unnecessary and unintentional erosion of hundreds of
billions of US Dollars of real value in constant items (e.g., banks´ and
companies´ equity) never maintained in the world´s constant item economy year
in year out.
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.