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."
Monetary items are normally not inflation–adjusted daily under HCA
during low inflation although Chile inflation-adjusts between 20 and 25 per
cent of its broad M3 money supply daily (2011) and most countries issue
government inflation-indexed bonds which totalled about USD 2.9 trillion at the
end of 2009. Inflation thus erodes the real value of most money and other
monetary items evenly throughout the world´s monetary economy under the HC
paradigm. Money and other monetary items would only maintain their real values
perfectly stable, excluding complete daily indexation of the total money
supply, under permanently sustainable zero per cent annual inflation. This has
never been achieved on a sustainable basis over an extended period of time.
The South African Reserve Bank conducts monetary
policy within an inflation targeting framework. The current target is for CPI
inflation to be within the target range of 3 to 6 per cent on a continuous
The SARB´s definition of price stability results in the erosion of the
real value of the Rand at a rate of three to six per cent per annum. That is
the erosion of about R66 to R132 billion in real value in the SA monetary
economy per annum (March 2012). Real value is eroded evenly in Rand bank notes
and coins and other monetary items (loans, deposits, consumer credit, mortgage
credit, monetary investments, car loans, nominal government bonds, etc.)
throughout the SA monetary economy. Inflation has no effect on any non–monetary
item in the SA or any other economy.
Monetary items not inflation-indexed daily are valued at their current
depreciated generally lower real values by being accounted during the current
accounting period at their original nominal HC values during inflation.
Monetary items´ real values are eroded by inflation over time. Being valued at
their original nominal values during inflation means that monetary items are
automatically being valued by the continuous economic process of inflation over
time. Monetary items´ real values thus change daily in the internal economy as
indicated by the Daily CPI or a monetized daily indexed unit of account, but
their nominal values stay the same over time under HCA. Under HCA this change
in real value is not calculated and not accounted. The net monetary loss or
gain is not calculated and accounted during low inflation.
This obviously means that monetary items are always correctly valued
during the current financial period in any current account: at its current real
value as determined by the Daily CPI or monetized daily indexed unit of
account. Money and other monetary items´ real values consequently generally
decrease to a lower real value daily as indicated by the Daily CPI in low
inflationary economies. Their nominal values stay the same under HCA when they
are not inflation-adjusted daily.
There are net monetary losses and gains whenever the entire or any part
of the money supply is not inflation–indexed on a daily basis. It is however a
Generally Accepted Accounting Practice compliant with IFRS not to calculate net
monetary losses and gains under HCA except during hyperinflation as required by
IAS 29.By implementing the stable
measuring unit assumption it is considered that changes in the purchasing power
of money are not sufficiently important to require financial capital
maintenance in units of constant purchasing power during low and high inflation
and deflation. It is thus generally assumed under HCA that money is, in
practice, perfectly stable for the purpose of valuing current period monetary
items during low inflation in the accounting records. Daily infltion-indexed
monetary items are valued and accounted at the values as determined in the
contracts under which they are being inflation-adjusted daily, i.e. their
nominal values increase daily while their real values stay the same during
There is no stable measuring unit assumption under financial capital
maintenance in units of constant purchasing power (CIPPA). All monetary items
(the whole money supply) would be inflation–indexed on a daily basis in terms
of the Daily CPI with complete coordination in a perfect implementation of financial
capital maintenance in units of constant purchasing power which is highly
unlikely in the near future (2012). It would be the best solution, but it is
doubtful that any country would have an accounting authority and a central bank
with the necessary understanding of the implementation and benefits of
financial capital maintenance in units of constant purchasing power in terms of
a Daily CPI to implement the best solution right from the start.This would remove the entire cost of
inflation (not actual inflation in money and other monetary items) from the
The concept of net monetary losses and gains would be extinct under
inflation-adjusting the entire money supply and complete coordination.
Chile is the country closest to achieving this, still implementing the
HCA model. Chile inflation-indexes 20 to 25 per cent of its broad M3 money
supply (2011) on a daily basis by means of the Unidad de Fomento. The rest of Chile´s money supply is subject to
the erosion of the real value monetary items by inflation. All constant items in
Chile´s constant item economy economy never maintained constant are also still
subject to the erosion of their real values by the implementation of the stable
measuring unit assumption.
The stable measuring unit assumption does not erode the about R132
billion (March 2012) in real value of the Rand and other monetary items in the
SA monetary economy: six per cent annual inflation does that.
Net monetary gains and losses are constant real value non–monetary items
(income statement gains and losses) once they are accounted and have to be
inflation–adjusted – measured in units of constant purchasing power –
thereafter under financial capital maintenance in units of constant purchasing
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.