Measurement of
inventories under financial capital maintenance in units of constant purchasing
power
The difference between financial capital maitenance in nominal monetary
units (traditional Historical Cost Accounting) and financial capital
maintenance in unit of constant purchasing power, i.e. Constant Item Purchasing
Power Accounting (CIPPA), is that the stable measuring units assumption is always
implemented under HCA but is never implemented under CIPPA.
The fact that the real value of money
(and thus the monetary medium of exchange) was and is never perfectly stable on a sustainable basis within an economy during
inflation and deflation is reflected in an entity in the way the three basic
economic items, i.e., monetary, variable and constant items, are measured
/valued (for example variable items in
terms of daily fair value and constant items in terms of daily constant purchasing
power) over time under financial capital maintenance in units of constant
purchasing power.
The reason for and the advantage of financial capital maintenance in units
of constant purchasing power in terms of a Daily CPI is the fact that the
constant purchasing power of equity (capital) is automatically maintained
constant for an indefinite period of time in all entities that at least break
even in real value at all levels of
inflation and deflation – ceteris paribus.
Everything is done (and accounted daily) and all historical financial
information is stated at the current, i.e. today´s, real value which generally
changes every day. The concept of a nominal
Historical Cost or a nominal historical
value is abolished because the stable measuring unit assumption is never
implemented under financial capital maintenance in units of constant purchasing
power. Tomorrow today´s real values will be historical reference amounts and
must be valued (measured) at tomorrow´s real value, e.g. tomorrow´s market
price, Daily Consumer Price Index, etc.
Financial capital maintenance in units of constant purchasing power is
authorized in IFRS in the Conceptual Framework (2010), Par. 4.59 (a) and includes
Historical Cost as a measurement basis, but excludes the stable measuring unit
assumption.
Since both financial capital maintenance in units of constant purchasing
power (CIPPA) as well as financial capital maintenance in nominal monetary units
(HCA) are authorized in the Conceptual Framework (2010), Par. 4.59 (a) it means
that IFRS are implemented under two paradigms, namely the HC paradigm and the
Constant Item Purchasing Power paradigm.
IAS 2
Inventories, Par. 9
Measurement of Inventories states:
‘Inventories
shall be measured at the lower of cost and net realisable value.’
An inventory item measured at Historical Cost in terms of IAS 2 shall be
measured in terms of the current, i.e. today´s, Daily Consumer Price Index and
continuously updated day after day thereafter because there is no stable measuring
unit assumption under financial capital maintenance in units of constant
purchasing power.
Par. 10 Cost of
Inventories states:
‘The cost of
inventories shall comprise all costs of purchases, costs of conversion and
other costs incurred in bringing the inventories to their present location and
condition.’
All historical costs of purchases, historical costs of conversion and other
historical costs incurred in bringing the inventories to their present location
and condition shall be measured in terms of the current, i.e. today´s, Daily
Consumer Price Index and continuously updated day after day thereafter because
there is no stable measuring unit assumption under financial capital
maintenance in units of constant purchasing power.
Par. 23 Cost
Formulas states:
‘The cost of inventories of items
that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects shall be assigned by using specific
identification of their individual costs.’
The above individual historical costs shall be measured in terms of the
current, i.e. today´s, Daily Consumer Price Index and continuously updated day
after day thereafter because there is no stable measuring unit assumption under
financial capital maintenance in units of constant purchasing power.
Par. 25 states:
‘The cost of
inventories, other than those dealt with in paragraph 23, shall be assigned by
using the first-in, firts-out (FIFO) or weighted average cost formula.’
The cost of inventories, other than those dealt with in IAS 2, paragraph 23,
assigned using the first-in,
firts-out (FIFO) or weighted average cost formula shall be measured in terms of
the current, i.e. today´s, Daily Consumer Price Index and continuously updated
day after day thereafter because the stable measuring unit assumption is never
implemented under financial capital maintenance in units of constant purchasing
power.
Par. 34
Recognition as an expense states:
‘When
inventories are sold, the carrying amount of those inventories shall be
recognised as an expense in the period in which the related revenue is
recognised.’
When inventories are sold, the carrying amount of those inventories shall be
measured in terms of the current, i.e. today´s, Daily Consumer Price Index and
continuously updated day after day thereafter and shall be recognised as an
expense in the period in which the related revenue is recognised because the
stable measuring unit assumption is never implemented under financial capital
maintenance in units of constant purchasing power.
Nicolaas Smith Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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