Capital Maintenance in Units of Constant Purchasing Power is the maintenance of the constant purchasing power of capital (equity) – with capital being equal to the real value of net assets – for an indefinite period of time at all levels of inflation (low inflation, high inflation and hyperinflation) and deflation in all entities that at least break even in real value – ceteris paribus – in units of constant purchasing power in terms of an index that recognizes all the changes (every change) in the general price level.
Capital Maintenance in Units of Constant Purchasing Power was originally authorised as an option to financial capital maintenance maintenance in nominal monetary units (the 3000 year old, generally accepted, globally implemented, traditional Historical Cost Accounting model) at all levels of inflation (low inflation, high inflation and hyperinflation) and deflation in IFRS in the original Framework (1989), Par 104 (a) which states ‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’
Capital Maintenance in Units of Constant Purchasing Power is required during hyperinflation in terms of IAS 29 Financial Reporting in Hyperinflationary Economies (IFRS are principles-based standards: the requirement is implied/inferred in IAS 29). Unfortunately IAS 29 has been implemented in terms of the monthly published CPI since its authorization in 1989. This results in the destruction of part of the real value of current year profits by the implementation of the stable measuring unit assumption during the periods that the daily change in the general price level is being ignored under IAS 29 during hyperinflation (from the 1st of the month till the second last day of the month: the monthly CPI is the CPI valid on the last day of the month). [The implications of the difference in the value of the monthly publised CPI and the Daily CPI on the last day of the month need to be analysed]. There are at least 365 different price levels in the general price level during low inflation, high inflation, hyperinflation and deflation. IAS 29 is implemented recognizing only the 12 month-end CPIs during the year during hyperinflation.
Although Capital Maintenance in Units of Constant Purchasing Power is required during hyperinflation in terms of IAS 29, it, unfortunately, does not result in 100 per cent Capital Maintenance in Units of Constant Purchasing Power during hyperinflation. This is remedied with the implementation of an index that recognizes all changes in the general price level during hyperinflation.
This can be done with (1) the use of the daily US Dollar or other relatively stable foreign currency parallel rate (where a daily parallel rate exists) or (2) a Brazilian-style URV-based daily index that was almost entirely made up of the US Dollar daily exchange rate (not a parallel rate) during hyperinflation or (3) the use of the Daily CPI at initial levels of hyperinflation.
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