Difference between ACCOUNTING and ECONOMIC Capital Maintenance in Units of Constant Purchasing Power

A. ACCOUNTING Capital Maintenance in Units of Constant Purchasing Power in terms of a daily index.

Updated on 28 July 2013

1. The stable measuring unit assumption is never implemented when measuring constant real value non-monetary items in terms of a daily index. 

2. It is implemented when measuring monetary items not inflation-adjusted or deflation-adjusted daily. This is a carry-over from Historical Cost Accounting.

3. Net monetary gains and losses are accounted.

4. Variable real value non-monetary items are measured in terms of IFRS excluding nominal Historical Cost.

A form of ACCOUNTING CMUCPP is implemented under IAS 29 Financial Reporting in Hyperinflationary Economies which requires restatement of HC or CC financial statements in terms of the measuring unit current at the end of the reporting period. IAS 29 has been implemented since 1990 in terms of the monthly published CPI at the end of the reporting period. The use of the monthly instead of the Daily CPI (or daily USD parallel rate) results in the destruction of the real value - at the rate of hyperinflation - of a part of current year results since 353 non-month-end daily changes in the general price level are ignored under IAS 29. IAS 29 is implemented to only recognize the 12 month-end CPI values. The use of the month-end CPI is not required in IAS 29. The standard simply requires the use of a general price index at the end of the reporting period. The Daily CPI is a lagged, daily interpolation of the monthly published CPI. The USD parallel rate is used as a daily index at high levels of hyperinflation. There can be more than one change in the general price level per day during hyperinflation (Hanke 2008).

Different forms of ACCOUNTING CMUCPP were widely implemented in Latin America from the mid 1960´s to the mid 1990´s in the form of monetary correction or indexation or price-level restatement: all in terms of a daily index.

B. ECONOMIC Capital Maintenance in Units of Constant Purchasing Power in terms of daily index.

The stable measuring unit assumption is never implemented. 

This means:

1. Constant real value non-monetary items (e.g. all items in equity, trade debtor, trade creditors, etc.) would always and everywhere be measured in units of constant purchasing power in terms of a daily index under complete coordination (everyone and every thing - automated computing - always doing it)  within an entity, group of entities, economy, monetary union or eventually the entire world.

2. Monetary items would always and everywhere be inflation-adjusted or deflation-adjusted in terms of a daily index under complete coordination (everyone and every thing - automated computing - always doing it)  within an entity, group of entities, economy, monetary union or eventually the entire world. 

3. There would be no net monetary gains or losses.

4. There would be no cost of or gain from inflation or deflation.

5. Variable real value non-monetary items would be measured in terms of IFRS excluding nominal Historical Cost.

This is an economic solution since daily inflation-adjustment and daily deflation-adjustment of all monetary items have to be eventually legislated in the commercial and central banking system. The IASB is not generally the place where this would be institutionalized although the simple elimination of the stable measuring unit assumption logically implies daily inflation-adjustment and daily deflation-adjustment of all monetary items as well as all constant items.

Accounting CMUCPP was authorized in IFRS in the original Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010), Par. 4.59 (a)] which states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power." Comprehensive economic and accounting CMUCPP are only possible with an index that recognizes all changes in the general price level. This is not possible with using the monthly CPI. The use of the Daily CPI does this in low and high inflationary economies. The daily US Dollar parallel rate needs to be used for this purpose at high levels of hyperinflation.

Accounting CMUCPP in terms of a daily index is required before Economic CMUCPP in terms of a daily index can be implemented.

Currently more than USD 2.4 trillion in government capital inflation-indexed bonds are inflation-adjusted daily worldwide.

The global nominal bond market is worth USD 24 trillion (2013).

Chile inflation-adjusts 25 percent of its broad M3 money supply daily in terms of their Unidade de Fomento which is a lagged, daily interpolated indexed unit of account.

Nicolaas Smith Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.