Balance sheet constant real value non–monetary items are valued under HCA using the traditional HC model in terms of which the very erosive stable measuring unit assumption is applied. This unknowingly, unintentionally and unnecessarily erodes the real values of constant real value non–monetary items never maintained constant at a rate equal to the annual rate of inflation. Unknowingly, unintentionally and unnecessarily the wrong choice is made. Since everyone does it, since it is the traditional, generally accepted choice and since it is also authorized in the original Framework (1989), Par 104 (a) which is applicable in the absence of specific IFRS, it results in the Historical Cost Mistake.
On the other hand, the exact opposite is also generally accepted: it is acknowledged that inflation is eroding the real value of the depreciating monetary unit used as the depreciating monetary medium of exchange and depreciating monetary unit of account and some, not all, constant real value non–monetary income statement items like salaries, wages, rentals, etc. are updated or measured in units of constant purchasing power on an annual basis by increasing their nominal values at a rate at least equal to the annual rate of inflation thus keeping their non–monetary real values constant over the time period in question.
So, on the one hand it is currently acknowledged that the nominal values of some (not all) income statement items, e.g. salaries, wages, rentals, etc., have to be indexed or updated by means of the CPI because the stable measuring unit assumption cannot be applied and, on the other hand, it is assumed – at exactly the same time and during exactly the same period – that the constantly depreciating monetary unit is perfectly stable, but, only for the valuation of balance sheet constant real value non–monetary items like retained earnings, issued share capital, capital reserves, provisions, other shareholder equity items, trade debtors, trade creditors, etc. as well as for the other income statement items not updated. The constant real values of all constant items never maintained constant during HCA are thus unknowingly, unintentionally and unnecessarily eroded at a rate equal to the annual rate of inflation amounting of hundreds of billions of US Dollars in the world´s constant item economy, year in year out, decade after decade when the stable measuring unit assumption is implemented during inflation.
Companies listed on stock exchanges comply with IFRS. If a country should enter into hyperinflation they would implement IAS 29. They would then apply the CPPA inflation accounting model and restate all income statement items plus balance sheet constant real value non–monetary items as well as all variable real value non-monetary items (only required during hyperinflation) in their period-end HC or CC financial statements by means of the period-end CPI in an attempt to maintain these items´ real values during hyperinflation. They would restate, for example, issued share capital and retained earnings for all listed companies and banks from the dates these items were originally contributed or came about and attempt to maintain their existing constant real non–monetary values constant, but, only for as long as the economy is in hyperinflation.
When the economy is not in hyperinflation any more they would stop implementing IAS 29 and generally go back to the real value eroding HC model (as Brazil did in 1994 and Turkey did in 2005) and again erode the existing constant real non-monetary values of all constant real value non–monetary items never maintained constant (e.g. the portion of shareholders´ equity not maintained constant with sufficient revaluable fixed assets under HCA) at a rate equal to the annual rate of inflation when they again implement the stable measuring unit assumption during low inflation. When they choose CIPPA it automatically maintains the constant real value of all constant items constant forever in all entities that at least break even during inflation and deflation – ceteris paribus.
Auditors would certify – when applicable – that a company´s financial statements fairly present the financial position of the company and comply with IFRS when boards of directors choose to implement CIPPA, i.e. when they choose to continuously measure financial capital maintenance in units of constant purchasing power during low inflation and deflation as authorized in the original Framework (1989), Par 104 (a).
Nicolaas Smith
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