Capital Maintenance in Units of Constant Purchasing Power at Princeton University
Princeton University
A negative interest rate is impossible under CMUCPP in terms of the Daily CPI.
Showing posts with label Capital Maintenance in Units of Constant Purchasing Power. Show all posts
Showing posts with label Capital Maintenance in Units of Constant Purchasing Power. Show all posts
Wednesday 5 June 2013
Monday 27 May 2013
UNDERSTANDING CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER
UNDERSTANDING CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER
DEFINITION: Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) is the maintenance of the constant purchasing power of capital for an indefinite period of time at all levels of inflation and deflation in 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, normally daily, changes in the general price level (Smith 2012 Ch 1.15).
Capital is equal to the real value of net assets (Smith 2012 Ch 12.2).
The general price level can change more than once a day (even hourly) during hyperinflation (Hanke and Kwok 2009, p 359, Smith 2012 Ch 11.7).
The following are all forms of CMUCPP:
1. Indexation
2. Monetary correction
3. Price-level accounting
4. Price-level restatement
of non-monetary items (including equity) in countries with high or hyperinflation (Central Bank of Chile 2002 p 8).
5. Restatement of Historical Cost or Current Cost financial statements in terms of the measuring unit current at the end of the reporting period during hyperinflation as required in IAS 29 Financial Reporting in Hyperinflationary Economies (IAS 29 Par 8).
CMUCPP is a relatively old capital maintenance concept.
‘The consumer price index was first used in 1707. In 1925 it became institutionalized when the Second International Conference of Labour Statisticians, convened by the International Labour Organization, promulgated the first international standards of measurement.’ (Vink, Kirsten and Woermann 2004 p 217)
CMUCPP in the form of indexation (monetary correction) or price-level restatement was widely used in Latin America from the early 1960´s (Lefort and Schmidt-Hebbel 2002 p 2).
‘A common feature of financial statements that are prepared throughout Latin America is that they are adjusted in some way to take into consideration the economic effects of price changes in the local economy (Nobes and Parker 1991). In the case of Chile, this adjustment primarily reflects changes in the general price level. The values of assets, liabilities and owners’ equity that are not fixed in terms of the local currency are restated to reflect changes in the purchasing power of the local currency. The unrealized gains and losses that result from this restatement are recorded as a single line-item in the income statement that is referred to as the “monetary correction” (corrección monetaria).’ (Jennings and Maturana 2005 p 86)
CMUCPP has been used in Venezuela in the form of IAS 29 from 2009 (PricewaterhouseCoopers 2009) to the present (2013). Brazil used CMUCPP very successfully in the form of indexation (monetary correction) in terms of different government-supplied daily indices under different governments from 1964 till 1994 (Central Bank of Brazil 2007).
Advantages of CMUCPP
CMUCPP in terms of an index that recognizes all (normally daily) changes in the general price level would:
1. Maintain the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value – ceteris paribus – at all levels of inflation and deflation, including during hyperinflation (Smith 2012).
2. Stabilize the constant real value non-monetary item economy at all levels of inflation or deflation including during hyperinflation (see Brazil from 1964 to 1994).
‘Indexation also has macroeconomic implications. In particular, indexation has played a critical role in many stabilization programs.’ (Lefort and Schmidt-Hebbel 2002 p 1)
3. Maintain the constant purchasing of all constant items besides equity, e.g.,
salaries, wages, rents, etc. by means of measurement in units of constant purchasing power in terms of a daily index.
‘Indexation allows the system of relative prices to survive large inflation shocks. Wage and financial indexation are clear examples of arrangements that accomplish this purpose. Wage indexation substitutes for the need for frequent renegotiation of wages and may reduce labor market transactions costs in economies where inflation is at least moderate.’ (Lefort and Schmidt-Hebbel 2002 p 1)
4. Maintain the real value of monetary items constant when they are inflation-adjusted in terms of a daily index.
‘And the experience of several emerging economies shows that indexing financial instruments may be key to success in developing liquid long-term fixed-income markets.’ (Lefort and Schmidt-Hebbel 2002 p 1)
CMUCPP authorized in IFRS
CMUCPP was originally authorized in IFRS as an option to financial capital maintenance in nominal monetary units (Historical Cost Accounting) at all levels of inflation and deflation 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.’
CMUCPP implied in IAS 29
CMUCPP during hyperinflation is implied in IAS 29. CMUCPP, i.e., restatement required in IAS 29, is the only accounting model specifically prescribed in IFRS.
‘At the present time, it is not the intention of the Board to prescribe a particular model other than in exceptional circumstances, such as for those entities reporting in the currency of a hyperinflationary economy.’ (Conceptual Framework (2010) Par 4.65)
IFRS are principles-based standards. (ICAS 2006 p20) The principle of CMUCPP was originally authorized in the Framework (1989) Par 104 (a). The requirement is implied/inferred in IAS 29 since restatement of non-monetary items (including equity) in terms of the general price index is a form of CMUCPP.
(1) IAS 29 Par 24 requires nominal capital to be restated by applying a general price index which is measurement in units of constant purchasing power by applying a general price index during hyperinflation.
(2) Par 12 and 14 define monetary items and classifies non-monetary items. Current period nominal monetary items are generally not inflation-adjusted during the reporting year.
(4) Par 26 requires the restatement (measurement in units of constant purchasing power) of all items in the statement of comprehensive income.
The above four features are all CMUCPP features.
Daily Index
The implementation of an index that recognizes all changes (normally daily changes) in the general price level would maintain the constant purchasing power of capital and profits as was done very successfully in Brazil from 1964 till 1994.
Daily indices were also used elsewhere in Latin America, e.g., in Chile with the very successful Unidad de Fomento (UF) (Shiller 1998) – still used in Chile today – the world´s first inflation-indexed unit of account that was copied in Mexico, Colombia (the Real Value Unit used currently) and Ecuador (Lefort and Schmidt-Hebbel 2002 p 5).
Daily indices that could be used during hyperinflation are:
(1) The US Dollar or another relatively stable foreign currency parallel exchange rate as a generally available substitute for a daily index representing current real value where the parallel rate´s use is accepted (officially allowed) and the greater part of the economy is valued in terms of the parallel rate or
(2) A Brazilian-style Unidade-Real-de-Valor-based daily index that was almost entirely made up of the US Dollar daily exchange rate during hyperinflation or
(3) A Daily CPI at initial levels of hyperinflation.
‘Another coordination problem is that we must decide, and agree, on a way to smooth the CPI. We should not define prices just in terms of the latest CPI because the CPI is vulnerable to sudden jumps from month to month. This is particularly true when we are talking about indexing financial contracts to the CPI. A unit of account like the UF would smooth out the CPI movements, otherwise there would be important jumps in deposit balances on the dates of new announcements of the CPI. Thus, the smoothing of the CPI in producing the UF has also been a fundamental part of the functioning of the UF as an analogue of money. (Shiller 1998 p 13)
Smoothing is a lagged, daily interpolation of the monthly published CPI. There are no surprises with a Daily CPI: it is always known in advance, e.g., the US Daily CPI Index.
Daily CPI
The Daily CPI – available in all countries that issue government capital inflation-indexed bonds, i.e., in almost the entire world economy, is a one to four month (Olfasson and Jonsson 2007 p 2) lagged, daily interpolation of the monthly published general price level Consumer Price Index (Shiller 1998). The Daily CPI normally recognizes all changes in the general price level (when the CPI is recognized as the general price level) during low inflation, high inflation, initial hyperinflation and deflation.
The following are links to Daily CPIs
Daily CPIs are currently being used in most of the world economy to inflation-adjust more than USD 3.4 trillion sovereign capital inflation-indexed bonds on a daily basis.
CMUCPP used (not implemented) in low inflationary countries too
CMUCPP was implemented in a number of countries, including Turkey, Russia and Zimbabwe during hyperinflation in terms of IAS 29 since 1990, the year of first implementation of the standard (IAS 29). CMUCPP is currently (2013) being implemented during hyperinflation in Venezuela and Belarus in terms of IAS 29. CMUCPP has been used since 1990 in terms of IAS 29 and is currently being used in terms of IAS 29 by multi-nationals with subsidiaries in hyperinflationary countries, in low inflationary countries too when they consolidated/consolidate the financial statements of these subsidiaries in their consolidated financial statements.
Constant real value non-monetary items
The constant item constant purchasing power concept of capital (Smith 2012 Ch 1.21.1.(iii)) is implemented under CMUCPP. Constant real value non-monetary items (Smith 2007, 2012 Ch 4) are inferred in IFRS in the Conceptual Framework (2010) Par 4.59 (a).
Capital is a non-monetary item. Non-monetary items to be measured in units of constant purchasing power are thus constant real value non-monetary items or simply constant items. They include issued share capital, retained earnings, capital reserves, all other items in equity, trade debtors, trade creditors, all other non-monetary receivables, all other non-monetary payables, all items in the income statement, provisions, etc. They are always and everywhere measured in units of constant purchasing power in terms of an index that recognizes all changes in the general price level (Smith 2012 Ch 4).
Variable real value non-monetary items
Non-monetary items that are not constant items are variable real value non-monetary items (Smith 2007, 2012 Ch 3) or simply variable items. They include property, plant, equipment, trademarks, quoted and unquoted shares, foreign exchange, inventories, etc. They are measured in terms of IFRS excluding the stable measuring unit assumption (Smith 2012 Ch3).
The stable measuring unit assumption is never implemented under ideal CMUCPP (Smith 2012 Ch 1.11.1).
(a) Net monetary gains and losses and
(b) Net constant purchasing power gains and losses
are calculated and accounted under CMUCPP.
Trade debtors, trade creditors, other non-monetary payables and other non-monetary receivables are generally accepted under the HCA model – including in IAS 29 – to be monetary items (PricewaterhouseCoopers 2006 p 7). They are constant real value non-monetary items under CMUCPP since they are linked to underlying non-monetary items.
The calculation and accounting of (a) net monetary gains and losses and (b) net constant purchasing power losses and gains are the same under CMUCPP. Non-monetary receivables´ and non-monetary payables´ (CMUCPP classification) different classifications under the two models are consequently not a problem as far as the accounting of the above net gains or losses under IAS 29 and ideal CMUCPP is concerned.
Value date
The value date under CMUCPP is the current date; i.e., today because the stable measuring unit assumption is never implemented under this model. All items (monetary and non-monetary items) in financial statements at a date in the past are always accessed/viewed/presented/stated/valued/measured at the current, i.e., today´s Daily CPI during low and high inflation and deflation or today´s daily US Dollar parallel rate during hyperinflation (Smith 2012 Ch 4.13.20) .
CMUCPP was specifically proposed to the International Accounting Standards Board in January 2012 in the proposal ‘IFRS “X” CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER’ (Smith 2012 Ch 12) as the replacement for IAS 29 which was identified by the IASB as a future priority research project entitled Financial Reporting in High Inflationary Economies.
REFERENCES
CENTRAL BANK OF BRAZIL 2007 Written communication as quoted in Smith 2012 Ch 1.9
CENTRAL BANK OF CHILE 2002 VIII Meeting on Central Banks Accounting and Budgetary Aspects. Effects of inflation in financial statements
GUCENME U and ARSOY A P 2005 Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 – 2005 Academy of Accounting Historians 2005 Research Conference 6-8 Oct 2005 Ohio State University Columbus Ohio USA
HANKE S H and KWOK A K F 2009 On the Measurement of Zimbabwe’s Hyperinflation, Cato Journal Vol 29 No 2 (Spring/Summer 2009) pp 353–64
INSTITUTE OF CHARTERED ACCOUNTANTS OF SCOTLAND (ICAS), 2006 Principles-based or Rules-based Accounting Standards. A Question of Judgement
JENNINGS R and MATURANA G 2005 The Usefulness of Chilean Inflation Accounting Revista ABANTE Vol 8 Nº 1 pp 85-118 April 2005
LEFORT F and SCHMIDT-HEBBEL K (eds) 2002 Indexation, Inflation, and Monetary Policy Central Bank of Chile
OLAFSSON B O and JONSSON R F 2007 Recommendations Concerning the Method of Calculating Daily CPI and CTI Index Values
PRICEWATERHOUSECOOPERS 2006 Understanding IAS 29
PRICEWATERHOUSECOOPERS 2009 Straight away – Venezuela hyperinflation
SHILLER R J 1998 Indexed Units of Account: Theory and Assessment of Historical Experience Cowles Foundation Discussion Paper Nº 1171
VINK N, KIRSTEN J and WOERMANN C, 2004, South Africa’s Consumer Price Index for food (CPIF): A comparative historical view Agrekon, June 2004, Vol 43, No 2 pp 217-227Nicolaas Smith Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Saturday 25 May 2013
Example of Daily versus monthly CPI under IAS 29
Example of Daily
versus monthly CPI under IAS 29
The following are data showing a derived
monthly CPI and Daily CPI for Zimbabwe from 1 November 2007 till 31 December
2007 based on actual monthly inflation percentages. Only the monthly inflation
information is actual data from the Central Bank of Zimbabwe. The rest are all
theoretically derived data.
Application
of IAS 29 and CMUCPP using data from Zimbabwe
|
||||||||||||||||||
Monthly inflation rates reported by the CB of Zimbabwe from Mar 2007 till
July 2008 (Steve Hanke article)
|
||||||||||||||||||
Date
|
Derived relatively stable
foreign curreny rate
|
Mnthly
|
Derived Monthly CPI on
month-end
|
|||||||||||||||
ZimDollars per 1 US Dollar
|
Inflation %
|
URV based Daily
Index on other days
|
||||||||||||||||
Zim$/USD rate based on derived
CPI
|
Month-end Daily Index assumed =
CPI
|
|||||||||||||||||
01/nov/07
|
43,8769
|
4 387,69
|
||||||||||||||||
02/nov/07
|
45,7184
|
4 571,84
|
||||||||||||||||
03/nov/07
|
47,5598
|
4 755,98
|
||||||||||||||||
04/nov/07
|
49,4012
|
4 940,12
|
||||||||||||||||
05/nov/07
|
51,2427
|
5 124,27
|
||||||||||||||||
06/nov/07
|
53,0841
|
5 308,41
|
||||||||||||||||
07/nov/07
|
54,9256
|
5 492,56
|
||||||||||||||||
08/nov/07
|
56,7670
|
5 676,70
|
||||||||||||||||
09/nov/07
|
58,6084
|
5 860,84
|
||||||||||||||||
10/nov/07
|
60,4499
|
6 044,99
|
||||||||||||||||
11/nov/07
|
62,2913
|
6 229,13
|
||||||||||||||||
12/nov/07
|
64,1327
|
6 413,27
|
||||||||||||||||
13/nov/07
|
65,9742
|
6 597,42
|
||||||||||||||||
14/nov/07
|
67,8156
|
6 781,56
|
||||||||||||||||
15/nov/07
|
69,6570
|
6 965,70
|
||||||||||||||||
16/nov/07
|
71,4985
|
7 149,85
|
||||||||||||||||
17/nov/07
|
73,3399
|
7 333,99
|
||||||||||||||||
18/nov/07
|
75,1813
|
7 518,13
|
||||||||||||||||
19/nov/07
|
77,0228
|
7 702,28
|
||||||||||||||||
20/nov/07
|
78,8642
|
7 886,42
|
||||||||||||||||
21/nov/07
|
80,7056
|
8 070,56
|
||||||||||||||||
22/nov/07
|
82,5471
|
8 254,71
|
||||||||||||||||
23/nov/07
|
84,3885
|
8 438,85
|
||||||||||||||||
24/nov/07
|
86,2300
|
8 623,00
|
||||||||||||||||
25/nov/07
|
88,0714
|
8 807,14
|
||||||||||||||||
26/nov/07
|
89,9128
|
8 991,28
|
||||||||||||||||
27/nov/07
|
91,7543
|
9 175,43
|
||||||||||||||||
28/nov/07
|
93,5957
|
9 359,57
|
||||||||||||||||
29/nov/07
|
95,4371
|
9 543,71
|
||||||||||||||||
30/nov/07
|
97,2786
|
131,42
|
9 727,86
|
|||||||||||||||
01/dez/07
|
104,8117
|
10 481,17
|
||||||||||||||||
02/dez/07
|
112,3448
|
11 234,48
|
||||||||||||||||
03/dez/07
|
119,8779
|
11 987,79
|
||||||||||||||||
04/dez/07
|
127,4111
|
12 741,11
|
||||||||||||||||
05/dez/07
|
134,9442
|
13 494,42
|
||||||||||||||||
06/dez/07
|
142,4773
|
14 247,73
|
||||||||||||||||
07/dez/07
|
150,0105
|
15 001,05
|
||||||||||||||||
08/dez/07
|
157,5436
|
15 754,36
|
||||||||||||||||
09/dez/07
|
165,0767
|
16 507,67
|
||||||||||||||||
10/dez/07
|
172,6098
|
17 260,98
|
||||||||||||||||
11/dez/07
|
180,1430
|
18 014,30
|
||||||||||||||||
12/dez/07
|
187,6761
|
18 767,61
|
||||||||||||||||
13/dez/07
|
195,2092
|
19 520,92
|
||||||||||||||||
14/dez/07
|
202,7423
|
20 274,23
|
||||||||||||||||
15/dez/07
|
210,2755
|
21 027,55
|
||||||||||||||||
16/dez/07
|
217,8086
|
21 780,86
|
||||||||||||||||
17/dez/07
|
225,3417
|
22 534,17
|
||||||||||||||||
18/dez/07
|
232,8749
|
23 287,49
|
||||||||||||||||
19/dez/07
|
240,4080
|
24 040,80
|
||||||||||||||||
20/dez/07
|
247,9411
|
24 794,11
|
||||||||||||||||
21/dez/07
|
255,4742
|
25 547,42
|
||||||||||||||||
22/dez/07
|
263,0074
|
26 300,74
|
||||||||||||||||
23/dez/07
|
270,5405
|
27 054,05
|
||||||||||||||||
24/dez/07
|
278,0736
|
27 807,36
|
||||||||||||||||
25/dez/07
|
285,6067
|
28 560,67
|
||||||||||||||||
26/dez/07
|
293,1399
|
29 313,99
|
||||||||||||||||
27/dez/07
|
300,6730
|
30 067,30
|
||||||||||||||||
28/dez/07
|
308,2061
|
30 820,61
|
||||||||||||||||
29/dez/07
|
315,7392
|
31 573,92
|
||||||||||||||||
30/dez/07
|
323,2724
|
32 327,24
|
||||||||||||||||
31/dez/07
|
330,8055
|
240,06
|
33 080,55
|
Example
Zimbabwean company formed on 1 November
2007 with USD 1000 in capital invested on day one in stock and sold on day one
with a 300 percent markup. IAS 29 applied in terms of the monthly CPI and the
Daily CPI.
Hist Cost
|
|||||||
Date
|
Dr
|
Cr
|
Dr
|
Cr
|
|||
USD
|
USD
|
Zim$
|
Zim$
|
||||
1/11/07
|
Capital
|
1000
|
43 877
|
||||
1/11/07
|
Stock
|
1000
|
43 877
|
||||
1/11/07
|
Bank
|
4000
|
175 508
|
||||
1/11/07
|
Sales
|
4000
|
175 508
|
||||
30/11/07
|
|||||||
31/12/07
|
P+L – CoS
|
1000
|
43 877
|
||||
31/12/07
|
Stock
|
1000
|
43 877
|
||||
|
|||||||
31/12/07
|
Sale
|
4000
|
175 508
|
||||
31/12/07
|
P+L – Sales
|
4000
|
175 508
|
||||
31/12/07
|
Net Monetary Loss
|
-
|
-
|
-
|
-
|
||
31/12/07
|
P+L - Net Mon Loss
|
-
|
-
|
-
|
-
|
||
31/12/07
|
Net Monetary Loss
|
-
|
-
|
-
|
-
|
||
31/12/07
|
Ret Profit/Loss
|
3000
|
131 631
|
||||
31/12/07
|
P+L - Ret
Profit/Loss
|
3000
|
|||||
Profit
|
Profit
|
||||||
IAS 29 with monthly CPI
|
||||||
Date
|
Daily CPI
|
Z$/USD
|
Conv
|
Dr
|
Cr
|
|
Derived
|
Derived
|
Factor
|
Zim$
|
Zim$
|
||
1/11/07
|
4 387,69
|
43,8769
|
Capital
|
3,40
|
149 208
|
|
1/11/07
|
4 387,69
|
43,8769
|
Stock
|
3,40
|
149 208
|
|
1/11/07
|
4 387,69
|
43,8769
|
Bank
|
1,00
|
175 508
|
|
1/11/07
|
4 387,69
|
43,8769
|
Sales
|
3,40
|
596 831
|
|
30/11/07
|
9
727,86
|
97,2786
|
3,40
|
|||
31/12/07
|
33 080,55
|
330,8055
|
P+L – CoS
|
3,40
|
149 208
|
|
31/12/07
|
33 080,55
|
330,8055
|
Stock
|
3,40
|
149 208
|
|
|
||||||
31/12/07
|
33 080,55
|
330,8055
|
Sales
|
3,40
|
596 831
|
|
31/12/07
|
33 080,55
|
330,8055
|
P+L - Sales
|
3,40
|
596 831
|
|
31/12/07
|
33 080,55
|
330,8055
|
Net Monetary Loss
|
421 322
|
||
31/12/07
|
33 080,55
|
330,8055
|
P+L - Net Mon Loss
|
421 322
|
||
31/12/07
|
33 080,55
|
330,8055
|
Net Monetary Loss
|
421 322
|
||
31/12/07
|
33 080,55
|
330,8055
|
Ret Profit/Loss
|
26 301
|
||
31/12/07
|
33 080,55
|
330,8055
|
P+L - Ret
Profit/Loss
|
26 301
|
||
1 939 700
|
1 939 700
|
|||||
Profit
|
IAS 29 with Daily CPI
|
||||||
Date
|
Daily CPI
|
Z$/USD
|
Conv
|
Dr
|
Cr
|
|
Derived
|
Derived
|
Factor
|
Zim$
|
Zim$
|
||
1/11/07
|
4 387,69
|
43,8769
|
Capital
|
7,54
|
330 806
|
|
1/11/07
|
4 387,69
|
43,8769
|
Stock
|
7,54
|
330 806
|
|
1/11/07
|
4 387,69
|
43,8769
|
Bank
|
1,00
|
175 508
|
|
1/11/07
|
4 387,69
|
43,8769
|
Sales
|
7,54
|
1 323 222
|
|
30/11/07
|
9 727,86
|
97,2786
|
||||
31/12/07
|
33 080,55
|
330,8055
|
P+L - CoS
|
7,54
|
330 806
|
|
31/12/07
|
33 080,55
|
330,8055
|
Stock
|
7,54
|
330 806
|
|
|
||||||
31/12/07
|
33 080,55
|
330,8055
|
Sales
|
7,54
|
1 323 222
|
|
31/12/07
|
33 080,55
|
330,8055
|
P+L - Sales
|
7,54
|
1 323 222
|
|
31/12/07
|
33 080,55
|
330,8055
|
Net Monetary Loss
|
7,54
|
1 147 714
|
|
31/12/07
|
33 080,55
|
330,8055
|
P+L - Net Mon Loss
|
7,54
|
1 147 714
|
|
31/12/07
|
33 080,55
|
330,8055
|
Net Monetary Loss
|
7,54
|
1 147 714
|
|
31/12/07
|
33 080,55
|
330,8055
|
Ret Profit/Loss
|
155 298
|
||
31/12/07
|
33 080,55
|
330,8055
|
P+L - Ret
Profit/Loss
|
155 298
|
||
4 611 067
|
4 611 067
|
|||||
Loss
|
From the above examples we can see that the
results under IAS 29 with a Daily CPI is different from IAS 29 with the monthly
CPI. The Daily CPI data show what really happened.
When all sales are for cash, net equity
will be the same under both the monthly and Daily CPI. This is only the case
when all sales are only for cash.
Under IAS 29 applying HC principles, sales
for cash and on credit would have the same result. Debtors are monetary items
under HCA and as IAS 29 is implemented. Not under CMUCPP in terms of a Daily
CPI. Debtors are constant real value non-monetary items under CMUCPP since they
are always linked to non-monetary items and the result would be the same as in
USD: no loss at all in the real value of Debtors, i.e., no Net Constant
Purchasing Power Loss that is calculated in the same way as the Net Monetary
Loss. Profit would be better than in USD. Ideal CMUCPP results in zero erosion
of real value, i.e., the same as under zero inflation. There is still erosion
of real value in USD since USD accounts assumes the low inflation in the USD
does not exist, i.e., the HC stable measuring unit assumption is applied.
Ideal CMUCPP in terms of a Daily Index
would result in actual zero erosion of real value in all entities that at least
break even in real value – ceteris
paribus – at all levels of inflation and deflation.
Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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