Constant Item Purchasing Power Accounting - Abstract - Part 4 of 5

Both HC variable and HC constant items are considered to be simply HC non-monetary items under HCA.


Non-monetary items under the HCA model include HC items based on the stable measuring unit assumption. Both variable real value non-monetary items (e.g. inventory and fixed property) valued at HC in terms of IFRS and US GAAP, as well as constant real value non-monetary items (e.g. shareholders´ equity items) also valued at HC in terms of IFRS and US GAAP, are valued in nominal monetary units applying the very erosive stable measuring unit assumption during non-hyperinflationary periods. Both HC variable and HC constant items are thus considered to be simply HC non-monetary items. There is no split under HCA.

The very erosive stable measuring unit assumption means it is simply assumed under the HCA model that changes in the real value or purchasing power of money are not sufficiently important to continuously measure financial capital maintenance in units of constant purchasing power in low inflationary and deflationary economies for the purpose of valuing most constant items which are valued as HC items.

It is a generally accepted accounting practice not to apply the stable measuring unit assumption to the valuing of only certain income statement constant items, namely salaries, wages, rentals, etc. which are generally inflation-adjust annually. All other income statement items (all income statement items are constant items) and all balance sheet constant items are valued in nominal monetary units when the stable measuring unit assumption is applied during low inflation and deflation.

It is impossible to maintain the real value of financial capital constant with financial capital maintenance in nominal monetary units per se applying the very erosive stable measuring unit assumption during inflation and deflation. The monetary measuring unit (money) is not perfectly stable during inflation and deflation. Inflation erodes the real value of only money and other monetary items while deflation creates more real value in only money and other monetary items over time. Sustainable zero annual inflation has never been achieved in the past and is not likely to be achieved any time soon in the future. Financial capital maintenance in nominal monetary units per se during inflation and deflation as authorized in IFRS and US GAAP is a popular accounting fallacy. IFRS and US GAAP should not be based on popular accounting fallacies as they currently are.

“Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity.” Framework (1989)

Shareholders´ equity’s constant real value can only be maintained constant (excluding continuous additions of fresh capital) with financial capital maintenance in nominal monetary units during inflation when at least 100% of the updated original real value of all contributions to shareholders´ equity are invested in revaluable fixed assets with an equivalent updated fair value – revalued or not. This is generally the case only in, for example, hotel, hospital and property groups. Valuing a revaluable fixed asset at HC does not erode its real value. It would normally be revalued when it is eventually sold or exchanged. It can also be revalued via the revaluation reserve before it is finally sold / exchanged.

However, the portion of shareholders´ equity’s real value, under HCA, that is never maintained constant with sufficient revaluable fixed assets during low inflation, is being treated the same as a monetary item (e.g. cash). Its real value is eroded at a rate equal to the annual rate of inflation because it is freely chosen in terms of US GAAP and the Framework, Par 104 (a) to implement financial capital maintenance in nominal monetary units and apply the very erosive stable measuring unit assumption during low inflation.

The stable measuring unit assumption

The stable measuring unit assumption is based on the fallacy that changes in the purchasing power of money are not sufficiently important to require the continuous measurement of financial capital maintenance in units of constant purchasing power during low inflation and deflation. Hyperinflation is defined in IFRS as a cumulative inflation rate approaching or equal to 100% over three years, i.e. 26% annual inflation for 3 years in a row. Financial capital maintenance in units of constant purchasing power is required in IFRS in IAS 29 during hyperinflation: it is thus required at 26% annual inflation for 3 years in a row. It is, however, left as an option at 20% or 15% or 6% or 2% for three years in a row or any number of years. Real value erosion in constant items never maintained constant by the implementation of the stable measuring unit assumption at continuous 20% inflation (which would wipe out 100% of the real value of shareholders´ equity never maintained constant in 4 years, e.g. in all companies with no revalueable fixed assets) is currently considered as not sufficiently important for the implementation of continuous financial capital maintenance in units of constant purchasing power (CIPPA). The stable measuring unit assumption currently erodes 51% of the real value of shareholders´ equity and all other constant items never maintained constant over 35 years in all economies with continuous 2% annual inflation implementing traditional HCA as authorized in US GAAP and IFRS. CIPPA automatically stops this forever in all entities that break even during inflation whether they own any revaluable fixed assets or not.

Nicolaas Smith

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