High inflation

High inflation

High inflation is experienced in a functional currency of an economy suffering from high inflation, but which is not hyperinflationary.

Functional currency

Functional currency is the currency of the primary economic environment in which the entity operates. IAS 21, Par 8

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Differences betweetn CIPPA and CPPA

Differences betweetn CIPPA and CPPA

CIPPA                                                                          CPPA  

1.      When implemented

Implemented at all levels of inflation and deflation.

Only implemented during hyper-  inflation as required by IAS 29

2.      Stable measuring unit assumption

The stable measuring unit assumption is never implemented.

The stable measuring unit assumption is implemented in the preparation of Historical Cost or Current Cost financial reports which are then restated in terms                                                                                      of the period-end monthly published CPI only during hyperinflation.

3.      Non–monetary items 

Non–monetary items are split in variable  and constant real value non–monetary items.

No split in non–monetary items.

4.      Capital concept 

Constant purchasing power financial    capital concept implemented.

Nominal financial capital concept imple-mented in HC or CC financial reports then restated in terms of the period–end monthly published CPI only during hyper-inflation.

5.      Capital maintenance concept

Financial capital maintenance in units    of constant purchasing power concept        implemented: i.e., shareholders´ equity      is measured in units of constant purch–      asing power in terms of a daily rate at      all levels of inflation and deflation.

Nominal financial capital maintenance concept implemented: shareholders´ equity is measured in nominal monetary units in HC or CC financial reports during the accounting period which are then restated in terms of the period–end monthly published CPI only during hyperinflation.

6.       Inflation–accounting model or not?

A basic accounting model implemented  at all levels of inflation and deflation in-        cluding during hyperinflation.

An inflation–accounting model imple-mented only during hyperinflation.

7.       IFRS authorization

Originally authorized in IFRS in the Framework (1989), Par 104 (a).

Authorized in IFRS in IAS 29 in 1989.

8.      Measurement

Daily measurement of all items in terms of a daily rate as detailed below.

Non-monetary items in HC or CC financial reports are restated at the end of the accounting period in terms of the period-end monthly published CPI.

9.      Measurement of monetary items

Historic and current period monetary    items are inflation–adjusted daily in terms of a daily rate. When not inflation  –adjusted daily during the current  period, the net monetary loss or gain   is calculated and accounted.

Monetary items are measured in       nominal monetary units. They are not inflation–adjusted or restated. The net monetary loss or gain is calculated and accounted in terms of incorrectly defined monetary and non-monetary items.

10.   Measurement of variable items

Variable items are measured in terms of IFRS and updated daily in terms of  a daily rate when not measured daily in terms of IFRS.

Non–monetary items are not split in variable and constant items. All non–monetary items in HC or CC financial reports are restated in terms of the period–end monthly published CPI.

11.  Measurement of constant items

Historic and current period constant  items are measured in  units of constant purchasing power  on a daily basis in terms of a daily rate.

Non–monetary items are not split in variable and constant items. All non–monetary items in HC or CC financial reports are restated in terms of the period–end monthly published CPI.

12.  Net constant item loss or gain

Net constant item loss or gain calculated and accounted. This is a new accounting concept.

A net constant item loss or gain concept does not exist under HCA, CPPA and IFRS.

13.  Measurement of trade debtors and trade creditors

Constant real value non–monetary pay– ables and receivables (e.g. trade debtors   and trade creditors) are measured in terms of a daily rate. The net constant     item loss or gain is accounted where            applicable.

Trade debtors and trade creditors and other payables and receivables are treated as monetary items and measured in nominal monetary units in HC or CC financial reports. They are not restated. The net real value loss or gain during hyperinflation is incorrectly accounted as a net monetary loss or gain in terms of IAS 29. It is a netconstant item loss or gain.

14.  Consumer Price Index 

Daily Consumer Price Index or a monetized daily indexed unit of account used during low and high inflation and deflation. Daily US Dollar parallel or daily index rate used during hyperinflation.

Monthly Consumer Price Index used during hyperinflation as per IAS 29.

15.  Parallel rate

Daily hard currency parallel rate used  during hyperinflation.

Daily hard currency parallel rate not used during hyperinflation.

16.  Indexation

Daily indexation can be used during        hyperinflation, e.g. in terms of a Brazilian-                 style Unidade Real de Valor.

No daily indexation used during hyperinflation.

17.   Monetized daily indexed unit of account

A monetized daily indexed unit of account can be used at all levels of inflation and deflation.

A monetized daily indexed unit of account not used during hyperinflation.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Strengths of CIPPA compared to books on Capital Maintenance

Strengths of CIPPA compared to books on Capital Maintenance

1.       CIPPA proves there are three concepts of capital and capital maintenance authorized in IFRS since 1989.

2.       CIPPA splits non-monetary items in variable and constant real value non-monetary items and shows that this split is indirectly defined in IFRS since 1989.

3.       CIPPA proves that it is not inflation but the stable measuring unit assumption eroding companies´ capital and invested profits.

4.       CIPPA proves that financial capital maintenance in nominal monetary units per se is a fallacy during inflation and deflation.

5.       CIPPA proves that financial capital maintenance in units of constant purchasing power in terms of a daily rate at all levels of inflation and deflation automatically maintains 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.

Strengths of books on Capital Maintenance compared to CIPPA

1.       It is generally accepted that there are only two concepts of capital and capital maintenance, namely, physical and financial.

2.       HCA implements financial capital maintenance in nominal monetary units. The HC paradigm is the generally accepted global paradigm.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

The monetary nature of monetary items that are not money held

Monetary items

Monetary items are money held and items with an underlying monetary nature.

An item with an underlying monetary nature is, in principle, a substitute for money held.

All items in the economy – monetary and non-monetary items – are normally received or paid in money. That does not mean they are all monetary items. Money is simply used as the generally accepted medium of exchange. Non-monetary items remain non-monetary items even when they are always paid or received in money.

Monetary items that are not money held have the exact same attributes as money held except that they are not actually bank notes and coins. A bank loan is a monetary item that is not always money held. It can be received or paid in actual bank notes and coins or as an electronic transfer into a bank account. A bank loan that is not money held is an item with an underlying monetary nature. An item with an underlying monetary nature is, in principle, a substitute for money held.

A building is a non-monetary item. It is not a substitute for money held. It is normally paid for in money. The owner normally receives money for selling it, and the buyer normally pays for it in money, but, that is simply the medium of exchange. The owner can also receive the payment for the building in diamonds. The building is a non-monetary item irrespective of how it is exchanged between two entities.

Commercial bonds, government bonds, money market items, debt items, notes payable, notes receivable, capital market items, bank loans, car loans, housing loans, student loans, consumer loans, etc. are all, in principle, substitutes for money held. They are all items with an underlying monetary nature.

Pensions, salaries, wages and rentals are generally paid and received in money, but, they are not monetary items. They are all constant real value non-monetary items. They are not, in principle, substitutes for money held. Money is simply the generally accepted medium of exchange in the settlement of these items.

A salary payable is an obligation to deliver compensation for the work done in terms of the employment contract by the salary earner in the form of payment in a mutually agreed medium of exchange. The generally accepted mutually agreed form of payment is money. Payment can be in any mutually agreed form. A salary is not, in principle, a substitute for money held. A salary is not an item with an underlying monetary nature. Money is simply the generally accepted medium of exchange.

Nicolaas Smith

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Strengths of CIPPA compared to indexation

Strengths of CIPPA compared to indexation

1.       CIPPA splits non-monetary items in variable and constant items which makes CIPPA acceptable at all levels of inflation and deflation.

2.       CIPPA recognizes that it is the stable measuring unit assumption doing the damage and not inflation. Brazil (from 1964 to 1994) and Chile (from 1967 to 2008) implemented financial capital maintenance in units of constant purchasing power and then went back to HCA because of a lack of understanding that it is not inflation that is causing the erosion of real value in constant items, but, in fact, the stable measuring unit assumption.

3.       CIPPA is implemented at all levels of inflation and deflation – not only during hyperinflation like indexation.

Strengths of indexation compared to CIPPA

1.       Indexation is generally accepted during hyperinflation.

2.       It is generally accepted that there are only two basic items in the economy, namely, monetary and non-monetary items. Indexation is similar to CIPPA only during hyperinflation excluding (a) the split of non-monetary items in variable and constant items and (b) the understanding of the effect of the stable measuring unit assumption.

Nicolaas Smith

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.