Measurement Bases under the IFRS Units of Constant Purchasing Power Paradigm

MEASUREMENT BASES

There are three economic items in the economy.

1. MONETARY ITEMS

Definition: Monetary items are all items in the money supply.

Examples: Money (local fiat currency, cash, bank notes, bank coins), capital amount of money loans, capital amount of bonds, capital amount of bunds, capital amount of bank deposits, capital amount of money and capital market instruments, etc.

MEASUREMENT BASIS

(a) Nominal Historical Cost 

i.e., in nominal monetary units only during current financial year for monetary items not inflation-indexed daily in terms of the Daily CPI. These items exist in terms of Historical Cost contracts still being used under the Units of Constant Purchasing Power paradigm.

(b) Daily Updated Historical Cost

for prior year monetary items in current year financial reports and all other historical monetary items not part of current year financial reports:  

always and everywhere updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level - generally in terms of the Daily CPI. There is no such thing as a nominal historical cost monetary item except for current year monetary items that are not inflation-adjusted daily.

NON-MONETARY ITEMS

Definition: Non-monetary items are all items that are not monetary items. 

They are divided in two sub-groups:

2. VARIABLE REAL VALUE NON-MONETARY ITEMS

Definition: Variable items are non-monetary items with variable real values over time.

Examples: Property, plant, equipment, foreign exchange (foreign currencies), inventories, raw materials, work-in-progress, finished goods, listed and unlisted shares, trademarks, patents, bitcoins, etc

MEASUREMENT BASIS

Fair value always and everywhere updated at least daily till the current (today´s) real value. There is no such thing as a nominal historical variable real value non-monetary item.

3. CONSTANT REAL VALUE NON-MONETARY ITEMS

Definition: Constant items are non-monetary items with constant real values over time.

Examples: Salaries, wages, rent, bank charges, interest paid, interest received, interest payable, interest receivable, issued share capital, retained earnings, capital reserves, all other items in shareholders´equity, all items in the profit and loss account, all items in the comprehensive income statement, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary receivables, all other non-monetary payables, etc.

MEASUREMENT BASIS

Units of constant  purchasing power always and everywhere updated at least daily till the current (today´s) real value in terms of all (at least daily) changes in the general price level, generally in terms of the Daily CPI. There is no such thing as a nominal historical constant real value non-monetary item.

The Units of Constant Purchasing Power Measurement Basis: in terms of all - at least daily - changes in the general price level under all levels of inflation (low, high and hyperinflation) and deflation always and everywhere updated till the current (today´s) real value. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation.

Summary

MEASUREMENT BASES

1. Units of constant  purchasing power*
2. Fair value*
3. Updated Historical Cost*
4. Nominal Historical Cost
  
*Always and everywhere updated in terms of all (at least daily) changes in the general price level - generally in terms of the Daily CPI - up to the current (today´s) real value under all levels of inflation (low, high and hyperinflation) and deflation. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation.

The above measurement bases are used in general purpose accounting / financial reporting under the IFRS authorized UCPP paradigm, i.e., under Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI. 

General Price Level

The general price level (indicated by the Daily CPI) changes at least daily. It can change more than once a day during hyperinflation. The only place this is understood (not the Daily CPI part) by every adult member (as well as all child street vendors) of the general public, is in a hyperinflationary economy. Consequently, all items, except current year monetary items (in "live" bank accounts, nominal HC monetary item contracts, etc.) have to be updated daily in terms of all (at least daily) changes in the general price level, updated to the current (today´s) real value (in terms of today´s Daily CPI value). 

Real value of all historical values change at least daily

The real value of all historical (for example, all yesterday´s) economic values expressed in terms of a monetary unit of measure (i.e., the real value of all historical items), generally change in terms of all (at least daily) changes in the general price level. Simply stated: the real value of all historical (yesterday´s) items changes every day. 

The net monetary gain or loss in nominal monetary items - as qualified above - is calculated and accounted only during the current financial period only under IFRS authorized Capital Maintenance in Units of Constant Purchasing Power, i.e., only under the IFRS authorized Units of Constant Purchasing Power paradigm.

UCPP paradigm authorized in IFRS 25 years ago

Capital Maintenance in Units of Constant Purchasing Power was authorized in IFRS in the original Framework (1989), Par. 104 (a) which stated: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power".  This paragraph appears unaltered in the current Conceptual Framework (2010), Par. 4.59 (a). 

Irresponsible IASB

CMUCPP is required in IFRS in IAS 29 Financial Reporting in Hyperinflationary Economies. The guidance for CMUCPP given in IAS 29 unfortunately does not result in the achievement of actual CMUCPP in a hyperinflationary economy as a result of the use of the monthly published CPI. Only the use of the Daily CPI can result in actual CMUCPP. The IASB very irresponsibly refuses to change IAS 29 to require the use of the Daily CPI because the IASB refuses to take the time to get to understand the economy-wide stabilizing effect of daily indexing in terms of the Daily CPI.

The IASB very irresponsibly also refuses to deal with the Units of Constant Purchasing Power measurement basis as it has always been used under HCA in its current discussions regarding Measurement in the Conceptual Framework although all HC entities (almost all entities) used it over the last 100 years, all HC entities (almost all entities) use it today and all HC entities (almost all entities) will use it in the future. This is a very good example of the fact that all members of the current IASB and IASB staff have very little knowledge and almost no understanding of the effect of Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI authorized in IFRS 25 years ago. This continues to result in the issuance of low quality IFRSs by a very stubborn and boldly disrespectful IASB, mainly almost completely ignorant of the economic effects of financial capital maintenance in units of constant purchasing power in terms of the Daily CPI. 

See also 

Historical Cost Accounting versus Capital Maintenance in Units of Constant Purchasing Power™

Three measurement bases in IFRS

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

SAICA’s members use IFRS as an excuse to hide inefficiencies

The following article appeared in Business Day on 20 September 2007: 

“South African Institute of Chartered Accountants (Saica) executive president, Ignatius Sehoole has 

expressed concern about the number of companies criticising financial reporting standards in SA.

Several companies have said that International Financial Reporting standards as applied in SA did 

not give a true reflection of financial performance. ‘It is perplexing to see that companies do this 

every year. Not only is it a way of explaining why their results have not met expectations, but it is 

also a fine decoy for focusing attention away from more sensitive corporate issues,’ Sehoole said 

yesterday.”

How do you feel about this comment? The president of SAICA says that his members are deceitful. Hey, Mr President, who pays your salary? Are CEOs of listed companies supposed to submit to the stupidities of IFRS without a fight? I am surprised that more has not been written about this in the past. No, I am not surprised! SAICA will not tolerate any criticisms of IFRS. My articles were rejected by them because of my outspoken objection to some of the issues in the standards. When I tried to get the weekly financial journals to publish some of the issues I was told: “These issues are of no interest to our readers.”

Accounting standards are supposed to be written with the objective of enabling management of 

companies to report fairly on the performance of the companies under their stewardship. Because 

of stupidities in IFRS and because auditors in SA have an attitude that regardless of how stupid 

IFRS is, you must comply at all costs, we have the situation in SA today that companies are reporting nonsense figures. How can any logical accountant justify the following accounting treatments:

1. Charging the cost of buying back one’s shares to profit.

2. Writing off investments held on behalf of creditors to the company’s own equity.

3. Charging future year’s rental expenses to the current year or crediting future year’s rental income in the current year.

4. Creating liabilities for future operating rental payments or assets for future operating rental 

receipts.

5. Charging the capital cost of creating a BEE scorecard to headline earnings.

6. Charging the cash cost of rewarding staff directly to equity.

7. Raising liabilities that have absolutely no chance of ever materialising.

8. Capitalising intangible assets bought but not being allowed to capitalise identical assets 

developed.

9. Providing for deferred tax at the full income tax rate on assets that are valued after tax.

10. Depreciating buildings that appreciate.

11. Taking profits before selling the goods.

12. Revaluing fixed asset directly to income.

13. Including in headline earnings capital gains on equity investments but not capital gains on 

investment properties.

14. Capitalising assets of suppliers, which the entity does not own.

15. Recognising gains and losses on foreign exchange when the company is fully hedged.

And we won’t even talk about the all-time ludicrous effect that expensing embedded derivates has on the profits of some entities. I have listed over 150 adjustments analysts have to make to financial statements to arrive at economic reality!

Mr Sehoole has no idea how the above stupidities wreck havoc on relationships between auditors and clients. I know, because often I am called in to assist. However, SAICA and the IASB will not listen to or tolerate any criticism of IFRS. They want the world to believe that they have created a thing of beauty and perfection. If anyone questions the validity of some standard, they retaliate. 

What I want to know is: How are they going to handle the situation when they are eventually forced to change a standard that has been causing chaos it the past? For example, after ten years the IASB has realised that its standard on deferred tax is wrong (they would not listen to us at the time). 

Practice Review has been penalising members for not apply this wrong standard and SAICA has been threatening disciplinary action against practitioners who have not complied. Will there be an apology for all the chaos caused?

The standard setters will save much embarrassment to themselves if they listen to their constituents instead of retaliating with accusations of deceit.

Charles Hattingh

January 2008 

Criticisms of IFRS

1. IASB refusal to require Daily Indexing in IAS 29

IAS 29 Financial Reporting in Hyperinflationary Economies, which gives guidance regarding the implementation of capital maintenance in units of constant purchasing power during hyperinflation, does not actually result in such capital maintenance being achieved in practice. This was clearly demonstrated during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy with no positive effect at all. The reason being that IAS 29 does not require the use of the Daily CPI which is the only way such capital maintenance can be achieved using a fiat local currency. The IASB refuses to urgently review IAS 29 to require the use of the Daily CPI despite consistent requests for such a review and despite the fact that such a change would help countries like Venezuela and Belarus to stabilize their non-monetary economies very similar to the way it was done in Brazil from 1964 to 1994 with the use of a Daily Index: especially the very successful Unidade Real de Valor Daily Index used in Brazil in 1994.

2. IASB refusal to recognize the 100-year-old use of the Units of Constant Purchasing Power Measurement Basis under HCA

The IASB ignores measurement in units of constant purchasing power as a measurement basis to update certain expenses (e.g., salaries, wages, etc.) and certain prices (e.g., utilities) under the Historical Cost Accounting model (under the HC paradigm) in the Measurement section of the Conceptual Framework despite the fact that all entities (including the IFRS Foundation) that used HCA over the last 100 years, implemented it, all HCA entities (including the IFRS Foundation) use it today and all HCA entities (including the IFRS Foundation) will use it in the future.

3. IASB refusal to deal with the UCPP paradigm under Measurement in the CF

The IASB refuses to deal with the Units of Constant Purchasing Power paradigm under the Measurement section in the Conceptual Framework despite the fact that it has been used for 25 years in IFRS in IAS 29 and despite the fact that it is specifically defined in the Capital Maintenance section of the Conceptual Framework which specifically states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power".

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Bitcoin´s Achilles´ heel

The bitcoin dream: if only it could be money. Imagine!

Why is bitcoin not money? Because its price in terms of real currencies is not relatively stable.

Let´s assume for some unknown reason bitcoin´s price would become relatively stable with a 2% decrease in real value per annum. That would make it a medium of exchange with a relatively stable price that could be used as a relatively stable store of value, very similar to the US Dollar, Euro, British Pound, etc.

What would happen in a country with high inflation like Argentina?

People would start keeping their savings in bitcoin, they would start pricing their products in bitcoin, they would start doing business only in bitcoin, all prices would be stated in bitcoin. The CPI could be calculated from items priced only in bitcoin. Bitcoin would be able to be used as a unit of account for accounting purposes.

Result: it would be as if the Argentinean economy were dollarized: i.e., the economy would stabilize. However, the stabilizing currency would not be the US Dollar, but bitcoin.

Unfortunately this will never happen because bitcoin is not money. It is not a medium of exchange with a relatively stable price.

Bitcoin´s inherent quality of never being able to have a relatively stable price is thus its Achilles' heel.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Related article

Japanese Scholars Draft Proposal for a Better Bitcoin

Silliest statements in accounting

"Measuring items in units of constant purchasing power makes no difference to the economy."

Prof Geoff Everingham
University of Cape Town __________________________________________________________________

"Financial reporting has no effect on the economy."

Michael Stewart 
Director of Implementation Activities at the IASB

__________________________________________________________________

"Historical cost has predictive value."

IASB staff

_____________________________________________________________________________


"If capital maintenance concepts will only be used for high inflation issues, the question could be asked whether the concepts should be retained in the Conceptual Framework or not." 

South African Institute of Chartered Accountants

_______________________________________________________________________________

Welcome to the IASB

EVERYONE IN THE WORLD ECONOMY who today implements HISTORICAL COST ACCOUNTING uses the units of constant purchasing power measurement basis to update some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, i.e., to measure these items in units of constant purchasing power in terms of the CPI or a Cost of Living Index on an annual basis under HISTORICAL COST ACCOUNTING.

Basically, they implement the units of constant purchasing power measurement basis under HISTORICAL COST ACCOUNTING.

However, the current members of the IASB and the current members of the IASB staff refuse to acknowledge that.

That is what publicly donated funds are being used for: to pay these peoples´ salaries to come up with junk, low quality IFRSs.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

IASB continues to ignore Units of Constant Purchasing Power under HCA

Although all entities that ever used the HISTORICAL COST ACCOUNTING  model during the last 100 years (i.e., almost all entities), all entities using HISTORICAL COST ACCOUNTING  today (i.e., almost all entities) and all entities who will use HISTORICAL COST ACCOUNTING in the future (i.e., almost all entities), used, use and will use the units of constant purchasing power measurement basis to update some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, the IASB and IASB staff (in my personal opinion) very irresponsibly, continue to ignore it in their current proposals for measurement bases under HCA which only include:

1. Historical cost 

2. Current measurement bases, namely:

(a) fair value (see paragraphs A14–A21);

(b) fulfilment value for liabilities and value in use for assets (see 
paragraphs A22–A31).

All current members of the IASB and IASB staff used measurement in units of constant purchasing power under HISTORICAL COST ACCOUNTING during all of their careers to date. However, they refuse point blank and very irresponsibly to acknowledge its 100 year old usage under HISTORICAL COST ACCOUNTING. We cannot, in my personal, private opinion, accept their view regarding measurement bases under HISTORICAL COST ACCOUNTING, in this case. It would be very irresponsible from users to accept their current very irresponsible refusal to acknowledge that measurement in units of constant purchasing power was a generally accepted measurement basis under HISTORICAL COST ACCOUNTING  for the last 100 years, still is today used under HISTORICAL COST ACCOUNTING and will forever in the future be used while HISTORICAL COST ACCOUNTING is implemented by entities worldwide.

The low quality of current IFRSs thus continues into the future. See, for example, IAS 29 which had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy. The IASB refuses, again point blank, to acknowledge that IAS 29 had no positive effect in Zimbabwe. How can we keep the current IASB members and IASB staff in office when they are - in my personal, private opinion -  clearly very irresponsible?

The current IASB members and IASB staff members are, in my personal opinion (I had personal dealings with a number of IASB staff members in the past), most probably the worst incumbents in the history of the IASB. I have listened to IASB board members during public deliberations.

In my personal opinion, they have unbelievably low levels of knowledge about, for example:

(1) the units of constant purchasing power measurement basis

(2) capital maintenance in units of constant purchasing power in terms of a Daily CPI as was so successfully implemented in Latin America from 1960 till the late 1990´s.

(3) the economy wide stabilizing effect of daily indexing in terms of the Daily CPI.

In my personal opinion, all members of the current IASB as well as all current IASB staff members should be replaced immediately with people who have adequate knowledge about (1) to (3) mentioned above.

A lot of contributors' money is being wasted by keeping the current IASB members and IASB staff members. They should all be replace immediately, in my personal opinion.

See also: 

IASB defines measurement bases under Historical Cost Accounting

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Use of Daily CPI in IAS 29 compliant with IFRS

IAS 29 Financial Reporting in Hyperinflationary Economies has been implemented since its authorization in 1989 in terms of the monthly published CPI. This has consistently resulted in IAS 29 not being effective in implementing capital maintenance in units of constant purchasing power which is, in fact, the objective of IAS 29. For example: IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy which imploded on 20 November, 2008 despite the full implementation of IAS 29 during the final 8 years of hyperinflation in that country.

Accountants generally realize that it is common sense that IAS 29 had no positive effect in Zimbabwe.

The requirement that financial statements shall be stated at the "measuring unit current at the end of the reporting period" has - until very recently - always been interpreted by users and auditors as meaning that items like, for example, daily sales, daily cost of sales, daily expenses, daily costs, all daily items accounted from day one till the last day of every month have to be measured in units of constant purchasing power in terms of ONE, SINGLE, monthly published Consumer Price Index at the end of the reporting period (end of the month, for example for the preparation of monthly accounts during hyperinflation) while, in fact, the general price level during hyperinflation can change by 10% to 100% to 100 million per cent (see Zimbabwe during 2008) every day of the month.

During low and high inflation and deflation the general price level also changes at least daily as indicated by the official Daily CPI which is based on the official monthly published CPI.

Monthly accounts have in practice thus been prepared (and audited) over the last 25 years by users (and auditors approving those accounts) who implemented IAS 29 during hyperinflation when they used the respective single, monthly published CPI during the financial year when it was a very well known fact - acknowledged by everyone in the hyperinflationary economy - that the general price level changed at least DAILY.  This resulted in ever more meaningless monthly and annual profit or loss results and consequent wrong retained earnings and ever higher erosion of the real value of shareholders' equity (capital) the higher the rate of hyperinflation. It also resulted in the completely unnecessary destruction of tens of billions of US Dollars in real value in shareholders´ equity (see Zimbabwe) and all constant real value non-monetary items, for example, salaries, wages, rents, etc. never updated in terms of every - at least DAILY - change in the general price level during hyperinflation.

It is abundantly clear that IAS 29 does not REQUIRE the use of the monthly published CPI. It simply requires that financial statements "shall be stated in terms of the measuring unit current at the end of the reporting period." Users and auditors developed the practice of using the monthly published CPI  over the 25 years since IAS 29 had been required in IFRS during hyperinflation as from April, 1989 because Daily CPIs were only used and are currently only used for the daily pricing (valuation) of government inflation-indexed bonds in many different countries. The use of daily indices from 1960 till the late 1990's in especially South American countries was seen as fundamentally a monetary and not an accounting measure because of the mistaken belief that inflation affects the real value of both monetary and non-monetary items. Inflation only affects the real value of monetary items. It has no effect on the real value of non-monetary items. The implementation of the stable measuring unit assumption affects the real value of constant real value non-monetary items not updated daily in terms of the Daily CPI.

The reason for this practice was and is that users over the last 25 years generally did not and still generally do not understand that ONLY measurement in units of constant purchasing power in terms of ALL - at least DAILY - changes in the general price level is necessary to achieve actual capital maintenance in units of constant purchasing power (as was achieved in Brazil in 1994 with the Unidade Real de Valor Daily Index) that is required in IAS 29, but is not achieved as a result of the use of the monthly CPI instead of the DAILY CPI.

The Daily CPI was very successfully used in Brazil from 1964 till 1994 with the application of various government supplied indices during that period and especially with the final very successful Unidade Real de Valor DAILY INDEX that Brazil used together with their Real Plan monetary reform to stop hyperinflation overnight with a totally free accounting cum monetary practice at no cost.

Unfortunately daily indexing was never recognized in the many - mostly Latin American -  countries that widely implemented monetary correction or "correcção monetária" from the 1960's to the 1990's, as the underlying basis of a fundamental accounting model, namely capital maintenance in units of constant purchasing power in terms of the Daily CPI. All those countries saw daily indexing as only a monetary measure and never as an accounting model. This accounts for the lack of understanding of capital maintenance in units of constant purchasing power in terms of the Daily CPI today.

IAS 29 states the following:

"The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period."

IAS 29, Par. 8

IAS 29 does not REQUIRE the use of the monthly published CPI.

Using the DAILY CPI would also result in "financial statements stated in terms of the measuring unit current at the end of the reporting period."

However, using the DAILY CPI would result in ACTUAL capital maintenance in units of constant purchasing power since it is - in general - the ONLY way it can be achieved during inflation and deflation (and especially during hyperinflation) in a non-dollarized economy.

The use of the Daily CPI in IAS 29 is thus compliant with IFRS. The use of the Daily CPI in IAS 29 during hyperinflation would result in stabilizing the non-monetary or real economy during hyperinflation over a short period of time as it was done in Brazil in 1994.

What happened in Brazil in 1994 with respect to the use of the very successful Unidade Real de Valor DAILY INDEX is often ignored. The reason for this is the fact that very few people understand the economy-wide stabilizing effect of implementing capital maintenance in units of constant purchasing power - as required in IAS 29 - in terms of the DAILY CPI. IAS 29 is and always has been implemented in terms of the monthly published CPI.

 The IASB has stated in 2013 that IAS 29 gives guidance on the implementation of capital maintenance in units of constant purchasing power.

IAS 29 can thus correctly be implemented in terms of the Daily CPI which would result in "financial statements stated in terms of the measuring unit current at the end of the reporting period" during hyperinflation since the DAILY CPI on the last day of every month or year would also be "the measuring unit current at the end of the reporting period" when the Daily CPI is chosen as the measuring unit during hyperinflation. IAS 29 does not state which measuring unit must be used. The user has full discretion regarding the choice of measuring unit during hyperinflation.

The Daily CPI is a valid measuring unit since it is based on the official CPI. The Daily CPI is used by all (many) governments issuing sovereign inflation-indexed bonds, for example Treasury Inflation-Index Securities (TIPS) in the United States and the CER in Argentina.

 Argentina Daily CPI - CER (Coeficiente de Estabilización de Referencia)

Click in sequence: "Estadísticas e Indicadores"

"Monetarias y Financieras"
"Descarga de paquetes estandarizados de series estadísticas":

At the bottom of the page you will see: "Coeficiente de estabilización de referencia (CER), serie diaria", then choose a year and open the excel file.

The very simple formula to calculate the Daily CPI based on the official monthly published CPI is widely available on the internet in the few cases where a government does not issue inflation-indexed bonds. All government inflation-indexed bonds are currently priced DAILY in terms of an already existing official Daily CPI.

Links to some Daily CPIs appear on the right of this blog.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

IASB defines measurement bases under Historical Cost Accounting

HISTORICAL COST ACCOUNTING

The IASB mistakenly decided to recognize only the following two measurement bases under the Historical Cost Accounting model in the Conceptual Framework in IFRSs:

"A2. Measurement bases can be categorised as:

(a) historical cost (paragraphs A3–A11); or

(b) current measurement bases (paragraphs A12–A35).

1. HISTORICAL COST

A3. Measurements based on historical cost provide monetary information about resources, claims and changes in resources and claims using information about past transactions (for example, transaction prices). The initial measurement of assets or liabilities measured at historical cost is not adjusted to reflect changes in prices. However, the carrying amount is adjusted over time to reflect changes such as consumption, impairment and fulfilment.

2. Current measurement bases

A12. Current measurement bases are updated to reflect conditions at the measurement date. The following paragraphs describe the following current measurement bases:

(a) FAIR VALUE (see paragraphs A14–A21);

(b) fulfilment value for liabilities and value in use for assets (see paragraphs A22–A31)."

It is generally accepted that IFRSs, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies, deal with financial reports prepared under the Historical Cost basis.

The IASB thus, shockingly and very irresponsibly, continues to ignore the more than a 100-year-old and universally used Units of Constant Purchasing Power measurement basis under Historical Cost Accounting.

The third measurement basis used by all entities implementing Historical Cost Accoutning (but ignored by the IASB) is: 

3. UNITS OF CONSTANT PURCHASING POWER (ignored by the IASB)

The Units of Constant Purchasing Power measurement basis is used to update  some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, i.e., to measure these items in units of constant purchasing power in terms of the CPI or a Cost of Living Index on an annual basis under HISTORICAL COST ACCOUNTING. 

It is part of US GAAP. Its use is universal under Historical Cost Accounting, but the IASB refuses to recognize it in the Conceptual Framework. This is a fundamental mistake in the Conceptual Framework and adds to IFRS being of low quality.

Summary

MEASUREMENT BASES UNDER HCA

1. Nominal Historical Cost
2. Fair Value
3. Units of constant purchasing power (ignored by the IASB)

See also: 

Historical Cost Accounting versus Capital Maintenance in Units of Constant Purchasing Power™

and

Three measurement bases in IFRS

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Historical Cost Accounting versus Capital Maintenance in Units of Constant Purchasing Power™

"Double-entry accounting is one of the greatest inventions of the human mind." Wolfgang Goethe 

DOUBLE-ENTRY ACCOUNTING MODELS


I) CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER™


Paradigm: Units of Constant Purchasing Power 

Capital Maintenance

The constant purchasing power of shareholders' equity (capital) and all other constant real value non-monetary items are maintained constant in all entities that at least break even in real value, ceteris paribus at all levels of inflation (low, high and hyperinflation) and deflation. 

General Price Level fact: the general price level changes at least daily. Thus the use of the Daily CPI. The general price level can change more than once per day during hyperinflation.

The stable measuring unit assumption is never implemented.

MEASUREMENT BASES

There are three economic items in the economy.

1. Monetary items

Measurement basis 

(a) During current financial year: Nominal Historical Cost, i.e., in nominal monetary units. These items exist in terms of Historical Cost contracts still being used under the Units of Constant Purchasing Power paradigm.

(b) Prior year monetary items in current year financial reports and all other historical monetary items not part of current year financial reports: daily updated Historical Cost always and everywhere updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level - generally in terms of the Daily CPI. There is no such thing as a nominal historical cost monetary item except for current year items.

2. Variable real value non-monetary items

Measurement basis: Daily updated fair value always and everywhere updated till the current (today´s) real value. There is no such thing as a nominal historical variable real value non-monetary item.

3. Constant real value non-monetary items

Measurement basis

Daily updated units of constant  purchasing power always and everywhere updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level, generally in terms of the Daily CPI. There is no such thing as a nominal historical constant real value non-monetary item.

The Units of Constant Purchasing Power Measurement Basis: in terms of all - at least daily - changes in the general price level under all levels of inflation (low, high and hyperinflation) and deflation always and everywhere updated till the current (today´s) real value. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation.

Summary

MEASUREMENT BASES

1. Units of constant  purchasing power*
2. Fair value*
3. Updated Historical Cost*
4. Nominal Historical Cost
  
*Always and everywhere updated in terms of all (at least daily) changes in the general price level - generally in terms of the Daily CPI - up to the current (today´s) real value under all levels of inflation (low, high and hyperinflation) and deflation. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation. 

Net Monetary Losses and Gains

Net monetary gains and losses are always calculated and accounted.     

Authorization in IFRS: CMUCPP™ was originally authorized in the original Framework (1989), Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

CMUCPP™ was also authorized in US GAAP in 1989 as well as in other country accounting standards at that time.

Measurement time interval: Every change in the general price level, i.e., daily under low, high and hyperinflation and deflation while the general price level can change more than once per day during hyperinflation.

Classification of Economic Items

1. Monetary items

2. Variable real value non-monetary items

3. Constant real value non-monetary items.

CPI: Daily CPI (in general): all changes in the general price level.

Financial Reports

Financial reports are updated daily generally in terms of the Daily CPI to the current (today´s) date. Financial reports are thus preferably kept only in digital form and not printed on hard (paper) copy. 

Effect of inflation/deflation

1. Inflation and deflation only affect the real value of monetary items not inflation- or deflation-adjusted in terms of all (at least daily) changes in the general price level, nothing else.

See Also

Measurement Bases under the IFRS Units of Constant Purchasing Power Paradigm

Three measurement bases in IFRS

II) HISTORICAL COST ACCOUNTING 




Paradigm: Nominal Historical Cost

Capital Maintenance

No entity in the world economy ever knew and today knows whether it maintained or maintains the real value (constant purchasing power) of all contributions to shareholders´equity (capital) over the life of the entity. Generally, the real value of capital was and is eroded in that portion of capital (not known by any entity) not backed by the real value of net assets. The result was and is continual erosion of a portion of the real value of capital (equity) or inadequate capital maintenance over time during inflation and the creation of real value in these items not updated daily during deflation resulting in economic instability. 

Accounting standard setters, HC accounting educators and HC accountants and people in general mistakenly believe nothing can be done about this matter except the lowering of inflation or deflation by central banks. That is not true.

Daily inflation- or deflation-indexing of the entire money supply in terms of all (at least daily) changes in the general price level would remove the complete effect of low, high and hyperinflation and deflation. Chile inflation-indexes at least 25% of its entire money supply on a daily basis with their Unidad de Fomento Daily Index. 

This would do nothing to actual low, high and hyperinflation and deflation. That has to be dealt with by the monetary authorities. Accounting (daily inflation - or deflation-indexing) can only remove the effect of inflation or deflation.

Daily measurement of all constant real value non-monetary items in terms of all (at least daily) changes in the general price level would maintain the constant purchasing power of these items constant in all entities that at least break even in real value, ceteris paribus at all levels of low, high and hyperinflation and deflation. Obviously, this would require the rejection of the HCA model and the adoption of the Capital Maintenance in Units of Constant Purchasing Power™ model at all levels of inflation and deflation always in terms of the Daily CPI.

General Price Level assumption: Under HCA the general price level is assumed to be perfectly stable at all levels of low and high inflation and deflation. Assumption: the general price level changes once per month during hyperinflation. Thus the incorrect use of the monthly published CPI during hyperinflation under the IAS 29 Financial Reporting in Hyperinflationary Economies. Only updating in terms of all - at least daily - changes in the general price level can result in actual capital maintenance in units of constant purchasing power which has never been achieved under the current version of of the IAS 29 which is mistakenly implemented using the monthly published CPI. 

Basic underlying principle: the stable measuring unit assumption is implemented for the valuation of some, not all items.

IFRS are based on the HCA model with the exception of IAS 29 although HC principles are even used under this standard too.

Measurement bases

(i) Historical Cost

(ii) Current Measurement Bases

       (a) fair value 

       (b) fulfilment value for liabilities and value in use for assets 

(iii) Units of Constant Purchasing Power 


The UCPP measurement basis is used to update  some expenses, for example, salaries and wages, etc. and some prices, e.g., utility prices, mobile phone call rates, etc. on an annual basis, i.e., to measure these items in units of constant purchasing power in terms of the CPI or a Cost of Living Index on an annual basis under HISTORICAL COST ACCOUNTING. It is part of GAAP under IFRS and US GAAP. Its use is so universal that the IASB refuses to recognize it specifically in the Conceptual Framework. This is a fundamental mistake in the CF and adds to IFRS being of low quality.

Net Monetary Losses and Gains

Net monetary gains and losses are never calculated and accounted.  

Authorization in IFRS: Historical Cost Accounting was originally authorized in the original Framework (1989), Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

HCA is the centuries old, traditional, global, generally accepted accounting model used by almost all entities worldwide.

Measurement time interval

(i) Under Nominal Historical Cost measurement: No time interval: it is assumed time does not change. Original date with no change in time after that.

(ii) Under Unupdated Fair Value measurement: The end of the reporting period which can - in general - be the end of (a) the month (b) quarter (c) six months (d) nine months or (e) twelve months.

CPI: Annual CPI used when items like salaries, wages, rents, etc. are updated, normally annually. They are then treated like nominal historical costs for accounting purposes.

Classification of Economic Items

1. Monetary items

2. Non-monetary items

Financial Reports

A HC financial report is generally prepared on hard (paper) copy and in digital format after the end-date of the financial period to which the financial report refers, stated at the balance sheet date and never updated.

HC financial reports are thus always out of date and technically wrong and can be misleading in terms of the, at least, daily changing general price level as indicated by the Daily CPI. HC financial reports are more misleading in terms of real values the higher the rate of cumulative inflation or deflation from the date of the balance sheet to the date that the report is read. 

HC accountants assume they overcome this problem when they simply apply the stable measuring unit assumption, i.e., they simply assume money was, is and will always be perfectly stable over any period of time at any level of low and high inflation and deflation. They abruptly change their minds as soon as hyperinflation is reached at 26% per annum inflation for three years in a row; i.e., 100% cumulative inflation over three years which is the IASB´s definition of hyperinflation used by all accountants worldwide. They then try to implement capital maintenance in units of constant purchasing power during hyperinflation. Unfortunately they do it in terms of IAS 29. They do it in terms of the monthly published CPI. This results in IAS 29 not having any positive effect as it had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy in the recent past. Only applying at least the Daily CPI can result in actual capital maintenance in units of constant purchasing power. IAS 29 was implemented in terms of the monthly published CPI during 8 years in Zimbabwe´s hyperinflationary economy with no positive effect at all. 

When hyperinflation is overcome and the economy returns to a low inflationary level, HC accountants again suddenly start assuming money is perfectly stable. They again implement the stable measuring unit assumption and implement HCA. 

Effect of inflation/deflation

It is mistakenly believed by (taught to) HC accountants, economists, central bankers, bankers, business people and people in general that inflation and deflation affect the real value of both monetary and non-monetary items as mistakenly stated in all HC textbooks ever written and also specifically stated in US GAAP and IFRS.

HC accountants, economists, central bankers, bankers, business people and people in general do not realize that inflation and deflation are monetary phenomena and can only affect monetary items and nothing else. They were and are generally taught incorrectly at all universities that inflation and deflation affect the real value of both monetary and non-monetary items. 

See Also

IASB defines measurement bases under Historical Cost Accounting

Three measurement bases in IFRS

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Currency can be monetary or non-monetary

FOREIGN CURRENCY

A currency as a foreign currency outside its local, non-dollarized economy is a variable real value non-monetary item and its value is determined in the forex markets compared to other foreign currencies. A currency as a foreign currency´s price (real value) outside its local economy is determined second by second in the forex markets.


Foreign currency losses and gains

Foreign exchange losses and gains are calculated and accounted in terms of IFRS under both the traditional Historical Cost Accounting model under the Historical Cost paradigm and under financial capital maintenance in units of constant purchasing power in terms of IFRs under the Units of Constant Purchasing Power paradigm, the second accounting paradigm authorized under IFRS since April, 1989. 

LOCAL CURRENCY

A currency as a local currency - in a non-dollarized economy - is a monetary item and its local real value within its local economy is determined by inflation or deflation. 

A local currency´s real value in a non-dollarized economy is determined by the DAILY change in the general price level within its local economy. It changes at least once per day. It is indicated by the change in the DAILY CPI. It can change more than once per day during hyperinflation. During hyperinflation its real local value is determined by the daily US Dollar parallel rate when no Daily CPI is available. 

Historical Cost Accounting

Net monetary losses and gains in a local currency in a non-dollarized economy are NOT calculated and accounted under the traditional Historical Cost Accounting model. 

The stable measuring unit assumption is implemented under HCA. For example, the real value of issued share capital is never updated and entities do not know whether they have ever maintained or are maintaining the real value (constant purchasing power) of issued share capital over the life of the entity.

FINANCIAL CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER

Totally useless IAS 29 Financial Reporting in Hyperinflationary Economies

Net monetary losses and gains in a hyperinflationary local currency are calculated and accounted during hyperinflation under financial capital maintenance in units of constant purchasing power implemented in terms of the totally useless IAS 29 Financial Reporting in Hyperinflationary Economies. 

The stable measuring unit assumption is still implemented on non-month-end days under the totally useless IAS 29 since the monthly published CPI is mistakenly used when only the use of the DAILY CPI will result in actual capital maintenance in units of constant purchasing power. The result of this is that the constant purchasing power (real value) of capital is not maintained under this totally useless standard.

IASB

The International Accounting Standards Board continues to refuse to change the totally useless IAS 29 to REQUIRE the use of the Daily CPI despite the fact that most accountants in the world (excluding the ones at the IASB) acknowledge that it is absolutely clear to any person with common sense that IAS 29 had no positive effect in Zimbabwe. The totally useless IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy since that economy imploded on 20 November 2008 with full implementation of IAS 29 over that period. The IASB is the only entity in the world who refuses to acknowledge that the totally useless IAS 29 had no positive effect during the 8 years it was implemented in Zimbabwe´s hyperinflationary economy. The totally useless IAS 29 is currently having no positive effect in the Venezuelan and Belarus economies.

Capital Maintenance in Units of Constant Purchasing Power

Net monetary losses and gains in a local currency in a non-dollarized economy are calculated and accounted under the Capital Maintenance in Units of Constant Purchasing Power accounting model at all levels of inflation (low, high and hyperinflation) and deflation. 

The stable measuring unit assumption is NEVER implemented under CMUCPP. This results in the constant purchasing power (real value) of all constant real value non-monetary items, including all items in shareholders´ equity, always being maintained constant at all levels of inflation (low, high and hyperinflation) and deflation in all entities that at least break-even in real value, ceteris paribus.

BITCOIN

Bitcoin is never a monetary currency. It is never a monetary item. It is never a unit of measure for accounting purposes. It is only a variable real value non-monetary item and its price changes second by second on the various bitcoin exchanges. 

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Measurement bases cannot be restricted to Historical Cost Accounting

It is realized by now in the accounting world that International Financial Reporting Standards are almost 100% concerned with financial capital maintenance in nominal monetary units; i.e., with Historical Cost Accounting. It is not 100% because completely useless IAS 29 Financial Reporting in Hyperinflationary Economies has been providing guidance (albeit incorrect and useless guidance) regarding financial capital maintenance in units of constant purchasing power since April 1989; for the last 25 years although the IASB itself only realized it in early 2013 after the elapse of 24 years from the date of authorization of completely useless IAS 29 after I pointed it out to the Board.

There are thus two official paradigms catered for in IFRS:

(i) The centuries old, global, traditional Historical Cost paradigm under which the stable measuring unit assumption is implemented and net monetary gains and losses in monetary items (incorrectly identified and defined in IFRS) are not calculated and accounted.

(ii) The Units of Constant Purchasing Power paradigm authorized as from April, 1989 (for the last 25 years) under which the stable measuring unit assumption is never implemented - currently only required in IFRS during hyperinflation - and under which net monetary gains and losses in monetary items (incorrectly identified and defined in IFRS) are calculated and accounted.

The forthcoming IASB meeting on the Conceptual Framework (22 to 24 October), however, only deals with measurement with regard to HCA in agenda paper 10B. That is consequently a serious mistake if the IFRS Foundation were of the intention to issue high quality IFRSs.

How did this persistent ignoring by the IASB of the Units of Constant Purchasing Power Paradigm come about?

In my opinion, there are various complex reasons.

It was believed at the IASB for 24 years till the first half of 2013 that IFRSs provide NO GUIDANCE regarding the implementation of financial capital maintenance in units of constant purchasing power despite the fact that this had been provided (incorrectly) in the completely useless IAS 29 as from April 1989, i.e., for the last 24 years, at that time. The IASB specifically stated in 2013 that IFRSs provide no such guidance. "10. Under current IFRS, there is no particular guidance on how to prepare financial statements stated in constant purchasing power units."  They only realized their error after I pointed it out to them with recourse to a letter to Hans Hoogervorst as last resort. The IASB subsequently (finally) stated  - after 24 years - that (the completely useless) IAS 29 deals with financial capital maintenance in units of constant purchasing power.

Thus, no-one at the IASB in the first 24 years that the completely useless IAS 29 was implemented realized that an IFRS had been giving (incorrect and useless) guidance regarding the implementation of financial capital maintenance in units of constant purchasing power for almost the entire existence of the IASB and its predecessor bodies.

Why was that?

The reason was (and is) that no-one at the IASB and its predecessor bodies ever understood and today still do not understand the economy wide beneficial effect of implementing financial capital maintenance in units of constant purchasing correctly IN TERMS OF A DAILY CPI in an economy. The reason for that is that the completely useless IAS 29 has never been implemented correctly to actually result in financial capital maintenance in units of constant purchasing power as I pointed out to Mr Hoogervorst in my letter. Why? Because the completely useless IAS 29 still today requires the use of the monthly CPI when only the use of at least the Daily CPI results in actual financial capital maintenance in units of constant purchasing power as it was used, for example, so successfully in 1994 in Brazil as part of their Real Plan to stop hyperinflation overnight with their use of the DAILY Unidade Real de Valor index used very successfully in the entire Brazilian economy on a daily basis. The Brazilian experience with the use of the very successful Unidade Real de Valor DAILY INDEX was and today still is completely ignored by everyone at the IASB.

The proof of that is the fact that no-one at the IASB is, in fact, capable of publicly admitting (in terms of personal understanding) that the completely useless IAS 29 had no positive effect during the 8 years it had been implemented in Zimbabwe´s hyperinflationary economy (because no-one at the IASB today understands the underlying concept and the effects of correct financial capital maintenance in units of constant purchasing power IN TERMS OF A DAILY CPI) although it is generally accepted worldwide by most accountants (excluding the ones at the IASB) that the completely useless IAS 29 obviously had no positive effect in Zimbabwe during hyperinflation: Zimbabwe's economy imploded on 20 November 2008 after 8 years of full implementation of the completely useless IAS 29. The IASB stated that it can only express an opinion regarding the use of IAS 29 in Zimbabwe after carrying out a special review of its use in Zimbabwe. This special review has not yet been undertaken.

The IASB today thus continues to remain ignorant (they have no knowledge of, they do not understand) of the substantial economy-wide stabilizing effect of financial capital maintenance in units of constant purchasing power IN TERMS OF A DAILY CPI under the UCPP paradigm despite what happened in Brazil from 1964 to 1994 and especially in 1994 (having been extensively reported in the media and in many books/academia) and elsewhere in Latin America during that time and afterwards.

What should happen at the forthcoming Conceptual Framework meeting if the IASB were to issue high quality IFRSs?

Measurement in the Conceptual Framework should be stated in terms of the two paradigms.

The IASB's habitual excuse that measurement in units of constant purchasing power MIGHT be dealt with IF the POSSIBLE FUTURE RESEARCH PROJECT on financial reporting in high inflationary economies MAY indicate a need to review (the completely useless) IAS 29 is not a reasonable reason to exclude dealing with measurement under the second paradigm (the units of constant purchasing power paradigm) used in IFRS when it is taken into account that the completely useless IAS 29 (which is intended to be implemented under the units of constant purchasing power paradigm, but fails completely) has been used over the last 25 years by thousand of companies in many countries and is now in use - again with absolutely no positive effect - in Venezuela and Belarus, for example.

The use of measurement in units of constant purchasing power as one of the measurement bases (the other two being HC and fair value as currently stated in IASB staff paper 10B) as provided for in the CF for use as part of HCA under the HC paradigm under which the stable measuring unit assumption is still implemented as the main underlying concept is NOT the same as measurement in units of constant purchasing power in terms of the DAILY CPI under the second Units of Constant Purchasing Power Paradigm under which the stable measuring unit assumption is NEVER implemented.

In my opinion the IASB continues to be irresponsible in its duties and functions on an international basis with regard to the urgently needed review of the completely useless IAS 29 to change it to REQUIRE the use of the Daily CPI instead of the current (25 year) practice that the monthly published CPI is used which is the single and only reason for IAS 29 being completely useless and ineffective today in Venezuela and Belarus exactly as it had no positive effect in Zimbabwe in the past.

In my opinion it would not be reasonable to restrict dealing with measurement in the CF to the three measurement bases in HCA under the HC paradigm. In my opinion it would be reasonable for the IASB to include measurement in units of constant purchasing power in terms of the Daily CPI under the Units of Constant Purchasing Power Paradigm under which the stable measuring unit assumption is never implemented as part of Measurement in the Conceptual Framework.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Least understood, but most powerful economic model of all time

The double entry accounting model is the least understood but most powerful as well as everlasting economic model of all time. It is so powerful, so complete, so indestructible; it will endure all eventualities.

Wolfgang Goethe, the German writer and statesman, described it in the 1750's as "one of the greatest achievements of the human mind". I agree 100% with him. There is no and never will be an economic model greater than the double entry accounting model.

Very few people, for example, understand why bitcoin is based on a public "ledger". The double entry accounting ledger being the central part of the double entry accounting model.

In my view we can easily solve a number of our global, fundamental economic problems with the double entry accounting model. Fundamental problems like, for example, monetary value destruction during inflation and hyperinflation; very destabilizing monetary creation via deflation; very destabilizing national currency differences, economic and financial instability, poverty, inequality, etc.

On the other hand: the most destructive economic assumption of all time is undoubtedly the stable measuring unit assumption: in principle, the very destructive, global, traditional, centuries old, generally accepted Historical Cost Accounting model: currently the worst possible accounting model of our time: an accounting model that has now overstayed its welcome: it was the only viable and easily understood accounting model during the last 100 years: now its time has passed. It has to be finally killed off as soon as possible. It is not required anymore. It served its purpose. It certainly is very backward to implement HCA today when the CPI is almost 100 years old and most countries already publish the all important Daily CPI that is the sine qua non of the new Units of Constant Purchasing Power economy.

As a Units of Constant Purchasing Power accountant I live in exciting times.

The flip side of the coin: Historical Cost Accountants live in the worst of times: the basic substance of their nominal historical cost world is being broken down at an accelerating rate. Fact: they do not even know it or understand that is happening: the HC lemming effect. They are too hard-wired in HCA. They are too hard-wired in believing the stable measuring unit assumption. To HC accountants money was, is and always will be perfectly stable at all rates of inflation from zero to 25.99%. How silly can you get!!

Fact: the HCA status quo will most probably continue for the next 200 years!

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.