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Thursday 11 August 2011

Valuing monetary items

Measurement of monetary items in the economy

Measurement is determining the particular basis at which monetary items are to be valued and accounted on a daily basis in the functional currency - the legal unit of account for accounting purposes - in an economy under all levels of inflation and deflation. The functional currency is the currency of the primary economic environment in which an entity operates. The functional currency is normally the national (or monetary union) monetary unit which is legal tender in the economy. In dollarized economies the adopted hard currency is the functional currency for accounting purposes.

Entities implement financial capital maintenance in nominal monetary units when they prepare their financial reports in terms of the HCA model. The stable measuring unit assumption is applied to some - not all - items under HCA.  Changes in money´s general purchasing power are not considered sufficiently important to require financial capital maintenance in units of constant purchasing power under HCA as authorized in IFRS.

Monetary items are thus generally not inflation–adjusted. The Chilean banking system is partially indexed using the Unidad de Fomento. Monetary items are also inflation-adjusted in other economies, e.g.  TIPS in the US economy, where HCA is the generally accepted accounting model.

Under CIPPA, i.e. financial capital maintenance in units of constant purchasing power during inflation and deflation, there is no stable measuring unit assumption as authorized in IFRS. All monetary items are thus inflation-adjusted on a daily basis in terms of the Daily Index. Historical monetary items as well as current financial period monetary items are inflation-adjusted. This requires inflation-adjustment of all monetary items in the banking system. Complete coordination in the economy eliminates the cost of inflation completely from the monetary economy when all money is in the banking system and all monetary items outside the banking system are also inflation-adjusted in terms of the Daily Index.

Chile is the country closest to achieving this. HCA is the generally accepted accounting model in Chile.

Nicolaas Smith

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

Wednesday 10 August 2011

Unstable unit of account

Unstable unit of account

Unstable money’s third function is that it is the unstable unit of account in the economy. It is a monetary standard of measure of the real value of economic items to facilitate exchange without barter in order to overcome the double coincidence of wants problem. Inflation erodes the real value of money and deflation increases the real value of money. Money has never been perfectly stable in real value over an extended period of time. However, money illusion makes people believe that money maintains its real value stable over the short to medium term. Money is the only standard unit of measure that is not a fundamentally stable or fixed unit of account. All other standards of measure are perfectly stable units.

Accounting transformed money illusion into a generally accepted accounting principle with the very destructive stable measuring unit assumption, also called the Measuring Unit Principle.

The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial reports.

Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.

The very erosive stable measuring unit assumption is based on the fallacy that changes in the general purchasing power (real value) of unstable money are not sufficiently important to require adjustments to the basic financial reports; i.e. not sufficiently important to require financial capital maintenance in units of constant purchasing power during inflation and deflation.

In an inflationary economy depreciating money is used as a depreciating monetary unit of account to value and account economic activity. It is very tempting to state that it is very clear that you cannot have a unit of account that is not stable – as in fixed – in real value for accounting purposes. However, we have been doing exactly that since the start of inflation in the economy; i.e. for about the last 3000 years. The problem stems from the difficulty in achieving zero inflation on a sustainable basis (never achieved to date) and the difficulty in defining a universal unit of real value (also never achieved to date).

The only perfect solution to eliminate the erosion of real value in constant items never maintained constant during inflation and deflation is financial capital maintenance in units of constant purchasing power; i.e. the measurement of all constant items in units of constant purchasing power in terms of a Daily Index during inflation and deflation (CIPPA).

Financial capital maintenance in units of constant purchasing power is, in principle, required by IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation under which all non–monetary items (variable real value non–monetary items as well as constant real value non–monetary items) are inflation–adjusted in terms of the period-end CPI. This does not result in stabilizing the real economy during hyperinflation since IAS 29 simply requires the restatement of HC or CC financial statements. Stabilizing the real economy during hyperinflation is only possible with either daily updating of all non–monetary items in terms of the daily change in the US Dollar parallel rate – where the parallel rate exists officially or unofficially – or with Brazilian–style daily updating in terms of a Daily Index supplied by the government.

Measurement in units of constant purchasing power is implemented under the traditional Historical Cost Accounting model with the valuation of only some – not all – income statement items, e.g. salaries, wages, rentals, etc. but no balance sheet constant items in units of constant purchasing power during low inflation.

The real value maintaining function (effect) of measuring financial capital maintenance in units of constant purchasing power is not generally realized as it relates to balance sheet constant items. If it were realized, the very erosive stable measuring unit assumption would have been stopped by now. Its implementation unknowingly, unintentionally and unnecessarily erodes hundreds of billions of US Dollars per annum of real value in constant items never maintained constant under HCA in the world economy.

The erosive effect of the stable measuring unit assumption as far as using it to measure salaries, wages, rentals, etc. during low inflation is concerned, is very well understood. But, not as far as balance sheet constant items never maintained constant under HCA during low inflation is concerned.

Inflation is the problem or number one enemy – as everyone knows – in the money supply or monetary economy since real value or purchasing power is the most fundamental economic concept in any economy under any economic model including the Historical Cost Accounting model and not unstable money as is generally accepted under the mistaken belief (money illusion) or assumption (stable measuring unit assumption) that changes in the purchasing power of money is not sufficiently important during low inflation and deflation to require financial capital maintenance in units of constant purchasing power.

The stable measuring unit assumption is the second enemy in the constant item economy – and not inflation as everyone so mistakenly believe. Inflation has no effect on the real value of non-monetary items. Money’s function as depreciating unit of account is of critical importance. The implementation of this very erosive assumption in the world´s inflationary economy is the second, unknown and hidden (camouflaged by IFRS authorization of financial capital maintenance in nominal monetary units) real value erosion process or enemy whereby the HCA model unknowingly erodes significant amounts of real value in the real economy each and every year.

Nicolaas Smith

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

Tuesday 9 August 2011

Sticky salaries and wages

Sticky salaries and wages

The constant real value non–monetary items salaries and wages are generally sticky downwards: it is not easy for firms to reduce them in nominal value. It is, of course, very, very easy to reduce their real values during inflation: just keep them the same or increase them at a rate lower than the inflation rate. People are apparently agreeble to accept the latter option which means a reduction in real value. People are very unhappy to accept a reduction in nominal value of salaries and wages.

It may happen that it could be some time before the concept of enhanced economic stability during deflation via financial capital maintenance in units of constant purchasing power (CIPPA) is generally accepted. Salaries and wages would then be automatically decreased in nominal value by means of measurement in units of constant purchasing power while their real values would stay the same during deflation. This would improve economic stability substantially and help central banks in their task of getting the economy into a low inflationary mode again. It would also reduce the level of the monetary effect of a lower general price level during deflation.

Salaries and wages are already being decreased in nominal value in the labour market during deflation, but, not yet automatically as a normal accounting practice by measuring them in units of constant purchasing power in terms of the negative change in the CPI.

A possible practical way of overcoming the opposition people have in accepting a decrease in salaries and wages during months of negative monthly inflation while the annual inflation rate is still positive (during inflation and disinflation) would be the following:

Employment contracts could state that salaries and wages would be updated (there is no stable measuring unit assumption under IFRS-authorized financial capital maintenance in units of constant purchasing power - CIPPA) in terms of the Daily Index while the DI value is increasing. When it decreases as a result of a period of negative monthly inflation while the annual inflation rate is still positive, salaries and wages would be kept fixed in nominal value during that period in order to give employees certainty as to the amount of money they will receive at month end. They would, of course, be receiving more in real value during the period their salaries and wages are fixed with a decreasing DI. As soon as the Daily Index turns positive again salaries and wages will be updated again in terms of the increasing DI, but, only after allowing a recoupment of the period of the decrease in the DI while annual inflation was still positive. Thus, their salaries and wages would be kept fixed for a little longer while the DI is already increasing. They would, of course, be receiving less in real value during the period their salaries and wages are fixed with an increasing DI. Months of negative monthly inflation during a year of positive annual inflation are normally limited to one or two consecutive months. The net effect to salaries would be the same as always updating them in terms of the DI whether it was increasing or decreasing during continuous annual inflation and disinflation. Neither employers nor employees would be negatively affected in the above case.

During deflation a different approach is required because keeping salaries fixed in nominal value during deflation means their real values are increasing daily and may after some time severely affect entities´ ability to maintain stability in their operations during deflation which may result in layoffs affecting employees in the worst way. On the other hand, employees need certainty about how much money they will receive during the current year in their contracts also during deflation.

Employment contracts could state that during deflation salaries and wages would be kept fixed during the contract year in which the economy first enters into deflation. Contracts could then be agreed to be renegotiated at the end of that contract year and yearly thereafter while the economy remains in deflation with a view to decreasing the nominal values of salaries and wages (not their real values) in a predictable manner in line with deflation. Their real values would remain the same or increases in real terms could be negotiated. It could then also be negotiated to increase salaries and wages in real terms by keeping them fixed during deflation depending on each entities´ specific circumstances.

Nicolaas Smith

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

Monday 8 August 2011

Daily CPI - South Africa

Daily CPI - South Africa

The Daily Consumer Price Index is a lagged daily interpolation of the Consumer Price Index. Daily CPI Formula.

Unit of account: Rand

CPI 2008 = 100

CPI Aug 2011 118.30 Published on 21-09-11


18-Out-2011 118,570
17-Out-2011 118,563
16-Out-2011 118,556
15-Out-2011 118,550
14-Out-2011 118,543
13-Out-2011 118,536
12-Out-2011 118,530
11-Out-2011 118,523
10-Out-2011 118,516
9-Out-2011 118,510
8-Out-2011 118,503
7-Out-2011 118,496
6-Out-2011 118,490
5-Out-2011 118,483
4-Out-2011 118,476
3-Out-2011 118,470
2-Out-2011 118,463
1-Out-2011 118,456
30-Set-2011 118,449
29-Set-2011 118,443
28-Set-2011 118,436
27-Set-2011 118,429
26-Set-2011 118,423
25-Set-2011 118,416
24-Set-2011 118,409
23-Set-2011 118,403
22-Set-2011 118,396
21-Set-2011 118,389
20-Set-2011 118,383
19-Set-2011 118,350
18-Set-2011 118,318
17-Set-2011 118,285
16-Set-2011 118,253
15-Set-2011 118,220
14-Set-2011 118,188
13-Set-2011 118,156
12-Set-2011 118,123
11-Set-2011 118,091
10-Set-2011 118,058
9-Set-2011 118,026
8-Set-2011 117,994
7-Set-2011 117,961
6-Set-2011 117,929
5-Set-2011 117,897
4-Set-2011 117,864
3-Set-2011 117,832
2-Set-2011 117,800
1-Set-2011 117,767
31-Ago-2011 117,735
30-Ago-2011 117,703
29-Ago-2011 117,670
28-Ago-2011 117,638
27-Ago-2011 117,606
26-Ago-2011 117,574
25-Ago-2011 117,541
24-Ago-2011 117,509
23-Ago-2011 117,477
22-Ago-2011 117,456
21-Ago-2011 117,435
20-Ago-2011 117,415
19-Ago-2011 117,394
18-Ago-2011 117,373
17-Ago-2011 117,352
16-Ago-2011 117,332
15-Ago-2011 117,311
14-Ago-2011 117,290
13-Ago-2011 117,269
12-Ago-2011 117,249
11-Ago-2011 117,228
10-Ago-2011 117,207
9-Ago-2011 117,187
8-Ago-2011 117,166
7-Ago-2011 117,145
6-Ago-2011 117,124
5-Ago-2011 117,104
4-Ago-2011 117,083
3-Ago-2011 117,062
2-Ago-2011 117,042
1-Ago-2011 117,021
31-Jul-2011 117,000
30-Jul-2011 116,980
29-Jul-2011 116,959
28-Jul-2011 116,938
27-Jul-2011 116,918
26-Jul-2011 116,897
25-Jul-2011 116,876
24-Jul-2011 116,856
23-Jul-2011 116,835
22-Jul-2011 116,814
21-Jul-2011 116,794
20-Jul-2011 116,773
19-Jul-2011 116,752
18-Jul-2011 116,737
17-Jul-2011 116,721
16-Jul-2011 116,706
15-Jul-2011 116,691
14-Jul-2011 116,675
13-Jul-2011 116,660
12-Jul-2011 116,645
11-Jul-2011 116,629
10-Jul-2011 116,614
9-Jul-2011 116,598
8-Jul-2011 116,583
7-Jul-2011 116,568
6-Jul-2011 116,552
5-Jul-2011 116,537
4-Jul-2011 116,521
3-Jul-2011 116,506
2-Jul-2011 116,491
1-Jul-2011 116,475


Disclaimer: The numbers presented here are accurate to the best knowledge of the author, but no warranty is expressed or implied that they are accurate or appropriate for use in contracts.

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

Daily CPI - Portugal

Daily CPI - Portugal

The Daily Consumer Price Index is a lagged daily interpolation of the Consumer Price Index. Daily CPI Formula.

Unit of account: Euro

CPI 2008 = 100

CPI August 2011 103.648  Published on 12.09.2011

12-Out-2011 103,618
11-Out-2011 103,633
10-Out-2011 103,648
9-Out-2011 103,664
8-Out-2011 103,679
7-Out-2011 103,694
6-Out-2011 103,709
5-Out-2011 103,724
4-Out-2011 103,739
3-Out-2011 103,755
2-Out-2011 103,770
1-Out-2011 103,785
30-Set-2011 103,800
29-Set-2011 103,815
28-Set-2011 103,831
27-Set-2011 103,846
26-Set-2011 103,861
25-Set-2011 103,876
24-Set-2011 103,891
23-Set-2011 103,907
22-Set-2011 103,922
21-Set-2011 103,937
20-Set-2011 103,952
19-Set-2011 103,967
18-Set-2011 103,983
17-Set-2011 103,998
16-Set-2011 104,013
15-Set-2011 104,028
14-Set-2011 104,043
13-Set-2011 104,059
12-Set-2011 104,074
11-Set-2011 104,089
10-Set-2011104,092
9-Set-2011104,094
8-Set-2011104,097
7-Set-2011104,099
6-Set-2011104,102
5-Set-2011104,104
4-Set-2011104,107
3-Set-2011104,109
2-Set-2011104,112
1-Set-2011104,114
31-Ago-2011104,117
30-Ago-2011104,119
29-Ago-2011104,122
28-Ago-2011104,124
27-Ago-2011104,127
26-Ago-2011104,129
25-Ago-2011104,132
24-Ago-2011104,134
23-Ago-2011104,137
22-Ago-2011104,139
21-Ago-2011104,142
20-Ago-2011104,144
19-Ago-2011104,147
18-Ago-2011104,150
17-Ago-2011104,152
16-Ago-2011104,155
15-Ago-2011104,157
14-Ago-2011104,160
13-Ago-2011104,162
12-Ago-2011104,165
11-Ago-2011104,167
10-Ago-2011104,170
9-Ago-2011104,172
8-Ago-2011104,180
7-Ago-2011104,188
6-Ago-2011104,196
5-Ago-2011104,203
4-Ago-2011104,211
3-Ago-2011104,219
2-Ago-2011104,227
1-Ago-2011104,235
31-Jul-2011104,242
30-Jul-2011104,250
29-Jul-2011104,258
28-Jul-2011104,266
27-Jul-2011104,274
26-Jul-2011104,281
25-Jul-2011104,289
24-Jul-2011104,297
23-Jul-2011104,305
22-Jul-2011104,313
21-Jul-2011104,320
20-Jul-2011104,328
19-Jul-2011104,336
18-Jul-2011104,344
17-Jul-2011104,352
16-Jul-2011104,359
15-Jul-2011104,367
14-Jul-2011104,375
13-Jul-2011104,383
12-Jul-2011104,391
11-Jul-2011104,399
10-Jul-2011104,406
9-Jul-2011104,408
8-Jul-2011104,410
7-Jul-2011104,412
6-Jul-2011104,413
5-Jul-2011104,415
4-Jul-2011104,417
3-Jul-2011104,419
2-Jul-2011104,420
1-Jul-2011104,422

Disclaimer: The numbers presented here are accurate to the best knowledge of the author, but no warranty is expressed or implied that they are accurate or appropriate for use in contracts.

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