Practical result of abolishing the stable measuring unit assumption

Practical result of abolishing the stable measuring unit assumption

In practice abolishing the stable measuring unit assumption, i.e. correctly accepting and implementing the proven fact that money (the monetary medium of exchange) is never perfectly stable under inflation and deflation within and economy will mean that financial statements as prepared at a specific date (e.g. the year end) will only be valid when consulted on that specific date, i.e. the year end date. When the financial statements are consulted after that date, all values at the stated historical date will be updated in terms the current, i.e. today´s, Daily CPI: the date on which the financial statements are consulted. The amounts of the items stated at the date the financial statements were prepared shall then be historical reference amounts (not values – value can only be perceived in terms of current value, i.e. today´s Daily CPI) as at the date of the financial statements and the Daily CPI at that date always to be updated in terms of the Daily CPI to the current, i.e. today´s, date thereafter.

In digital financial statements the amounts at the date of the financial statements will only be visible as part of the financial statements on that date. Thereafter they will never be part of the financial statements again to be seen as original fixed nominal historical amounts. They will be in memory (and on all original dated hard copy documents) at that date with a historical amount (not value – value can only be perceived in terms of current value, i.e. today´s Daily CPI) and the Daily CPI at that date. When consulted at any time after that date the original historical fixed nominal amounts of their real values measured in terms of the Daily CPI at the historical date will always be updated in terms of the current, i.e. today´s, Daily CPI.

During inflation their real values will remain the same for an indefinite period of time, but their nominal values will generally increase daily in terms of the Daily CPI.

During deflation their real values will remain the same for an indefinite period of time, but their nominal values will generally decrease daily in terms of the Daily CPI.

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Measurement of inventories under financial capital maintenance in units of constant purchasing power

Measurement of inventories under financial capital maintenance in units of constant purchasing power

The difference between financial capital maitenance in nominal monetary units (traditional Historical Cost Accounting) and financial capital maintenance in unit of constant purchasing power, i.e. Constant Item Purchasing Power Accounting (CIPPA), is that the stable measuring units assumption is always implemented under HCA but is never implemented under CIPPA.

The fact that the real value of money (and thus the monetary medium of exchange) was and is never perfectly stable on a sustainable basis within an economy during inflation and deflation is reflected in an entity in the way the three basic economic items, i.e., monetary, variable and constant items, are measured /valued  (for example variable items in terms of daily fair value and constant items in terms of daily constant purchasing power) over time under financial capital maintenance in units of constant purchasing power.

The reason for and the advantage of financial capital maintenance in units of constant purchasing power in terms of a Daily CPI is the fact that the constant purchasing power of equity (capital) is automatically maintained constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus.

Everything is done (and accounted daily) and all historical financial information is stated at the current, i.e. today´s, real value which generally changes every day. The concept of a nominal Historical Cost or a nominal historical value is abolished because the stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power. Tomorrow today´s real values will be historical reference amounts and must be valued (measured) at tomorrow´s real value, e.g. tomorrow´s market price, Daily Consumer Price Index, etc.

Financial capital maintenance in units of constant purchasing power is authorized in IFRS in the Conceptual Framework (2010), Par. 4.59 (a) and includes Historical Cost as a measurement basis, but excludes the stable measuring unit assumption.

Since both financial capital maintenance in units of constant purchasing power (CIPPA) as well as financial capital maintenance in nominal monetary units (HCA) are authorized in the Conceptual Framework (2010), Par. 4.59 (a) it means that IFRS are implemented under two paradigms, namely the HC paradigm and the Constant Item Purchasing Power paradigm.

IAS 2 Inventories, Par. 9 Measurement of Inventories states:

‘Inventories shall be measured at the lower of cost and net realisable value.’

An inventory item measured at Historical Cost in terms of IAS 2 shall be measured in terms of the current, i.e. today´s, Daily Consumer Price Index and continuously updated day after day thereafter because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power.

Par. 10 Cost of Inventories states:

‘The cost of inventories shall comprise all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.’

All historical costs of purchases, historical costs of conversion and other historical costs incurred in bringing the inventories to their present location and condition shall be measured in terms of the current, i.e. today´s, Daily Consumer Price Index and continuously updated day after day thereafter because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power.

Par. 23 Cost Formulas states:

‘The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.’

The above individual historical costs shall be measured in terms of the current, i.e. today´s, Daily Consumer Price Index and continuously updated day after day thereafter because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power.

Par. 25 states:

‘The cost of inventories, other than those dealt with in paragraph 23, shall be assigned by using the first-in, firts-out (FIFO) or weighted average cost formula.’

The cost of inventories, other than those dealt with in IAS 2, paragraph 23, assigned using the first-in, firts-out (FIFO) or weighted average cost formula shall be measured in terms of the current, i.e. today´s, Daily Consumer Price Index and continuously updated day after day thereafter because the stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power.

Par. 34 Recognition as an expense states:

‘When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised.’

When inventories are sold, the carrying amount of those inventories shall be measured in terms of the current, i.e. today´s, Daily Consumer Price Index and continuously updated day after day thereafter and shall be recognised as an expense in the period in which the related revenue is recognised because the stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power.

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What to do with the world´s accumulated Historical Cost Accounting loss

What to do with the world´s accumulated Historical Cost Accounting loss

Entities preparing their financial statements based on the historical cost basis generally do not know whether they have maintained the constant purchasing power of their equity constant over time.

The test would be to measure every item in current equity in units of constant purchasing power as from the date each item was contributed or came about over the entity´s lifetime and then to compare that total value with the company´s current net asset value measured in real value, i.e. no item in current net assets to be stated at historical cost, but at fair value.

This would be required to be done by an entity adopting financial capital maintenance in unit of constant purchasing power as authorized in IFRS in the Conceptual Framework (2010), Par. 4.59 (a) instead of financial capital maintenance in units of nominal monetary units, the traditional HCA model.

In most entities this would result in an enormous accumulated Historical Cost Accounting loss to be accounted as part of equity.

The net effect would be an enomous increase in the nominal value of equity (measured in units of constant purchasing power over the entity´s lifetime to date) together with and enormous accumulated Historical Cost Accounting loss, but resulting in the same current net equity real value being equal to the current real value of net assets before and after the above calcultions are made.

It is thus advisable to rather simply value current net assets in real value and state that as the constant real value of current equity to be maintained constant as from here on foreward by means of financial capital maintenance in units of constant purchasing power.

It is very doubtful that tax authorities would accept the sudden calculation of enormous accumulated Historical Cost Accounting losses which would represent the erosion of equity by the stable measuring unit assumption (HCA) over the lifetime of the entity to date under the Historical Cost paradigm.

In countries which allow the write-off of profits against accumulated losses over five years, for example, it would mean that no taxes would be paid by entities over the next five years in the case of an entire country adopting financial capital maintenance in units of constant purchasing power as from the same date. No country would accept not receiving any taxes from the corporate sector for five years.

This could be overcome in two ways:

1. The accumulated HCA loss not being allowed for tax purposes. It would thus remain on entities´ balance sheets over many years till it is written off against future profits. The net constant real value of equity would be correct and be maintained constant correctly by means of financial capital maintenance in units of constant purchasing power. This option would be costly in terms of accounting time spent on the calculations. It would reveal the real cost today of having implemented HCA over the lifetime of an entity.
2. Do not value past additions to equity in units of constant purchasing power and do not calculate the current HCA accumualted loss. Value current equity at the real value of current net assets and implement financial capital maintenance in units of constant purchasing as from the current date foreward. This option would have no extra costs, but would hide the accumulated cost of having implemented the HCA model over the lifetime of the entiy.

The second option is obviously the better choice.

So, the answer to the question: what to do about the world´s accumulated HCA loss is: just ignore it J in time-honoured accounting fashion.

However, it is actually required to stop the hundreds of billions of US Dollars (2012) in real value eroded each and every year by the implementation of the stable measuring unit assumption (HCA) in the world´s constant item economy during inflation and hyperinflation.

I do realize that may only happen a hunderd or more years from now (2012). Individual companies (even countries) are free to start anytime they like. It was authorized in IFRS in 1989.

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Unacceptable items in IFRS

Unacceptable items in IFRS

1. IAS 29 Financial Reporting in Hyperinflationary Economies.

It was duely implemented in Zimbabwe for at least the last six years during hyperinflation in that country: it had zero effect in the Zimbabwean hyperinflationary economy during those six years.

2. The IASB definitions of monetary items in IAS 21 and IAS 29.

All items paid or received in money are not monetary items. All economic items – monetary and non-monetary items – are generally paid or received in money as the monetary medium of exchange. A non-monetary item always paid or received in money does not transform that non-monetary item into a monetary item. It remains a non-monetary item always paid or received in money, e.g., salaries and wages.

3. The exclusion of measurement in units of constant purchasing from the FASB´s  and IASB´s joint list of possible basic measurement bases.

Measurement in units of constant purchasing power is a basic measurement basis continously applied in the world economy. Salaries, wages, rentals and many other items are generally measured in units of constant purchasing power on an annual basis in most of the world economy.

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BASIC MEASUREMENT BASES

Monetary items

1. Measurement in terms of the general price level index.

This requires the calculation and accounting of net monetary losses and gains only as long as the stable measuring unit assumption (HCA) is mistakenly still being applied. It is an absolute fact that the monetary unit of measure is not perfectly stable.

Variable real value non-monetary items

2. Fair value and related bases excluding the stable measuring unit assumpiton as stated in the FASB and IASB list (below) of nine measurement bases.

Constant real value non-monetary items

      3. Units of constant purchasing power.

The following is the FASB and IASB list of basic measurement bases which mainly apply to variable items:

“Measurement Bases

“The Boards agreed to the following set of nine measurement basis candidates:

1. Past entry price

2. Past exit price

3. Modified past amount

4. Current entry price

5. Current exit price

6. Current equilibrium price

7. Value in use

8. Future entry price

9. Future exit price.”

It can be seen from the above FASB and IASB list that neither

(i)                  measurement (of monetary items) in terms of a general price level index nor

(ii)                 measurement (of constant items) in units of constant purchasing power

are considered by either the FASB or the IASB as possible basic measurement bases.

The IASB does, however, require the calculation of net monetary losses and gains only during hyperinflation in terms of IAS 29 Financial Reporting in Hyperinflationary Economies.

The inexplicable omission of these two basic measurement bases is obviously a mistake on the part of the FASB and IASB.

Most salaries and wages and tens of thousands of other items have been and are currently measured in units of constant purchasing power on an annual basis in the world economy during at least the last 100 years.

It is impossible to explain how units of constant purchasing power can be omitted by both the FASB and IASB as a basic measurement basis.

The only possible explanation is to state that to err is human.

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Measurement in units of constant purchasing power excluded from IASB and FASB measurement bases list

Measurement in units of constant purchasing power excluded from IASB and FASB measurement bases list

The FASB and IASB spent several years discussing measurement around the world during the Measurement Chapter of their Joint Conceptual Framework Project.

After several years of discussions around the world they published the following joint list of possible basic measurement bases:

MeasurementBases

"The Boards agreed to the following set of nine measurement basis candidates:

1. Past entry price

2. Past exit price

3. Modified past amount

4. Current entry price

5. Current exit price

6. Current equilibrium price

7. Value in use

8. Future entry price

9. Future exit price.”

It can be seen from the above FASB and IASB list that neither

(i)                  measurement (of monetary items) in terms of the Daily Consumer Price Index nor

(ii)                 measurement in units of constant purchasing power

are considered by both the FASB and the IASB as possible basic measurement bases to be included on their list.

Measurement in units of constant purchasing power is thus currently (2012) excluded as a possible basic measurement basis by both the FASB and IASB.

It is to be noted that financial capital maintenance in units of constant purchasing power as an alternative to HCA (see above) automatically maintains the existing constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value – ceteris paribus – at all levels of inflation and deflation.

The omission of measurement in units of constant purchasing power from the FASB´s and IASB´s joint list of possible basic measurement bases is thus noted with concern. It is difficult to come up with a plausible explanation why both the FASB and the IASB exclude measurement in units of constant purchasing power as a possible basic measurement basis.

The fact that financial capital maintenance in units of constant purchasing power is authorized in IFRS in the Framework since 1989 would normally result in it automatically being included in a list of possible basic measurement bases. However, after several years of international discussion both the FASB and IASB do not regard measurement in units of constant purchasing power as a possible basic measurement basis.

A healthy and robust discussion and publication of different viewpoints and research are good for the ongoing development of the understanding of the basic concepts of accounting / financial reporting at the FASB, IASB and elsewhere.

However, excluding measurement in units of constant purhasing power from the current (2012) list of possible basic measurement bases is not compatible with the development of high quality international accounting standards.

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FORGET INFLATION!?

FORGET INFLATION!?

MONETARY ITEMS

Definition

Monetary items are units of local currency held and items with an underlying monetary nature being substitutes of the former.

MEASUREMENT BASIS

The measurement basis used to measure monetary items over time under financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Conceptual Framework (2010), Par. 4.59 (a) is the following:

Measurement in terms of the Daily Consumer Price Index.

This requires the calculation and accounting of net monetary losses and gains only while third party entities you deal with still implement Historical Cost Accounting and apply the stable measuring unit assumption.

ADVANTAGE OF DAILY INFLATION-ADJUSTMENT OF ALL MONETARY ITEMS

Inflation-adjustment on a daily basis of the entire money supply under full co-ordination will eliminate the entire cost of inflation (not actual inflation) from the entire economy. In practice (maybe in 100 years´ time) this will result in no-one being concerned about the actual rate of inflation since monetary item balances will maintain their real values over time.

Chile currently (2012) inflation-adjusts 20 to 25 per cent of its entire broad M3 money supply on a daily basis in terms of their Unidad de Fomento which is a monetized daily indexed unit of account used in the country since 1967 according to the Central Bank of Chile.

At least USD 3 trillion is currently (2012) being inflation-adjusted on a daily basis in terms of country-specific Daily Consumer Price Indices in the world economy. USD 798 billion is today (29-07-2012)  being inflation-adjusted on a daily basis in terms of the US Daily CPI in the US economy.

Yes, under complete inflation-adjustment of the entire money supply with complete co-ordination (everyone doing it) we can forget about inflation. Unfortunately that may only happen in 100 years´ time.

We are still a long way away from that. However, I have no doubt that it will happen one day.

We had a form of it in Angola in 1996 in Auto-Sueco (Angola), the company where I worked. We had it during hyperinflation of 3200 per cent per annum because I implemented accounting-dollarization as from 1 January 1996 in the company. We updated all our trade debtors, new car, new truck, spare parts prices and workshop service rates daily in term of the daily US Dollar black market or parallel rate.

We stopped our fear of hyperinflation with daily updating of all non-monetary items.

Low inflation countries can do the same with daily inflation-adjusting the entire money supply and the implementation of financial capital maintenance in units of constant purchasing power in terms of a Daily CPI as authorized in IFRS.

This will take a very long time to come about, but I am sure we will all eventually do it.

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IASB unanimously support a research programme on financial reporting in high-inflation and hyperinflationary economies

IASB unanimously support a research programme on financial reporting in high-inflation and hyperinflationary economies

At its May 2012 meeting the International Accounting Standards Board unanimously supported initiating a research programme focusing initially on, amongst other items, financial reporting in high-inflation and hyperinflationary economies.

This is an important decision as far as financial capital maintenance in units of constant purchasing power (Constant Item Purchasing Power Accounting which is implemented   at all levels of inflation and deflation) is concerned.

In the 2011 Agenda Consultation comment letter request document the IASB stated the following:

‘Inflation accounting (revisions to IAS 29 Financial Reporting in Hyperinflationary Economies)

IAS 29 provides guidance on the preparation of financial statements in a functional currency that is suffering from hyperinflation.  Concerns have been raised from some countries whose economies suffer from high inflation, but which are not hyperinflationary. Those concerns are that the effects of high inflation on an entity’s financial results are not adequately reflected in IFRS financial statements. A research paper was prepared on this issue and submitted to the IASB by the Federación Argentina de Consejos Profesionales de Ciencias Económicas. A future project could use this research paper to consider revisions to IAS 29 to include guidance for entities whose functional currency is that of an economy subject to high inflation, but not to hyperinflation.’

The Federación Argentina de Consejos Profesionales de Ciencias Económicas submitted a research report to the IASB in 2010 entitled IFRS ‘X’ INFLATION.  The IASB made the FACPCE´s reseach report available to me on my request.

In an unsolicited comment letter in Jan 2012 I pointed out to the IASB that inflation has no effect on the real value of non-monetary items and I comprehensively amended the FACPCE´s proposal to IFRS ‘X’ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.

Both IFRS X’ INFLATION and the amended version IFRS ‘X’ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER are available in full in the ebook CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS here.

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Acknowledgements

I wish to thank the following people and entities for helping me in this project either directly or indirectly:

David Mosso, Vice Chairman (retired) at the Financial Accounting Standards Board (1978-1987) and Chairman (retired) at the US Federal Accounting Standards Advisory Board (1997-2006) for reading an abstract of my work and for his comment: ‘Good work.’

Prof. Robert Shiller from Yale University for his clarifications to me regarding the formula for calculating the Unidad de Fomento in Chile.

Prof. Rachel Baskerville from The School of Accounting and Commercial Law at the Victoria University in Wellington, New Zealand for taking the time in 2010 to confirm the authorization of a third concept of capital maintenance in IFRS with her colleague Prof. Kevin Simpkins, the Chairman of the New Zealand Accounting Standards Review Board and for her statement: ‘‘There is much to be gained from moving away from reporting on the basis Financial Capital Maintenance in Nominal Monetary Units.’

Sir David Tweedie, Ex-Chairman of the International Accounting Standards Board, and Prof. Geoffrey Whittington, ex-member of the IASB, for their valued input in 2005 regarding that year’s version of the manuscript.

The South African Institute of Chartered Accountants for their valued exchange of ideas regarding the project in 2008.

Prof. Geoff Everingham, Emeritus Professor of Accounting at the University of Cape Town, for his valued exchange of ideas regarding the project in 2008.

Without SAICA´s and Prof. Everingham’s input in 2008 the project would not be where it is today.

Prof. Steve Hanke from the Cato Institute and John Hopkins University for his detailed assistance regarding currency boards to me prior to 2005 and his assistance with the definition of severe hyperinflation more recently.

Dr Gustavo Franco, Ex-Governor of the Banco Central do Brazil for his contribution to confirm that trade debtors and trade creditors are non-monetary items which have to be measured in units of constant purchasing power during inflation and hyperinflation.

Ron Lott, FASB Research Director and Kevin McBeth, FASB Project Manager for clearing up my doubts regarding the treatment of capital maintenance during the IASB and FASB´s Joint Conceptual Framework Project.

Dr Cemal KUCUKSOZEN, the Ex-Head of the Accounting Standards Department at the Capital Markets Board of Turkey in Ankara, for reading the 2005 version of the manuscript and for his comments including: ‘Theoretically, I totally agree with you. But, as you know, there is a trend towards acceptance of International Accounting Standards and IFRS issued by the IASB all over the world. In this regard, we can change over to Real Value Accounting when there is a change in IAS / IFRS toward Real Value Accounting or there is a trend toward Real Value Accounting all over the world.’ Constant Item Purchasing Power Accounting was called Real Value Accounting in 2005.

Prof. Dr Aylin POROY ARSOY from the Uludag University in Turkey for her information regarding her article where she and Prof. Dr Umit GUCENME state in 2005 that inflation has no effect on the real value of non-monetary items.

Dr Fermín del Valle, Chairman of the Special Commission created by the Federación Argentina de Consejos Profesionales de Ciencias Económicas (FACPCE) in 2009, for making FACPCE´s 2010 research paper to the IASB regarding the replacement of IAS 29 available to me in 2012.

Prof. Stephen Zeff from Rice University for his detailed assistance with inflation accounting to me in 2008.

The Canadian Institute of Chartered Accountants for providing copies of IAS 6 and IAS 15.

April Pitman, Technical Manager at the IASB for liaising with FACPCE regarding my access to their 2010 research paper.

Graham Terry, Vice President at The South African Institute of Chartered Accountants for his assistance in getting my article Financial Statements, Inflation & The Audit Report published in Accounting SA, SAICA´s accounting journal, in 2007.

Riana Julies, editor at Accounting SA, SAICA´s accounting journal for publishing my article Financial Statements, Inflation & the Audit Report in 2007 after I initially stated that I doubted very much that it would be published.

Prof. Ignacio Rodríguez from the Escuela de Administración, Pontificia Universidad Católica de Chile for clarifying the use of the Unidad de Fomento in Chile to me in 2011.

Prof. Ignacio Velez-Pareja from the Universidad Tecnologica de Bolivar, Department of Finance and International Business in Colombia for his extensive discussions with me in 2009 regarding the effect of inflation.

Robert Burgess, Resident IMF Representative in South Africa in 2007 and Norbert Funke from the IMF for their assistance in dealing with my questions regarding stabilization programs in high inflation situations during Zimbabwe’s hyperinflation.

Miguel Octavio, the owner of the Venezuelan blog The Devil’s Excrement and the commentators on his blog for sharing their experience of hyperinflation under President Hugo Chávez in Venezuela.

Banco Central de Chile for supplying me with detail of the extent of daily inflation-adjustment of the money supply in Chile.

Banco Central do Brasil for supplying me with detail regarding daily indexing of non-monetary items during 30 years of hyperinflation in Brazil.

Statistics South Africa for clarifications to me regarding the CPI in South Africa.

Motley Fool, the owner of the Fool’s Paradise blog for bringing the Unidad de Fomento to my attention in 2011.

Newzimbabwe.com Forum members for sharing with me the daily developments during the last two years of Zimbabwe’s period of hyperinflation under President Robert Mugabe and Gideon Gono, governor of the Reserve Bank of Zimbabwe.

Terry Clague, Publisher for Business, Management & Accounting books at Routledge Publishers for his assistance in my attempt to get published and his comment: ‘The quality of the book is not in question.’

Jonathan Norman, Publisher at Gower Publishing for his role in my attempt to get published and his comment: ‘You make a convincing case for the book.’

Juta Academic Publishers in Cape Town for offering me a publishing contract in 2005. Unfortunately we could not agree on terms at the time.

Harriet, my daughter, for her enduring support for the project.

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Preface - Part 1

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I developed the theoretical basis for Constant Item Purchasing Power Accounting (CIPPA) over the last 16 years since I worked in Angola’s hyperinflationary economy from 1994 to 1997. This project started in Angola’s hyperinflationary economy in 1996. I went to Angola from Portugal in October, 1994 to work at Auto-Sueco (Angola), the Volvo distributor in that country. After 15 months of living and working in a hyperinflationary economy and being responsible for the financial reporting in the company, I convinced Mr Tomáz Jervell, the President of Auto-Sueco, our holding company in Portugal, that I should do our accounting in Angola in US Dollars as from 1 January, 1996. I started writing the book in 1996 about how I accounting-dollarized our daily business operations and daily accounting in Luanda.

The book had many major revisions during the last 16 years. The first title was Zero Inflation. Other titles included Real Value, Maintaining the Wealth of Nations and RealValueAccounting.Com. I think the basic concepts will not change much as from 2012.

The book is the result of my research regarding the effects of the stable measuring unit assumption in accounting and the economy. I first wrote everything about Constant Item Purchasing Power Accounting, including the name.

I realized very early on that measurement in units of constant purchasing power should be used at all levels of inflation and deflation. I identified the split of non-monetary items in variable and constant items by 2005 which made the use of the CIPPA model acceptable to the accounting profession and business community during low and high inflation and deflation. I only realized that it is not inflation but the stable measuring unit assumption eroding companies´ capital and invested profits during 2009.

I named the model Constant Item Purchasing Power Accounting because (a) I identified the split of non-monetary items in variable and constant items and (b) to differentiate CIPPA from the inflation accounting model Constant Purchasing Power Accounting (CPPA) required by International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies only during hyperinflation.  CIPPA is used at all levels of inflation and deflation.

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CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS 

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Measurement of constant items

Measurement of constant items

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1 Definition 

A constant item is a non-monetary item with a constant real value over time that is not generally determined in a market on a daily basis within an entity.

Constant real value non-monetary items are fixed in terms of real value while their nominal values change daily in terms of a Daily CPI or other daily index under financial capital maintenance in units of constant purchasing power (CIPPA).

2 Measurement

Measurement of constant items is the generally accepted accounting practice of determining the monetary amounts at which constant items are to be recognised, valued, carried and accounted on a daily basis in the economy under all levels of inflation and deflation. This involves the selection of the particular basis of measurement. Constant items can only be measured in units of constant purchasing power during inflation and deflation because the stable measuring unit assumption is not applied in their measurement. Constant items are always and everywhere valued in terms of IFRS in units of constant purchasing power by applying the Daily CPI or a monetized daily indexed unit of account at the current (today’s) rate under financial capital maintenance in units of constant purchasing power (CIPPA) during low and high inflation and deflation. Constant items would always and everywhere be valued on a daily basis in terms of a relatively stable foreign currency parallel rate or a Brazilian-style Unidade Real de Valor index rate during hyperinflation.

Financial capital maintenance in nominal monetary units (HCA) and its IFRS–authorized alternative – financial capital maintenance in units of constant purchasing power (CIPPA) – would be one and the same accounting model at permanently sustainable zero inflation. This is proof that financial capital maintenance in units of constant purchasing power (CIPPA) is the logical next step in our fundamental model of accounting.

The IASB defined monetary items in IAS 29 incorrectly as money on hand and items to be paid in money or to be received in money. Most variable real value non–monetary items as well as constant real value non–monetary items are generally received or paid in money as the generally accepted monetary medium of exchange. The fact that the IASB defines non–monetary items as all items in the income statement and all other assets and liabilities in the balance sheet that are not monetary items, after having defined monetary items incorrectly, leads to the wrong classification of some constant real value non–monetary items, notably trade debtors and trade creditors, as monetary items by, for example, PricewaterhouseCoopers in their publication Understanding IAS 29. This results in the net monetary gain or loss generally being calculated incorrectly by companies implementing IAS 29 in hyperinflationary economies.

The definition of non–monetary items as being all items that are not monetary items is a generic definition. It is thus premised by the IASB that there are only two fundamentally distinct items in the economy: monetary and non–monetary items and that the economy is divided into two parts: the monetary and non–monetary economy. IAS 29 and other IFRS are based on this premise of only two fundamentally different items in the economy. This is a false premise.

It is not true that there are only two basic economic items as defined in IFRS. There are three fundamentally different basic economic items in the economy:

1 Monetary items

2 Variable real value non–monetary items

3 Constant real value non–monetary items

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