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|---|---|
| Key concepts | |
| Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow forecasting · Chart of accounts · Journal · Special journals · Constant item purchasing power accounting · Cost of goods sold · Credit terms · Debits and credits · Double-entry system · Mark-to-market accounting · FIFO and LIFO · GAAP / IFRS · General ledger · Goodwill · Historical cost · Matching principle · Revenue recognition · Trial balance | |
| Fields of accounting | |
| Cost · Financial · Forensic · Fund · Management · Tax (U.S.) | |
| Financial statements | |
| Balance sheet · Cash flow statement · Statement of retained earnings · Income statement · Notes · Management discussion and analysis · XBRL | |
| Auditing | |
| Auditor's report · Financial audit · GAAS / ISA · Internal audit · Sarbanes–Oxley Act | |
| Accounting qualifications | |
| CA · CPA · CCA · CGA · CMA · CAT · CFA · CIIA · IIA · CTP · ACCA |
Constant-purchasing-power accounting (CPPA) is:
a consistent method of indexing accounts by means of a general index which reflects changes in the purchasing power of money. It therefore attempts to deal with the inflation problem in the sense in which this is popularly understood, as a decline in the value of the currency. It attempts to deal with this problem by converting all of the currency unit measurement in accounts into units at a common date by means of the index."[1]
International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies[2] [3] is the International Accounting Standards Board´s inflation accounting model under which all non-monetary items (variable and constant real value non-monetary items) in historical cost or current cost period-end financial statements are restated in terms of the period-end consumer price index (CPI) only during hyperinflation which the IASB describes as an exceptional circumstance. IAS 29 does not require valuation of non-monetary items in units of constant purchasing power on a daily basis during the accounting period. IAS 29 does not require consistent daily indexing by means of a general index which reflects daily or even hourly changes in the purchasing power of money during hyperinflation. It simply requires restatement of HC and CC period-end financial statements.
Constant item purchasing power accounting (CIPPA) is the IASB's basic accounting model originally authorized in IFRS in 1989 as an alternative to traditional historical cost accounting where under financial capital maintenance is always and everywhere measured in units of constant purchasing power in terms of a daily CPI or monetized daily indexed unit of account (e.g. the Unidad de Fomento in Chile) during low inflation and deflation and in terms of a daily parallel rate or daily index rate during high inflation and hyperinflation because there is no stable measuring unit assumption under CIPPA. CIPPA implements financial capital maintenance in units of constant purchasing power – as originally authorized in IFRS in the Framework (1989), Par 104 (a) [now Conceptual Framework (2010), Par 4.59 (a)] which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power” as an alternative to the 3000-year-old generally accepted globally implemented traditional HCA model – with differentiated variable and constant real value non-monetary items in terms of a daily rate which automatically maintains the real value of capital 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. Net constant item losses and gains are calculated and accounted whenever constant items are not measured in units of constant purchasing power. Variable real value non-monetary items are valued in terms of IFRS and then updated daily in terms of a daily rate. Historical variable items are updated in terms of a daily rate because there is no stable measuring unit assumption under CIPPA. Monetary items are always and everywhere (current period and historical monetary items) inflation-adjusted in terms of a daily rate since the stable measuring unit assumption is rejected under financial capital maintenance in units of constant purchasing power. Net monetary losses and gains are calculated and accounted whenever monetary items are not inflation-adjusted. CIPPA is a price-level accounting model.
CIPPA automatically maintains the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus – whether they own any revaluable fixed asset or not.
CIPPA only maintains the real value of all non-monetary items (the entire real or non-monetary economy) relatively stable when these items are valued on a daily basis in terms of a Brazilian-style non-monetary index or daily parallel rate (normally the daily US Dollar parallel rate) during hyperinflation. IAS 29 simply requires the restatement of Historical Cost or Current Cost period-end financial statements in terms of the period-end monthly published Consumer Price Index to make these financial statements more useful during hyperinflation. IAS 29 does not require daily valuation of all non-monetary items in units of constant purchasing power in terms of a daily rate. IAS 29 thus does not require the implementation of financial capital maintenance in units of constant purchasing power. PricewaterhouseCoopers state the following regarding the use of the HCA model during hyperinflation: "Inflation–adjusted financial statements are an extension to, not a departure from, historic cost accounting."[4]
CIPPA was authorized in IFRS in the IASB's original Framework for the Preparation and Presentation of Financial Statements, Par. 104 (a)[5] [6] in 1989. In terms of the original Framework, (1989) Par 104 (a) accountants choose CIPPA to implement a financial capital concept of invested purchasing power, i.e. financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation instead of the traditional HC concept of invested money. They thus implement a Constant Purchasing Power financial capital maintenance concept by measuring financial capital maintenance in units of constant purchasing power instead of traditional HC nominal monetary units and they implement a Constant Purchasing Power profit/loss determination concept in units of constant purchasing power instead of in real value eroding nominal monetary units under HCA. Examples of constant items are issued share capital, retained income, capital reserves, all other items in shareholders´ equity, trade debtors, trade creditors, provisions, deferred tax assets and liabilities, all other non-monetary payables, all other non-monetary receivables, salaries, wages, rentals, all other items in the income statement, etc. Examples of variable items are property, plant, equipment, listed and unlisted shares, inventory, foreign exchange, etc. Variable items are valued in terms of International Financial Reporting Standards (IFRS) at for example fair value, market value, recoverable value, present value, net realizable value, etc. or Generally Accepted Accounting Principles (GAAP) during non-hyperinflationary periods.
Monetary items, variable real value non-monetary items and constant real value non-monetary items are the three fundamentally different basic economic items in the economy.
CIPPA automatically maintains the real value of capital constant in all entities that at least break even in real value including banks´ and companies´ capital base, for an unlimited period of time – all else being equal- whether these entities own revaluable fixed assets or not and without the requirement of additional capital from capital providers in the form of extra money or extra retained profits simply to maintain the existing constant real non-monetary value of existing capital constant. This is opposed to the traditional historical cost accounting model under which the real value of that portion of shareholders´ equity never maintained constant with sufficient revaluable fixed assets (revalued or not) are unknowingly, unnecessarily and unintentionally eroded at a rate equal to the annual rate of inflation as a result of the implementation of the very erosive stable measuring unit assumption under HCA. CIPPA was authorized in IFRS in 1989 as an alternative to the traditional HCA model at all levels of inflation and deflation in the original Framework (1989) and is applicable as a result of the absence of specific IFRS relating to the concepts of capital and capital maintenance and the valuation of specific constant real value non-monetary items. [7]
It does not state "during hyperinflation." That is stated in IAS 29 Financial Reporting in Hyperinflationary Economies. The original Framework (1989), Par 104 (a) is thus applicable at all levels of inflation and deflation: i.e., during low inflation too.
Discredited 1970-style CPPA was a form of inflation accounting which tried unsuccessfully – by updating all non-monetary items (variable real value non-monetary items and constant real value non-monetary items) equally by means of the period-end CPI in an unsuccessful attempt to correct the real value eroding effect of the stable measuring unit assumption during high inflation (but not yet hyperinflation) in the 1970´s. CPPA is not the same as CIPPA. CIPPA is implemented at all levels of inflation and deflation. CIPPA is not only inflation-accounting. Under CIPPA all non-monetary items – constant and variable items – are updated daily in terms of a Brazilian-style non-monetary index or a hard currency parallel rate during hyperinflation.
The CIPPA model presents substantial benefits, for example, automatically maintaining banks' and companies' existing capital base 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.
Certain income statement constant real value non-monetary items, most notably salaries, wages, rentals, etc. are updated on an annual basis by means of the monthly published CPI, that is, valued or measured in units of constant purchasing power during low inflation, in most economies implementing the traditional HCA model. They are, however, thereafter paid on a monthly basis by applying the stable measuring unit assumption; i.e. they are not updated daily as done under CIPPA.
South African Institute of Chartered Accountants: "Yes, this does have conceptual appeal and was experimented with in the UK and US in the 1970s, when inflation was high. Yet the markets brushed aside the inflation-adjusted figures because: • "The capital markets are acutely aware of the extent of inflation and are perfectly capable of allowing for this in determining the value of shares; and
• "Businesses are affected by the specific price changes of the products with which they are dealing; changes that may bear little relationship to a general price index like the CPI. "It therefore made little practical sense to introduce CPI-based adjustments. Indeed, when the CPI-based approach was included in supplementary accounts, business generally objected on the grounds that the adjusted numbers did not reflect the impact of specific inflation. "Eventually, with inflation abating in the UK and US, and accountants engaging in increasingly technical dead-end debates, the use of CPI-adjusted numbers was abandoned. "Self-evidently, inflation adjustments that apply accounting standard IAS 29 are essential in hyperinflationary environments, in which historic numbers are meaningless. Even then, the adjusted figures have little meaning, since by the time they see the light of day they are already out of touch with reality.
International Accounting Standard 29, Par. 6: "In most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued. Some entities, however, present financial statements that are based on a current cost approach that reflects the effects of changes in the specific prices of assets held."
The following quote from Geoffrey Whittington's[10] book Inflation Accounting – An Introduction to the Debate, published in 1983, reflects the above position:
"Constant Purchasing Power Accounting (CPP) is a consistent method of indexing accounts by means of a general index which reflects changes in the purchasing power of money. It therefore attempts to deal with the inflation problem in the sense in which this is popularly understood, as a decline in the value of the currency. It attempts to deal with this problem by converting all of the currency unit measurement in accounts into units at a common date by means of the index."[11]
The specific choice of measuring financial capital maintenance in units of CPP (the CIPPA model) as authorized in the original Framework (1989), was approved by the IASB’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.
"In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8."
IAS8, 11:
“In making the judgement, management shall refer to, and consider the applicability of, the following sources in descending order: (a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.”
There is no applicable IFRS or Interpretations regarding the capital concept, the capital maintenance concept and the valuation of all constant real value non-monetary items. The original Framework (1989), Par 104 (a) is thus applicable.
CIPPA is not only an inflation accounting model. CIPPA is implemented at all levels of inflation and deflation. IAS 29 is the inflation-accounting model defined in IFRS. CIPPA by measuring financial capital maintenance in units of CPP incorporates an alternative CPP capital concept, CPP financial capital maintenance concept and CPP profit determination concept to the HC capital concept, HC financial capital maintenance concept and HC profit determination concept. CIPPA requires all constant items always and everywhere to be valued in units of CPP in terms of a daily rate because there is no stable measuring unit assumption under this accounting model. Variable items are valued in terms of IFRS or GAAP and then updated in terms of a daily rate. Historical variable items are updated in terms of a daily rate as a result of the absence of the stable measuring unit assumption under CIPPA.
The statement "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power,"' in the IASB´s original Framework (1989), Par 104 (a), means that CIPPA has been authorized by the IASB since 1989 as an alternative to the traditional HCA model at all levels of inflation and deflation - also during periods of low inflation and deflation. This means that the international accounting profession has been in agreement regarding the use of financial capital maintenance in units of CPP during low inflation and deflation since 1989. It also means that financial capital maintenance in units of constant purchasing power to automatically maintain the real value of capital constant in all entities that at least break even - ceteris paribus - in a low inflationary environment is authorized in IFRS since the original Framework (1989) is applicable in the absence of specific IFRS.
Income statement constant items like salaries, wages, rents, pensions, utilities, transport fees, etc. are normally valued in units of CPP during low inflation in most economies as an annual update. Payments in money for these items are normally inflation-adjusted by means of the consumer price index (CPI) to compensate for the erosion of the real value of money (the monetary medium of exchange) by inflation only on an annual not daily basis. "Inflation is always and everywhere a monetary phenomenon" and can only erode the real value of money (the functional currency inside an economy) and other monetary items. Inflation can not and does not erode the real value of non-monetary items. Inflation has no effect on the real value of non-monetary items. Constant items´ real values are automatically maintained for an unlimited period of time in all entities that at least break even by the CIPPA model as per the original Framework (1989) at all levels of inflation and deflation as authorized by the IASB since 1989 instead of currently being eroded by the implementation of the traditional HC model when the very erosive stable measuring unit assumption is applied. It is thus the stable measuring unit assumption and not inflation that erodes the real value of constant items never maintained constant at a rate equal to the inflation rate when the stable measuring unit assumption is implemented for an indefinite period of time during continuous low inflation.
Implementing the CIPPA model means the stable measuring unit assumption is rejected. The stable measuring unit assumption is implemented when the HCA model is chosen where under financial capital maintenance is measured in nominal monetary units. Financial capital maintenance in nominal monetary units per se during inflation and deflation is a fallacy since it is impossible to maintain the existing real value of capital constant with financial capital maintenance in nominal monetary units (the HCA model) per se during inflation and deflation. Accountants world wide currently choose the traditional HCA model.
Accountants have to calculate the net monetary loss or gain from holding monetary items when they choose the CIPPA model and measure financial capital maintenance in units of constant purchasing power in the same way as the IASB currently requires its calculation and accounting during hyperinflation. The calculation and accounting of net monetary losses and gains during low inflation and deflation have thus been authorized in IFRS since 1989. There are net monetary losses and net monetary gains during low inflation too, but they are not required to be calculated when accountants choose the traditional HCA model.
It is an inexplicable contradiction that net monetary gains and losses are required by the IASB to be calculated and accounted during hyperinflation but not during non-hyperinflationary periods, especially when the IASB approved alternative to HCA, namely CIPPA does require their calculation and accounting during low inflation.
Net constant item gains and losses are also calculated and accounted under CIPPA.
IFRS authorize two basic accounting models:
1. Financial capital maintenance in nominal monetary units or Historical cost accounting (see the Framework (1989), Par 104 (a)).
2. Financial capital maintenance in units of constant purchasing power or Constant Item Purchasing Power Accounting (see the Framework (1989), Par 104 (a)).
A. Under Historical cost accounting the underlying assumptions used in IFRS are:
The stable measuring unit assumption (traditional Historical Cost Accounting) during annual inflation of 25% for 3 years in a row would erode 100% of the real value of all constant real value non-monetary items not maintained under the Historical Cost paradigm.
B. Under Constant Item Purchasing Power Accounting the underlying assumptions in IFRS are:
Framework for the preparation and presentation of financial statements
Concepts of Capital and Capital Maintenance
A major difference between US GAAP and IFRS is the fact that three fundamentally different concepts of capital and capital maintenance are authorized in IFRS while US GAAP only authorize two capital and capital maintenance concepts during low inflation and deflation: (1) physical capital maintenance and (2) financial capital maintenance in nominal monetary units (traditional Historical Cost Accounting) as stated in Par 45 to 48 in the FASB Conceptual Satement Nº 5. US GAAP does not recognize the third concept of capital and capital maintenance during low inflation and deflation, namely, financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) in 1989.
The three concepts of capital defined in IFRS during low inflation and deflation are:
The three concepts of capital maintenance authorized in IFRS during low inflation and deflation are:
The IASB authorized the CIPPA model during low inflation and deflation in the original Framework (1989) as an alternative to the HCA model. The IASB, however, currently still requires the implementation of their current inflation accounting model as defined in IAS 29 during hyperinflation.[30]