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IFRS authorize daily indexed units of account

July 30, 2011 in Uncategorized

IFRS authorize

1. Daily indexed units of account since they also authorize:

2. The Constant Item Purchasing Power Accounting model under which there is no stable measuring unit assumption ever which means that:

(i) only constant items are always and everywhere measured in units of constant purchasing power (not inflation-adjusted because inflation is always and everywhere a monetary phenomenon: inflation has no effect on the real value of non-monetary items) on a daily basis in terms of a daily index unit per se during inflation and deflation and in terms of the daily parallel rate or daily index rate during hyperinflation automatically resulting in the complete elimination of the cost of the stable measuring unit assumption (universally mistakenly taught and understood to be the same as the cost – the net monetary loss or gain – of inflation/deflation/hyperinflation) amounting to hundreds of billions of US Dollars per annum in the world´s constant item economy (the above values per annum to be maintained instead forever);

(ii) all variable items are measured in terms of IFRS and all historical variable items are updated (not inflation-adjusted: see above) on a daily basis in terms of a daily index unit during inflation and deflation and per se in terms of the daily parallel rate or daily index rate during hyperinflation;

(iii) all monetary items are inflation-adjusted on a daily basis in terms of a daily index unit during inflation and deflation and in terms of the daily parallel rate or daily index rate during hyperinflation resulting in the automatic complete elimination of the cost of or gain from inflation, deflation and hyperinflation from the economy.

The combination of the above results in CIPPA automatically maintaining the constant purchasing power of capital constant forever in all entities that at least break even during inflation and deflation – ceteris paribus.

Nicolaas Smith

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

IFRS authorize

July 28, 2011 in Uncategorized

(Summary of CIPPA)

 

IFRS authorize:

1. Financial capital maintenance in units of constant purchasing at all levels of inflation and deflation in the original Framework (1989), Par 104 (a). This leads to:

2. The split of non-monetary items in variable real value non-monetary items and constant real value non-monetary items. When some items are authorized to be measured in units of constant purchasing power it logically means that some items have constant real values. These constant items cannot be monetary items since monetary items have unstable real values during inflation and deflation. They have to be non-monetary items with constant real values. When some non-monetary items have constant real values it logically means that some non-monetary items have variable real values.

3. The rejection of the stable measuring unit assumption. This leads to:

4. The elimination of the entire cost of the stable measuring unit assumption from the constant item economy: all constant items are always and everywhere measured in units of constant purchasing power (not inflation-adjusted: inflation is always and everywhere a monetary phenomenon and has no effect on the real value of non-monetary items) which results in zero erosion of real value in constant items.

5. Updating (not inflation-adjustment – see above) of all historical variable items since there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power (CIPPA).

6. Daily inflation-adjustment of all monetary items: there is no stable measuring unit assumption, thus, monetary items are inflation-adjusted which is required on a daily basis based on a lagged and smoothed Consumer Price Index to avoid excessive arbitrage speculation. This leads to:

7. The elimination of the entire cost of inflation from the economy. This leads to:

8. The extinction of the concept of a net monetary loss or gain in the economy.

All the above leads to:

9. Automatic maintenance of the constant purchasing power of capital forever in all entities that at least break even during inflation and deflation – ceteris paribus (CIPPA). This should lead to:

10. The end of the Historical Cost Accounting model/paradigm.

Nicolaas Smith

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

test

July 27, 2011 in Uncategorized

No stable measuring unit assumption (HCA) and the entire cost of inflation is removed from the economy

Inflation-adjusting all monetary items (all monetary item assets and all monetary item liabilities) in the economy eliminates the cost of or gain from inflation completely from the economy when all monetary items are in the banking system: there is no net monetary gain or loss when all monetary items are inflation-adjusted daily as they are apparently doing in Chile with the Unidad de Fomento (UF) and all monetary items are in the banking system.

This has been authorized in International Financial Reporting Standards 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 for the last 22 years since financial capital maintenance in units of constant purchasing power – as authorized in IFRS – means there is no stable measuring unit assumption at all in the economy under Constant Item Purchasing Power Accounting.

All three basic economic items are thus free from the stable measuring unit assumption:

1. Monetary items are inflation-adjusted on a daily basis in terms of the daily CPI (UF in Chile) under financial capital maintenance in units of constant purchasing power during inflation and deflation (Constant Item Purchasing Power Accounting) as authorized in IFRS: no stable measuring unit assumption.

Non-monetary items are split in

(a) constant real value non-monetary items (e.g. shareholders´ equity, trade debtors, trade creditors, salaries, wages, rents, all other items in shareholders´ equity, all other items in the income statement, etc.) and

(b) variable real value non-monetary items (e.g. property, plant, equipment, shares, stock, foreign exchange, etc.)

2. Constant items are measured in units of constant purchasing power in terms of the CPI under financial capital maintenance in units of constant purchasing power during inflation and deflation (CIPPA) as authorized in IFRS: no stable measuring unit assumption.

3. Variable items are measured in terms of IFRS. Historical variable items are updated in terms of the CPI during inflation and deflation (CIPPA) as authorized in IFRS: no stable measuring unit assumption


 

Inflation-adjusting all monetary items daily does not stop inflation since inflation is always and everywhere a monetary phenomenon (Friedman). However, it eliminates the entire cost of or gain from inflation and deflation from the economy when all monetary items are in the banking system.

I am sure Chilean accountants do not account the net monetary loss or gain from inflation because there is no net monetary loss or gain from inflation when they inflation-adjust all monetary items in Chile on a daily basis in terms of the UF.

Nicolaas Smith

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

Banks with no fixed assets

July 26, 2011 in Uncategorized

Banks with no fixed assets

  

Updated on 27-7-11

Under financial capital maintenance in units of constant purchasing power during inflation and deflation (CIPPA) there is no stable measuring unit assumption: thus, all monetary items are inflation-adjusted. All bank deposits, monetary item loans, all monetary items (monetary item assets and monetary item liabilities) are inflation adjusted. This completely removes the the cost of or gain from inflation and deflation from the economy. IFRS thus authorizes the elimination of the cost of or gain from inflation and deflation from the economy. There is no net monetary gain or loss when all monetary items are inflation-adjusted on a daily basis as it is currently happening in Chile with the Unidad de Fomento. 

Constant items are measured in units of constant purchasing power in terms of IFRS in all accounts under all circumstances and in all published forms.

Variable real value non-monetary items are valued in terms of IFRS. All historical variable items are updated in terms of the CPI during inflation and deflation (either daily  – see the Unidad de Fomento in Chile – or monthly)  and in terms of the daily parallel or daily index rate during hyperinflation.

Variable and constant items are not inflation-adjusted by definition. Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. The stable measuring unit assumption (not inflation) erodes the real value of constant items never updated.

All monetary items are inflation-adjusted since inflation can only erode the real value of money and other monetary items.

The result of CIPPA is that a bank that at least breaks even in real terms during inflation and deflation – ceteris paribus – can automatically maintain the constant purchasing power of its capital constant forever even if it has no fixed assets at all. Completely virtual banks are thus possible under CIPPA.

This is only possible under financial capital maintenance in units of constant purchasing power (CIPPA) as originally authorized in IFRS in the Framework (1989), Par 104 (a) as qualified above. All monetary items have to be in the banking system and have to be inflation-adjusted.

Nicolaas Smith

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

Unidad de Fomento

July 25, 2011 in Uncategorized

Hi Motley Fool,

Thank you very much for this info on my previous blog. I tried to reply via the “Reply” link on my blog and the “Comment” option on my and your blogs, but, nothing worked. So, here is my reply.

I did not know about the UF.

Yes, the Unidad de Fomento results in Chile implementing most of Constant Item Purchasing Power Accounting (CIPPA) since 1967. The wiki article does not indicate whether they account the net monetary gain or loss from inflation. The UF is similar to the Brazilian Unidade Real de Valor (URV). Brazil supplied their economy with a daily index from 1964 to 1994. I also do not know whether Brazil calculated the net monetary loss or gain. I will have to find out.

This will strenghten the case for CIPPA tremendously. I state in the book that all that is missing is due process before CIPPA will replace the Historical Cost Accounting model.

Chile has already taken the next step without the rest of the world even being ready to take the first step towards implementing financial capital maintenance in units of constant purchasing power (CIPPA): Chile not only update constant real value non-monetary items and historical variable real value non-monetary items, but, also monetary items. This is a logical next step. I just did not realize that Chile has been doing it since 1967. So, it seems to me Chile learnt from Brazil. Now it is time for us to learn from them.

“It was created on January 20, 1967, for the use in determining principal (monetary item) and interest (constant item) in international secured loans for development, subject to revaluation according to the variations of inflation. Afterwards it was extended to all types of bank loans (monetary items), private or special financing (monetary items), purchases or investments on installments (constant items), contracts (constant items), and some special situations. Also it is used in legal standards such as the par value of stock/capitalization of companies (constant items), fines (constant items), etc. It has become the preferred and predominant measure for determining the cost of construction (historical variable items: Historical Cost), values of housing (historical variable items) and any secured loan (monetary items), either private or of the Chilean government.”

The Wiki article is a very good example of the fact that everyone thinks inflation erodes the real value of non-monetary items: the stable measuring unit assumption is not mentioned at all in the article.

Thank you very much for this information.

Kind regards,

Nicolaas.

Money is an unstable store of value

July 22, 2011 in Uncategorized

Money is an unstable store of value

Unstable money is an unstable store of value. Unstable money is a depreciating store of value during inflation and an appreciating store of value during deflation.

Unstable money has to maintain most of its real value over the short term in order to be accepted as an unstable medium of exchange. It would not solve barter’s double coincidence of wants problem if it could not be stored over time and still remain valuable in exchange.

The fact that inflation is eroding the real value of unstable money means it is a store of depreciating real value during inflation. Money was a store of value right from the start. First types of money consisted of gold or silver coins. The metals from which the coins were made had an actual real value in themselves and these coins could be melted down and the metal could be sold in its bullion form when the bullion price was above the coin price. Next money was not made of precious metal but money consisted of bank notes, the real values of which were fully backed by gold reserves. Today depreciating or appreciating fiat money´s real value is backed by all the underlying value systems in an economy while the actual bank notes and coins simply represent depreciating real value since the materials the notes and coins are made of have almost no intrinsic value. Although the store of value function and permanently fixed nominal values of depreciating or appreciating bank notes and bank coins are legally defined, fiat money´s real value is determined by all the underlying values systems in an economy. The change in fiat money´s depreciating or appreciating real value is indicated by the economic processes of inflation and deflation respectively.

The abuse of money’s store of value function led to inflation.

Money is a liquid medium of exchange; i.e. it is readily available as cash and it is normally easy to obtain on demand in banks in most economies under normal economic conditions – all else being equal. A property, e.g. a well–located plot of land with a well–maintained and well–equipped building – which is a variable real value non–monetary item – is also a store of value. It is however quite an illiquid store of value. The real value is not immediately available in easily transportable and divisible cash. Money’s high liquidity makes it more desirable as a store of value in comparison with other stores of value like gold, property, marketable securities, bonds, etc. Money is obviously not the best store of value in an inflationary economy where its real value is continuously being eroded by inflation. Money is normally available in convenient smaller denominations which facilitate everyday small purchases. As such, money is very user friendly. It is easily transportable especially with electronic transfer facilities.

Inflation actually manifests itself in money’s store of value function since inflation always and everywhere erodes the real value of only money and other monetary items. Inflation does not manifest itself in money’s medium of exchange function in the case of spot transactions (since the exchange is made between money and the other item considered to be equal in real value to the money amount at the moment of exchange) or unit of account function (the stable measuring unit assumption manifests itself in money´s unit of account function) which vindicates the fact that inflation can only erode the real value of money and monetary items; i.e. inflation has no effect on the real value of non–monetary items. Money is always a medium of exchange of equal real value at the moment of exchange. Free market prices are adjusted in the market in a price setting process that takes the decreasing real value of money during inflation or the increasing real value of money during deflation into account (amongst many other factors) so that economic items (the product or service or right and the amount of money) of equal real value are exchanged at the moment of exchange.

Depreciating money has a constantly decreasing real value during inflation. Depreciating “bank money” deposits have the same attributes as depreciating money with the single exception that they are not physical depreciating bank notes and bank coins but accounted depreciating monetary items. The depreciating money represented by depreciating bank money also has a depreciating store of value function during inflation. Money appreciates in real value during deflation.

Nicolaas Smith

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

Functions of money

July 21, 2011 in Uncategorized

Functions of money

Money performs the following three functions:

1. Unstable medium of exchange

2. Unstable store of value

3. Unstable unit of account

1. Unstable medium of exchange

Money has the basic function that it is an unstable medium of exchange of equivalent real values at the moment of exchange. It overcomes the inconveniences of a barter economy where there must be a double coincidence of wants before a trade can take place. For a trade to take place in a barter economy one person must want exactly what the other person has to offer, at the exact time and place where it is offered.

In a monetary economy the real value of goods and services are measured in terms of unstable money, the unstable monetary medium of exchange, which is generally accepted to buy any other good or service. Without this function or attribute the invention cannot be money.

We use payment with unstable money instead of barter to exchange real values in our economies in the transactions we enter into when we buy and sell goods, services, ideas, rights and any kind of property whether physical, virtual or intellectual. Unstable money is the lifeblood of an economy even though it is continuously changing in real value. Without unstable money the creation and exchange of real value in an economy would be severely restricted, as it would become a barter economy.

Nicolaas Smith

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

Consumer Price Index – Part 2 of 2

July 20, 2011 in Uncategorized

Consumer Price Index – Part 2 of 2

We also use the annual change in the CPI as a measure to calculate the creation of real value in monetary items and constant real value non–monetary items never maintained constant (nominal values never decreased in line with deflation) over time in a deflationary economy that uses the HCA model.

Financial capital maintenance is measured in units of constant purchasing power by valuing only constant items – per se – in terms of the change in the CPI on a monthly basis during inflation and deflation (CIPPA). Financial capital maintenance is measured in units of constant purchasing power by valuing all non–monetary items (variable and constant items) – per se – on a daily basis in terms of the change in the US Dollar parallel rate (when it exists officially or unofficially) or a Brazilian–style daily non–monetary index during hyperinflation (Constant Purchasing Power Accounting – CPPA).

There is no CPI in a barter economy as there is no money in such an economy. The CPI is essential to correctly index the real value of constant items in the economy with continuous measurement of financial capital maintenance in units of constant purchasing power (CIPPA) being used as the fundamental model of accounting during inflation and deflation.

  

The nominal value of money stays the same over time while the real value of money is automatically determined by inflation and deflation: eroded by inflation and increased by deflation, respectively. The nominal value of a constant item changes inversely with the level of the CPI with measurement in units of constant purchasing power under CIPPA resulting in its real value remaining constant during inflation and deflation. The real value of money changes inversely with the level of inflation.

The CPI is the sine qua non in an inflationary and deflationary economy to correctly fix the problem created by the fact that money is the only universal unit of account that is not a stable unit of measure: the monetary unit of account has no fundamental constant. Under the Historical Cost paradigm (implementing the HCA model) it is assumed that money is perfectly stable in all cases where the stable measuring unit assumption is applied.

It would be difficult to measure the erosion in the real value of money and the creation of real value in money correctly during inflation and deflation, respectively, and to correctly implement financial capital maintenance in units of constant purchasing power without the CPI during inflation and deflation. The CPI is calculated during hyperinflation, but, it is impossible to maintain the constant purchasing power of constant items constant in terms of the CPI that becomes available a month or more after a transaction or event during hyperinflation of hundreds of millions or more per cent per annum. The daily change in the parallel or index rate is used for that purpose during hyperinflation. See Brazil´s use of daily indexing during very high and hyperinflation from 1964 to 1994.

Financial capital maintenance in units of constant purchasing power in terms of the CPI makes it relatively easy to fix the problem and to stop the erosion of hundreds of billions of US Dollars in real value in the world´s constant item economy each and every year during low inflation.

  

Nicolaas Smith  

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

Valuing / accounting variable items

July 19, 2011 in Uncategorized

Valuing / accounting variable items

Variable items are valued in terms of IFRS under CIPPA. They are accounted in terms of the CPI at the date of the valuation during inflation and deflation. They are valued / accounted in terms of the daily parallel rate or the daily index rate during hyperinflation.

Under CIPPA and CPPA all valuations (accounting entries) contain four elements:

1.    An indication whether the item valued / accounted is

a.    A monetary item (m),

b.    A constant item (c) or

c.     A variable item (v).

2.    The value of the item expressed in terms of the functional currency.

3.    The date of the valuation.

4.    The CPI at the date of the valuation / accounting during inflation and deflation or the daily parallel or index rate during hyperinflation.

         Variable items valued in terms of IFRS at Historical Cost as well as all other historical variable item IFRS valuations are updated in ledger accounts and in financial reports and publications in whatever format in terms of the CPI (monthly) till the next valuation in terms of IFRS because there is no stable measuring unit assumption under CIPPA during inflation and deflation. This is done in order to always reflect the IFRS valuation in terms of the current depreciated or appreciated real value of money over time. Variable items are always updated – per se – in terms of the current daily parallel or index rate during hyperinflation.          

         The fact that specific variable items are valued at Historical Cost in terms of IFRS, e.g. stock valued at the lower of cost or net realizable value, does not mean that the HCA model is being implemented because there is no stable measuring unit assumption under CIPPA and CPPA.

        The Framework states that the concept of capital maintenance plus the measuring basis chosen determines the accounting model implemented. Under CIPPA financial capital maintenance is measured in units of constant purchasing power: there is no stable measuring unit assumption under CIPPA. Historical Cost is one of the various measurement bases used under CIPPA. HC valuations are thus always updated under CIPPA; i.e. the stable measuring unit is never applied.

         Under CIPPA monetary items in ledger accounts and in current period financial reports published during the current accounting period are valued / accounted in  nominal monetary units, but, the net monetary loss or gain is always calculated and accounted: i.e. there is no stable measuring unit assumption as implemented under Historical Cost Accounting. The net monetary loss or gain is not calculated and accounted under HCA because the stable measuring unit assumption is implemented.

       Specific variable items are valued at HC in terms of IFRS, but, then they are continuously updated during inflation, deflation and hyperinflation under financial capital maintenance in units of constant purchasing power because there is no stable measuring unit assumption under CIPPA and CPPA.

         When all variable items are always valued during whatever period or in whatever financial report or ledger account, in terms of IFRS, e.g. fair value, then they will never be required to be updated during inflation and deflation.

          Variable items are always updated in principle (per se) during hyperinflation in terms of the daily parallel rate of daily index rate.

Nicolaas Smith

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

4 Reasons why CIPPA automatically maintains capital constant forever

July 18, 2011 in Uncategorized

4 Reasons why CIPPA automatically maintains capital constant forever

CIPPA automatically maintains the constant purchasing power of capital constant forever in all entities that at least break even during inflation and deflation – ceteris paribus – as a result of:

1. Financial capital maintenance in units of constant purchasing power during inflation and deflation: the rejection of the stable measuring unit assumption;

2. Double entry accounting: For every credit (e.g. capital) there is an equivalent debit (e.g. fixed assets, stock, trade debtors, cash, etc.);

3. The fact that the constant real non-monetary value of capital is equal to the real value of net assets, and

4. The fact that a company, in principle, has an unlimited lifetime.

Nicolaas Smith

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