Capital Maintenance in Units of Constant Purchasing Power™

Financial capital maintenance in units of constant purchasing power during hyperinflation is authorized in current IFRS

Under IAS 29 Financial Reporting in Hyperinflationary Economies, financial capital maintenance in nominal monetary units is implemented; i.e., the Historical Cost Accounting model which includes the application of the stable measuring unit assumption during hyperinflation.

‘‘Inflation-adjusted financial statements are an extension to, not a departure from, historical cost accounting.’

PricewaterhouseCoopers, Understanding IAS 29, 2006, Page 5.

IAS 29 was implemented during the last six years of hyperinflation in Zimbabwe with noeffect at all.

IAS 29 is only required for the restatementof Historical Cost or Current Cost financial statements during hyperinflation.

IAS 29, Par. 8 states:

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

IAS 29 is thus not required when an entity implements financial capital maintenance in units of constant purchasing power during hyperinflation as authorized at all levels of inflation and deflation, including hyperinflation, in current IFRS in The 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.’

Financial capital maintenance in units of constant purchasing powerduring hyperinflation is thus authorized in terms of currentIFRS.

The stable measuring unit assumption is, in principle, never implemented under financial capital maintenance in units of constant purchasing power. When it is implemented in practice, e.g., with the measurement of monetary items in nominal monetary units, then the net monetary loss or gain is calculated and accounted under financial capital maintenance in units of constant purchasing power accounting.

Financial capital maintenance in units of constant purchasing power is not Constant Purchasing Power Accounting, i.e., it is not the restatement of non-monetary items in Historical Cost or Current Cost financial statements.

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.