Capital Maintenance in Units of Constant Purchasing Power Is Authorized By The IASB During Low Infla
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 Capital Maintenance in Units of Constant Purchasing Power has been authorized by the IASB since 1989 as an alternative to the traditional HCA model at all levels of inflation and deflation, including during hyperinflation as required in IAS 29. 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, high inflation, hyperinflation 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 Capital Maintenance in Units of Constant Purchasing Power 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 Capital Maintenance in Units of Constant Purchasing Power 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.
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