IFRS-Authorized Basic Accounting Models: Underlying Assumptions

Only available on StudyMode
  • Topic: Inflation, Generally Accepted Accounting Principles, Inflation accounting
  • Pages : 2 (441 words )
  • Download(s) : 35
  • Published : November 9, 2010
Open Document
Text Preview
Underlying assumptions
IFRS authorize two basic accounting models:
I. Financial capital maintenance in nominal monetary units, i.e., Historical cost accounting during low inflation and deflation (see the Framework, Par 104 (a)). II. Financial capital maintenance in units of constant purchasing power, i.e., Constant Item Purchasing Power Accounting - CIPPA - during low inflation and deflation (see the Framework, Par 104 (a)) and Constant Purchasing Power Accounting (see IAS 29) - CPPA - during hyperinflation. Financial capital maintenance in units of constant purchasing power is not authorized under US GAAP. The following are the four underlying assumptions in IFRS:

* 1. Accrual basis: the effect of transactions and other events are recognized when they occur, not as cash is gained or paid. * 2. Going concern: an entity will continue for the foreseeable future. * 3. Stable measuring unit assumption: financial capital maintenance in nominal monetary units or traditional Historical cost accounting; i.e., accountants consider changes in the purchasing power of the functional currency up to but excluding 26% per annum for three years in a row (which would be 100% cumulative inflation over three years or hyperinflation as defined in IFRS) as immaterial or not sufficiently important for them to choose financial capital maintenance in units of constant purchasing power during low inflation and deflation as authorized in IFRS in the Framework, Par 104 (a). Accountants implementing the stable measuring unit assumption (traditional Historical Cost Accounting) during annual inflation of 25% for 3 years in a row would destroy 100% of the real value of all constant real value non-monetary items not maintained under the Historical Cost paradigm. * 4. Units of constant purchasing power: financial capital maintenance in units of constant purchasing power during low inflation and deflation; i.e. the rejection of the stable measuring unit assumption. See The...
tracking img