Real Value Accounting / IAS 29

A SA company listed on the Johannesburg Stock Exchange prepares its financial reports in terms of International Financial Reporting Standards. IFRS require an entity to choose how it wants to maintain its financial capital: either in nominal monetary units (traditional Historical Cost Accounting) or in units of constant purchasing power during low inflation. This IFRS option only applies during low inflation and deflation. There is no option during hyperinflation. During hyperinflation an entity whose functional currency is a hyperinflationary currency has to implement Constant Purchasing Power Accounting (CPPA), i.e., financial capital maintenance in units of constant purchasing power, inflation-adjusting all non-monetary items - both variable as well as constant real value non-monetary items - during hyperinflation – as required in IAS 29.

The Board of Directors of a JSE listed company is responsible for approving changes in accounting policies. Adopting IFRS was a change in accounting policies. When IFRS are adopted, entities have to make a choice between two basic accounting models during low inflation and deflation. IFRS accept that “a financial concept of capital is adopted by most entities in preparing their financial statements”. The Board of Directors thus only had to decide how it wanted to maintain the company´s financial capital in terms of IFRS as it was given a specific choice between two options on the adoption of IFRS. There is a directly stated choice in IFRS and the Board of Directors actually had to make and made that choice on the adoption of IFRS during low inflation. There is no choice during hyperinflation.

There are no specific IFRS relating to the concept of capital and capital maintenance.

IAS 8 Par 10 and 11 state:

Par 10 In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is:


(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements:

(i) represent faithfully the financial position, financial performance and cash flows of the entity;
(ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
(iii) are neutral, ie free from bias;
(iv) are prudent; and
(v) are complete in all material respects.


Par 11 In making the judgement described in paragraph 10, 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 are no specific IFRS relating to the concept of capital and capital maintenance. The measurement concepts in the Framework are thus applicable

The IFRS Framework for the Preparation and Presentation of Financial Statements (1989) states:



“Concepts of Capital and Capital Maintenance

Concepts of Capital


102. A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.


Concepts of Capital Maintenance and the Determination of Profit

104. The concepts of capital in paragraph 102 give rise to the following concepts of capital maintenance:


(a) Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.


(b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.


108. Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. They may not be recognised as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit.”

There are consequently three concepts of capital maintenance at all levels of inflation and deflation (including normal low inflation) in terms of IFRS:

a) Physical capital maintenance
b) Financial capital maintenance in nominal monetary units
This is the generally accepted traditional Historical Cost Accounting model.
c) Financial capital maintenance in units of constant purchasing power

which the IASB also authorized in the Framework, Par 104 (a) in 1989 for implementation during low inflation and deflation as an alternative to the globally implemented generally accepted traditional Historical Cost Accounting model. Financial capital maintenance in units of constant purchasing power is, however, specifically required in IFRS to be implemented in terms of IAS 29 - the IFRS inflation accounting model - during hyperinflation.

The Board of Directors had a choice between two basic accounting models in terms of the Framework, Par 104 (a) during low inflation:

I) Financial capital maintenance in nominal monetary units, i.e. traditional Historical Cost Accounting, and
II) Financial capital maintenance in units of constant purchasing power, i.e. Constant Item Purchasing Power Accounting (CIPPA) during low inflation.

The Framework, Par 104 (a) states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.” It is a directly stated choice and the Board had to make and made the choice during low inflation.

The Board of Directors has no choice during hyperinflation: It has to implement IAS 29 or Constant Purchasing Power Accounting (CPPA) during hyperinflation.