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Saturday, 23 February 2008

Dual Destruction of Real Value in the Economy.

Inflation always and everywhere results in the destruction of real value in

(A) all monetary items over time (which cannot be updated) and

(B) constant real value non-monetary items (historical cost items, eg. retained income) when the latter are NEVER updated as a result of the stable measuring unit assumption which is a generally accepted accounting principle or GAAP.

Retained income has never been and is never updated in economies that are not hyperinflationary economies under the current Historical Cost paradigm. Retained income is only updatable since 1989 in hyperinflationary economies in terms of International Accounting Standards IAS 29 Financial Reporting in Hyperinflationary Economies. IAS 29 does not require daily updating (as required under Real Value Accounting) and thus fails to have any effect in hyperinflationary economies.

A good example is the situation in Zimbabwe where IAS 29 is being applied without any effect on the state of the Zimbabwean economy. The International Accounting Standards Board´s IAS 29 is thus a complete and utter failure that serves no purpose at all and reduces the IASB´s credibility tremendously.

The IASB´s as well as the FASB´s credibility is even further diminished by the fact that they require the updating of all constant real value non-monetary items under hyperinflation but ban it under all other inflationary conditions thus supporting the annual destruction of hunderds of billions of US Dollars of real value in all companies´ retained income balances world wide in non-hyperinflationary economies.