Saturday, 5 April 2008

Historical Costs and Constant Values

Historical costs, eg. money, retained income, salaries, issued share capital and taxes NEVER updated in non-hyperinflationary economies (Historical Cost Accounting) have constant nominal values while their real values are being destroyed at the rate of inflation.

This results in the destruction of hundreds of billions of Euros in real value in the world economy each and every year because of the use of the Historical Cost Accounting model. This is simply in constant real value non-monetary items.

Variable real value non-monetary items are adequately valued in terms of International Accounting Standards. Real value is not generally destroyed in variable real value non-monetary items under IAS rules. The Historical Cost Accounting model only destroys real value in constant real value non-monetary items NEVER updated; for example, retained income as well as all other constant real value non-monetary items not fully or never updated.

Unfortunately the International Accounting Standards Board does not recognise constant real value non-monetary items. It only recognises monetary and non-monetary items - the latter including Historical Cost items. The IASB in this way contributes to the destruction of hundreds of billions of Euros in, for example, the real value of retained income world wide each and every year.

Under hyperinflation Historical Cost Accounting can destroy a complete economy as happened to the Zimbabwean economy over the past 14 years of hyperinflation. Historical Cost Accounting has destroyed many other economies in the past during hyperinflation. Eg. Jugoslavia, Germany during their hyperinflationary years and others.

Brazil is the only country in the world that was not destroyed by hyperinflation (30 years of it: 1964 to 1994) because they used a DAILY index to update all non-monetary items DAILY. The International Monetary Fund refuses to see the importance of this. That is why there is little hope that the IMF can help Zimbabwe to quickly get back to a stable monetary unit and a stable real economy. Their economists and accountants are too blinded by Historical Cost Accounting.

Constant values

for example

retained income
issued share capital

have constant real values.

Under Real Value Accounting they are subject to 0% inflation

while their nominal values are updated everytime the Consumer Price Index changes in non-hyperinflationary economies.

In hyperinflationary economies their nominal values (as well as all other non-monetary items) are updated DAILY at a DAILY index rate or the parallel rate - in the absence of a daily rate - when Real Value Accounting is used as the basic accounting model.