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Saturday, 1 November 2008

DOUBLE ENTRY ACCOUNTING - per se – neither creates nor destroys value

DOUBLE ENTRY ACCOUNTING - per se – neither creates nor destroys value.

Double entry accounting - per se - maintains value.

Historical Cost Accounting destroys real value during low inflation when entities do not own sufficient revaluable fixed assets.

Only Constant ITEM Purchasing Power Accounting which rejects the stable measuring unit assumption maintains the real value of constant real value non-monetary items over time in low inflationary economies.

The IASB´s Framework:

Par 104 (a):

"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

INFLATION destroys value in monetary items with and without an accounting model.

Inflation or hyperinflation can not destroy the real value of constant real value non-monetary items never or not fully updated over time. Put in another way: inflation and hyperinflation do not destroy the real value of non-monetary items which do not hold their value in terms of purchasing power.

Real value is only destroyed in constant items never or not fully updated over time when accountants freely choose to implement the stable measuring unit assumption instead of units of constant purchasing power as they can do in terms of IFRSs.

SA Chartered Accountants unknowingly destroy real value on a massive scale in the SA real economy when they choose – without anyone forcing them to make that choice - to measure financial capital maintenance in nominal monetary units in terms of Paragraph 104 (a) of the IASB´s Framework.

CAs freely choose the Historical Cost Accounting model under which they implement the stable measuring unit assumption. In so doing, they unintentionally destroy about R200 billion in the real value of constant items never or not fully updated in the real economy each and every year.

Only when accountants choose to implement the stable measuring unit assumption is value destroyed in constant items never or not fully updated. Both the Historical and the Current Cost Accounting models destroy value in an inflationary economy because accountants choose to implemnt the stable measuring unit assumption in the valuation and accounting of constant real value non-monetary items.

When CA´s choose to measure financial capital maintenance in units of constant purchasing power they will stop destroying about R200 billion in real value annually in the real economy.

Inflation-adjusting accounts in a low inflation environment is part of International Financial Reporting See the Framework (1989), par 104 (a). Salaries, wages, rents, interest, pensions, utilities, etc are inflation-adjusted in most economies.
When CAs choose to measure financial capital maintenance in units of constant purchasing power they will reject the stable measuring unit assumption in terms of IFRSs.
Simply choosing to measure financial capital maintenance in units of constant purchasing power, as per Par 104 (a), SA accountants will stop unknowingly destroying about R200 billion in real value in the SA real economy each and every year, they will follow IFRSs, they will reject the stable measuring unit assumption and they will inflation-adjust all constant items in the SA economy.

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