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Monday, 29 June 2009

Inflation has no effect on the real value of non-monetary items

Inflation, being a uniquely monetary phenomenon, can not, by definition, destroy the real value of non-monetary items. Inflation has no effect on the real value of non-monetary items.

It is SA accountants’ choice of accounting model that determines whether they carry on currently unintentionally destroying real value in constant real value non-monetary items never or not fully updated (the real value destroying traditional HCA model) when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation or maintain those values in future for an unlimited period of time (the IASB approved real value maintaining CIPPA model) – all else being equal.

It is not inflation that is doing the destroying in the real value of constant items. It is our accountants unknowingly doing the destroying when they implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.

This is the case with all constant items never or not fully inflation-adjusted including the unintentional destruction by SA accountants of the real value of Shareholders´ Equity in SA banks and companies which do not have sufficient variable items that can be or are revalued via the Revaluation Reserve or with insufficient holding gains to compensate for the real value shortfall in Shareholders´ Equity under HCA.