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Thursday, 25 June 2009

Price-level accounting clearly does not prevail

Price-level accounting clearly does not prevail for balance sheet constant items, as Harvey Kapnick hoped for in 1976, except during rare instances of hyperinflation (e.g., Turkey’s latest period of hyperinflation) when companies are required to implement IAS 29 which is the IASB´s CPP inflation accounting model.
The implementation of IAS 29 inflation accounting by Zimbabwean listed companies as required by the Zimbabwean Stock Exchange made no difference to the Zimbabwean economy during the final stages of the hyperinflationary destruction of the Zimbabwe Dollar. Updating all non-monetary items as required by IAS 29 inflation accounting in terms of the Consumer Price Index when it is not calculated and supplied by the government and when the value of the Zimbabwe Dollar halved every 15 hours, was obviously of no use.

The IASB specifically requires financial capital maintenance in terms of units of constant purchasing power during hyperinflation, but, leaves it as an option to the disastrously destructive traditional HCA model during non-hyperinflationary periods. An option that is ignored by almost all accountants during non-hyperinflationary periods because of, firstly, the lack of appreciating the very destructive effect of the stable measuring unit assumption on the real values of balance sheet constant items during non-hyperinflationary periods; secondly, the lack of appreciating the real value maintaining effect on balance sheet constant items of choosing to measure financial capital maintenance in units of constant purchasing power during non-hyperinflationary periods; as well as, thirdly, the general assumption by most accountants that price-level accounting always refers ONLY to CPP inflation accounting when all non-monetary items (variable and constant items) are inflation adjusted by means of the CPI during high and hyperinflationary periods in terms of IAS 29 inflation accounting.

Price-level accounting does prevail in certain income statement items, e.g. salaries, wages, rentals, etc. which are inflation-adjusted by means of the CPI in most economies, including South Africa.

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