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Friday, 14 August 2009

Constant ITEM Purchasing Power Accounting as a financial capital maintenance concept

Constant ITEM Purchasing Power Accounting, despite being approved by the IASB in the Framework, Par. 104 (a) twenty years ago, is almost completely ignored by most accountants in non-hyperinflationary economies even though it would maintain instead of destroy the real values of not only all income statement constant items but also all balance sheet constant real value non-monetary items for an unlimited period of time.

This is because any price-level accounting is generally viewed by almost all accountants and accounting authorities, but excluding the IASB, as a 1970-style failed and discredited inflation accounting model that requires all non-monetary items - variable real value non-monetary items and constant real value non-monetary items - to be inflation-adjusted by means of the CPI.

They – including the IASB - forego the opportunity to promote the substantial real value maintaining benefits of measuring financial capital maintenance in units of constant purchasing power in companies and the economy in general.

This results in the unknowing destruction by SA accountants of billions of Rand in real value in the SA real economy – in companies´ and banks´ Retained Earnings (to name just one item unknowingly destroyed by SA accountants like this) - year in year out because they choose to measure financial capital maintenance in nominal monetary units and implement the very destructive stable measuring unit assumption as part of the real value destroying Historical Cost Accounting model in SA when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.

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