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Wednesday, 26 August 2009

Money cannot be valued in units of constant purchasing power

Units of constant purchasing power

There are three basic economic items in the economy:

1. Monetary items

2. Variable items

3. Constant items

We will analyse the possibility and the effect of valuing items in units of constant purchasing power in each case.

Monetary items

Inflation only destroys the real value of money and other monetary items over time.

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

Money and other monetary items´ real values are destroyed at the rate of inflation over time in a low inflationary and in a hyperinflationary environment.

SA accountants VALUE money and other monetary items in nominal monetary units during the current financial period since that is the only way in which they can be valued under any accounting model.

It is impossible to update, inflation-adjust or restate money and other monetary items during the current financial period during low inflation, hyperinflation or deflation.

It is impossible to inflation-adjust money and other monetary items during the current financial period by means of units of constant purchasing power during low inflation, hyperinflation or deflation.

SA accountants can only VALUE monetary items in nominal monetary units, eg. bank account balances, capital amounts of bank loans, capital amounts of bank savings, car loans, housing loans, consumer loans, student loans, all other monetary loans, etc.

Monetary items cannot be valued in units of constant purchasing power during the current financial period under any accounting model.

Kindest regards,

Nicolaas Smith