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Thursday, 20 August 2009

The second systemic economy-wide process of real value destruction

There was only one systemic economy-wide process of real value destruction operating in the economy before double entry accounting was invented.

The economic process of inflation destroyed the real value of money and other monetary items equally throughout the monetary economy at that time as it does today in economies subject to inflation.

There was no simultaneous second systemic economy-wide process as we experience today whereby accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated during indefinite inflation.

This includes the unknowing destruction by accountants of the real value of Shareholders´ Equity in companies without sufficient variable items that are or can be revalued via the Revaluation Reserve or without sufficient hidden and unrecognised holding gains to compensate for the real value shortfall in Shareholders´ Equity as we experience today because now accountants choose to maintain the very destructive stable measuring unit assumption for an unlimited period of time while they assume indefinite inflation – all else being equal.

The reason was that the real value destroying traditional Historical Cost Accounting model was not yet invented at that time.

We will go back to only one systemic economy-wide process of real value destruction operating in the economy, namely the economic process of inflation destroying the real value of money and other monetary items, when SA accountants reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the International Accounting Standards Board in the Framework for the Preparation and Presentation of Financial Statements, Par. 104 (a) in 1989 which states:

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

All constant items´ real values will be maintained for an indefinite period of time - ceteris paribus.

Kindest regards,

Nicolaas Smith