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Tuesday, 26 January 2010

SA accountants clueless about destruction by stable measuring unit assumption

The real values of many reported constant real value non-monetary items, for example, reported retained earnings never maintained, in the SA economy are currently not being maintained stable during low inflation. To the contrary: they are unnecessarily, unknowingly and unintentionally being destroyed at a rate equal to the annual rate of inflation by SA accountants implementing their very destructive stable measuring unit assumption when they measure financial capital maintenance in nominal monetary units – the accounting fallacy as authorized by the IASB in the Framework, Par 104 (a) in 1989 - for an unlimited period of time during indefinite inflation.

Many accountants see themselves as simply providing historic economic information. They do not understand the fact that continuously maintaining the constant purchasing power of capital which requires continuously maintaining the real values of all constant items stable during inflation and deflation is a basic objective of accounting. This is the result of:

(1) the three popular accounting fallacies; namely,

(a) the stable measuring unit assumption (authorized by the IASB) ,
(b) financial capital maintenance in nominal monetary units (authorized by the IASB) and
(c) the erosion of companies´ profits and capital by inflation (fully accepted by the IASB, the FASB);

(2) the fact that most accountants and accounting authorities do not understand the real value destroying effect of the very destructive stable measuring unit assumption on reported constant items never maintained during low inflationary periods when the stable measuring unit assumption/financial capital maintenance in nominal monetary units is applied for an unlimited period of time during indefinite inflation and

(3) the fact that most accountants and accounting authorities do not understand the real value maintaining effect on constant items of continuously measuring financial capital maintenance in units of constant purchasing power during low inflation as approved by the IASB in the Framework, Par 104 (a).

If they had understood the above, they would have stopped the stable measuring unit assumption / financial capital maintenance in nominal monetary units by now.


This is what the International Accounting Standards Committee Board authorized 21 years ago in the Framework for the Preparation and Presentation of Financial Statements, Par 104 (a):

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

It was adopted by the IASB in 2001.

Amazingly the very popular accounting fallacy of financial capital maintenance in nominal monetary units and its perfect antidote are both authorized in the exact same IASB statement in 1989.

There are no specific IFRS relating to the concepts of capital or the concepts of capital maintenance. The Framework thus applies.

“In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8."
IAS Plus, Deloitte December 2009

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