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Thursday, 4 February 2010

IASB clueless about destruction by stable measuring unit assumption

The International Accounting Standards Board confirms the fact that the Historical Cost paradigm is firmly in place when it states in IAS 29 Financial Reporting in Hyperinflationary Economies and in the Framework that companies´ primary financial reports are prepared in most economies based on the traditional Historical Cost Accounting model without taking changes in the general level of prices (here it is clear that the IASB blames inflation and not the stable measuring unit assumption) or specific price changes of assets into account, with the exception that investments, equipment, plant and properties can be revalued. The IASB does not mention the destruction of the real value of balance sheet constant items never maintained when accountants implement the stable measuring unit assumption during low inflationary periods because it is not generally understood: the IASB, like the US Financial Accounting Standards Board and most accountants mistakenly believe that the destruction (erosion) of companies´ capital and profits is caused by inflation.

They all support the stable measuring unit assumption (based on a fallacy) and the actual fallacy of financial capital maintenance in nominal monetary units during low inflation and deflation. The destruction of real value in constant items by implementing the stable measuring unit assumption is very well understood - and compensated for by inflation-adjusting them by applying the annual CPI - in the case of the income statement constant items salaries, wages, rentals, etc.

Neither is the real value maintaining effect on balance sheet constant items understood of freely choosing to measure financial capital maintenance in units of constant purchasing power instead of in nominal monetary units – both models being approved by the IASB in the Framework, Par 104 (a).

The International Accounting Standards Committee (the IASB predecessor body) blamed changing prices in IAS 15 Information Reflecting the Effects of Changing Prices for affecting an enterprise’s results of operation and financial position. They defined changing prices as (1) specific price changes and (2) changes in the general price level which changed the general purchasing power of money, i.e. they blamed specific price changes and inflation for affecting companies´ results and financial position. Whereas the FASB mentioned the stable measuring unit assumption in FAS 33 and FAS 89, the IASB never mentioned it in either IAS 6 Accounting Response to Changing Prices or IAS 15. IAS 15 completely superseded IAS 6. IAS 15 was eventually withdrawn.

Because most accountants and users of financial statements have been inculcated with a model of financial reporting that assumes stability of the monetary unit, accepting a change of this consequence would take a lengthy period of time under the best of circumstances. FAS 89, Par 4, 1986

The integrity of the historical cost/nominal dollar system relies on a stable monetary system. FAS 33, 1979.
Copyright © 2010 Nicolaas J Smith