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Saturday, 24 July 2010

Only IFRS authorize financial capital maintenance in units of constant purchasing power.

Comment to AccountingWeb.Com blog.

Mr Pounder,

You state in your first post:

"In each of my posts, I’ll tell you something about IFRS that’s relevant, that’s reliable, and that you’re unlikely to have read or heard anywhere else."

Here is something about IFRS that is relevant, reliable and that you´re unlikely to have read or heard anywhere else:

US GAAP as stated by the FASB only recognize two forms of capital maintenance as stated in Par 45 to 48 of the FASB Concepts Statement 5, namely

(a) Financial capital maintenance in nominal monetary units applying the stable measuring unit assumption, i.e. the Historical Cost Accounting model, and

(b) Physical capital maintenance.

IFRS state in the Framework (1989), Par 104 (a)

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

IFRS thus recognize three concepts of capital maintenance during low inflation and deflation:

1. Physical capital maintenance
2. Financial capital maintenance in nominal monetary units (HCA)
3. Financial capital maintenance in units of constant purchasing power (Constant Item Purchasing Power Accounting)

Financial capital maintenance in nominal monetary units (as per US GAAP, for example) is a fallacy: it is impossible to maintain the real value of financial capital constant in nominal monetary units per se during inflation and deflation. Implementing traditional HCA (as all US companies do) results in the destruction of hundreds of billions of Dollars PER ANNUM in the real value of constant real value non-monetary items (e.g. shareholders´ equity) never maintain constant as a result of insufficient revaluable fixed assets (revalued or not) under the HCA model.

Financial capital maintenance as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago is the only way to stop this unknowing, unnecessary and unintentional destruction by US accountants forever.

US GAAP do not allow financial capital maintenance in units of constant purchasing power during low inflation and deflation.

Do you think the FASB (US companies) should adopt financial capital maintenance in units of constant purchasing power?

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith