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Wednesday, 11 August 2010

PricewaterhouseCoopers, the IASB and the FASB bamboozled by accountants´ notorious stable measuring unit assumption

Most accountants and economists will confirm that real value is being destroyed in banks´ and companies´ capital over time. The banking crisis – remember?

Most of them blame inflation – except two Turkish academics, the head of the Turkish Accounting Standards Department, the late Milton Friedman – and I.

It is not inflation doing the destroying as someone stated. It is them assuming there is no inflation when they never update companies´ and banks´ capital when they implement their very destructive stable measuring unit assumption.

Most of them believe the FASB when it tells them that the erosion of business profits and invested capital is caused by inflation.

They are all dead wrong: Friedman was right: inflation is always and everywhere a monetary phenomenon: inflation per se has no effect on any non-monetary item ever – as confirmed by the two Turkish academics.

What will happen when we change the global 3000 year old Historical Cost paradigm to the IFRS approved units of constant purchasing power regime?

First of all: accountants´ brains get filled by one word when they read or hear the term units of constant purchasing power:

INFLATION-ACCOUNTING!!!

Accountants forget that most of them inflation-adjust salaries, wages, rentals, etc annually.

However, IFRS authorized financial capital maintenance in units of constant purchasing power at ALL levels of inflation and deflation in the Framework, Par 104 (a) twenty one years ago.

Inflation-adjusting ONLY constant real value non-monetary items during low inflation (not all non-monetary items as required by inflation-accounting during hyperinflation) would mean that SA accountants would knowingly maintain about R167 billion in the constant real value of existing constant items currently unknowingly and unnecessarily being destroyed by them PER ANNUM in the SA real economy in, for example, that portion of companies´ capital not backed by sufficient revaluable fixed assets as a result of them implementing the stable measuring unit assumption.

The magic of accounting is that it is double entry: for every debit there is an equivalent credit.

So, if companies´ equity is to be inflation-adjusted (an increase in nominal credit values to maintain real values constant during low inflation) where does the opposite increase in nominal debit values come from?

For example from trade debtors: currently trade debtors are incorrectly classified by the IASB, the FASB, PricewaterhouseCoopers, etc, as monetary items. They are constant real value non-monetary items.
Copyright © 2010 Nicolaas J Smith