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Monday, 10 January 2011

Two systemic processes of real value erosion

There was only one systemic process of real value erosion operating only in the monetary economy before the invention of double entry accounting. The economic process of inflation only eroded the real value of depreciating money and other depreciating monetary items equally throughout only the monetary economy at that time as it does today in economies subject to inflation and hyperinflation.

There was no simultaneous second systemic real value erosion process, as we experience it today, whereby the Historical Cost Accounting model unknowingly, unnecessarily and unintentionally erodes significant amounts of real value of existing constant real value non-monetary items never or not fully maintained, e.g. Retained Profits, only in the constant item economy because accountants freely choose to implement their very erosive stable measuring unit assumption during inflation. The reason was that the traditional IFRS authorized Historical Cost Accounting model which includes the very erosive stable measuring unit assumption (based on a fallacy) and which is founded on financial capital maintenance in nominal monetary units (another very popular accounting fallacy) was not yet invented at that time.

Nicolaas Smith

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Fin24 22-3-11