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Wednesday, 2 February 2011

Accountants do not simply report on what took place

There is no substance in the statement that financial reporting simply reports on what took place. It can be correctly stated that the above statement has no substance when we refer to the IASB-approved basic accounting option of continuous financial capital maintenance in units of constant purchasing power which requires the valuing of only constant items in units of constant purchasing power during low inflation and deflation as authorized in the Framework, Par 104 (a) in 1989 which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”


The first option in Par 104, namely, financial capital maintenance in nominal monetary units during inflation and deflation is a fallacy: it is impossible to maintain the real value of capital stable in nominal monetary units per se during inflation and deflation. Continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation is generally applicable in the economy as a result of the absence of specific IFRS as per IAS8.11. However, that is not the same as comprehensive CPI-based adjustment of accounts themselves as accountants and accounting authorities automatically assume when financial capital maintenance in units of constant purchasing power during low inflation and deflation is suggested. Only constant items (not variable items) are continuously valued in units of constant purchasing power by continuously applying the CPI on a monthly basis during low inflation and deflation to implement a constant purchasing power capital concept of invested constant purchasing power and a constant purchasing power financial capital maintenance concept with measurement in units of constant purchasing power which includes a constant purchasing power profit or loss determination concept with the continuous valuation of only constant items in units of constant purchasing power during low inflation and deflation. The IASB is dead right that financial capital maintenance can be measured in units of constant purchasing power during low inflation and deflation as authorized in the Framework (1989), Par 104 (a) twenty two years.

The real values of banks´ and companies´ existing constant real value non-monetary items never maintained, e.g. retained profits, are unnecessarily, unknowingly and unintentionally being eroded by the implementation of the traditional HCA model at a rate equal to the annual rate of inflation when companies´ boards of directors choose to apply the stable measuring unit assumption during low inflation.

It is a simple fact that continuous financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par 104 (a) in 1989, i.e. inflation-adjusting all constant items in the economy during low inflation, would remedy this unknowing, unintentional and unnecessary erosion by the application of the HCA model in companies that at least break even whether they own revaluable fixed assets or not and without extra money or retained profits to maintain the constant real value of existing constant real value equity constant

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