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Thursday, 17 February 2011

Capital deficiency during sub-prime crisis

The world economy would be more robust today if only continuous financial capital maintenance in units of constant purchasing power had been authorized in the Framework (1989), Par 104 (a). The implementation of the Constant Item Purchasing Power Accounting model would today maintain the real values of all companies´ and banks´ Issued Share capital, Retained Earnings and all other items in Shareholders´ Equity since then in companies and banks that at least break even, instead of unknowingly, unintentionally and unnecessarily eroding their real values never maintained with traditional Historical Cost Accounting at a rate equal to the rate of inflation year in year out during low inflationary periods when accountants implement the very erosive stable measuring unit assumption which is based on the fallacy that the erosion of the real value of the functional currency (money) during low inflation is not sufficiently important for them to implement continuous financial capital maintenance in units of constant purchasing power. Accountants unknowingly do this because they are authorized to choose to measure financial capital maintenance in nominal monetary units – a complete fallacy also approved by the IASB – implementing the traditional HCA model authorized by the IASB in the exact same Framework, Par 104 (a) 22 years ago.

Had only real value maintaining financial capital maintenance in units of constant purchasing power (CIPPA) been approved in 1989 it would have made a significant difference over this period as verified by the huge capital injections required as a result of the capital deficiency problems caused by the continuous unknowing, unnecessary and unintentional erosion by accountants´ implementation of the very erosive stable measuring unit assumption in the valuation of banks´ and companies´ Shareholders´ Equity values never maintained constant under the HCA model as evidenced during the recent sub-prime financial crisis.

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