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Saturday, 12 March 2011

Reasons why accountants do not yet select CIPPA

Accountants do not yet select financial capital maintenance in units of constant purchasing power and accounting professors and lecturers do not teach accounting students to select the real value maintaining IFRS-approved alternative to the 3000 year old very erosive generally accepted traditional Historical Cost Accounting model because

(1) they still automatically assume that any price-level accounting model always refers to the CPP inflation accounting model to be used only during high and hyperinflation,

(2) they do not yet realize that the implementation of the traditional Historical Cost Accounting model unknowingly, unintentionally and unnecessarily erodes real value on a significant scale (hundreds of billions of US Dollars per annum) in the world´s real economy when financial capital maintenance in nominal monetary units is implemented, and

(3) they do not yet realize that they can automatically stop this massive annual erosion of existing constant real value in existing constant real value non-monetary items never maintained constant by simply selecting the alternative approved by the IASB predecessor body, the IASC Board, 22 years ago, namely, the measurement of financial capital maintenance in units of constant purchasing power during low inflation and deflation as approved in the Framework, Par 104 (a) which is compliant with IFRS and was adopted by the IASB in 2001.

(4) they still believe and implement the IASB-authorized fallacy that "financial capital maintenance can be measured in nominal monetary units."

(5) they still believe and implement the stable measuring unit assumption that is based on the fallacy that changes in the real value of the monetary unit of account is not sufficiently important to require financial capital maintenance in units of constant purchasing power during low inflation and deflation,

(6) they still believe the fallacy that "the erosion of business profits and invested capital is caused by inflation" as stated by the FASB in FAS 89

(7) they still believe that since the central bank and monetary authorities control the rate of inflation, there is thus nothing they can do about this generally acknowledged erosion of companies´ and banks´ equity (especially evident during the sub-prime financial crisis).

If they had realized the enormous amount of real value eroded each and every year by the implementation of financial capital maintenance in nominal monetary units (the traditional Historical Cost Accounting model) during low inflation, they would have stopped the stable measuring unit by.

Prof Geoffrey Whittington is one of the world’s leading experts on inflation accounting and International Financial Reporting now Standards. It is clear from his benchmark book, Inflation Accounting (1983), that CPP inflation accounting, as implemented in the period leading up to 1983, was used by accountants during high and hyperinflation to index or inflation-adjust all non-monetary accounts by means of a general index - normally the CPI which reflected changes in the purchasing power of the functional currency.

Whittington’s book was published in 1983. The IASB´s Framework which authorized measuring financial capital maintenance in units of constant purchasing power during low inflation and deflation was approved in 1989.

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