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Monday, 30 May 2011

HCA abdicates a fundamental objective of financial reporting

HCA abdicates a fundamental objective of financial reporting


A fundamental objective of general purpose financial reporting is not just “to convey value information about the economic resources of a business” as Harvey Kapnick stated in the 1976 Sax Lecture.

http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm

The objectives of general purpose financial reporting are:

1) Automatic maintenance of the constant purchasing power of capital in all entities that at least break even - ceteris paribus.


2) Provision of continuously updated decision–useful financial information about the reporting entity to capital providers and other users.

Historical Cost Accounting abdicates a fundamental objective of general purpose financial reporting to the fiction that money is stable in real value during inflation and deflation. Double-entry accounting (not HCA) makes it possible to automatically maintain the existing constant real non-monetary value of capital constant forever in all entities that at least break even – ceteris paribus – during inflation and deflation whether they own any fixed assets or not. Automatic constant real value financial capital maintenance is, however, only possible with financial capital maintenance in units of constant purchasing power (Constant Item Purchasing Power Accounting) per se during low inflation and deflation. That is to say: it is only possible with the split of non-monetary items in variable and constant items with only constant items being continuously updated (month-after-month) in terms of the CPI. Automatic constant real value capital maintenance is also possible during hyperinflation, but, only with daily valuation of all non-monetary items (variable and constant items) in terms of a daily Brazilian-style non-monetary index or hard currency daily parallel rate.

The stable measuring unit assumption (not inflation) makes it impossible to automatically maintain the constant real value of capital constant during inflation and deflation per se even when entities break even on a nominal basis. To the contrary: the stable measuring unit assumption automatically erodes the existing constant real value of all constant items never maintained constant during inflation. This amounts to hundreds of billions of US Dollars unknowingly, unintentionally and unnecessarily eroded in the world´s constant item economy year after year. CIPPA automatically stops this erosion forever in all entities that break even during inflation and deflation.


Nicolaas Smith

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