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Tuesday, 13 September 2011

Books to be balanced in real terms

Books to be balanced in real terms

 Constant items would always and everywhere be measured in units of constant purchasing power in terms of a Daily Consumer Price Index or monetized daily indexed unit of account under Constant Item Purchasing Power Accounting; i.e., implementing financial capital maintenance in units of constant purchasing power during inflation and deflation. This would eliminate the total cost of the stable measuring unit assumption (currently hundreds of billions of US Dollars per annum) from the constant item economy only in the unlikely case of complete coordination right from the start of changing over to financial capital maintenance in units of constant purchasing power.

Constant items within an entity with no third parties involved would always and everywhere be measured in units of constant purchasing power. This would include all items in shareholders´ equity, provisions, all items in the income statement, accounts payable, all other non–monetary payables, etc.

A new accounting item, net constant item loss or gain would be calculated and accounted where trade debtors and other third party entities due to pay other non–monetary receivables initially do not agree to measurement in units of constant purchasing power in terms of a Daily Consumer Price Index or monetized daily indexed unit of account. The real value loss is not a net monetary loss because it is not caused by inflation in the real value of a monetary item, but, by the application of the stable measuring unit assumption causing a loss in the real value of a constant real value non-monetary item. The calculation and accounting of the net constant item loss or gain is required because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power: the books would – for the first time – be balanced in real terms.

Nicolaas Smith

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