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Thursday, 16 February 2012

Measurement myths in IFRS

Measurement myths in IFRS

1.       Financial capital maintenance can be measured in nominal monetary units.

This was originally authorized in the Framework (1989), Par. 104 (a) [now Conceptual Framework (2010), Par. 4.59 (a)] which states:

 ‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

It is impossible to maintain the real value of capital in nominal monetary units during low inflation, high inflation or hyperinflation per se. It is only possible in the single case where an entity always invests 100 per cent of the updated real value of all contributions to shareholders´ equity in revaluable fixed assets (revalued or not) with an equivalent updated fair value which is most probably only the case in hotel, hospital and other property-intensive entities.

In the vast majority of cases the stable measuring unit assumption (not inflation - as generally accepted) erodes the real value of that portion of shareholders´ equity (e.g. total retained earnings) never maintained constant under Historical Cost Accounting with sufficient revaluable fixed assets (revalued or not) currently amounting to hundreds of billions of USD of constant item real value eroded in the world´s capital investment base each and every year for as long as HCA is implemented as the global, traditional accounting model. (See the ongoing financial crisis).

2.       Companies´ invested capital and retained earnings are eroded by inflation.

Inflation has no effect on the real value of non-monetary items.

‘Purchasing power of non monetary items does not change in spite of variation in national currency value.’
             Gucenme, U. and Arsoy, A. P. (2005). Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 – 2005. Special Issue Accounting for the Global and the Local: The Case of Turkey. Critical Perspectives on Accounting, Volume 20, Issue 5, July 2009, p. 568–590.
The erosion of companies´ capital and retained profits is caused by the implementation of the stable measuring unit assumption as part of the traditional HCA model during inflation.

3.       Changes in the purchasing power of money are not sufficiently important to require Capital Maintenance in Units of Constant Purchasing Power.

      This is the stable measuring unit assumption as authorized in IFRS as part of the authorization of the Historical Cost Accounting model in the original Framework (1989), Par. 104 (a).

Changes in the purchasing power of unstable money logically require financial Capital Maintenance in Units of Constant Purchasing Power during low and high inflation, hyperinflation and deflation.
Nicolaas Smith

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