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Tuesday, 24 April 2012

Value accounting

Value accounting


On the other hand, there has also been strong awareness in the accounting profession for a very long time that financial reporting is actually about value and not simply about Historical Cost.



‘...it is really values that are the basic data of accounting, and costs are important only because they are the most dependable measures of initial values of goods and services flowing into the enterprise through ordinary market transactions.’



Paton W. A., "Accounting Procedures and Private Enterprise", The Journal of Accountancy, April 1948, p.288.



It is broadly agreed that financial reporting should be value based. By value based it is  meant that variable items cannot always be valued at Historical Cost and are to be valued in terms of specific measurement bases defined in IFRS and US GAAP; for example, market value, the lower of cost and net realizable value, fair value, present value, recoverable value, etc.  



Value accounting has been defined in International Standards since 1976 via International Accounting Standards and IFRS relating to variable items. Value accounting thus clearly prevails in the valuation and accounting of variable items in terms of IFRS.



The real value of monetary items is eroded daily by inflation and increased daily by deflation while it is normally hyper-eroded daily by hyperinflation. The real value of monetary items is eroded by inflation, increased by deflation and hyper–eroded by hyperinflation. The nominal value of monetary items stays the same during the current financial period, i.e., in all active ledger accounts under any accounting model and under any economic environment, but, the real value is automatically adjusted by inflation, deflation and hyperinflation. The real value of monetary items can be halved every 24.7 hours as it happened during hyperinflation in Zimbabwe in 2008. According to Prof. Steve Hanke from John Hopkins University prices halved every 15.6 hours during hyperinflation in Hungary in 1946.  



The net monetary loss or net monetary gain in monetary items caused by inflation, deflation and hyperinflation resulting from holding net monetary item assets or net monetary item liabilities is calculated and accounted in terms of IAS 29 in hyperinflationary economies and in terms of financial capital maintenance in units of constant purchasing power (CIPPA) at all levels of inflation and deflation. They are not calculated and accounted under the traditional Historical Cost Accounting model, although it can be done according to Harvey Kapnick.

‘Computing the gains or losses from holding monetary items can be done and the information disclosed when the books are maintained on a historical–cost basis.’

Harvey Kapnick, Chairman of Arthur Anderson & Company, Value based accounting: Evolution or revolution, Saxe Lecture, 1976, Page 6.  


Nicolaas Smith

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