Saturday, 15 June 2013

IFRS are based on a fallacy

Maintaining the constant purchasing power of capital in nominal monetary units is impossible during inflation (including during low inflation) when net assets include constant real value non-monetary items not measured in units of constant purchasing power and monetary items not inflation-adjusted - both in terms of an index which recognizes all changes in the general price level (normally a Daily Index).

It is generally assumed that capital maintenance means that the real value (constant purchasing power) of capital is maintained constant over time.

It is generally impossible to maintain the constant purchasing power of capital constant in nominal monetary units during inflation. The statement in IFRS in the Conceptual Framework, par. 4.59 (a) that “Financial capital maintenance can be measured in nominal monetary units” is thus a fallacy. IFRS are thus based on a fallacy which came about through social and economic practice over the last 3000 years. It may take another 200 years to undo that practice.

Nicolaas Smith

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