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Wednesday 16 April 2014

HCA is like shooting yourself in both feet

HCA is like shooting yourself in both feet

Under Historical Cost Accounting you apply the stable measuring unit assumption. That´s a double whammy to the maintenance of real value: (a) you do not maintain the real value of monetary items and (b) you do not maintain the real value of constant real value non-monetary items during inflation and deflation as follows:

1. With monetary items you assume money is perfectly stable and you DO NOT inflation-index all monetary items daily 

and

2. With constant real value non-monetary items you apply the stable measuring unit assumption and you DO NOT measure constant real value non-monetary items in units of constant purchasing power in terms of all changes in the general price level, that is: at least daily. 

There´s you double whammy to real value under HCA.

Under Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI you would:

A Maintain the real value of all monetary items by inflation-indexing them daily 

and 

B Maintain the constant purchasing power (real value) of all constant real value non-monetary items constant by measuring them in units of constant purchasing power in terms of the Daily CPI. 

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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