Pages

Saturday, 22 March 2008

Historical Cost Accounting destroying hundreds of billions of Dollars of real value in the world economy year in year out.

The application of the historical cost principle by the accounting profession results in the destruction of "hundreds of billions of dollars in retained income real value year in year out" [5] - as well as in all other constant real value non-monetary items never or not fully updated throughout the world economy.

This can be stopped by the revoking of the stable measuring unit assumption. This has been authorised by the International Accounting Standards Board in International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies.

"Par 8 The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the balance sheet date.
Par 11 Balance sheet amounts not already expressed in terms of the measuring unit current at the balance sheet date are restated by applying a general price index.
Income statement
Par 26 This Standard requires that all items in the income statement are expressed in terms of the measuring unit current at the balance sheet date. Therefore all amounts need to be restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded in the financial statements."
Paragraph 40 can be taken as revoking the stable measuring unit assumption in low inflationary economies as the word inflation is used instead of hyperinflation.

"Par 40 The disclosures required by this Standard are needed to make clear the basis of dealing with the effects of inflation in the financial statements."

Neither US GAAP nor the IASB allows the updating of constant real value non-monetary items, for example retained income, in low inflationary economies thus contributing to the destruction of "hundreds of billions of Dollars in real value in all companies´ Retained Income balances all around the world" [6] as well as in all constant real value non-monetary items never or not fully updated.

From: Wikipedia: Historical Cost: http://en.wikipedia.org/wiki/Historical_cost