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Tuesday, 14 October 2008

One small step for accountants; one giant leap for mankind.


Collateralised Debt Obligations (CDOs) are variable real value non-monetary items valued at fair value. They are neither constant real value non-monetary items nor monetary items.

Real Value Accounting deals with the inflation-adjustment of historical cost non-monetary items or constant items; for example, issued share capital, retained earnings, all other items in shareholder´s equity, trade debtors, trade creditors, deferred tax assets, deferred tax liabities, etc.

Under Real Value Accounting banks´ issued share capital, retained earnings, capital reserves (excluding the revaluation reserve under current Historical Cost accounting - non-existent under Real Value Accounting) and all items in shareholder´s equity would be updated from the date each item was contributed at the rate of inflation over the time period to today´s date.

Banks would thus maintain the real value of their equity instead of having the real value of their capital destroyed at the rate of inflation under the current Historical Cost paradigm which is an important part of the current problem: see governments recapitalizing banks.

Also see the blatantly small values for historical cost share capital in older multinationals´ balance sheets compared to the large more recently contributed retained earnings balances.

The real values of the banks´ issued share capital values as well as their retained earnings balances were always in the past destroyed during inflationary periods because accountants applied the stable measuring unit assumption as they do today and will in the future be destroyed at the rate of inflation as long as accountants carry on applying the stable measuring unit assumption.

This destruction will stop under Real Value Accounting: that is, when accountants choose to maintain capital in units of constant purchasing power in terms of the IASB´s Framework Par. 104 (a):

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

One small step for accountants; one giant leap for mankind.