Saturday, 27 June 2009

The confusion about inflation accounting

Most accountants and accounting authorities completely ignore the real value maintaining Constant Item Purchasing Power basic accounting model as approved by the IASB in the Framework, Par. 104 (a) as an alternative for the real value destroying traditional HC basic accounting model.

They do not appreciate, firstly, that SA accountants unknowingly destroy real value on a massive scale in the SA real economy when they implement the real value destroying stable measuring unit assumption for an unlimited period of time during indefinite inflation in the case of balance sheet constant items when they do not have sufficient revaluable fixed assets or holding gains to compensate for a real value shortfall in Shareholders´ Equity.

Secondly, they mistakenly assume that any price-level accounting always only relates to inflation accounting during high and hyperinflation despite the fact that the IASB approved a constant item price-level basic accounting model twenty years ago.

Thirdly, they do not appreciate the real value maintaining effect on balance sheet constant items of choosing to measure financial capital maintenance in constant purchasing power units as approved by the IASB in the Framework, Par. 104 (a).

Financial capital maintenance in units of constant purchasing power is generally not implemented in non-hyperinflationary economies.

Measurement in units of constant purchasing power is, however, comprehensively and extensively used for the valuation of income statement constant items, e.g., salaries, wages, rentals, etc in most economies at all levels of inflation, including in South Africa.

© 2005-2010 by Nicolaas J Smith. All rights reserved
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