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Wednesday, 8 July 2009

Accounting a property value at historical cost does not destroy its real value.

The second economic item is a variable item.

Variable items are real value non-monetary items with variable real values over time.

Examples are property, plant equipment, inventory, quoted and unquoted shares, finished goods, foreign exchange, etc.

SA accountants value variable items correctly in term of SA Gaap or IFRS at, for example, market value, present value, fair value, recoverable value, net realizable value, etc.

SA accountants do not unknowingly destroy the real value of variable items because they value them at Historical Cost, for example.

When accountants value properties at historical cost, i.e. they show them at their original nominal values in the financial statements, they do not unkowingly destroy their real values.

When these properties are eventually sold, they will be priced at the market values at that time. No real value is unknowingly being destroyed like that.

Properties can be periodically revalued under Historical Cost Accounting rules and the increased values are debited to the property accounts and credited to the Revaluation Reserve account in the balance sheet.

Properties "valued" or stated at historical cost normally represent unknown hidden holding gains that are only realised when these properties are eventually sold in an open market.

To be continued .....

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