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Monday, 14 September 2009

It is not inflation doing the destroying

It was stated in 2008 that there is no doubt that inflation destroys the real value of monetary as well as non-monetary items that do not maintain their real value in terms of purchasing power. Reference: This blog.

I agreed at the time. Subsequently it became very clear to me that inflation has no effect on the real value of non-monetary items over time. The understanding of the real value destroying effect of the stable measuring unit assumption on constant items never or not fully updated is a work in progress. Not inflation, per se, but SA accountants´ implementation of the very destructive stable measuring unit assumption during low inflation as it forms part of the real value destroying HCA model, destroys the real value of constant real value non-monetary items never or not fully updated over time.

There is no substance in the statement that inflation destroys the real value of non-monetary items which do not hold their real value over time. Inflation has no effect on the real value on non-monetary items over time.

“Purchasing power of non monetary items does not change in spite of variation in national currency value.”

Prof. Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
SA accountants unknowingly destroy or maintain (please note: not create) the real value of constant real value non-monetary items (please note: not variable real value non-monetary items) depending on whether they choose the IASB approved real value destroying traditional HCA model under which they implement the very destructive stable measuring unit assumption during non-hyperinflationary periods for an unlimited period of time during indefinite inflation or the IASB approved real value maintaining Constant ITEM Purchasing Power Accounting model under which they select to reject the stable measuring unit assumption at all levels of inflation and deflation for an unlimited period of time.

Inflation is a uniquely monetary phenomenon and can only destroy the real value of money and other monetary items over time. It has no effect on the real value of non-monetary items. See GUCENME and ARSOY above. SA accountants unknowingly, unintentionally and unwittingly do the destroying of the real value of constant items, e.g. Retained Earnings, Issued Share capital, other items in shareholder’s equity, salaries, wages, rentals, etc never or not fully updated or inflation-adjusted over time when they choose the real value destroying traditional HCA model during inflationary periods when they maintain the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.

This includes the unknowing destruction by SA accountants of the real value of the Issued Share capital of SA companies and banks which do not have any or sufficient property or other variable real value non-monetary items to revalue to an amount at least equal to the updated original real value of all contributions to Shareholder’s Equity. SA accountants unknowingly destroy the real value of the Retained Earnings of all SA companies and banks and the real value of the Issued Share capital of SA companies with no variable real value non-monetary items to revalue continuously at a rate equal to the inflation rate while they continue implementing the very destructive stable measuring unit assumption during non-hyperinflationary conditions when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation.

Summary: Inflation only destroys the real value of money. It has no effect on non-monetary items. Not inflation, but, SA accountants implementing the very destructive stable measuring unit assumption are unknowingly destroying the real value of constant items never updated in the SA real economy on a massive scale. The destruction stops when they value constant items in units of constant purchasing power.

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