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Wednesday, 16 September 2009

SA accountants abdicate one of their main functions

The function of financial accounting is not just “to convey value information about the economic resources of a business” as Harvey Kapnick stated in the 1976 Sax Lecture.

http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm

It is an essential function of accounting to maintain the real value of constant items during inflation and deflation.

This can only be achieved by valuing constant items in units of constant purchasing power, i.e., by inflation-adjusting all constant items by means of the CPI during low inflation as approved by the IASB in the Framework, Par. 104 (a) twenty years ago and by implementing IAS 29 during hyperinflation.

Accountants have abdicated the essential financial capital maintenance function of accounting to their fiction that money is stable in real value during inflation and deflation. In so doing, they have in the past unknowingly destroyed and currently unknowingly destroy real value on a massive scale in the real economy when they implement the very destructive stable measuring unit assumption as part of the IASB approved real value destroying traditional Historical Cost Accounting model during non-hyperinflationary periods when they implement the stable measuring unit assumption for an unlimited period of time during indefinite inflation.

Accountants and accounting authorities do not appreciate that they can change that by simply rejecting the stable measuring unit assumption when they choose the IFRS compliant Constant ITEM Purchasing Power Accounting model and measure financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.

Kindest regards,

Nicolaas Smith

Summary: It is obviously one of the main functions of accounting to maintain the real value of constant items during inflation and deflation. Accountants unknowingly destroy constant items´ real values at the rate of inflation when they do not inflation-adjust them.