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Tuesday, 29 December 2009

IFRS statement mainly a destructive fallacy

SA accountants doing their companies’ accounting in compliance with IFRS are required, in terms of the IASB´s Framework, Par 104 (a), to choose between measuring financial capital maintenance in nominal monetary units or in units of constant purchasing power.

The IFRS statement “Financial capital maintenance can be measured … in nominal monetary units” in the Framework, Par 104 (a) is mainly a destructive fallacy.

It would only be true – per se – in nominal and real value terms in one single theoretical instance: It would only be possible to maintain the nominal and real value of financial capital constant in nominal monetary units per se at sustainable zero inflation – an economic environment that has never been achieved in all of monetary history and is not very likely to be achieved any time soon or even in the distant future.

The IASB statement is not a fallacy at zero inflation. It is, however, a purely theoretical statement at zero inflation: We have never had, we do not have and we most probably will never have sustainable zero inflation anywhere in the monetary economy.

Kindest regards,

Nicolaas Smith