Thursday, 25 February 2010

HCA abdicates one of its main functions

1970-style Constant Purchasing Power (CPP) inflation accounting was a popular but failed attempt at inflation accounting at the time. It was a form of inflation accounting which tried unsuccessfully to make corporate accounts more informative when comparing current transactions with previous transactions by updating all non-monetary items (without distinguishing between variable and constant real value non-monetary items) equally by means of the Consumer Price Index during high and hyperinflation. 1970-style CPP inflation accounting was abandoned as a failed and discredited inflation accounting model for reasons explained below when general inflation decreased to low levels thereafter.

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.

The objectives of general purpose financial reporting are:

1) Automatic maintenance of the constant purchasing power of capital in all entities that at least break even - ceteris paribus.

2) Provision of continuously updated decision-useful financial information about the reporting entity to capital providers and other users.

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 monthly CPI during low inflation and deflation, namely, by measuring financial capital maintenance in units of constant purchasing power as approved by the IASB in the Framework, Par 104 (a) twenty one years ago and by valuing both variable and constant items at the daily parallel rate in terms of IAS 29 during hyperinflation.

HCA has unknowingly abdicated the essential financial capital maintenance function of accounting to the 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 (at least R200 billion per annum) in the SA real economy when they implement their very destructive stable measuring unit assumption as part of the IASB approved traditional Historical Cost Accounting model for an unlimited period of time during indefinite inflation.

Kindest regards,

Nicolaas Smith

Copyright © 2010 Nicolaas J Smith

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