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Thursday, 4 March 2010

Constant items

As a result of a lack of understanding the destructive nature of their implementation of the very destructive stable measuring unit assumption, 1970-style CPP inflation accounting was not an accounting system implemented by accountants to correct or eliminate the destruction of the real value of constant items by the use of the stable measuring unit assumption, but, a failed attempt to simply make financial reports more understandable and more comparable with previous year statements during periods of high inflation by inflation-adjusting all non-monetary items equally in terms of the CPI.

Accountants simply do not understand that they unknowingly destroy real value on a massive scale in all constant items never maintained when they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation. In many cases they do not even know that they make that choice. Neither do they understand that they will stop that destruction by freely choosing to measure financial capital maintenance in units of constant purchasing power, as approved in the IASB Framework, Par 104 (a) in 1989.

Prof Geoffrey Whittington in his definitive work on inflation accounting in the beginning of the 1980´s, Inflation Accounting - An Introduction to the Debate, published in 1983, clearly indicated that with 1970-style CPP inflation accounting all non-monetary accounts (with no distinction being made between variable and constant real value non-monetary item accounts) were updated by means of the CPI.

"Constant Purchasing Power Accounting (CPP) is a consistent method of indexing accounts by means of a general index which reflects changes in the purchasing power of money. It therefore attempts to deal with the inflation problem in the sense in which this is popularly understood, as a decline in the value of the currency. It attempts to deal with this problem by converting all of the currency unit measurement in accounts into units at a common date by means of the index."

This eventually led to the failure of 1970-style CPP accounting as an inflation accounting model.

The destruction of real value in the real economy by SA accountants will stop when they stop their assumption that the rand is perfectly stable only for the purpose of accounting constant items never maintained.
Copyright © 2010 Nicolaas J Smith