Pages

Wednesday, 12 May 2010

Stealth enemy camouflaged by IFRS authorization and general acceptance

Constant items never maintained are treated like monetary items when their nominal values are never updated as a result of the implementation of the stable measuring unit assumption as part of the traditional Historical cost accounting model during low inflation and deflation.
“The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”

Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.
The second enemy is SA accountants´ stable measuring unit assumption. Financial capital maintenance in units of constant purchasing power as authorized in the IASB´s Framework, Par 104 (a) in 1989 is the enemy of the stable measuring unit assumption during low inflation and deflation. In principle, SA accountants assume the unit of measure, the Rand, is perfectly stable during low inflation and deflation; that is, they assume that changes in its general purchasing power are not sufficiently important to require the inflation-adjustment of the nominal values of all constant items in the SA real economy in order to maintain their real values constant. In so doing, they unknowingly, unintentionally and completely unnecessarily destroy the real values of constant items never maintained during low inflation to the amount of about R167 billion in the SA constant item economy each and every year while they implement the HCA model and inflation remains at 5%.

SA accountants´ stable measuring unit assumption is a stealth enemy camouflaged by GAAP, IASB authorization which makes it IFRS compliant and the generally accepted accounting fallacy that the erosion (destruction) of companies´ capital and profits is caused by inflation: hardly anyone knows or understands that when SA accountants implement their very destructive stable measuring unit assumption they are unknowingly, unintentionally and unnecessarily destroying the real values of constant items never maintained at a rate equal to the rate of inflation under HCA during low inflation. Some people who already know about it claim that it makes no difference to the economy. SA accountants unknowingly destroying about R167 billion per annum in the SA real economy do make a difference. They do not understand that SA accountants unknowingly actually destroy existing real value on a significant scale in the SA constant item economy year in year out.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith