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Friday, 6 August 2010

It´s the stable measuring unit assumption, stupid!

We have seen so far that accountants implement the Historical Cost Accounting model because it is the traditional model for the last 3000 years – or more.

Historical Cost Accounting is based on the fallacy of financial capital maintenance in nominal monetary units: it is impossible to maintain the real value of financial capital constant in nominal monetary units per se during inflation and deflation.

They accept and admit that companies´ capital and retained profits are constantly being eroded (which is the same as destroyed). They all believe and are taught that this erosion is caused by inflation. They are told as much by the FASB and the IASB.

However:

It´s the stable measuring unit assumption, stupid! as Bill Clinton would have said.

Accountants unknowingly, unnecessarily and unintentionally destroy the real value of that portion of companies´ equity never maintained constant by sufficient revaluable fixed assets under HCA during inflation because they implement the stable measuring unit assumption.

They would stop this destruction when they freely change over to financial capital maintenance in units of constant purchasing power as they have been authorized in IFRS in the Framework, Par 104 (a) in 1989. It states:

“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”

When SA accountants do that they will knowingly maintain about R167 billion per annum in the SA real economy for as long as annual inflation stays at about 5%.
Copyright © 2010 Nicolaas J Smith