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Wednesday, 15 September 2010

Basel III maintains the financial-capital-maintenance-in-nominal-monetary-units fallacy

Banking regulation is about banks having sufficient capital and maintaining that capital adequacy ratio during inflation and deflation.

However, the basic financial capital maintenance concept is a fallacy, namely, financial capital maintenance in nominal monetary units (the traditional global generally accepted Historical Cost Accounting model): it is impossible to maintain the real value of financial capital constant in nominal monetary units per se during inflation and deflation.

The IASB foresaw this 21 years ago and authorized financial capital maintenance in units of constant purchasing power during low inflation and deflation in IFRS in the Framework, Par 104 (a) in 1989 which states:

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

See Constant ITEM Purchasing Power Accounting - CIPPA (NOT Constant Purchasing Power Accounting - CPPA)

US GAAP do not provide for financial capital maintenance in units of constant purchasing power – only IFRS do.

Accountants implementing IFRS can freely change over to financial capital maintenance in units of constant purchasing power any time they wish.



Copyright © 2010 Nicolaas J Smith