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Tuesday, 21 September 2010

The stable measuring unit assumption

One of the basic principles in accounting is “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 IASB manages to side-step the appropriate split between variable and constant items in IFRS with the stable measuring unit assumption which it authorized as part of HCA in the Framework, Par 104 (a). The IASB-authorized both the implementation of the stable measuring unit assumption as well as its rejection in Par 104 (a). SA accountants have to choose the one or the other. Most probably all SA accountants choose financial capital maintenance in nominal monetary units which is a complete fallacy during inflation and deflation: it is impossible to maintain the real value of financial capital constant during inflation and deflation. This means they implement the stable measuring unit assumption during non-hyperinflationary periods.
Copyright © 2010 Nicolaas J Smith