Monday, 28 February 2011

Inflation-adjusted accounts are a blessing during low inflation - Part 1

Inflation-adjusted income statement constant real value non-monetary items, for example, salaries, wages, rentals, etc. are – right this very moment – a blessing to users all around the world because they maintain the constant real non-monetary value or constant real non-monetary purchasing power of salaries, wages, rentals, etc during low inflation as long as the inflation-adjustment is at least equal to inflation over the period in question. Millions of workers, their trade unions, governments, accountants and people in general would agree that the practice of inflation-adjusting accounts in a low inflation environment is a blessing to users in the world economy. It is one of the basic pillars of a stable economy as has been amply proven by Brazilian accountants during the 30 years of very high and hyperinflation from 1964 to 1994 when they maintained their internal demand in the country relatively stable by daily inflation-adjusting salaries, wages, rentals and other non-monetary items in their real economy. This was not done during Zimbabwe´s period of hyperinflation and was a major factor in the eventual hyperinflationary monetary meltdown which led to the death of the Zimbabwe Dollar on 20 th November, 2008.

Inflation-adjusted balance sheet constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, Share premiums, Capital Reserves, General Reserves, all other items in Shareholders´ Equity, trade debtors, trade creditors, taxes payable, taxes receivable, salaries payable, salaries receivable, all other non-monetary payables, all other non-monetary receivables, etc. in the world´s low inflationary economies would be a blessing to everyone when accountants simply decide to change from their current implementation of their very erosive stable measuring unit assumption – which is based on a fallacy – and financial capital maintenance in nominal monetary units per se which is impossible during inflation and deflation and another fallacy and freely choose to implement the real value maintaining financial capital maintenance in units of constant purchasing power accounting model (Constant Item Purchasing Power Accounting) as approved by the IASB in IFRS in the Framework( 1989), Par 104 (a) twenty two years ago. Accountants measuring financial capital maintenance in units of constant purchasing power (implementing CIPPA) would knowingly maintain for an unlimited period of time – all else being equal - instead of currently unknowingly, unnecessarily and unintentionally erode as they also did last year and all the years before and will do next year if they do not stop with their very erosive stable measuring unit assumption hundreds of billions of US Dollars in constant item real value annually in the world´s real economy.

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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