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Monday, 7 February 2011

Value accounting

There is strong awareness in the accounting profession that accounting is really about value and not simply about Historical Cost.

"...it is really values that are the basic data of accounting, and costs are important only because they are the most dependable measures of initial values of goods and services flowing into the enterprise through ordinary market transactions”

Paton W. A., "Accounting Procedures and Private Enterprise", The Journal of Accountancy, April 1948, p.288.

Most accountants agree that accounting should be value based. By value based they mean that variable real value non-monetary items can not always be valued at Historical Cost and are to be valued in terms of specific standards formulated in IFRS or GAAP at, for example, market value, net realizable value, fair value, present value or recoverable value, etc.

Value accounting has been specifically defined in International Standards since 1976 via IAS and IFRS relating to variable items. Value accounting thus prevails in the valuation and accounting of variable items in terms of IAS and IFRS.

Value accounting also prevails as far as the accounting and valuing of monetary items during the current accounting period are concerned. Monetary items are measured in nominal monetary units no matter which accounting model is used. The real values of monetary items are kept always current by inflation, deflation and hyperinflation since the nominal values of monetary items are not updated or inflation-adjusted during the current accounting period in any inflationary, deflationary or hyperinflationary economy. The real value of money and other monetary items generally changes monthly during inflation and deflation while it normally changes daily or even every 8 hours during hyperinflation. The real value of money is eroded during inflation, increased during deflation and hyper-eroded during hyperinflation. The nominal values of monetary items stay the same during the current financial period under any accounting model, but, their real values are automatically adjusted by inflation, deflation and hyperinflation. The real value of money and other monetary items can be halved every 24.7 hours as has happened recently during hyperinflation in Zimbabwe. According to Prof Steve Hanke from John Hopkins University prices halved every 15.6 hours during hyperinflation in Hungary in 1946.

The net monetary loss or net monetary gain resulting from holding an excess of either monetary item assets or monetary item liabilities is currently only calculated and accounted during the implementation of the IASB´s inflation accounting model Constant Purchasing Power Accounting (CPPA) as defined in IAS 29 in hyperinflationary economies. Net monetary gains and losses are required to be calculated and accounted during low inflation and deflation when companies measure financial capital maintenance in units of constant purchasing power in terms of the Framework, Par 104 (a) - the Constant Item Purchasing Power Accounting model - during low inflation and deflation. They are not calculated and accounted under the traditional Historical Cost Accounting model, although it can be done according to Harvey Kapnick. See Saxe Lecture, 1976.

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