Thursday, 10 March 2011

Inflation-adjusted accounts during low inflation is a blessing to users - Part 2

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 value or purchasing power of salaries, wages, rentals, etc. constant 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, economists and people in general would agree that the practice of inflation-adjusting accounts in a low inflation environment is a blessing to users. In fact, it is one of the basic pillars of a stable economy as has been amply proven by Brazilian accountants, economists and the Brazilian Central Bank 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 inflation-adjusting salaries, wages, rentals and many other non-monetary items in their real economy.

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 a low inflation economy would be a blessing to everyone in that economy when accountants simply decide to change from their current implementation of the very erosive stable measuring unit assumption – which is based on a fallacy – and financial capital maintenance in nominal monetary units (the traditional Historical Cost Accounting model) which is impossible during inflation and another fallacy, and freely choose to implement the real value maintaining financial capital maintenance in units of constant purchasing power model during low inflation and deflation ( as applied in the Constant Item Purchasing Power Accounting model) as approved by the IASB in the Framework, Par 104 (a) in 1989. Accountants implementing financial capital maintenance in units of constant purchasing power during low inflation would knowingly maintain - instead of the generally accepted HCA model currently unknowingly, unnecessarily and unintentionally eroding real value in constant real value non-monetary items never maintained as it also did last year and all the years before and will do next year if the very erosive stable measuring unit assumption is not stopped – all else being equal.

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

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