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Wednesday, 4 May 2011

Value accounting

Value accounting


There is, on the other hand, also strong awareness in the accounting profession that accounting is actually 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.

It is generally accepted that accounting should be value based. By value based it is meant that variable real value non-monetary items cannot always be valued at HC, but, are to be valued in terms of specific measurement bases defined in IFRS or GAAP; for example, market value, net realizable value, fair value, present value, recoverable value, etc.

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

Value accounting also prevails as far as the valuing and accounting 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 under whatever economic environment: low inflation, deflation and hyperinflation. The real value of monetary items is kept always current, i.e. generally lower by inflation, generally higher by deflation and generally very much lower by hyperinflation since the nominal value of monetary items is not and cannot be updated or measured in units of constant purchasing power during the current accounting period in an inflationary, a deflationary or a hyperinflationary economy.

The CPI which quantifies the erosion of the real value of only monetary items by low inflation and the creation of real value by deflation in only monetary items is published on a monthly basis. The hyper-erosion of the real value of only monetary items is normally known via the daily US Dollar parallel rate or daily index rate or even every 8 hours during hyperinflation. The nominal value of monetary items in actual accounts stays the same forever under any accounting model and under any economic environment, but, the real value is automatically adjusted by inflation, deflation and hyperinflation. The real value of monetary items can be halved every 24.7 hours as it 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 in monetary items caused by inflation, deflation and hyperinflation resulting from holding net monetary item assets or net monetary item liabilities is calculated and accounted in terms of IAS 29 in hyperinflationary economies and in terms of CIPPA in low inflationary and deflationary economies. The calculation and accounting of net monetary losses and gains during low inflation and deflation have thus been authorized in IFRS since 1989. They are not calculated and accounted under the traditional Historical Cost Accounting model, although it can be done according to Harvey Kapnick.

"Computing the gains or losses from holding monetary items can be done and the information disclosed when the books are maintained on a historical–cost basis."

Harvey Kapnick, Chairman of Arthur Anderson & Company, Value based accounting: Evolution or revolution, Saxe Lecture, 1976, Page 6.


Nicolaas Smith

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