The Conceptual
Framework for Financial Reporting (2010), paragraph OB7 states:
‘General
purpose financial reports are not designed to show the value of a
reporting entity.’
A reporting entity´s value can be one of
three values:
1.
Real market value
2.
Real intrinsic value
3.
Real net asset value
The Conceptual Framework is correct in the
case of real market value and real intrinsic value. General purpose financial
reports are not designed to show the real market value or real intrinsic value
of a reporting entity.
It is stated in the original Framework
(1989), Par. 104 (a) [now Conceptual Framework (2010), Par. 4.59 (a)]:
‘Financial
capital maintenance can be measured in either nominal monetary units or units
of constant purchasing power.’
General purpose financial reports prepared
under the concept of capital maintenance
in units of constant purchasing power in terms of a Daily Consumer Price
Index or daily rate (e.g. the daily US Dollar parallel rate during
hyperinflation) are designed – as a result its combination with the
double-entry accounting model – to
automatically maintain the constant purchasing power of capital constant for an
indefinite period of time in all entities that at least break even in real
value at all levels of inflation and deflation – ceteris paribus – whether they
own any revaluable fixed assets or not.
The real value of capital is always equal to
the real value of net assets under capital maintenance in units of constant purchasing
power in terms of a Daily CPI or daily rate.
Conclusion:
General purpose financial reports prepared
under the concept of capital maintenance
in units of constant purchasing power as authorized in IFRS are designed to
show the real net asset value of a reporting entity and to maintain it constant
for an indefinite period of time as qualified above.
The real net asset value of an entity as
reported on the date of the statement of financial position is only valid for
that day when the statement is accessed or viewed on that day. Thereafter the historic
constant real net asset value of the entity as reported on the date of the
statement of financial position remains constant for an indefinite period of
time, but, its nominal value changes daily in terms of a Daily Consumer Price
Index or other daily rate.
Monetary items in the historic statement of
financial position or other financial report have to be inflation-adjusted,
variable items have to be updated and constant items have to be measured in
units of constant purchasing power in terms of the current (today´s) Daily CPI
or other daily rate after the date of the financial report.
The actual real net asset value of an
entity also generally changes daily as a result of an entity being a going concern
and generally involved in daily operations.
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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