Purchasing power of capital has to be maintained

Purchasing power of capital has to be maintained

“It is essential to the credibility of financial reporting to recognize that the recovery of the real cost of investment is not earnings — that there can be no earnings unless and until the purchasing power of capital is maintained.”

FAS 33

Not a single company in the world economy knows whether it has maintained the purchasing power of its capital over the lifetime of the company.

Financial capital maintenance in units of constant purchasing power in terms of a Daily Consumer Price Index (i.e., Constant Item Purchasing Power Accounting) would automatically  maintain the constant purchasing power of capital constant for an indefinite period of time in all companies that at least break even in real value – ceteris paribus.

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Nicolaas Smith Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.