Financial reporting affects the economy

Financial reporting affects the economy

Accounting which includes financial reporting affects the economy via the accounting policies and especially the measurement bases adopted by entities.  Accounting records economic activity. Economic activity is affected by the choice of accounting policies and measurement bases. Accounting is recording of economic activity. Accounting policies influence the choice of measurement bases which affects the economy.

The single most powerful measurement base affecting the economy is the choice of implementing the stable measuring unit assumption, i.e., choosing Historical Cost Accounting.

The actual implementation of the stable measuring unit assumption is not the recording of economic activity. Implementing the stable measuring unit assumption  is a business practice / policy which is after the event recorded via accounting and financial reporting when the period-end financial statements are prepared.

Thus implementing the stable measuring unit assumption is not accounting. It is the implementation of a business practice. The Conceptual Framework states that the choice of the measurement bases and the capital maintenance concept chosen, determines the accounting model.

HCA causes the cost of inflation and the cost of hyperinflation because it is chosen by the board of directors as the accounting model to be used by the entity. HCA requires the implementation of the stable measuring unit assumption in the measurement of certain items.

HCA determines the business practice. HCA decides when economic items will be required to be measured implementing the stable measuring unit assumption.

Thus, HCA causes the cost of inflation and the cost of hyperinflation, not actual inflation and actual hyperinflation which are economic processes, not accounting practices.

Nicolaas Smith
Opinions on this blog expressed by me are my personal opinions.
Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.