Sunday, 9 November 2014

Three measurement bases in IFRS

Very interestingly the same three measurement bases are used under both Historical Cost Accounting and its alternative authorized in IFRS, namely, Capital Maintenance in Units of Constant Purchasing Power.

1. Historical Cost
2. Fair Value
3. Units of Constant Purchasing Power (For example: generally salaries are updated periodically under HCA using the UCPP measurement basis, i.e., they are updated in an attempt to maintain their real value which is normally reduced as a result of the implementation of the stable measuring unit assumption during inflation and hyperinflation.)  

Click below for the application of these three measurement bases under 

Historical Cost Accounting 

II Capital Maintenance in Units of Constant Purchasing Power

The implementation of one of the accounting models results in a paradigm completely different from the other.

There is only one reason for that. The stable measuring unit assumption: the assumption accountants make that money was, is and always will be perfectly stable in real value; that there never were, are or ever will be inflation and deflation.  

The stable measuring unit assumption is always implemented under HCA:

(i) net monetary gains or losses up to hyperinflation and during deflation were/are never calculated and accounted


(ii) nominal equity is assumed to be equal to net assets in nominal value. No entity ever knew or now knows whether it kept or keeps or will keep the real value of all contributions to equity constant over the lifetime of the entity.

The stable measuring unit assumption is never implemented under CMUCPP: 

(a) net monetary gains or losses are always calculated and accounted 


(b) all historical (for example, yesterday´s) economic values (all items) are always updated till the current (today´s) real value in terms of the Daily CPI because the general price level changes at least daily resulting in the constant purchasing power (real value) of equity being maintained constant in all entities that at least break even in real value over time .

Nicolaas Smith 

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