The Historical Cost Debate is the debate over the last 100 years or so about the exclusive use of Historical Cost for all accounting purposes. The accounting profession has realized for a very long time that financial reports based on Historical Cost for all economic items do not fairly represent a company’s results and operations. As a result of this debate the pure Historical Cost Accounting model has been improved and changed dramatically during this time, so much so, that today we have a huge volume of IFRS where under variable real value non–monetary items are not all valued at HC but at, e.g., fair value or the lower of cost and net realizable value or market value or recoverable value or present value, etc. This debate has thus been a very valid and successful debate regarding the valuation of variable real value non–monetary items.
Unfortunately, the stable measuring unit assumption is still an IFRS–approved option that is used for the valuation of most constant real value non–monetary items (excluding annual valuation of salaries, wages, rents, etc.) during low inflation and deflation. Fortunately, the option of measuring financial capital maintenance in units of constant purchasing power during low inflation and deflation (CIPPA) has been approved in IFRS in the original Framework (1989), Par 104 (a).
Entities value variable real value non–monetary items in terms of IFRS when they implement both the traditional HCA model and when they measure financial capital maintenance in units of constant purchasing power during low inflation and deflation applying CIPPA. Inflation has no effect on the real values of variable real value non–monetary items. Inflation can only erode the real value of money and other monetary items: nothing else.
Nicolaas Smith
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