Companies listed on stock exchanges have to prepare primary financial reports in terms of the IASB´s International Financial Reporting Standards. IFRS are Standards, Interpretations and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the IASB´s Framework in the absence of a Standard or an Interpretation that specifically applies to a transaction.
“In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8." IAS Plus, Deloitte. Date: 21st March, 2010 http://www.iasplus.com/standard/framewk.htm
IAS 8.11:
“In making the judgement, management shall refer to, and consider the applicability of, the following sources in descending order:
(a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.”
There are no specific IFRS relating to the valuation of the constant real value non–monetary items Issued Share Capital, Retained Earnings, most other items in Shareholders Equity, the concepts of capital, the concepts of capital maintenance and the determination of profit or loss. The definitions, the concepts for their measurement and the criteria for their recognition in the Framework are thus applicable in terms of IAS 8.11.
A fundamental attribute of the traditional Historical Cost Accounting model which boards of directors select when they decide on behalf of companies to measure financial capital maintenance in nominal monetary units (a generally accepted accounting fallacy not yet extinct) in terms of the IASB´s original Framework (1989), Par 104 (a) is that it unknowingly, unnecessarily and unintentionally erodes the existing constant real non–monetary value of that portion of shareholders´ equity never maintained constant as a result of insufficient revaluable fixed assets (revalued or not) with the implementation of the very erosive stable measuring unit assumption during low inflation.
The implementation of the HCA model, on the other hand, unnecessarily, unknowingly and unintentionally creates real value in constant real value non–monetary items never maintained constant (not decreased at a rate equal to the annual rate of deflation) as a result of the implementation of the real value creating stable measuring unit assumption during deflation (recently mainly in Japan).
Nicolaas Smith
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