The application of the historical cost principle by the accounting profession results in the destruction of "hundreds of billions of dollars in retained income real value year in year out" [5] - as well as in all other constant real value non-monetary items never or not fully updated throughout the world economy.
This can be stopped by the revoking of the stable measuring unit assumption. This has been authorised by the International Accounting Standards Board in International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies.
"Par 8 The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the balance sheet date.
Par 11 Balance sheet amounts not already expressed in terms of the measuring unit current at the balance sheet date are restated by applying a general price index.
Income statement
Par 26 This Standard requires that all items in the income statement are expressed in terms of the measuring unit current at the balance sheet date. Therefore all amounts need to be restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded in the financial statements."
Paragraph 40 can be taken as revoking the stable measuring unit assumption in low inflationary economies as the word inflation is used instead of hyperinflation.
"Par 40 The disclosures required by this Standard are needed to make clear the basis of dealing with the effects of inflation in the financial statements."
Neither US GAAP nor the IASB allows the updating of constant real value non-monetary items, for example retained income, in low inflationary economies thus contributing to the destruction of "hundreds of billions of Dollars in real value in all companies´ Retained Income balances all around the world" [6] as well as in all constant real value non-monetary items never or not fully updated.
From: Wikipedia: Historical Cost: http://en.wikipedia.org/wiki/Historical_cost
Saturday 22 March 2008
Friday 21 March 2008
Historical Cost
In historical cost accounting, historical cost is the original monetary value of an economic item.
When an historical cost item, for example money or retained income, is never updated its real value is destroyed at the rate of inflation in low inflationary economies. Money cannot be updated. Retained income is currently not updated in low inflationary economies as a result of the application of the stable measuring unit assumption. Retained income is:
The accumulated net income retained for reinvestment in a business, rather than being paid out in dividends to stockholders.
One of the basic principles in accounting is:
“The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.” .
The combination of the historical cost accounting model and low inflation is thus indirectly responsible for the destruction of the real value of retained income equal to the annual average value of retained income times the average annual rate of inflation.
From Wikipedia: Historical Cost: http://en.wikipedia.org/wiki/Historical_cost
When an historical cost item, for example money or retained income, is never updated its real value is destroyed at the rate of inflation in low inflationary economies. Money cannot be updated. Retained income is currently not updated in low inflationary economies as a result of the application of the stable measuring unit assumption. Retained income is:
The accumulated net income retained for reinvestment in a business, rather than being paid out in dividends to stockholders.
One of the basic principles in accounting is:
“The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.” .
The combination of the historical cost accounting model and low inflation is thus indirectly responsible for the destruction of the real value of retained income equal to the annual average value of retained income times the average annual rate of inflation.
From Wikipedia: Historical Cost: http://en.wikipedia.org/wiki/Historical_cost
Thursday 20 March 2008
What is the real value of money?
The real value of money within an economy or monetary union is determined by all the underlying value systems within that economy or monetary union.
The daily changes in the real value of money are determined by the daily changes in the rate of inflation or hyperinflation or deflation as indicated by the Daily CPI.
Daily indexing of all monetary items within the banking system in terms of the Daily CPI eliminates the EFFECT of inflation, hyperinflation or deflation within an economy or monetary union. It does nothing immediately to inflation, hyperinflation or deflation.
Daily indexing of all constant real value non-monetary items in terms of the Daily CPI removes the EFFECT of the stable measuring unit assumption within an economy implementing the nominal Historical Cost paradigm during inflation, hyperinflation and deflation.
Variable real value non-monetary items´ real values are determined in terms of fair value - generally in free and open markets. Daily indexing of these values in terms of the Daily CPI between fair valuing them in the market keeps their real values up to date with daily changes in the general price level.
Updated on 29 May 2016
Buy the ebook.
Copyright (c) 2012 Nicolaas Smith
The daily changes in the real value of money are determined by the daily changes in the rate of inflation or hyperinflation or deflation as indicated by the Daily CPI.
Daily indexing of all monetary items within the banking system in terms of the Daily CPI eliminates the EFFECT of inflation, hyperinflation or deflation within an economy or monetary union. It does nothing immediately to inflation, hyperinflation or deflation.
Daily indexing of all constant real value non-monetary items in terms of the Daily CPI removes the EFFECT of the stable measuring unit assumption within an economy implementing the nominal Historical Cost paradigm during inflation, hyperinflation and deflation.
Variable real value non-monetary items´ real values are determined in terms of fair value - generally in free and open markets. Daily indexing of these values in terms of the Daily CPI between fair valuing them in the market keeps their real values up to date with daily changes in the general price level.
Updated on 29 May 2016
Buy the ebook.
Copyright (c) 2012 Nicolaas Smith
Wednesday 19 March 2008
What is real value?
Real value is what you can sell things for right now. That means, someone is willing to buy them from you for a specific value payable immediately.
There are three basic things in the economy:
1. Things that have changing real values.
2. Money.
3. Things that have constant real values.
We express these values in money terms. Everything has a money value but that does not mean it is money because be buy and sell it in money terms and we use money to pay for things. Only money is money.
The real values of things you do not own are the market values of those things right now.
The above real values change all the time as the supply and demand for these things change.
The above relate to the real values of things that have changing real values.
There are two more basic things in the economy: money and things that have constant real values.
We will look at money´s real value in the next post.
There are three basic things in the economy:
1. Things that have changing real values.
2. Money.
3. Things that have constant real values.
We express these values in money terms. Everything has a money value but that does not mean it is money because be buy and sell it in money terms and we use money to pay for things. Only money is money.
The real values of things you do not own are the market values of those things right now.
The above real values change all the time as the supply and demand for these things change.
The above relate to the real values of things that have changing real values.
There are two more basic things in the economy: money and things that have constant real values.
We will look at money´s real value in the next post.
Saturday 15 March 2008
The difference between price increases and inflation.
Very few people understand the difference between inflation and a price increase. Inflation is an increase in the general price level. A price increase is the increase of any single price.
Buy the ebook.
Copyright (c) 2012 Nicolaas Smith
Buy the ebook.
Copyright (c) 2012 Nicolaas Smith
Thursday 13 March 2008
Business confidence will increase if South Africa revokes the stable measuring unit assumption.
BusinessDay reports that business confidence is the lowest in seven years.
Business confidence in South Africa will increase considerably if accountants and the accounting faculties of SA universities get together to develop a plan to revoke the stable measuring unit assumption in the South African economy.
Businesses and workers will then know that as soon as the accountants in South Africa revoke the stable measuring unit assumption no more real value will be destroyed in the real value of constant real value non-monetary items never updated in the SA economy.
Salaries, capital, taxes, income and expenses will be updated monthly at the new Consumer Price Index value.
The South African non-monetary economy will operate at 0% inflation since all constant real value non-monetary items will be updated.
Cash inflation will still destroy the value of the Rand and all other monetary items.
Hold no cash and monetary items and you can avoid the destruction of real value in monetary items.
Revoking the stable measuring unit assumption will make the destruction of real value in the non-monetary economy impossible.
Business confidence will surge in SA when everyone knows that what is happening in Zimbabwe now will forever be impossible in South Africa as long as the stable measuring unit assumption is revoked.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Business confidence in South Africa will increase considerably if accountants and the accounting faculties of SA universities get together to develop a plan to revoke the stable measuring unit assumption in the South African economy.
Businesses and workers will then know that as soon as the accountants in South Africa revoke the stable measuring unit assumption no more real value will be destroyed in the real value of constant real value non-monetary items never updated in the SA economy.
Salaries, capital, taxes, income and expenses will be updated monthly at the new Consumer Price Index value.
The South African non-monetary economy will operate at 0% inflation since all constant real value non-monetary items will be updated.
Cash inflation will still destroy the value of the Rand and all other monetary items.
Hold no cash and monetary items and you can avoid the destruction of real value in monetary items.
Revoking the stable measuring unit assumption will make the destruction of real value in the non-monetary economy impossible.
Business confidence will surge in SA when everyone knows that what is happening in Zimbabwe now will forever be impossible in South Africa as long as the stable measuring unit assumption is revoked.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Tuesday 11 March 2008
Poor Accounting
Unfortunately these black students are learning Historical Cost Accounting which includes the stable measuring unit assumption.
They will most probably never be taught that the combination of inflation and the stable measuring unit assumption annually destroys hundreds of billions of Rand of the real value of constant real value non-monetary items never updated in the South African economy. This include the real value of all Retained Income of all SA companies (listed and unlisted) which they will never be allowed to update as long as South Africa is not experiencing hyperinflation.
Most of them will most probably not even know anything about the stable measuring unit assumption as it is hardly ever mentioned in accounting lectures in South Africa. I wonder if the term even appears at all in any accounting textbook in South Africa.
This is very sad since it is exactly the combination of inflation and the stable measuring unit assumption as applied by Zimbabwean accountants that destroyed the Zimbabwean economy over the last 20 years of high and hyperinflation in that country.
I can foresee that the very same accountants may in the future help to destroy the SA economy when they apply the stable measuring unit assumption in the companies where they will be working or whose accounts they will be auditing. Just like it is now happening in Zimbabwe.
If they are taught that the combination of inflation and the stable measuring unit assumption is destroying hundreds of billions of Rands in the real value of all constant real value non-monetary items never updated (eg. retained income) in the SA economy annually and that by revoking it they can stop this destruction, they may have the guts to do that and to save the SA economy from the disaster that is currently happening in Zimbabwe.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
They will most probably never be taught that the combination of inflation and the stable measuring unit assumption annually destroys hundreds of billions of Rand of the real value of constant real value non-monetary items never updated in the South African economy. This include the real value of all Retained Income of all SA companies (listed and unlisted) which they will never be allowed to update as long as South Africa is not experiencing hyperinflation.
Most of them will most probably not even know anything about the stable measuring unit assumption as it is hardly ever mentioned in accounting lectures in South Africa. I wonder if the term even appears at all in any accounting textbook in South Africa.
This is very sad since it is exactly the combination of inflation and the stable measuring unit assumption as applied by Zimbabwean accountants that destroyed the Zimbabwean economy over the last 20 years of high and hyperinflation in that country.
I can foresee that the very same accountants may in the future help to destroy the SA economy when they apply the stable measuring unit assumption in the companies where they will be working or whose accounts they will be auditing. Just like it is now happening in Zimbabwe.
If they are taught that the combination of inflation and the stable measuring unit assumption is destroying hundreds of billions of Rands in the real value of all constant real value non-monetary items never updated (eg. retained income) in the SA economy annually and that by revoking it they can stop this destruction, they may have the guts to do that and to save the SA economy from the disaster that is currently happening in Zimbabwe.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Monday 10 March 2008
Inflation´s destruction of the SA non-monetary economy can be stopped by SA accountants.
It was once generally accepted that the world was flat.
It is now generally accepted that Robert Mugabe´s policies destroyed the Zimbabwean economy.
In time people will come to understand that it was the combination of inflation and the stable measuring unit assumption that destroyed the Zimbabwean economy.
That same combination is currently destroying 9.4% per annum of all monetary items in South Africa as well as 9.4% per annum of the real value of Retained Income in all South African companies.
At continuous 9.4% per annum inflation all the real value of all Retained Income that remain in SA companies for the next 8 years will be completely destroyed. Today´s Retained Income balances will be there in 8 years time but they will be worth nothing - all else being equal.
When SA revokes the stable measuring unit assumption, this destruction of constant real value non-monetary items currently NEVER updated can be stopped.
Any SA company can revoke the stable measuring unit assumption and stop this destruction.
The International Accounting Standard Board authorised the updating of non-monetary items in IAS 29 in 1989.
If SA companies/accountants do not revoke the stable measuring unit assumption and inflation keeps on rising, then the combination of high inflation and the stable measuring unit assumption will definitely destroy the SA economy - exactly as it did in Zimbabwe over the last 14 years of hyperinflation in that country.
Three years of continuous 26% inflation is hyperinflation as defined by the IASB.
At the moment this destruction is taking place at 9.4% per annum. That means that the real value of all constant real value non-monetary items today that are never updated (eg. retained income) will see 100% of their real value destroyed over the next 8 years. The accounting values will still be in the books, but they will have zero real value - like the accounting values in Zimbabwean company accounts not updated.
It is now generally accepted that Robert Mugabe´s policies destroyed the Zimbabwean economy.
In time people will come to understand that it was the combination of inflation and the stable measuring unit assumption that destroyed the Zimbabwean economy.
That same combination is currently destroying 9.4% per annum of all monetary items in South Africa as well as 9.4% per annum of the real value of Retained Income in all South African companies.
At continuous 9.4% per annum inflation all the real value of all Retained Income that remain in SA companies for the next 8 years will be completely destroyed. Today´s Retained Income balances will be there in 8 years time but they will be worth nothing - all else being equal.
When SA revokes the stable measuring unit assumption, this destruction of constant real value non-monetary items currently NEVER updated can be stopped.
Any SA company can revoke the stable measuring unit assumption and stop this destruction.
The International Accounting Standard Board authorised the updating of non-monetary items in IAS 29 in 1989.
If SA companies/accountants do not revoke the stable measuring unit assumption and inflation keeps on rising, then the combination of high inflation and the stable measuring unit assumption will definitely destroy the SA economy - exactly as it did in Zimbabwe over the last 14 years of hyperinflation in that country.
Three years of continuous 26% inflation is hyperinflation as defined by the IASB.
At the moment this destruction is taking place at 9.4% per annum. That means that the real value of all constant real value non-monetary items today that are never updated (eg. retained income) will see 100% of their real value destroyed over the next 8 years. The accounting values will still be in the books, but they will have zero real value - like the accounting values in Zimbabwean company accounts not updated.
Friday 29 February 2008
If South Africa were a hyperinflationary economy ...
If SA were a hyperinflationary economy with continuous 26% inflation for three years in a row (the International Accounting Standards Board’s definition of hyperinflation) SA companies would implement International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies. Well behaving SA companies dutifully following useless (1) IASB requirements.
This would have no effect on hyperinflation in SA. IAS 29 is being applied in Zimbabwe since 2000 and is a complete and utter failure. The reason is that IAS 29 does not require DAILY updating of all non-monetary items as required under Real Value Accounting (2) but instead useless annual updating.
PricewaterhouseCoopers advocates equally useless monthly updating under hyperinflationary conditions.(3)
If SA were to copy Zimbabwe and were to follow the ineffectual IASB requirements and equally ineffectual PwC advice in this hypothetical hyperinflationary scenario, hyperinflation would destroy the SA economy in the same way it has been doing over the last 14 years of actual hyperinflation in Zimbabwe. SA companies would update commercial item prices daily (like in Zimbabwe ) but not salaries (like in Zimbabwe ) thus destroying the internal market very rapidly and destroying the whole economy equally rapidly.
If, on the other hand, SA, by chance, were to copy the very successful Brazilians in their 30 year (1964 to 1994) battle against hyperinflation and implement an Unidade Real de Valor (4) type of non-monetary index to update all non-monetary items (including salaries) DAILY under hyperinflation, the SA economy would keep on growing like in Brazil during hyperinflation.
Simply … because of DAILY updating of all non-monetary items under hyperinflation.
How singularly clever the Brazilians are.
If, in this hypothetical example, the South African Reserve Bank then were to manage to bring cash hyperinflation down to low levels again,
and if, by chance, all SA companies – which would have, by chance, come to understand the correctness of updating all non-monetary items DAILY (following the brilliant Brazilians) under hyperinflation -
then, by chance, stubbornly refuse to follow the very destructive and useless IASB requirement to go back to NOT updating all constant real value non-monetary items under LOW inflation, (the current state of affairs world wide)
SA would be the first country in the world to revoke the stable measuring unit assumption under LOW inflationary conditions.
This is something the accounting profession has been spectacularly unsuccessful in resolving for at least the last 100 years.
The stable measuring unit assumption is the silent, invisible destroyer of real value in all constant real value non-monetary items (eg. retained income) currently NEVER updated in all inflationary economies.
The IASB mandates you to update under hyperinflation, but then forbids you to update once you are back in low inflation thus supporting the destruction of hundreds of billions of US Dollars in real value in retained income world wide. Crazy and incomprehensible - but true.
One of the basic principles in accounting is “The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency.
This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.” (5)
If, on the other hand, we were to invert the above process and revoke the stable measuring unit assumption in SA in the very short term (not a snowball’s hope in hell),
it would be impossible in the very short term for the combination of low inflation and the stable measuring unit assumption ever more to destroy the real value of constant real value non-monetary items (eg. retained income) in SA.
This is happening at this very moment in all SA companies at the rate of 9.4% (Jan 2008 annual inflation rate) per annum equalling the destruction of hundreds of billions of Rands in retained income real value each and every year. Revoking the stable measuring unit assumption would maintain hundreds of billions of Rands of real value each and every year in the SA economy instead of annually destroying it.
It would also be impossible for hyperinflation ever to destroy the non-monetary economy in SA in the future - as long as we revoke the stable measuring unit assumption forever. We could still have Cash Hyperinflation (the one component of hyperinflation) but it would be impossible to have Historical Cost Accounting Hyperinflation - the second component of hyperinflation.
Simply … because of revoking ONE accounting assumption, namely, the stable measuring unit assumption.
How singularly clever we would be as a nation.
If …
Nicolaas Smith
realvalueaccounting@yahoo.com
(1) Useless in eliminating non-monetary inflation whereas daily updating of non-monetary items in a hyperinflationary economy does exactly that.
(2) Understanding IAS 29 PricewaterhouseCoopers.
(3) http://en.wikipedia.org/wiki/Unidade_real_de_valor
(4) Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York : Harcourt Brace Javonovich, Inc. Page 429.
This would have no effect on hyperinflation in SA. IAS 29 is being applied in Zimbabwe since 2000 and is a complete and utter failure. The reason is that IAS 29 does not require DAILY updating of all non-monetary items as required under Real Value Accounting (2) but instead useless annual updating.
PricewaterhouseCoopers advocates equally useless monthly updating under hyperinflationary conditions.(3)
If SA were to copy Zimbabwe and were to follow the ineffectual IASB requirements and equally ineffectual PwC advice in this hypothetical hyperinflationary scenario, hyperinflation would destroy the SA economy in the same way it has been doing over the last 14 years of actual hyperinflation in Zimbabwe. SA companies would update commercial item prices daily (like in Zimbabwe ) but not salaries (like in Zimbabwe ) thus destroying the internal market very rapidly and destroying the whole economy equally rapidly.
If, on the other hand, SA, by chance, were to copy the very successful Brazilians in their 30 year (1964 to 1994) battle against hyperinflation and implement an Unidade Real de Valor (4) type of non-monetary index to update all non-monetary items (including salaries) DAILY under hyperinflation, the SA economy would keep on growing like in Brazil during hyperinflation.
Simply … because of DAILY updating of all non-monetary items under hyperinflation.
How singularly clever the Brazilians are.
If, in this hypothetical example, the South African Reserve Bank then were to manage to bring cash hyperinflation down to low levels again,
and if, by chance, all SA companies – which would have, by chance, come to understand the correctness of updating all non-monetary items DAILY (following the brilliant Brazilians) under hyperinflation -
then, by chance, stubbornly refuse to follow the very destructive and useless IASB requirement to go back to NOT updating all constant real value non-monetary items under LOW inflation, (the current state of affairs world wide)
SA would be the first country in the world to revoke the stable measuring unit assumption under LOW inflationary conditions.
This is something the accounting profession has been spectacularly unsuccessful in resolving for at least the last 100 years.
The stable measuring unit assumption is the silent, invisible destroyer of real value in all constant real value non-monetary items (eg. retained income) currently NEVER updated in all inflationary economies.
The IASB mandates you to update under hyperinflation, but then forbids you to update once you are back in low inflation thus supporting the destruction of hundreds of billions of US Dollars in real value in retained income world wide. Crazy and incomprehensible - but true.
One of the basic principles in accounting is “The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency.
This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.” (5)
If, on the other hand, we were to invert the above process and revoke the stable measuring unit assumption in SA in the very short term (not a snowball’s hope in hell),
it would be impossible in the very short term for the combination of low inflation and the stable measuring unit assumption ever more to destroy the real value of constant real value non-monetary items (eg. retained income) in SA.
This is happening at this very moment in all SA companies at the rate of 9.4% (Jan 2008 annual inflation rate) per annum equalling the destruction of hundreds of billions of Rands in retained income real value each and every year. Revoking the stable measuring unit assumption would maintain hundreds of billions of Rands of real value each and every year in the SA economy instead of annually destroying it.
It would also be impossible for hyperinflation ever to destroy the non-monetary economy in SA in the future - as long as we revoke the stable measuring unit assumption forever. We could still have Cash Hyperinflation (the one component of hyperinflation) but it would be impossible to have Historical Cost Accounting Hyperinflation - the second component of hyperinflation.
Simply … because of revoking ONE accounting assumption, namely, the stable measuring unit assumption.
How singularly clever we would be as a nation.
If …
Nicolaas Smith
realvalueaccounting@yahoo.com
(1) Useless in eliminating non-monetary inflation whereas daily updating of non-monetary items in a hyperinflationary economy does exactly that.
(2) Understanding IAS 29 PricewaterhouseCoopers.
(3) http://en.wikipedia.org/wiki/Unidade_real_de_valor
(4) Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York : Harcourt Brace Javonovich, Inc. Page 429.
Saturday 23 February 2008
Dual Destruction of Real Value in the Economy.
Inflation always and everywhere results in the destruction of real value in
(A) all monetary items over time (which cannot be updated) and
(B) constant real value non-monetary items (historical cost items, eg. retained income) when the latter are NEVER updated as a result of the stable measuring unit assumption which is a generally accepted accounting principle or GAAP.
Retained income has never been and is never updated in economies that are not hyperinflationary economies under the current Historical Cost paradigm. Retained income is only updatable since 1989 in hyperinflationary economies in terms of International Accounting Standards IAS 29 Financial Reporting in Hyperinflationary Economies. IAS 29 does not require daily updating (as required under Real Value Accounting) and thus fails to have any effect in hyperinflationary economies.
A good example is the situation in Zimbabwe where IAS 29 is being applied without any effect on the state of the Zimbabwean economy. The International Accounting Standards Board´s IAS 29 is thus a complete and utter failure that serves no purpose at all and reduces the IASB´s credibility tremendously.
The IASB´s as well as the FASB´s credibility is even further diminished by the fact that they require the updating of all constant real value non-monetary items under hyperinflation but ban it under all other inflationary conditions thus supporting the annual destruction of hunderds of billions of US Dollars of real value in all companies´ retained income balances world wide in non-hyperinflationary economies.
(A) all monetary items over time (which cannot be updated) and
(B) constant real value non-monetary items (historical cost items, eg. retained income) when the latter are NEVER updated as a result of the stable measuring unit assumption which is a generally accepted accounting principle or GAAP.
Retained income has never been and is never updated in economies that are not hyperinflationary economies under the current Historical Cost paradigm. Retained income is only updatable since 1989 in hyperinflationary economies in terms of International Accounting Standards IAS 29 Financial Reporting in Hyperinflationary Economies. IAS 29 does not require daily updating (as required under Real Value Accounting) and thus fails to have any effect in hyperinflationary economies.
A good example is the situation in Zimbabwe where IAS 29 is being applied without any effect on the state of the Zimbabwean economy. The International Accounting Standards Board´s IAS 29 is thus a complete and utter failure that serves no purpose at all and reduces the IASB´s credibility tremendously.
The IASB´s as well as the FASB´s credibility is even further diminished by the fact that they require the updating of all constant real value non-monetary items under hyperinflation but ban it under all other inflationary conditions thus supporting the annual destruction of hunderds of billions of US Dollars of real value in all companies´ retained income balances world wide in non-hyperinflationary economies.
Wednesday 20 February 2008
Inflation and the stable measuring unit assumption are the two universal enemies.
Inflation IS the universal enemy as far as monetary items are concerned. Each one per cent rise in inflation instantaneously destroys more hunderds of billions of US Dollars in all monetary items throughout the whole economy. It is very difficult to arrive at zero per cent inflation. Two per cent inflation - defined incorrectly as "price stability" - destroys 51% of the real value of all monetary items over 35 years time.
The combination of inflation and the stable measuring unit assumption is the universal enemy as far as constant real value non-monetary items (historical cost items) NEVER updated (eg. retained income) are concerned. Each one per cent rise in inflation destroys even more hunderds of billions of US Dollars in the real value on constant real value non-monetary items NEVER updated each and every year on top of the hundreds of billions of US Dollars currently being destroyed each and every year by current inflation world wide.
Your contribution need not be deleted. The other side of the story need to be added.
You are only referring to one component of inflation, namely, cash inflation. What about the hunderds of billions of US Dollars destroyed each and every year in all companies´ retained income balances world wide in inflationary economies by the combination of inflation and the stable measuring unit assumption?
Revoke the stable measuring unit assumption (as mandated by the International Accounting Standards Board in IAS 29 in hyperinflationary economies) and you stop the second component of inflation forever. That is easy. It is simply an accounting procedure. Arriving at zero inflation is much more difficult to eliminate cash inflation.
Inflation and the stable measuring unit assumption are the two universal enemies
The combination of inflation and the stable measuring unit assumption is the universal enemy as far as constant real value non-monetary items (historical cost items) NEVER updated (eg. retained income) are concerned. Each one per cent rise in inflation destroys even more hunderds of billions of US Dollars in the real value on constant real value non-monetary items NEVER updated each and every year on top of the hundreds of billions of US Dollars currently being destroyed each and every year by current inflation world wide.
Your contribution need not be deleted. The other side of the story need to be added.
You are only referring to one component of inflation, namely, cash inflation. What about the hunderds of billions of US Dollars destroyed each and every year in all companies´ retained income balances world wide in inflationary economies by the combination of inflation and the stable measuring unit assumption?
Revoke the stable measuring unit assumption (as mandated by the International Accounting Standards Board in IAS 29 in hyperinflationary economies) and you stop the second component of inflation forever. That is easy. It is simply an accounting procedure. Arriving at zero inflation is much more difficult to eliminate cash inflation.
Inflation and the stable measuring unit assumption are the two universal enemies
Subscribe to:
Posts (Atom)