Difference between Historical Costs under HCA and CIPPA

September 13, 2012 in Uncategorized

Difference between Historical Costs under HCA and CIPPA

Historical Cost Accounting

The stable measuring unit assumption is implemented under financial capital maintenance in nominal monetary units (HCA). Historical Costs under HCA are thus always nominal Historical Costs, i.e., always wrong in terms of today´s real value, namely in terms of today´s Daily CPI.

There is not even one set of HC financial statements technically correct in terms of today´s real value. All HC financial statements are wrong in this sense: they are all wrong in terms of real value since they are all based on nominal Historical Costs during inflation and deflation. The higher the accumulated rate of inflation or deflation since the original date of the Historical Cost and the date it is accessed (read) in the financial statements, the greater the degree of error. HC financial statements prepared during hyperinflation is generally completely useless.

Constant Item Purchasing Power Accounting

The stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power (CIPPA). Historical Costs under CIPPA are thus never nominal Historical Costs: they are always Historical Costs updated to the current, i.e., today´s, real value in terms of today´s Daily CPI or other daily index when the financial statements are in a digital format, i.e., automatically updated daily.

This would result in daily updated real gross and net margins. It would result in daily updated real profit before tax, real tax payable, real dividends payable and real profit after tax, i.e. real net income; all continuously maintained constant in real value by means of financial capital maintenance in units of constant purchasing power and automatically updated to the current, i.e., today´s, Daily CPI or other daily index. This would result in the automatic maintenance of the constant purchasing power of capital in all entities that at least break even in real value – ceteris paribus – at all levels of inflation and deflation.

This would maintain (instead of erode) hundreds of billions of US Dollars in real value in the world´s capital investment base each and every year at the current level of world inflation.

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Nicolaas Smith

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