Erosion of real value of monetary and constant items caused by Historical Cost Accounting

January 7, 2013 in Uncategorized

Erosion of real value of monetary and constant items caused by Historical Cost Accounting

Cost of inflation and hyperinflation caused by Historical Cost Accounting
It is possible to have inflation and hyperinflation with no erosion in the real value of monetary items: simply inflation-adjust all monetary items daily: do not implement the stable measuring unit assumption: i.e., do not implement Historical Cost Accounting: implement its alternative authorised in IFRS: Capital Maintenance in Units of Constant Purchasing Power: i.e. never implementing the stable measuring unit assumption.
The same is true for constant real value non-monetary items.
Erosion of the real value of monetary and constant items over time during inflation and hyperinflation is caused by HCA: i.e., the implementation of the stable measuring unit assumption.
Inflation and hyperinflation only necessitate the updating – in terms of a changing nominal monetary unit of account – of the nominal value of the same real value because (1) the real value of money is determined by the change in the CPI in the case of monetary items´ real value during low inflation (USD parallel rate during hyperinflation) and (2) because money is the monetary unit of account in the measurement of constant real value non-monetary items.
Inflation and hyperinflation only have a cost in the economy under Historical Cost Accounting: HCA causes the cost of inflation and hyperinflation: i.e., when the stable measuring unit is implemented: when it is assumed (for practical or lack of the necessary instantaneous update technology) that money is perfectly stable over time.
When the stable measuring unit assumption is never implemented during inflation, there is no cost of inflation.
Historical Cost Accounting is the cause of the erosion of real value in monetary and constant items in the economy.
Inflation and hyperinflation are harmless without Historical Cost Accounting. Inflation and hyperinflation are toothless without the stable measuring unit assumption implemented under Historical Cost Accounting.
The cost of inflation and the cost of hyperinflation are caused by Historical Cost Accounting: by the implementation of the stable measuring unit assumption.
Actual inflation and hyperinflation are caused by an increase in the general price level. An increase in the general price level is caused by various economic factors, an important one being an excessive increase in the money supply.
Inflation and hyperinflation are an increase in the nominal value of the same real value over time.
Stop Historical Cost Accounting (implement Capital Maintenance in Units of Constant Purchasing Power as authorised in IFRS twenty three years ago) and there are:
  1. no stable measuring unit assumption,
  2. no cost of inflation – no erosion of the real value of monetary items during inflation,
  3. no cost of hyperinflation – no erosion of the real value of monetary items during hyperinflation,
  4. no erosion of constant real value non-monetary items (e.g., capital, non-monetary receivables, non-monetary payables, etc.) during inflation and hyperinflation,
  5. no creation of real value in monetary items during deflation and
  6. no creation of real value in constant real value non-monetary items (capital, non-monetary receivables, non-monetary payables, etc.) treated as monetary items during deflation.
Stop HCA and you fix erosion caused by the stable measuring unit assumption in the world economy during inflation and hyperinflation.
There will be no erosion of real value caused by the stable measuring unit assumption in the world economy when there is no HCA – when HCA is replaced by CMUCPP as authorised in IFRS twenty three years ago.
The stable measuring unit assumptiom is a much bigger enemy than inflation and hyperinflation. Inflation is toothless without HCA. HCA causes the cost of inflation. Without HCA there is no cost of inflation. 

Without HCA there is no cost of inflation PLUS  no cost of the erosion of constant items by the stable measuring unit assumption.
Historical Cost Accounting causes the cost of inflation and the cost of hyperinflation in the monetary economy.
The cost of the stable measuring unit assumption is made up as follows:
  1. The cost of stable measuring unit assumption in constant real value non-monetary items never maintained constant under HCA during inflation and hyperinflation and
  2. The cost of inflation and the cost of hyperinflation.
The stable measuring unit assumption is the real enemy in the economy: double the size of the cost of inflation or hyperinflation. The cost of inflation or hyperinflation in the monetary economy is only half the problem.
Accounting always recognized the total cost of the stable measuring unit assumption: accounting confused it as all (100%) being caused by inflation and hyperinflation. It is 100% caused by the stable measuring unit assumption: by HCA.
The cost of inflation / hyperinflation is caused by the implementation of the HCA model. The cost of inflation / hyperinflation is caused by the implementation of the stable measuring unit assumption under the HCA model.
Stop the stable measuring unit assumption (implement Capital Maintenance in Units of Constant Purchasing Power as authorised in IFRS twenty three years ago) and you stop the cost of inflation / hyperinflation – not actual inflation or hyperinflation. An increase in the general price level (inflation / hyperinflation) is the result of a combination of various economic factors: a very important one being an increase in the money supply.
The stable measuring unit assumption is a Generally Accepted Accounting Practice – also a US GAAP and UK GAAP – implemented by all accountants worldwide as authorised in IFRS and US GAAP.
Not implementing the stable measuring unit assumption stops the cost of inflation / hyperinflation at all levels of inflation and hyperinflation as proven by the daily inflation-indexing of government capital inflation-indexed bonds in low inflationary economies (e.g., USD 835 billion TIPS in the US – Jan 2013) and hyperinflationary economies: Venezuelan government capital inflation-indexed bonds. USD 3.5 trillion + of sovereign capital inflation-indexed bonds are currently inflation-indexed daily in the world economy (Jan 2013).
Inflation-index the entire money supply on a daily basis in an economy (Chile currently inflation-indexes 25% of its broad M3 money supply and Colombia inflation-indexes all mortgage bonds daily) and there would be inflation or hyperinflation in an economy, but no cost of inflation or hyperinflation; i.e., no erosion of the real value of monetary items excluding bank notes and coins with their nominal values permanently printed on them.
CMUCPP would stop the erosion of real value in monetary items (as qualified above) as well as in constant real value non-monetary items, but it would not necessarily stop inflation or hyperinflation. CMUCPP stops erosion – not inflation or hyperinflation – in the economy at all levels of inflation and hyperinflation. It would be as if there is no inflation or hyperinflation with actual inflation or hyperinflation.
The cost of inflation / hyperinflation (not inflation / hyperinflation) is caused by the HCA model. No HCA equals no cost of inflation / hyperinflation.
The HCA model is an inappropriate accounting model at all levels of inflation and deflation.

Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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