Real Value Accounting - The Next Step in Our Fundamental Model of Accounting

Abstract:     
Historical Cost Accounting is the global generally accepted basic accounting model. It recognizes two economic items:

1. Monetary items (monetary items and certain non-monetary items classified as monetary items - in terms of the IASB definition of monetary items).

2. Non-monetary items: variable real value non-monetary items valued, for example, at fair value, market value, present value, net realizable value, recoverable value - and historical cost items based on the stable measuring unit assumption which makes these HC items equal to (1) monetary items.

The International Accounting Standard Board's International Standards only identify monetary and non-monetary items. The split between variable and constant real value non-monetary items is generally overlooked as a result of the implementation of the stable measuring unit assumption - the cornerstone of the Historical Cost Accounting model - whereby it is accepted in low cash inflationary economies that the functional currency's internal real value is constantly being destroyed by cash inflation - but, this destruction of real value is regarded as of not sufficient importance to adjust the real values of constant real value non-monetary items in the financial statements. They are valued at historical cost which results in their destruction at the rate of inflation/hyperinflation year after year. This destruction commenced in about the year 1300 when the double entry accounting model was introduced.

Real Value Accounting

Three economic items:

I. Monetary items (only money and accounted monetary values pertaining only to money)

II. Variable real value non-monetary items (the same as under HCA excluding the stable measuring unit assumption).

III. Constant real value non-monetary items (The Third Economic Item constantly having been and being destroyed at the rate of inflation and hyperinflation - when there was and is inflation and hyperinflation - in all entities with double entry accounting since 1300 - the beginning of the double entry accounting model). RVA stops this destruction.

RVA identifies inflation's second component, namely, Historical Cost Accounting inflation.

The stable measuring unit assumption is revoked under RVA.

Keywords: accounting, real value accounting, inflation, stable measuring unit assumption, Historical Cost Accounting, IAS 29, International Financial Reporting Standards, International Accounting Standards, International Accounting Standards Board, deflation, hyperinflation, real value, CPI

JEL Classifications: M41, M44, M47

Working Paper Series