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Thursday 9 February 2012

General purpose financial reports are designed to show the value of a reporting entity

General purpose financial reports are designed to show the value of a reporting entity

The Conceptual Framework for Financial Reporting (2010), paragraph OB7 states:

‘General purpose financial reports are not designed to show the value of a
reporting entity.’

A reporting entity´s value can be one of three values:

1.       Real market value
2.       Real intrinsic value
3.       Real net asset value

The Conceptual Framework is correct in the case of real market value and real intrinsic value. General purpose financial reports are not designed to show the real market value or real intrinsic value of a reporting entity.

It is stated in the original Framework (1989), Par. 104 (a) [now Conceptual Framework (2010), Par. 4.59 (a)]:

‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

General purpose financial reports prepared under the concept of capital maintenance in units of constant purchasing power in terms of a Daily Consumer Price Index or daily rate (e.g. the daily US Dollar parallel rate during hyperinflation) are designed – as a result its combination with the double-entry accounting  model – to automatically maintain the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation – ceteris paribus – whether they own any revaluable fixed assets or not.

The real value of capital is always equal to the real value of net assets under capital maintenance in units of constant purchasing power in terms of a Daily CPI or daily rate.

Conclusion:

General purpose financial reports prepared under the concept of capital maintenance in units of constant purchasing power as authorized in IFRS are designed to show the real net asset value of a reporting entity and to maintain it constant for an indefinite period of time as qualified above.

The real net asset value of an entity as reported on the date of the statement of financial position is only valid for that day when the statement is accessed or viewed on that day. Thereafter the historic constant real net asset value of the entity as reported on the date of the statement of financial position remains constant for an indefinite period of time, but, its nominal value changes daily in terms of a Daily Consumer Price Index or other daily rate.

Monetary items in the historic statement of financial position or other financial report have to be inflation-adjusted, variable items have to be updated and constant items have to be measured in units of constant purchasing power in terms of the current (today´s) Daily CPI or other daily rate after the date of the financial report.

The actual real net asset value of an entity also generally changes daily as a result of an entity being a going concern and generally involved in daily operations.

Nicolaas Smith

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

1 comment:

  1. Best information. I appreciate about your post. Do you know about tax returns are due again ?
    Thanks

    ReplyDelete