ABSTRACT
The current broad principle of defining the unit of measure in terms of the debt-paying power of the dollar can result in strange information. To illustrate, an investment was bought in 1945 for $10,000 and sold in 1995 for $15,000. Defining the unit of measure that way and applying the realization principle results in reporting income of $5000 in 1995. The general purchasing power of the dollar, measured by the Consumer Price Index, fell about 88 percent from 1945 to 1995. In terms of general purchasing power, each dollar received was worth about 12 percent of what each dollar paid was worth. $10,000 was considerable wealth in 1945. It would buy a new house. $15,000 was a lot less wealth in 1995. It would barely buy a new car. So we financial reporters would report income of $5000 in circumstances in which people who aren’t financial reporters would say that the investor lost her shirt. (People who aren’t financial reporters aren’t imbued with the idea that inflation doesn’t matter. To test that, ask someone who isn’t a financial reporter what she would say to her financial reporter friend who bragged about a 20 percent raise she got at the end of a year in which there was 50 percent inflation. That’s no worse than her reporting the $5000 income.)
The AICPA and the FASB each once felt the same, as indicated in the opening quotes. This sentiment agrees with that sound view:
To the extent that growth of the corporation is overstated because it is reported in dollars without measurement of their decline in value, then society, corporate management, and the stockholder are all misguided.
