Stable measuring unit concept assumes that the base currency used to prepare financial statements is constant in real value i.e. purchasing power of money is stable and is not significantly affected by inflation or deflation to require:
- either change in capital maintenance method
- or adjustments to financial values of financial statements.
It is also called stable dollar assumption, stable currency assumption, stable monetary unit concept. It is one of the important assumptions under historical cost accounting.
As per accounting frameworks, financial information is required to relevant, reliable and comparable among other qualities for it to be usable by users of financial statements. Stable currency assumption plays a key role for historical cost approach as stable currency concept implies the inflation or deflation is non-existent i.e. rate is zero. This makes historical cost approach viable as historical values are relevant in future periods and for comparing financial results of different fiscal periods.
ABC borrows 1 million from XYZ bank payable in lump sum after 10 years. Loan is interest free and no other amount is payable in addition to principal amount. The inflation is 5% on average in the economy ABC is operating.
ABC will record this as a non-current liability and no adjustment will be made in future period for the effects of inflation as historical cost account assumes currency is stable for real value from one period to next. Therefore, no adjustment of 5% inflation will be made.