According to Irving Fisher, nominal interest rates are comprised of two components: (1) the real interest rate and (2) the anticipated rate of inflation. When inflation is perfectly anticipated, the decline in the purchasing power of a lender’s claim is offset by the difference between the real and nominal interest rates. Only when the actual rate of inflation differs from the anticipated rate will there be an
The FASB requires that inflation gains be measured by taking the product of the observed rate of inflation and the book value of outstanding debt. They call the result the
In contrast, current cost accounting for debt monitors changes in its market price, terming these changes
Under the financial capital maintenance concept, income consists of the flow that can be distributed without eroding the beginning-of-period market value of net assets. Holding gains on assets are treated as distributable income. Because a decrease in the market value of debt constitutes a net increase in owners’ equity, it too must be treated as distributable income if this concept is to be internally consistent.