Accounting constant items never updated at historical cost destroys their real values

The third economic item is a constant real value non-monetary item.

Constant items are real value non-monetary items with constant values over time.

Examples are issued share capital, retained earnings, all other items in shareholders´ equity, trade debtors, trade creditors, taxes payable, taxes receivable, all income statement items, etc.

When constant items are never updated, their real values are destroyed by accountants implementing the stable measuring unit assumption.

Accountants normally update or inflation-adjust some income statement items, eg. salaries, wages, rentals, etc in all low inflation economies, including in SA.

The only way the real value of shareholders´equity can be maintained under Historical Cost Accounting is when 100% of the original updated real value of all contributions to shareholders´ equity are invested in revaluable fixed assets that are continuously revalued via the Revaluation Reserve.

It is very unlikely that any company invests 100% of the original updated real value of all contributions to shareholders´ equity in revaluable fixed assets.

This means that the real value of all retained earnings in all banks and companies are unknowingly being destroyed at a rate equal to the annual rate of inflation by SA accountants implementing the stable measuring unit assumption.

This amounts to about R200 billion per annum in the SA economy.

To be continued ......

Kindest regards,

Nicolaas Smith
Banned by SAICA


My analysis of the unknowing and unintentional destruction of constant item real value in the SA economy caused by SA accountants´ selection of the stable measuring unit assumption does not alter by one iota the high standing and credibility of SA accountants, the South African Institute of Chartered Accountants, the SA accounting and auditing professions, teaching of accounting and auditing in SA or any individual mentioned by name in my statements.

Rejecting the stable measuring unit assumption, i.e. SA accountants selecting financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) twenty years ago (which is compliant with IFRS), is simply a logical, but, long overdue constant item real value maintaining improvement in basic accounting which, I am confident, will be speedily implemented after proper due process in South Africa.

Accounting a property value at historical cost does not destroy its real value.

The second economic item is a variable item.

Variable items are real value non-monetary items with variable real values over time.

Examples are property, plant equipment, inventory, quoted and unquoted shares, finished goods, foreign exchange, etc.

SA accountants value variable items correctly in term of SA Gaap or IFRS at, for example, market value, present value, fair value, recoverable value, net realizable value, etc.

SA accountants do not unknowingly destroy the real value of variable items because they value them at Historical Cost, for example.

When accountants value properties at historical cost, i.e. they show them at their original nominal values in the financial statements, they do not unkowingly destroy their real values.

When these properties are eventually sold, they will be priced at the market values at that time. No real value is unknowingly being destroyed like that.

Properties can be periodically revalued under Historical Cost Accounting rules and the increased values are debited to the property accounts and credited to the Revaluation Reserve account in the balance sheet.

Properties "valued" or stated at historical cost normally represent unknown hidden holding gains that are only realised when these properties are eventually sold in an open market.

To be continued .....

Kindest regards,

Nicolaas Smith
Banned by SAICA

Real Value Accounting - SA blog

My analysis of the destructive nature of the stable measuring unit assumption in the SA economy does not alter by one iota the high standing and credibility of SA accountants, the South African Institute of Chartered Accountants, the SA accounting and auditing professions, teaching of accounting and auditing in SA or any individual mentioned by name in my statements.

Rejecting the stable measuring unit assumption is simply a logical, but, long overdue improvement in basic accounting approved by the IASB 20 years ago which, I am confident, will be speedily implemented after proper due process in South Africa.

Three, not two, fundamentally different items in the economy

Accountants are taught that there are only two fundamentally different items in the economy, namely, monetary and non-monetary items.

That is wrong.

There are three fundamentally different items in the economy:

1. Monetary items

2. Variable real value non-monetary items

3. Constant real value non-monetary items


Monetary items are money held and items with an underlying monetary nature.


Examples of monetary items in today’s economy are bank notes and coins, bank loans, bank account balances, treasury bills, commercial bonds, government bonds, mortgage bonds, student loans, car loans, consumer loans, credit card loans, notes payable, notes receivable, etc.

To be continued ......

Kindest regards,

Nicolaas Smith
Banned by SAICA

Real Value Accounting - SA blog

The impact of inflation on the man in the street.

Milton Friedman correctly stated that "inflation is always and everwhere a monetary phenomenon." Inflation can only destroy the real value of the Rand and other monetary items like the real value of home loans originally made to home buyers. As inflation destroys the real value of the original loan amount at a higher rate than provided for by the bank at the time the loan was agreed, the bank has to increase interest on the loan to recover the updated real value of the loan plus a real profit margin.

Since inflation is only a monetary phenomenon, it is impossible - by definition - for inflation to have any effect on non-monetary items. Inflation has no effect on the real value of non-monetary items.

Inflation can only destroy the real value of money (the Rand) and other monetary items. Monetary items are money (Rands) held and items with an underlying monetary nature.

Non-monetary items are all items that are not monetary items.

Non-monetary items are sub-divided in variable real value non-monetary items and constant real value non-monetary items. Variable items are non-monetary items with variable real values over time. Variable items are items like property, plant, equipment, shares, inventory, finished goods, etc.

Variable items are correctly valued by our accountants in terms of SA Gaap or IFRS at for example fair value, market value, net realizable value, present value, recoverable value, etc. There are no unresovled problems (except the current developments in fair value) with the valuation of variable items.

Constant items are non-monetary items with constant real values over time. Constant items are items like issued share capital, retained earnings, share premium, share discount, capital reserves, all other items in shareholders´ equity, trade debtors, trade creditors, deferred tax assets and deferred tax liabilities, taxes payable, taxes receivable, all items in the profit and loss account, etc.

Our accountants value constant items at Historical Cost: i.e. they do not update their real values. The reason for this is that they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured either in nominal monetary units or in units of constant purchasing power."

Our accountants all choose nominal monetary units; i.e they all do their accounts based on the historical cost basis: i.e. they apply the stable measuring unit assumption. They assume that changes in the Rand´s purchasing power are not significant enough to require changes to the real values of constant items. They basically assume the Rand is perfectly stable ONLY for the valuation of the above constant items.

So what happens?

They correctly value certain income statement items in units of constant purchasing power. They thus inflation-adjust salaries, wages, rentals, etc annually like all other countries during low inflation.

BUT, when a SA company does not have revaluable property with an updated real value or hidden holding gains exactly equal to the original real value of all contributions to shareholders´ equity where they can continuously revalue the property or have sufficient holding gains to maintain shareholders´ equity´s real value, they destroy the real value of shareholders´ equity at a rate equal to the annual rate of inflation - because the Rand is the unstable unit of account in our economy - when these values are never updated or there is a lack of revaluable variable items during indefinite inflation.

It is not inflation destroying, for example R3 billion in the real value of ABSA´s retained earnings last year and the same this year. It is ABSA´s accountants valuing their retained earnings balance at historical cost because ABSA´s board of directors selected the historical cost basis for doing their accounts. ABSA´s board of directors can change their mind and select to measure financial capital maintenance in units of constant purchasing power as they can freely do in terms of the IASB´s Framework, Par. 104 (a) which is compliant with IFRS.

What will happen when ABSA do that? They will maintain about R3 billion in the real value of their retained earnings each and every year for an unlimited period of time - ceteris paribus - instead of destroying about that amount annually for an unlimited period of time - ceteris paribus - as they unknowingly and unintentionally did last year and as they unknowingly and unintentionally do this year..

What does this mean for the man in the street?

Our accountants unknowingly destroy about R200 billion annually in the SA real economy in this manner. This is a conservative estimate. When SA rejects the stable measuring unit assumption and implements finacial capital maintenance in units of constant purchasing power as provided for 20 years ago by the IASB in the Framework, Par. 104 (a) about R200 billion will be maintained in our real economy for an unlimited period of time. This is compliant with IFRS - see Par. 104 (a).

A boost of about R200 billion per annum for an unlimited period of time in the SA economy will lead to a stronger economy, more jobs, maintenance of investment capital in banks and companies, etc.

This will obviously benefit the man in the street.

Nicolaas Smith
Banned by SAICA

Accountants´ unstable unit of account is the only unit of measure that is not an absolute value

Accountants regard all non-monetary items stated at Historical Cost, whether they are variable real value non-monetary HC items or constant real value non-monetary HC items to be fundamentally the same, namely, non-monetary items – or, items that are not monetary items - when they implement the very destructive stable measuring unit assumption as part of the traditional HCA model during non-hyperinflationary periods.

This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always destroys the real value of money over time. It is thus impossible for money to be stable in real value during inflation.

On the other hand, inflation has no effect on the real value of non-monetary items.
The unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation. This means that the unit of measure in accounting is not a stable unit of measure during inflation and deflation.

Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measure that is not an absolute value. All other generally accepted units of measure are absolute values, e.g. metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.

Real value unknowingly and unnecessarily being destroyed by SAICA during 2009

The South African Institute of Chartered Accountants (SAICA) unknowingly destroyed about R 4 703 000 in the real value of the SAICA Group´s Accumulated Funds during 2008, as detailed below.

They are unknowingly and unnecessarily destroying about the same amount during 2009.


“Notes to the SAICA Group annual financial statements for the year ended 31 December 2008


2.3 Basis of preparation

The financial statements are presented in South African Rand rounded to the nearest thousand. They are prepared on the historical costs basis, except for the revaluation of the building and fair value of investments classified as available for sale.”


SAICA Group....................................Estm of R Val Destroyed
...........................Hist Cost......................Hist Cost... Real Value
.............................R´000..........................R´000........ R´000
...........................................................................May 09
....................CPI................................................... 106,6

SAICA Group.................Dec 07........Dec 08..........Dec 08
Annual Rep 31/12/08 CPI.....93,3.........102,2
AccumulatedFunds ...........47.272................4.509.............4.703

Chairman H H Hickey CA(SA)
Ex. President I S Sehoole CA(SA)

Independent Auditors
KPMG Inc.
Director: C Swart CA(SA)

SAICA 2008 Annual Report

The reason why SAICA unknowingly destroyed about R4.7 million in the real value of their Accumulated Funds is because they prepared the financial statements on the historical cost basis which includes the very destructive stable measuring unit assumption.

When SAICA chooses to maintain the real values of all their constant real value non-monetary items they are responsible for, not in real value destroying nominal monetary units, but in real value maintaining constant purchasing power units as they are authorized to do in terms of the International Accounting Standards Board´s Framework, Par. 104 (a) they will maintain the real value of their Accumulated Funds by an amount of about R4.7 million per annum for an unlimited period of time - ceteris paribus - instead of destroying about that amount each and every year for as long as they implement the very destructive stable measuring unit assumption.

Their notes to the Financial Statements also state:

"2.1 Statement of compliance
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS)."

Although they stated on their website on 27th August 2008 "We committed to and support IFRS as issued by the IASB.", they stated in the same statement that "We do not concur with the suggestion that the standards should reject the stable unit measuring assumption. "

The standards clearly

(1) reject the stable measuring unit assumption in IAS 29 Financial Reporting in Hyperinflationary Economies and

(2) authorize the rejection of the stable measuring unit assumption as an option in the IASB´s Framework, Par. 104 (a) which states that

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

So, on the one hand SAICA state that they support IFRS and on the other hand they say they do not concur that the stable measuring unit assumption should be rejected when, in fact, the standards alread do that in two instances - both authorized 20 years ago.

SAICA is very clear in their opposition to measurement in units of constant purchasing power: They stated on their website on 12 August 2008:

"Ultimately, inflation-adjusted accounts in a low inflation environment insult the user"

This is all very strange and contradictory because most countries in the world, including South Africa, inflation-adjust salaries, wages, rentals, etc during low inflation.

SAICA has a lot of explaining to do.

They refuse to discuss these matters with me.

They stated that my "constant repetition of the same theme ...... contains little by way of substance."

SAICA carried on and stated: "Mr Smith has beaten his drum long and often. It's been noted. The time has come to move on; to beat a different drum with a different theme."

Eventually they stated: "SAICA will make no further response to Mr. Smith's missives as we have clearly outlined our views."

Then they again deleted some of my statements and banned me from leaving comments on their forum.


See the thread:"R57.984 billion real value destroyed by CAs in 169 JSE listed companies"

on:

SAICA´s old forum - now inactive.


Kindest regards,

Nicolaas Smith
Banned by SAICA

Accountants generally choose the very destructive stable measuring unit assumption

It is generally accepted that the economy is divided in two parts: the monetary economy and the non-monetary or real economy. It is also generally accepted that there are two basic economic items in the economy: monetary items and non-monetary items. Monetary items are money held and items with an underlying monetary nature. Non-monetary items are all items that are not monetary items.
No distinction is generally made between the valuation of variable real value non-monetary items, e.g. property, plant, equipment, inventory, etc valued at Historical Cost and constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, Shareholders´ Equity and most items in the income statement also valued at Historical Cost.

This is the result of the fact that the economy is based on the Historical Cost paradigm. Historical Cost is the traditional measurement basis in accounting. It is thus generally accepted for accountants to choose to implement the very destructive stable measuring unit assumption during non-hyperinflationary periods.
One of the basic principles in accounting is “The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”


Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.
Non-monetary items are not all fundamentally the same. Non-monetary items are subdivided into variable real value non-monetary items and constant real value non-monetary items. The three fundamentally different basic economic items are, in fact, monetary items, variable items and constant items although it is generally accepted that there are only two basic economic items, namely, monetary and non-monetary items.