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Tuesday, 29 April 2008

SA Chartered Accountants, unwittingly, destroy real value on a huge scale

Reserve Bank governor Tito Mboweni recently hiked interest rates, despite real concern over the impact this will have on sustainable economic growth.

SA Chartered Accountants unintentionally destroy real value in the real economy on a huge scale with their assumption that the Rand is perfectly stable only for the purpose of accounting constant value items. This has an as yet unmeasured negative impact on Gross Domestic Product and sustainable economic growth.

There is an option that would make this destruction of the SA real economy by our Chartered Accountants impossible – if they so choose. They can also be ordered by their superiors in business and government to stop their very destructive assumption if they now knowingly carry on with this destruction.

Inflation results in the destruction of real value in monetary items and constant items over time.

Inflation has two components: a monetary component: monetary inflation and a non-monetary component: Historical Cost Accounting inflation. Chartered Accountants can stop the second component completely which will stop the destruction of real value in the real economy completely.

What causes monetary inflation is a very complex economic process which should be dominated by Tito Mboweni and the SARB as it is dominated by the Federal Reserve Bank, the European Central Bank and the Bank of England, for example.

Historical Cost Accounting inflation is caused by the combination of 10.6% (Mar 08) inflation and SA Chartered Accountants´ implementation of the stable measuring unit assumption (an Historical Cost Accounting practice) throughout the whole of the SA economy.

Monetary inflation will destroy 10.6% of the real value of all current (Mar 08) monetary items in SA over the next year - all else being equal.

Historical Cost Accounting inflation will result in the destruction by SA accountants during the next 12 months - all else being equal - as they did in previous years at the average rate of inflation, of:

(a) 10.6% of the real value of all listed and unlisted SA companies´ retained income, share premium, capital reserves and other [excluding (b)] constant real value non-monetary items never updated; plus

(b) 10.6% of the real value of the issued share capital of all SA companies with no well located and well maintained land and/or buildings or other variable real value non-monetary items able to be revalued at least equal to the original real value of each contribution of issued share capital; plus

(c) a further unknown amount (less than 10.6%) in the real value of constant real value non-monetary items not fully updated, e.g., salaries, wages, rents, fees, royalties, retainers, income taxes, company taxes, value added taxes and all other constant items not fully updated.

This will result in a reduction in GDP and the economic rate of growth in SA as it always did in the past and as it always will in the future as long as SA Chartered Accountants apply the stable measuring unit assumption only for this purpose.

The destruction of real value in the real economy by SA Chartered Accountants will stop when they stop their assumption that the Rand is perfectly stable only for the purpose of accounting constant items never or not fully updated.

We will still have 10.6% (Mar 08) cash inflation in the monetary economy – all else being equal – but we will have 0% inflation in the real economy with an (as for now unknown) increase in GDP and sustainable economic growth in SA when our CA´s stop the stable measuring unit assumption.

Inflation would then only have a monetary component, namely, monetary inflation.

Historical Cost Accounting inflation would be impossible since there would be no Historical Cost Accounting. All constant real value non-monetary items would automatically be updated every time the Consumer Price Index (CPI) changes.

SA Chartered Accountants would automatically maintain tens (probably even hundreds) of billions of Rands annually in real value in retained income and other constant value items when they update them monthly - instead of destroying real value on a massive scale in the SA real economy as they are currently doing and as they have always done in the past and as they will continue doing in the future if they do not stop that assumption.

No-one stops us from revoking the stable measuring unit assumption. The Historical Cost Accounting model is not required by SA law or by SA Generally Accepted Accounting Practice or by the International Accounting Standards Board or by International Financial Reporting Standards or by International Accounting Standards.