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Friday, 30 May 2008

Nicolaas Smith on 2008/05/30 01:09:08 AM - Re: Bradley

Nicolaas Smith on 2008/05/30 01:09:08 AM - Re: Bradley

Finweek

"Not updating share capital doesnt destroy any value, not in any real sense at least."

It only destroys real value at the annual rate of inflation in 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. Companies can always revalue land and buildings and add the revaluation reserve to capital when they have those assets. When do not have them like many thousands in SA do not have, then real value of their issued share capital is destroyed at the annual rate of inflation.

"The share capital number in the balance sheets is just that, a number."

No it is not. It is a constant real value non-monetary item. See IAS 29. Under hyperinflation (26% pa continuous inflation) the IASB mandates you to update capital as it is a non-monetary item. They are just completely illogical not to allow you to do it under non-hyperinflationary conditions like in SA. That is obviously wrong.

"What use would there possibly be in increasing this by inflation?"

As the IASB states in IAS 29: capital is a non-monetary item and its real value must be updated. Capital is a constant real value non-monetary item and must be updated at the monthly inflation rate in SA. All SA companies with no items to revalue are having their capital destroyed by accountants stable measuring unit assumption at the annual rate of inflation.

"Does it change the underlying value of the company? No."

Yes it does. Updating the issued share capital as well as retained income at the monthly rate of inflation obviously changes the underlying value of the company. R111 million is clearly different from R100 million. That is very obvious.

"When a company issues shares, it gets he money, an amount equal to share capital. How does updating this amount monthly, or yearly, by inflation improve anything?"

Remember the IASB mandates you to update capital under hyperinflation. My example: You start a company today with R100 million. Without updating: In 30 years time at continuous 10% annual inflation that R100 million will still be in the balance sheet but it will have lost 88% of its real value: it will be worth R12 million in today´s real value.

Updating it monthly at the inflation rate means that in 30 years time it will still be worth R100 million in today´s real value - it´s nominal value in 30 year´s time will be R1 744 940 227 or R1.7 trillion. Its real value will still be R100 million in todays terms. Take your pick. The IASB says you can do it only under hyperinflation. That is obviously a complete mistake.