Wednesday, 15 October 2008
Oct 15 2008 23:23
Some clarification about the R200 billion unknowingly being destroyed in SA retained earnigns balances by Chartered Accountants implementing the stable measuring unit assumption in combination with inflation:
+/- R200 billion PER ANNUM will be maintained for an unlimited period of time PER ANNUM - all else being equal: a new +/- R200 billion PER ANNUM each and every year FOREVER - all else (including 13% inflation) being equal.
Inflation is hopelessly too high in SA. The higher inflation the higher the value and vice versa. It is PER ANNUM for an unlimited period of time. It does make a big difference. And that is only with respect to real value destroyed or maintained in retained earnings balances.
It is also very interesting that IFRSs are already prepared for rejecting the stable measuring unit assumption via Par 104 (a) in the IASB´s Framework: ""Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
I think the reason the majority of accountants world wide choose nominal monetary units instead of units of constant pruchasing power is because of relatively low inflation world wide - or the absence of very high inflation.
Brazil chose units of constant purchasinc power during 30 years of hyperinflation: from 1964 to 1994 BECAUSE they were in hyperinflation. They implemented units of constant purchasing power via their indexing of all non-monetary items during those 30 years.
In that way they maintained their real economy while they had hyperinflation in their monetary economy.
Oct 15 2008 21:46
What about the +/- R200 billion real value destroyed in retained earnings annually in the SA real economy by Chartered Accountants implementing the stable measuring unit assumption? That value will be maintained for an unlimited period of time when CA´s stop the stable measuring unit assumption. Also remember that 90% of private sector investment is funded from retained earnings. Rejecting the stable measuring unit assumption is already part of IFRS´s since it is part of The Framework (Par. 104 a )Rejecting the stable measuring unit assumption will make the hyperinflationary or high inflationary destruction of the SA real economy impossible. Impressive advantages to just brush away. I´m sure the SA government will be quite interested to hear the full story. I plan to tell them and everyone in SA the full story. http://realvalueaccounting.blogspot.com/
Oct 15 2008 21:06
You've been banging on about this for a long time. However, true though it may be, businessmen dont like it! It helps them to have equity and assets stated at artificially lower values, because it inflates ROE, ROA etc! Of course, its good in another way too. They can point to higher, more recent COS and use this as an excuse to increase prices! These are the real reasons businesses don't want RVA. I dont believe they can be persuaded otherwise. It would have to be a statutory rule
Tuesday, 14 October 2008
Collateralised Debt Obligations (CDOs) are variable real value non-monetary items valued at fair value. They are neither constant real value non-monetary items nor monetary items.
Real Value Accounting deals with the inflation-adjustment of historical cost non-monetary items or constant items; for example, issued share capital, retained earnings, all other items in shareholder´s equity, trade debtors, trade creditors, deferred tax assets, deferred tax liabities, etc.
Under Real Value Accounting banks´ issued share capital, retained earnings, capital reserves (excluding the revaluation reserve under current Historical Cost accounting - non-existent under Real Value Accounting) and all items in shareholder´s equity would be updated from the date each item was contributed at the rate of inflation over the time period to today´s date.
Banks would thus maintain the real value of their equity instead of having the real value of their capital destroyed at the rate of inflation under the current Historical Cost paradigm which is an important part of the current problem: see governments recapitalizing banks.
Also see the blatantly small values for historical cost share capital in older multinationals´ balance sheets compared to the large more recently contributed retained earnings balances.
The real values of the banks´ issued share capital values as well as their retained earnings balances were always in the past destroyed during inflationary periods because accountants applied the stable measuring unit assumption as they do today and will in the future be destroyed at the rate of inflation as long as accountants carry on applying the stable measuring unit assumption.
This destruction will stop under Real Value Accounting: that is, when accountants choose to maintain capital in units of constant purchasing power in terms of the IASB´s Framework Par. 104 (a):
"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
One small step for accountants; one giant leap for mankind.