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Wednesday, 15 October 2008

It does make a big difference


Nicolaas Smith

Fin24

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.