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Wednesday, 12 August 2009

Normal and inflation accounting - for dummies

Inflation accounting is used during very high inflation and hyperinflation.

Hyperinflation is at least 100% cumulative inflation after 3 years: i.e. 26% annual inflation for 3 years in a row.

The International Accounting Standards Board requires companies in a hyperinflationary economy to implement their Constant Purchasing Power inflation accounting (CPPA) model formulated in International Accounting Standard IAS 29.

It is quite a simple process.

All non-monetary items are inflation-adjusted by means of the CPI.

The IASB also authorized SA accountants 20 years ago to use Constant ITEM Purchasing Power Accounting (CIPPA) during low inflation.

With CIPPA companies inflation-adjust ONLY constant items, eg. salaries, wages, rentals, companies capital, retained profits, trade debtors, trade creditors, taxes payable, taxes receivable, etc during low inflation.

In this way companies maintain these items´ constant real values during low inflation.

But, SA accountants have to actually CHOOSE this Constant ITEM Purchasing Accounting model instead of the traditional Historical Cost Accounting model.

All SA accountants pick the traditional HCA model. They at least inflation-adjust salaries, wages, rentals and some other income statement items. They value all other constant items at historical cost and thus unknowingly destroy their real values at a rate equal to the rate of inflation.

Not a single SA accountant picks the CIPPA model because hardly any one of them even know that there is a choice.

Do you know an accountant? Ask him or her about the two choices in basic accounting during low inflation approved by the IASB. I don´t think you will find many who even know about the choice they make when they use International Financial Reporting Standards.

SA accountants unknowingly destroy about R200 billion PER ANNUM in this way.

When they pick the CIPPA model as authorized by the IASB 20 years ago, they will maintain that R200 billion PER ANNUM forever.

SA accountants  refuse point blank to do this.

They will rather unknowingly (?) destroy about R200 billion PER ANNUM in the SA real economy.

They are really unknowingly (??) doing us all in quite a bit.

Do you know any accountants?

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