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Friday, 14 August 2009

One very deluded Historical Cost Market Monkey

Market Monkey said:

"The problem with your capital "raising" is that it doesn't raise any REAL money. You know. The stuff you use to actually buy things and services with. If you don't get the distinction between the funds raised via preference shares and an increase in funds due to an accounting change I'm gonna have to stop visiting and conclude you are one very deluded monkey. MM."
Real Value Accountant said:
"Hi Market Monkey,

I was getting worried. You have been very quiet lately. Thought you went off to meditate units of constant purchasing power in Tibet? :-)

You must believe me that I am not actually a snake oil salesman. I am just finishing off something I got involved in – by chance - 15 years ago trying to sort (and actually sorted out) out what was going on in the hyperinflationary Angolan economy. But, that´s another story.

What I state is actually correct and true. I did not invent this. The International Accounting Standards Board did. Read Paragraph 104 (a). It states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power." It is NOT of my making. I am just the messenger. I got involved by chance. I am simply the office messenger delivering the letters from the big bosses in London.

You are not up against me: you are taking on the IASB – Sir David and the boys in London – including Geoffrey Whittington, amongst others.

Why do you think the IASB approved financial capital maintenance in units of constant purchasing power if they had not subjected it to due process first? This is not of my making.

The IASB approved Constant ITEM Purchasing Power Accounting model (my name for it: the IASB formulated it in April, 1989. But, no-one has been using it for the last 20 years: so, there was no need for it to have a name; so, now I named it CIPPA) is not just an accounting change with no real world effect.

“A picture is worth a thousand words.”

So, I will try and show you some account “pictures”:

Your way of doing accounting: The Historical Cost Accounting model – used by all SA accountants:

Year One

Assets: Debit: Trade debtors R100 million
Liabilities: Credit: Capital R100 million

Your complete balance sheet.

After a year at 6.9% inflation and no activity for a year your auditors audit your accounts and give you an unqualified audit report in Year Two stating that the following FAIRLY reflects your business and your accounting is compliant with IFRS:

Year Two

Assets: Debit: Trade debtors R100 million
Liabilities: Credit: Capital R 100 million

Remember: this is after one year of no activity with inflation at 6.9%

Here are the IASB (not my) Constant Item Purchasing Power Accounting balance sheet which is also complaint with IFRS:

Year One

Assets: Debit: Trade Debtors R100 million (we assume today is 31.12 Year One)
Liabilities: Credit: Capital R100 million (we assume today is 31.12 Year One)

One year later with no activity and inflation at 6.9%:

Year Two

Assets: Debit: Trade Debtors R106.9 million (we assume today is 31.12 Year Two)
Liabilities: Credit: Capital R106.9 million (we assume today is 31.12 Year Two)

On 1st January Year Three you go and collect your R100 million from your debtors. We assume we are using the Historical Cost paradigm.
On 1st January Year Three the IASB go and collect their R106.9 million from their debtors. We assume we are using he Constant Purchasing Power paradigm.

The IASB collected ACTUAL Rands – the same as “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with.”

Sir David from the IASB likes rugby. He was in Cape Town at the time and the Boks were playing he All Blacks at Newlands. He took some of that R106.9 million of REAL Rands he collected from his trade debtors and bought a ticket to watch the Boks live at Newlands.

You only collected your miserable R100 million – destroyed in real value by 6.9% inflation. YOU did not have the extra Rands like “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with”, so you watched the game on TV at home.

YOU did not collect those REAL extra Rands. YOU collected you nominal monetary unit Historical Cost Rands destroyed at 6.9% by SA inflation.

Now, you want to tell me that under the IASB approved – not the Nicolaas Smith invented – Constant Item Purchasing Power Accounting model there is no “REAL money. You know. The stuff you use to actually buy things and services with.”

So, what I am promoting generates REAL FUNDS like “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with”.

Market Monkey, I´m sure you get it now.

As you can see: it is DOUBLE ENTRY ACCOUNTING. Real funds are generated because it is DOUBLE ENTRY ACCOUNTING. It is not just a one-sided accounting entry.

So, Market Monkey: who is deluded? You with your nominal historical cost monetary units destroyed at the rate of inflation (YOU may think they are worth the same as a year ago - I don´t know) or the IASB with their hands full of inflation adjusted constant real value non-monetary items in REAL Rands?
It is a complete paradigm change - as you may realize by now. This is also "by chance". When I got involved in 1994 I had no idea where this logical journey would lead me. I just take one logical step at a time.

Kindest regards,

Nicolaas Smith