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Wednesday, 30 September 2009

Salaries and wages are normally inflation-adjusted

Salaries, wages, rentals, etc are normally inflation-adjusted in South Africa and generally too in most economies in the world.
Inflation-adjusted income statement constant real value non-monetary items, for example, salaries and wages, are – right this very moment - a blessing to users in SA – and all around the world - because they maintain the real value or purchasing power of salaries and wages during inflation as long as the inflation-adjustment is at least equal to inflation over the period in question. Millions of SA workers, their trade unions, the SA government, SA accountants and South Africans in general would agree that the practice of inflation-adjusting accounts in a low inflation environment is a blessing to users and does not insult them.
Inflation-adjusted balance sheet constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, etc in SA´s low inflation environment would be a blessing to everyone in SA when our accountants simply choose to change from their current implementation of the real value destroying traditional HCA model and freely choose to implement the real value maintaining Constant ITEM Purchasing Power Accounting model as approved in the IASB´s Framework, Par. 104 (a) twenty years ago. They would maintain - instead of currently destroy as they also did last year and all the years before - at least R200 billion annually in constant item real value in the SA real economy for an unlimited period – all else being equal – and as they will do next year if they carry on with their very destructive stable measuring unit assumption.


© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.

Monday, 28 September 2009

1970-style CPP inflation accounting was a failed inflation accounting model.

1970-style CPP inflation accounting was a failed inflation accounting model.

The difference between constant real value non-monetary items and variable real value non-monetary items is not generally known yet.
SA accountants freely destroy real value in the real economy with their assumption that the rand is perfectly stable only for the purpose of accounting constant value items, and have absolutely no concern about the negative impact this has on sustainable economic growth.

The destruction of real value in the real economy by SA accountants will stop when they stop their assumption that the rand is perfectly stable only for the purpose of accounting constant items never or not fully updated.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission

Inflation August, 2009

A slightly diffirent presentation of inflation facts for South Afrca. It would
be quite interesting to calculate the amount of real value destroyed over the
last 5, 10, 15, 20, 25 years, etc.

Annual inflation 6.4%


Annual destruction in real value of Rand by inflation R128 billion aprox


Annual constant item real value destruction by the implementation of the
stable measuring unit assumption by SA accountants R200 billion aprox


Cumulative inflation since Jan 1981 1 386.3%


Cumulative inflation since Apr 1994 167.2%


Real value unknowingly destroyed by SA accountants in Shareholders´ Equity items having remained in SA companies from Jan 1981 to Aug 2009 without an equivalent investment in fixed assets with the same fair value (revalued or with undisclosed holding gains) as a result of Historical Cost Accounting. 93.3%


The equivalent value from Apr 1994 to Aug 2009. 62.6%


Kindest regards,

Thursday, 24 September 2009

Who destroy more real value: Inflation or SA Accountants?

100% of the inflation-adjusted original real values of all contributions to Shareholders´ Equity have to be invested in revaluable variable item fixed assets with an equivalent updated fair value (revalued or with unrecorded hidden holding gains) in order not to destroy Equity’s original real value under the traditional Historical Cost Accounting model implemented by all companies in South Africa.

The current real value of the nominal portion not invested as such will be destroyed at a rate equal to the rate of inflation when the constant item Equity is measured in nominal monetary units, i.e. implementing the stable measuring unit assumption as done by all SA accountants.

Most companies do not meet the 100% requirement. In practice this means that the real value of Retained Profits of all SA companies and banks are unknowingly and unintentionally being destroyed at a rate equal to the rate of inflation by SA accountants implementing the real value destroying traditional Historical Cost Accounting model.

Implementing the IASB approved alternative, namely, financial capital maintenance in units of constant purchasing power as authorized in 1989 in the Framework, Par. 104 (a), would stop this destruction forever under all levels of inflation and deflation whether a company has fixed assets or has no fixed assets at all.

SA accountants would maintain instead of currently destroy about R200 billion per annum in constant item real value in the SA real economy when they reject the stable measuring unit assumption as approved in Par. 104 (a).

One percent inflation destroys about R20 billion per annum in the real value of the Rand in SA.

6.4% inflation thus destroys about R128 billion per annum in the real value of the Rand.

SA accountants unknowingly and unintentionally destroy about R200 billion per annum in the real value of constant items not fully or never updated because they implement the stable measuring unit assumption.

Kindest regards

Nicolaas Smith

Summary: The only way you can prevent your accountant from destroying the real value of your capital and retained profits at the rate of inflation with traditional Historical Cost Accounting is to invest 100% of your capital and retained profits in fixed assets. Hardly any company does that. It means that most companies´ and banks´ retained profits are unknowingly being destroyed by their accountants.

Under the alternative units of constant purchasing power accounting during low inflation your accountant would maintain the real value of your capital and retained profits forever no matter what the rate of inflation and even if you have no fixed assets - as long as you break even.

SA accountants are unknowingly terrible destroyers with their stable measuring unit assumption.

Sir David Tweedie´s perfect solution

Accountants are players in the business game because of their specialized knowledge in the monetary game and variable item game which they play together with other management team players. Accountants are always scorekeepers by training in all the games too.

Accountants do not have the assistance of other management team players in the constant item game they play against the stable measuring unit assumption enemy. In the selected income statement constant item game accountants are unbeatable world champions against the stable measuring unit assumption enemy. They inflation adjust salaries, wages, rentals, etc during low inflation and score all the time. The stable measuring unit assumption enemy never scores as long as accountants measure these items in units of constant purchasing power during low inflation.

Now comes the End Game.

The purpose of this game is to maintain the real value of the other income statement and all balance sheet constant items.

The game is played at Ellis Park.

Sir David Tweedie, Chairman of the International Accounting Standards Board leads a delegation from the Board at the game. The IASB has a magnificent exhibition inside the Ellis Park grounds where they demonstrate their indestructible Measurement in Units of Constant Purchasing Power Missile Attack System. This missile kills the stable measuring unit assumption enemy instantaneously whenever this missile is used for an indefinite period of time.

It is very strange that all the Boards of Directors of especially JSE listed companies stream past Sir David´s exhibition without anyone even stopping to look at the deadly weapon. When I ask one of the Board of Directors why that is, they say the exhibition has been there since 1989 and no-one has ever stopped to look at it.

SA accounting professors are Historical Cost gurus. They advised them that accountants are actually only scorekeepers and should not even be on the field playing against the stable measuring unit assumption enemy. They state that there is absolutely no substance in the claim that Sir David´s Measurement in Units of Constant Purchasing Power system can be used during low inflation. They all love the stable measuring unit assumption. They feel that they have proved themselves after their long Historical Cost teaching careers and that anyone who opposes them must be nuts.

I pointed out to them that Sir David has a big poster up saying: FOR USE DURING LOW INFLATION!! The Board of Directors say they don´t understand it especially after the professors´ specific instructions that accountants are only scorekeepers and never players. They seem to be very confused.

The End Game begins.

There are only accountants on the field against the massive stable measuring unit assumption enemy who uses the Historical Cost method. The accountants kick off at the start of the financial year. Then something extraordinary happens. All the accountants get a glazy look in their eyes as if they cannot see the stable measuring unit assumption enemy. They all turn around and meekly go and sit behind the try-line.

The stable measuring unit assumption enemy gathers the ball and trots through unopposed to score under the poles and converts the try. The next kick-off is by the ABSA accountants. After the kick-off they do the same. They quietly run back and sit down behind the try-line. The stable measuring unit assumption picks up the ball, scores under the poles and converts thus destroying about R3.4 billion in the real value of ABSA´s Retained Profits during 2009.

At the end of the game the stable measuring unit assumption enemy has destroyed R200 billion in the real value of SA constant items never updated. The game is over for the year. The accountants being well trained scorekeepers keep score during and after the game.

In this game they are only scorekeepers which prove the professors right – but, only for this mainly balance sheet constant item game. Not for any of the other games. This proves that when accountants are only scorekeepers in Historical Cost nominal monetary values for constant items never updated, real value is destroyed on a massive scale in the SA real economy.

Next year´s game will be exactly the same unless Sir David can get SA Boards of Directors to accept his free offer. He is a very patient man. He has been trying for the last 20 years with not a single free give-away in SA – or anywhere else in the low inflation world. Apparently a rogue SA accountant living in Portugal accepted his offer. Well, at least he managed one free give-away in twenty years.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission

Wednesday, 23 September 2009

All hell breaks lose in final game

All hell breaks lose in final game


We have seen up to now that accountants are always scorekeepers because of their specialized training and knowledge in the two accounting games looked at so far: the monetary item game and the variable item game.

But, they are always also important players in these two games. They are never just scorekeepers as SA accounting professors so eloquently claim. They and all their supporters in this aspect of accounting are dead wrong.

A very interesting point is that in the monetary item and variable item games accountants join all the other members of their management teams to play the business game. As players they all score when they make profits, are part of the profit making process or simply mangage to maintain the real values of economic items.

In the monetary item game they are up against the inflation enemy. There are no apparent enemies in the variable item game as the efficient market mechanism kills all enemies to the equilibrium of supply and demand. We must admit that it was actually a variable item enemy, bad mortgage credit, which caused the current international financial crisis.

The constant item game is a very different type of game. There is only one person who can play this game: the accountant. No-one else in the management team or any worker in the business game can play this game.

We find the second economic enemy in this game: the stable measuring unit assumption. Only accountants can fight against the stable measuring unit assumption.

This economic enemy is a remarkable enemy. It is a stealth enemy. No-one really knows that it is destroying the economy. Those who know, like Market Monkey, say it does not really make any difference. He and they are dead wrong.

The board of directors can acquire a deadly weapon for the accountant to kill the stable measuring unit assumption instantaneously. All boards of directors inexplicably refuse to do anything about it.


Accountants managed to break the constant item game up into two games: a selected income statement constant item game and a mainly balance sheet constant item game.

In the selected income statement constant item game accountants completely crush the stable measuring unit assumption enemy. They inflation adjust salaries, wages, rentals, etc and the stable measuring unit assumption enemy never ever scores as long as accountants value these items in units of constant purchasing power.

Accountants are world champions in this selected income statement constant item game. They never lose and the stable measuring unit assumption enemy never scores one single point against them.

Accountants are obviously also scorekeepers in this game. They are the only players on the field but they get invaluable help from trade unions off the field.

In the next post all hell brakes loose in the final game. You will never ever believe what happens.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission

Tuesday, 22 September 2009

Inflation accounting

As a result of the lack of appreciating the destructive nature of their implementation of the very destructive stable measuring unit assumption, 1970-style CPP inflation accounting was also not an accounting system implemented by accountants to correct or eliminate the destruction of the real value of constant items by the use of the stable measuring unit assumption, but, a failed attempt to simply make financial reports more understandable and more comparable with previous year statements during periods of high inflation by inflation-adjusting all non-monetary items equally in terms of the CPI.

Accountants simply do not appreciate that they unknowingly destroy real value on a massive scale in all constant real value non-monetary items never or not fully updated when they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation. They also do not appreciate that they make that choice. Neither do they appreciate that they will stop that destruction by freely choosing to measure financial capital maintenance in units of constant purchasing power, as approved in the IASB Framework, Par. 104 (a) in 1989.

Geoffrey Whittington in his definitive work on inflation accounting in the beginning of the 1980´s, Inflation Accounting - An Introduction to the Debate, published in 1983, clearly indicated that with 1970-style CPP inflation accounting all non-monetary accounts (with no distinction being made between variable and constant real value non-monetary item accounts) were updated by means of the CPI.

He stated that Constant Purchasing Power inflation accounting (CPP) was a method of inflation-adjusting all non-monetary accounts consistently by means of the Consumer Price Index which reflected changes in money’s purchasing power. 1970-style CPP inflation accounting tried to deal with the problem of inflation in the popularly understood sense, as a decrease in the real value of money. According to Whittington, CPP inflation accounting tried to solve this problem by inflation-adjusting all non-monetary items at the reporting date by means of the CPI.

Kindest regards,

Nicolaas Smith

Monday, 21 September 2009

Inconvenient Villains

Dictionary.com: villain - "Something/someone said to be the cause of particular trouble"

There are three basic economic items in the economy.

1. Monetary items
2. Variable items
3. Constant items

Accountants value everything they account. Every accounting entry accounts a debit value and a credit value.

1. Monetary items are items like money, bank account balances, car loans, housing loans, student loans, consumer loans, any loan in money, saving accounts, etc.

Accountants cannot value them wrongly: the only way accountants can value and account monetary items is at their original nominal values. Inflation destroys the real value of the Rand and monetary items. So, monetary items are always automatically kept at their always lower real values because inflation destroys their real values equally.

This loss in real value is, inexplicably required by accounting authorities to be calculated and accounted during hyperinflation, but not during low inflation. Why, no-one knows. The IASB authorized accounting in units of constant purchasing power during low inflation 20 years ago. Under this accounting model you have to calculate the real value loss in money during low inflation. But, not when you use the traditional Historical Cost Accounting model that the whole world uses. Why, no-one knows.

So, inflation and not accountants destroys the real value of your Rand balances you keep over time. So, don´t keep Rand balances and you will not lose any real value. Or if you keep Rands over time, you have to receive interest on that money at least equal to the inflation rate over that period. That is just to maintain the real value of your money. You still have not received and real interest. Just nominal interest if it is exactly equal to the inflation rate.

2. Variable items are things like fixed property, land, buildings, plant, machinery, equipment, computers, raw material stock, finished goods stock, etc.

Accountants again value all these items when they account them. They value them in terms of rules set forth in International Financial Reporting Standards or SA Generally Accepted Accounting Practice.

No value is destroyed here by accountants as long as they follow the rules correctly.

So here we have no problem.

3. Constant items are items like salaries, wages, rentals, companies´ capital, retained profits, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary receivables and all other non-monetary payables, etc.

Accountants value salaries, wages, rentals, etc in units of constant purchasing power. So, they inflation-adjust these items every year and thus keep their real values updated. You know that if your salary is not inflation-adjusted then its real value is destroyed – not by inflation (inflation can only destroy the real value of the Rand which is the medium of exchange used to pay the constant item salary) - but by the accountant that values your salary at Historical Cost. When the accountant values your salary in units of constant purchasing power or updates it in terms of inflation then you do not lose any real value in your salary. So, it is your accountant’s way of doing accounts that is maintaining the real value of your salary. It has nothing to do with inflation because it does not matter how high or how low inflation is, when your accountant inflation-adjust your salary you never lose real value.

Your accountant has to do the same with your company´s capital, retained profits if you keep profit behind in the company to grow the company, trade debtors, trade creditors, taxes payable, taxes receivable, etc. Not a single accountant in SA does that. By not updating these items in terms of inflation or not inflation-adjusting them, your accountant is unknowingly destroying their real values at a rate equal to the rate of inflation. It is not inflation doing the destroying because if your accountant values these items in units of constant purchasing power, that is, updates them in terms of inflation or simply inflation-adjust them, then your accounatant will maintain their real values constant forever – as long as your business at least breaks even.

The International Accounting Standards Board authorized your accountant to do that 20 years ago. Not a single accountant in SA does that because they do not understand and they are not taught that valuing these items at Historical Cost means they destroy their real values at a rate equal to the inflation rate. They also do not understand and they are not taught that when they inflation-adjust these items they maintain their real values constant forever as long as your business breaks even.

Kindest regards,

Nicolaas Smith

Variable item game: Accountants - Scorekeepers or players?

As we stated before: The accounting game is played on three fields:

1. Monetary item field
2. Variable item field
3. Constant item field

We already know that accountants are important players on top of being the official scorekeepers in the monetary item game. Accountants are thus naturally good at multi-tasking in the monetary item game: scorekeepers by training as well as value keepers because of their specialized knowledge of the subject matter of monetary items.

Accountants are always multitasking: they always value everything they account - there are different ways of valuing items - and they are always scorekeepers by training.

They are never just scorekeepers no matter what the accounting professors say. They are dead wrong. They can be rewarded as Emeritus Professor of Accounting at all universities in South Africa. They will still be dead wrong stating that accountants are simply scorekeepers of past events.

Now let’s scrutinize the variable item game.

Variable items have variable real non-monetary values over time. Examples are property, plant, equipment, raw materials inventories, finished goods stock, foreign exchange, etc. Accountants value them at market value, fair value, recoverable value, present value and at net realizable value in terms of International Financial Reporting Standards or SA GAAP.

The business game is mainly played on this field. We have to admit that the main players in this field are not accountants. Production, manufacturing, warehousing, transportation, marketing, publicity, sales, after sales service, insurance, customs, taxation, etc are mainly done by other members in the business game team. Accountants are mainly in operation as scorekeepers because of their specialized knowledge and training.

Accountants are, nevertheless, also important players in the variable item game: Valuing variable items incorrectly can even lead to the collapse of the world economic system as evidenced by the latest financial crisis. Accountants are thus important players in being true and valid value custodians: valuing variable items correctly where these values are not determined in the market: see the sub-prime crisis.


Accountants are thus multitaskers in the variable item game too: they are very important players – not in scoring goals by making sales, but, in valuing variable items – the values of which are not determined in the market place - correctly. They keep on faithfully fulfilling their general task as scorekeepers too – during and after the game.

But, they are not just scorekeepers as the accounting professors and their followers claim. As I stated before: they are dead wrong.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission

Friday, 18 September 2009

Monetary game: Accountants - Scorekeepers or players?

The accounting game is played on three fields:

1. Monetary item field
2. Variable item field
3. Constant item field

1. Monetary item game

This game is played in war conditions. The enemy player is inflation. The purpose of the game is to maintain the real value of money and at the same time to make a profit. Accountants value all items in the economy and are thus always players. By nature they are also always scorekeepers.

The enemy inflation is always destroying the real value of money and so is continuously scoring. It is impossible for the accountant to maintain the real value of money constant during the game (the current financial year) no matter which accounting model the accountant uses. The accountant and other members of his team use various tactics to make extra money or profit to make up for the real value that the enemy inflation is continuously destroying in the real value of money. The accountant, because of his or her training, is mostly the player used to place money on call, invest it on other short term or long term investments to at least equal inflation and to make a positive return. Accountants have the permanent task to keep the score during and after the game.

Accountants get invaluable help from the South African Reserve Bank team under the leadership of Tito the Great who wages a non-stop war against inflation throughout the country on all fronts.

Accountants are thus important players and always scorekeepers in the monetary item battle game against the enemy inflation.

People like SA accounting professors who claim that accountants are only scorekeepers and never players are thus dead wrong.


© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission

Thursday, 17 September 2009

Not generally accepted but a fact

The IASB approved Framework, Par. 104 (a) which is applicable in this case since there is no specific IFRS relating to the valuation of Issued Share capital, Retained Earnings and other items in Shareholders´ Equity during non-hyperinflationary periods, allows accountants to reject the stable measuring unit assumption during all levels of inflation and deflation when they choose to measure financial capital maintenance in units of constant purchasing power as an alternative to measurement in nominal monetary units as applied in the traditional HCA model.

It is not generally appreciated by accounting authorities and accountants that they are unknowingly and unintentionally responsible for the destruction of the real value of constant real value non-monetary items never or not fully updated or inflation-adjusted or maintained over time when they implement the real value destroying traditional HCA model: more specifically, the very destructive stable measuring unit assumption during periods of inflation when they maintain it for an unlimited period of time during indefinite inflation. This lack of appreciation also applies to economists, business people and the public in general.

It is also not generally appreciated by accounting authorities and accountants that they can stop this destruction by selecting financial capital maintenance in units of constant purchasing power as authorized by the IASB 20 years ago in the Framework, Par. 104 (a) which is applicable in the absence of specific IFRS.

It is generally accepted and a fact that inflation destroys the real value of money (the internal functional currency) and other monetary items over time. It is also generally accepted and a fact that hyperinflation can destroy the real value of a country’s entire monetary base as happened in Zimbabwe recently. That was the result of a massive increase in the volume and nominal value of bank notes in the country by Gideon Gono, the governor of the Reserve Bank of Zimbabwe, with an equivalent extreme rate of destruction of the real value of the Zimbabwe Dollar since the massive nominal increase in ZimDollar money supply was not the result of a concomitant increase in real value in the real or non-monetary economy of Zimbabwe.

“By a continuing process of inflation, governments can confiscate,
secretly and unobserved, an important part of the wealth of their
citizens. By this method they not only confiscate, but they
confiscate arbitrarily; and, while the process impoverishes many,
it actually enriches some.

Lenin was certainly right. There is no subtler, no surer
means of overturning the existing basis of society than to
debauch the currency. The process engages all the hidden forces
of economic law on the side of destruction, and does it in a
manner which not one man in a million is able to diagnose.”


The Economic Consequences of the Peace by John Maynard Keynes
1919
http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/keynes/peace

It is generally accepted and a fact that inflation destroys the real value of the capital amounts of monetary savings and money lent over time.

It is generally accepted, but not a fact, that inflation erodes, which is the same as destroys, the real value of constant real value non-monetary items with fixed nominal payments over time, e.g. fixed salary, wage, rental payments, etc.

The constant real non-monetary values of salaries, wages, rentals, etc are generally maintained, i.e. not destroyed, when accountants choose to measure the real value of these constant real value non-monetary items in units of constant purchasing power in terms of the CPI in most economies with payment in depreciating money during inflation.

It is not generally accepted, but a fact, that SA accountants unknowingly destroy the real value of Retained Earnings of all SA companies and banks over time when they choose to measure financial capital maintenance in nominal monetary units in terms of the real value destroying traditional HCA model during inflation when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation and these companies and banks have no revaluable fixed asset variable items or insufficient revaluable fixed asset variable items to maintain 100% of the updated original real value of all contributions to their Shareholders´ equity.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.

Wednesday, 16 September 2009

Stable measuring unit assumption rejected

IFRS do, however, already – 20 years ago - allow the rejection of the stable measuring unit assumption as an alternative to HCA at all levels of inflation and deflation. The IASB´s Framework, Par. 104 (a) states that financial capital maintenance can be calculated in either constant purchasing power units or in nominal monetary units. Par. 104 (a) was authorized by the IASB predecessor body, the International Accounting Standards Committee Board in April, 1989 and adopted by the IASB in 2001.

The stable measuring unit assumption is also rejected in IAS 29 Financial Reporting in Hyperinflationary Economies.

The Standards thus already reject the stable measuring unit assumption under two circumstances:

1.) In IAS 29 during hyperinflationary conditions with the IASB´s Constant Purchasing Power inflation accounting model which is a complete price-level inflation accounting model under which all non-monetary items, variable and constant items, are inflation-adjusted by means of the CPI during hyperinflation, and

2.) In the Framework, Par. 104 (a) in the implementation of the Constant ITEM Purchasing Power basic accounting model with the measurement of financial capital maintenance in units of constant purchasing power as an alternative to the real value destroying traditional HCA model when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.

SA accountants abdicate one of their main functions

The function of financial accounting is not just “to convey value information about the economic resources of a business” as Harvey Kapnick stated in the 1976 Sax Lecture.

http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm

It is an essential function of accounting to maintain the real value of constant items during inflation and deflation.

This can only be achieved by valuing constant items in units of constant purchasing power, i.e., by inflation-adjusting all constant items by means of the CPI during low inflation as approved by the IASB in the Framework, Par. 104 (a) twenty years ago and by implementing IAS 29 during hyperinflation.

Accountants have abdicated the essential financial capital maintenance function of accounting to their fiction that money is stable in real value during inflation and deflation. In so doing, they have in the past unknowingly destroyed and currently unknowingly destroy real value on a massive scale in the real economy when they implement the very destructive stable measuring unit assumption as part of the IASB approved real value destroying traditional Historical Cost Accounting model during non-hyperinflationary periods when they implement the stable measuring unit assumption for an unlimited period of time during indefinite inflation.

Accountants and accounting authorities do not appreciate that they can change that by simply rejecting the stable measuring unit assumption when they choose the IFRS compliant Constant ITEM Purchasing Power Accounting model and measure financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.

Kindest regards,

Nicolaas Smith

Summary: It is obviously one of the main functions of accounting to maintain the real value of constant items during inflation and deflation. Accountants unknowingly destroy constant items´ real values at the rate of inflation when they do not inflation-adjust them.

Tuesday, 15 September 2009

No-one is suggesting inflation-adjusting variable items during low inflation

It is correct, essential and compliant with IFRS to inflation-adjust or update or maintain constant real value non-monetary items by means of the CPI which is a general price index during all levels of inflation and deflation. The reason for this is that non-monetary items - both variable and constant real value non-monetary items - are expressed in terms of money, i.e. in terms of an unstable monetary unit of account which is the same as the unstable monetary medium of exchange. Inflation destroys the real value of the unstable monetary medium of exchange - which is also the unstable monetary unit of account in accounting and the economy in general. Constant items thus have to be updated or maintained or valued at a rate equal to the rate of inflation or deflation, i.e. valued in units of constant purchasing power, in order to maintain their real values constant during inflation and deflation respectively because the unstable unit of measure in accounting is an unstable monetary unit of account and consequently hardly every absolutely stable during periods of inflation and deflation.

Variable items do not need to be and are not valued in units of constant purchasing power during low inflation because they are valued in terms of SA GAAP or IFRS at, for example, fair value, market value, present value, recoverable value, net realizable value, etc which take inflation - amongst many other things - into account.

Variable items are only valued in units of constant purchasing power during hyperinflation as required by the IASB in IAS 29.

There is a school of thought that 2% inflation is completely unharmful and that it has no disadvantages compared to absolute price stability. This is not correct. 2% inflation will destroy 50% of all Retained Profits over 35 years – all else being equal – when the stable measuring unit assumption is implemented for an indefinite period of time during indefinite inflation. This is what is happening in the European Monetary Union and in the USA.

It is not correct for accountants to inflation-adjust by means of the CPI, which is a general price index, variable real value non-monetary items which are subject to product specific inflation or price increases (e.g. properties, shares, etc.) for the purpose of valuing these variable items during the accounting period on a primary valuation basis during non-hyperinflationary periods. These variable real value non-monetary items are generally subject to market based real value changes determined by supply and demand. They incorporate product or item specific price changes or product specific inflation where the word inflation is used to simply mean a product or product group price increase instead of the general use of the word in economics to mean the destruction of the real value of money over time, i.e. a general destruction of the purchasing power of money which results in an increase in the general price level over time.

1970-style Constant Purchasing Power (CPP) inflation accounting was a popular but failed attempt at inflation accounting at that time. It was a form of inflation accounting which tried unsuccessfully to make corporate accounts more informative when comparing current transactions with previous transactions by updating ALL non-monetary items (without distinguishing between variable and constant real value non-monetary items) equally by means of the Consumer Price Index during high and hyperinflation.

Measurement in units of constant purchasing power was used for variable AND constant items during the high inflation 1970´s. 1970-style CPP inflation accounting was abandoned as a failed and discredited inflation accounting model when general inflation decreased to low levels thereafter.
Summary: Balance sheet constant items have to be inflation-adjusted during low inflation exactly the same as salaries and wages because money is an unstable unit of account. Variable items are valued in terms of IFRS or SA GAAP. Product inflation is incorporated in the market prices and other measurement bases of variable items. Variable items are not inflation-adjusted during low inflation - only during hyperinflation as required by IAS 29.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.

Monday, 14 September 2009

It is not inflation doing the destroying

It was stated in 2008 that there is no doubt that inflation destroys the real value of monetary as well as non-monetary items that do not maintain their real value in terms of purchasing power. Reference: This blog.

I agreed at the time. Subsequently it became very clear to me that inflation has no effect on the real value of non-monetary items over time. The understanding of the real value destroying effect of the stable measuring unit assumption on constant items never or not fully updated is a work in progress. Not inflation, per se, but SA accountants´ implementation of the very destructive stable measuring unit assumption during low inflation as it forms part of the real value destroying HCA model, destroys the real value of constant real value non-monetary items never or not fully updated over time.

There is no substance in the statement that inflation destroys the real value of non-monetary items which do not hold their real value over time. Inflation has no effect on the real value on non-monetary items over time.

“Purchasing power of non monetary items does not change in spite of variation in national currency value.”

Prof. Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
SA accountants unknowingly destroy or maintain (please note: not create) the real value of constant real value non-monetary items (please note: not variable real value non-monetary items) depending on whether they choose the IASB approved real value destroying traditional HCA model under which they implement the very destructive stable measuring unit assumption during non-hyperinflationary periods for an unlimited period of time during indefinite inflation or the IASB approved real value maintaining Constant ITEM Purchasing Power Accounting model under which they select to reject the stable measuring unit assumption at all levels of inflation and deflation for an unlimited period of time.

Inflation is a uniquely monetary phenomenon and can only destroy the real value of money and other monetary items over time. It has no effect on the real value of non-monetary items. See GUCENME and ARSOY above. SA accountants unknowingly, unintentionally and unwittingly do the destroying of the real value of constant items, e.g. Retained Earnings, Issued Share capital, other items in shareholder’s equity, salaries, wages, rentals, etc never or not fully updated or inflation-adjusted over time when they choose the real value destroying traditional HCA model during inflationary periods when they maintain the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.

This includes the unknowing destruction by SA accountants of the real value of the Issued Share capital of SA companies and banks which do not have any or sufficient property or other variable real value non-monetary items to revalue to an amount at least equal to the updated original real value of all contributions to Shareholder’s Equity. SA accountants unknowingly destroy the real value of the Retained Earnings of all SA companies and banks and the real value of the Issued Share capital of SA companies with no variable real value non-monetary items to revalue continuously at a rate equal to the inflation rate while they continue implementing the very destructive stable measuring unit assumption during non-hyperinflationary conditions when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation.

Summary: Inflation only destroys the real value of money. It has no effect on non-monetary items. Not inflation, but, SA accountants implementing the very destructive stable measuring unit assumption are unknowingly destroying the real value of constant items never updated in the SA real economy on a massive scale. The destruction stops when they value constant items in units of constant purchasing power.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission

Sunday, 13 September 2009

Intrinsic value increases simply with accounting policy change

The intrinsic value of a company is its actual value based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value.

Most often intrinsic worth is estimated by analyzing a company's fundamentals.

Intrinsic value is the actual value of company, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often difficult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value.

There is no universally accepted way to obtain this figure.


The fact that intrinsic value is the actual financial value of a company based upon the value found directly within the business and that it refers to the value of a company which is contained in the company itself means that the intrinsic value of all companies with positive shareholders equity will increase simply with a change in accounting policy from the real value destroying traditional Historical Cost Accounting model to measuring financial capital maintenance in units of constant purchasing power as authorized by the International Accounting Standards Board in the Framework, Par. 104 (a).

Par. 104 (a) states: “Financial capital maintenance can be calculated in either nominal monetary units or in units of constant purchasing power.”

This will increase the intrinsic value of most probably all companies on the Johannesburg Stock Exchange and most unlisted companies in SA.

Kindest regards,

Nicolaas Smith

PinkPolkaDot summary: Inflation-adjusting companies´ capital and retained profits (like accountants do with salaries) plus other constant items, will increase companies´ internal funding from equity (their capital will be maintained instead of unknowingly destroyed by their accountants) and increase their intrinsic values.

Saturday, 12 September 2009

Inflation accounting is only implemented during hyperinflation

During the period of high inflation in the 1970´s accountants tried various inflation accounting models in an attempt to adjust company financial reports supposedly to reflect the apparent effect of high inflation on non-monetary items.

During that period inflation accounting described a range of accounting models designed to correct comparison problems arising from historical cost accounting in the presence of high and hyperinflation. It was and still is generally accepted that inflation affects the real value of non-monetary items. That is not true. Inflation has no effect on the real value of non-monetary items. Inflation is a uniquely monetary phenomenon. It is not inflation, but, SA accountants selecting the Historical Cost Accounting model and implementing the very destructive stable measuring unit assumption who unknowingly and unintentionally destroy the real value of SA constant real value non-monetary items never or not fully updated during non-hyperinflationary periods.

Inflation accounting models that were tried unsuccessfully in the 1970´s include Constant Purchasing Power inflation accounting (CPPA) and Current Cost Accounting.

The Financial Accounting Standards Board issued an exposure draft in the United States in January, 1975, that required supplemental financial reports on a Constant Purchasing Power inflation accounting price-level basis. The Securities and Exchange Commission in the USA proposed in 1976 the disclosure of the current replacement cost of amortizable, depletable and depreciable assets used for production as well as most inventories at the financial year-end. It also proposed the disclosure of the approximate value of amortization, depletion and depreciation as well as the approximate value of cost of sales that would have been accounted in terms of the current replacement cost of productive capacity and inventories.

Both supplemental Constant Purchasing Power inflation accounting financial statements and value accounting were experimented with in Canada. Australia tried both replacement-cost inflation accounting and CPP price-level inflation accounting. Netherland companies experimented with value accounting. Replacement-cost disclosures for equity capital financed items were considered in Germany. CPP inflation accounting supplemental financial statements were tried in Argentina. Brazil used various indexes to update constant and variable non-monetary items for the 30 years from 1964 to 1994. In the United Kingdom an original proposal of supplementary CPP financial accounting financial reports was replaced by the Sandilands Committee proposal for a value accounting approach for inventories, marketable securities and productive property.

South Africa had published a discussion paper on value accounting at the time.

Presently, inflation accounting describes a complete price-level inflation accounting model, namely the Constant Purchasing Power inflation accounting model defined in IAS 29 Financial Reporting in Hyperinflationary Economies required by the IASB to be implemented during hyperinflation. It serves to maintain the real values of all non-monetary items – variable and constant real value non-monetary items - by inflation-adjusting them by means of the CPI during hyperinflation which is an exceptional circumstance according to the IASB.

“In a hyperinflationary economy, reporting of operating results and financial position in the local currency without restatement is not useful. Money loses value at such a rate that comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading.” IAS 29.2

Constant ITEM Purchasing Power Accounting (CIPPA) during low inflation as authorized by the IASB in 1989 in the Framework, Par. 104 (a) which states

"Financial capital maintenance can be measured in either units of nominal monetary units or in units of constant purchasing power."

is not an inflation accounting model. It is a real value maintaining basic accounting model alternative to the real value destroying traditional Historical Cost Accounting model which includes the very destructive stable measuring unit assumption.

Kindest regards,

Nicolaas Smith

Gold price high current value changes monthly

Real value is a constant, but, inflation-adjusted Historical Cost nominal monetary values change every time the Consumer Price Index related to the measurement unit, the US Dollar in the case of the gold price, changes.

For example, the gold price high of $2352.80 (CPI 215.351 07-09) on 21st January, 1980:

If inflation should increase dramatically in the USA and the CPI increases to 250 then the inflation-adjusted value for the 21st Jan, 1980 high would change to $2731.

Historical Cost nominal monetary values change every time the current CPI changes. That is logical. As current money is worth less and less as its real value is destroyed by inflation, past Historical Cost nominal monetary values have to be adjusted accordingly.

Historical real values are constant but their current nominal monetary values change every time the CPI of the respective monetary measuring unit changes.

This does not apply to monetary item values during the current financial period.

Gold is not a monetary item. Gold is a variable real value non-monetary item with its price expressed in terms of the US Dollar which is the monetary medium of exchange used.

Kindest regards,

Nicolaas Smith

Thursday, 10 September 2009

Money is the only unstable unit of measure

Money is the only unstable unit of measure


The unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation. This means that the unit of measure in accounting is not a stable unit of measure during inflation and deflation. Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measurement that is not an absolute value. It does not contain a fundamental constant. All other generally accepted units of measurement of time, distance, velocity, mass, momentum, energy and weight are absolute values, e.g. second, minute, hour, metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.

The South African Reserve Bank is the central bank of the Republic of South Africa. It regards its primary goal in the South African economic system as “the achievement and maintenance of price stability". SARB.

The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. SARB.

Price stability is a year-on-year increase in the Consumer Price Index of zero percent. A year-on-year increase in the CPI of above zero but below 2% is a high degree of price stability – it is not absolute price stability.

“The ECB´s Governing Council has announced a quantitative definition of price stability:

Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.

The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.”

http://www.ecb.int/mopo/strategy/pricestab/html/index.en.html

A below 2% year-on-year increase in the European Monetary Union’s harmonized CPI is the European Central Bank’s chosen definition of price stability. It is not the factual definition of absolute price stability. The SARB´s chosen definition of price stability is for “inflation to be within the target range of 3 to 6 per cent on a continuous basis”.

Accountants, on the other hand, simply assume that the unstable monetary unit of account or unstable monetary unit of measure is perfectly stable in non-hyperinflationary economies for the purpose of valuing constant real value non-monetary items. Changes in the general purchasing power or real value of the unstable monetary unit of measure (functional currency or money) are not considered to be sufficiently important to require adjustments to financial reports during non-hyperinflationary periods.

This led accountants to choose to measure financial capital maintenance in nominal monetary units and to choose to implement the real value destroying traditional Historical Cost Accounting model during non-hyperinflationary periods where under they select to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation. They value both variable items stated at Historical Cost in terms of SA GAAP or IFRS, as well as constant items also stated at Historical Cost in terms of the Historical Cost Accounting model, in nominal monetary units during non-hyperinflationary periods. Both HC variable and HC constant real value non-monetary items are thus considered by SA accountants to be simply HC non-monetary items.

There is a fixation in accounting that constant purchasing power inflation-adjustment simply means adjusting company financial statements mainly to make current year statements more comparable with previous year statements.

Inflation-adjustment is not automatically thought of as affecting the fundamental values of the underlying resources although that is what is done with world wide annual inflation-adjustment of salaries, wages, rentals, etc. The two processes are seen as different processes.

Kindest regards,

Nicolaas Smith

Wednesday, 9 September 2009

Real News - Relatively low gold price today

The gold price today at around $1000 is not a very high price compared to its previous all time real value high on 21 January, 1980. Imagine the psychological effect if the price must go up to its real value price in 1980.


US CPI

Jan 1980 77.8 Gold Price $850

Jul 2009 215.351 Inflation adjusted $2352

A $1000 gold price today (July 09 CPI) is equivalent to $361 in Jan 1980 or only 42% of the top real value price.

Kindest regards,

Nicolaas Smith

Capital destroyed by ABSA FirstRand and African Bank CAs

EXISTING real value unknowingly and unintentionally DESTROYED in three SA banks´ Retained Profits during their last financial year because their Boards of Directors refused to maintain - AT NO EXTRA COST - the real values of these banks´ EXISTING equity in units of constant purchasing power as it was freely in their power to do since the IASB authorized them to do that 20 years ago when it approved the Framework, Par. 104 (a) which states:

"Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."

African Bank Group R 299 million


Chartered Accountants on the Board of Directors during last financial year:
David Woollam CA(SA)
David Gibbon CA(SA)
Brian Steele BCom, CA(SA), MBA

Independent Auditors during last financial year:
Deloitte & Touche
Partner: G M Pinnock CA(SA)

ABSA R 3 388 million

Chartered Accountants on the Board of Directors during last financial year::
Group Chief Executive: S F Booysen DCom (Acc), CA(SA)
D C Arnold CA(SA), FCMA, AMP
S A Fakie BCom CA(SA)
B P Connellan CA(SA)
J H Shindehutte Bcom (Hons), CA(SA), HDip Tax
Y Z Cuba BCom (Stats), BCom (Hons) (Acc), CA(SA)

Independent Auditors during last financial year:
PricewaterhouseCoopers Inc.
Director: T Winterboer CA(SA)
Ernst & Young Inc.
Director: E van Rooyen CA(SA)

FirstRand Group R 4 158 million

Chartered Accountants on the Board of Directors during last financial year:
L L Dippenaar MCom, CA(SA)
D M Falck CA(SA)
P M Goss BEcon (Hons), BAccSc (Hons), CA(SA)
S E Nxasana BCom, Bcompt (Hons), CA(SA)
A T Nzimande BCom, CA(SA)
R K Store CA(SA)

Independent auditors during last financial year:

PricewaterhouseCoopers Inc.
Director: F Tonelli CA(SA)


The above Board of Directors are unknowingly and unintentionally DESTROYING at least the same EXISTING amounts during the current financial year. They will carry on unknowingly (?) and unintentionally (?) DESTROYING these banks´ EXISTING real values in their EXISTING Retained Profits as long as they refuse to maintain these banks´ EXISTING Shareholders´ equity in units of constant purchasing power as they have been authorized to do by the IASB in 1989 and which is compliant with International Financial Reporting Standards.

The above applies to all SA banks and companies.

The above is valid when the above Boards of Directors refuse to measure financial capital maintenance in units of constant purchasin power during an indefinite period of time during indefinite low inflation.

The above amounts are the real values these Boards of Directors will maintain in these banks forever each and every year - ceteris paribus - as long as these banks break even as soon as they simply select to value all constant items in the banks in unit of constant purchasing power. It was authorized by the IASB 20 years ago and is compliant with IFRS. These Boards of Directors still refuse point blank to do it. They will rather stubbornly carry on destroying the banks´ capital.

Strange but true.

Kindest regards,

Nicolaas Smith

Tuesday, 8 September 2009

Capital destruction in nominal monetary units

Capital is a constant real value non-monetary item. Its real value can be maintained constant forever in all companies at least breaking even - all else being equal - only when financial capital maintenance is measured in units of constant purchasing power during low inflation as the IASB authorized 20 years ago in the Framework, Par. 104 (a).

At continuous 6% annual inflation a nominal monetary item´s real value is destroyed as follows:

46% after 10 years
93% after 44 years
99% after 75 years

Capital´s real value can be maintained constant forever - ceteris paribus.

A SA accountant accounts capital once and it instantaneously loses its constant item status and is magically turned into a depreciating monetary item with the SA accountant unknowingly destroying its real value as set out above. This is the case in all SA companies which do not have 100% of all contributions to equity (excluding the revaluation reserve) invested in variable item fixed assets that can be or are revalued via the revaluation reserve.

In principle SA has never ever had and currently does not have any constant item Retained Profits. All SA´s supposedly "constant item" Retained Profits are simply CASH. Not cash in the bank earning interest but CASH as in notes and coins kept under the mattress with their real values being destroyed by inflation.

The IASB went to great lengths in IAS 29 to clearly define capital as a non-monetary item. That was a total waste of time in 1989 when it then went ahead to "approve" at the same time the impossible process of financial capital "maintenance" in nominal monetary units during low inflation.

Kindest regards,

Nicolaas Smith

The art of turning capital into CASH in a flash

SA accountants are great performing artists. They get their biggest inspiration from the American Institute of Certified Public Accountants´ definition of accounting that starts with the words: The art of …

SA accountants have perfected the art of turning capital into CASH in a flash. They wait patiently for SA entrepreneurs to start companies to increase the wealth of the nation. Companies need accountants to do their books. SA accountants confidently step forward and state: Trust me, I’m an accountant.

SA entrepreneurs have to use some of the existing wealth of the nation to serve as the investment capital of their companies.

The entrepreneurs entrust the accounting of this investment capital to their trusted accountants. SA accountants confidently value this capital in nominal monetary units on the basis that the International Accounting Standards Board states that it is humanly possible to measure financial capital maintenance in nominal monetary units during low inflation. (It isn´t.)

No-one has told SA accountants up till now that this is only possible at zero inflation. They thus happily value SA entrepreneurs´ capital in nominal monetary units and instantaneously turn that hard earned capital into CASH.

We all know what happens to CASH: its real value is destroyed by inflation.

SA accountants unknowingly destroy the real value of shareholders´ equity never updated at a rate equal to the inflation rate. This is the case in all SA companies which do not have 100% of all contributions to equity (excluding the revaluation reserve) invested in variable item fixed assets that can be or are revalued via the revaluation reserve.

SA accountants do their famous stable measuring unit assumption trick and instantaneously turn SA entrepreneurs´ capital into plain old CASH the very first instant they account that capital in nominal monetary units during low inflation. Real value destroyed forever at a rate equal to the rate of inflation or for as long as they carry on with their infamous stable measuring unit assumption.

Snap: nominal monetary units, and it’s done: Capital to CASH in a flash.

Kindest regards,

Nicolaas Smith

PS The real value of R 1 000 000 in Retained Profits contributed on 1st Jan 1981 which are still in Retained Profits today but updated at the rate of inflation: R 14 882 000. Real value destroyed since 1981 R13 882 000.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.

PricewaterhouseCoopers clueless about monetary and constant item real value

Dr Roelof Botha, an economic adviser to PricewaterhouseCoopers, does not agree with these levels of increase. "In the private sector increases exceeding consumer price inflation (CPI) may be justified if the company's productivity increases.

If institutions like the Reserve Bank and the South African Revenue Service (Sars) - which have no effect on the country's productivity and add no value to the economy - award salary increases higher than the CPI, they violate their own principles.
Fin24

Dr Roelof Botha from PricewaterhouseCoopers was commenting on the salary increases above the inflation rate at the SARB.

It is unbelievable that an economic adviser to PricewaterhouseCoopers would state that the SARB has no effect on the country´s productivity and add no value to the economy.

A 1% drop in the inflation rate maintains instead of destroy R20 billion per annum in the SA monetary economy. Tito Mboweni and his team at the SARB have succeeded in maintaining average annual inflation at 6% per annum for the last 10 years compared to 12% average annual inflation during the last 12 years of apartheid rule. They have thus maintained instead of destroyed R120 billion per annum in the SA monetary economy during the last 10 years.

Basically the SARB has added R120 billion PER ANNUM to the economy during the last 10 years. This will carry on in the future as long as inflation can be maintained at or below 6%.

PWC´s Dr Botha regards R120 billion per annum as "no value".

The 50% reduction in average annual inflation also reduced by 50% the amount of real value SA accountants at PricewaterhouseCoopers´ clients and all other SA companies unknowingly destroy in constant items never updated in the SA real economy. PWC signed most of their clients´ accounts off as "fairly presenting their businesses."

PricewaterhouseCoopers is not even remotely aware of the unknowing and unintentional destruction in the real value of constant items never updated by all the accountants at all their clients. PWC is blisfully lost in Historical Cost accounting - blindfolded by their complete support of the implementation of the very destructive stable measuring unit assumption in the SA economy.

PricewaterhouseCoopers´ Dr Botha will obviously state that Gideon Gono, the governor of the Reserve Bank of Zimbabwe had not the slightes effect on the Zimbabwean economy when he single handedly wiped out 100% of the real value of the Zimbabwe Dollar in the Zim monetary economy with hyperinflation at billions of percent and eliminated the ZimDollar completely from the Zim economy in that fashion.

The blatant lack of basic understanding of measurement of monetary as well as constant item real value in the SA economy by PricewaterhouseCoopers is shocking.

Kindest regards,

Nicolaas Smith

Third blank spot for SA accountants

We have already asked SA accountants

1. Is there inflation in SA or not?

2. Are there net monetary losses and gains during low inflation?

Now we can ask them: SA accountants how many basic economic items are there in the economy?

3. Two or three basic economic items?

SA accountants do accounting from the viewpoint that there are two basic items in the economy


Monetary items
Non-monetary items

They account variable items they value at Historical Cost, eg. stock when the Historical Cost of inventories is lower than net realizable value and Retained Profits - which is a constant item - both at Historical Cost. They make no difference between HC variable items and HC constant items.

Fact Check: There are three basic items in the economy:

Monetary items
Variable items
Constant items

SA accountants have never heard of constant items although they have been around for 500 years and they have been accounting them and unknowingly and unintentionally destroying their real values at the rate of inflation for the last 357 years.

Currently SA accountants unknowingly destroy about R200 billion PER ANNUM in the SA real economy because of their implementation of the stable measuring unit assumption during low inflation. The IASB authorized them to measure financial capital maintenance in units of constant purchasing power 20 years ago in the Framework, Par. 104 (a) which states:

“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”

SA accountants refuse point blank to measure financial capital maintenance in units of constant purchasing power.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.

Friday, 4 September 2009

Question No 2 for a chicken without a head

SA accountants, please answer the following question:

2. Are there net monetary losses and gains during low inflation?

The IASB approved IAS 29 Financial Reporting in Hyperinflationary Economies in 1989 which requires the calculation of net monetary losses and net monetary gains during hyperinflation.

SA accountants, there are net monetary losses and net monetary gains during hyperinflation because money loses real value during hyperinflation. If a company holds, on average, more monetary assets than liabilities during the financial year then it incurs a net monetary loss which is calculated and accounted during hyperinflation. With more monetary liabilities than monetary assets, on average, during the financial year, the company would have a net monetary gain that would be calculated and accounted during hyperinflation.

We all know that the Rand loses real value at 6.7% at the moment – during low inflation. All SA companies with, on average, more monetary assets than monetary liabilities during the 2009 financial year incur net monetary losses exactly the same as under hyperinflation. The same is true for companies with net monetary gains with, on average, more monetary liabilities than monetary assets during 2009.

These amounts are not calculated and accounted during low inflation by any SA accountant. They would be calculated and accounted when SA accountants start measuring financial capital maintenance in units of constant purchasing power in terms of the Daily CPI as authorised in the IASB´s original Framework(1989), Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

SA accountants, are there net monetary losses and gains during low inflation?

Why do you calculate them during hyperinflation and not during low inflation?

Do you have a clue of what is going on, or are you jumping down the drive-way like a chicken without a head?

Kindest regards,

Nicolaas Smith

Thursday, 3 September 2009

Question No1 for a chicken without a head

SA accountants, please answer the following question:

1. Is there inflation in SA or not?

Has there ever been any inflation in SA? Is the Rand perfectly stable or not? Is there zero inflation in SA or not?

The above are really all the same question.

SA accountants, on the one hand, you value variable items in terms of IFRS and SA GAAP under which the prices of variable items, eg. property, plant, equipment, shares, stock, etc., always automatically also include adjustments for inflation in the real value of the Rand. You clearly accept that there is inflation in the SA economy.

On the other hand, SA accountants, you act in practice as if there is no inflation in SA; you act in practice as if there has never ever been any inflation in the whole of the SA economic history. SA accountants, you act in practice as if the Rand is perfectly stable and that inflation is always at zero percent when you actually value constant items like companies Retained Profits at Historical Cost implementing your very destructive stable measuring unit assumption in SA´s low inflation environment as part or your real value destroying Historical Cost Accounting model you implement in all SA companies.

SA accountants do you have a clue of what is going on or are you jumping around the drive-way like a chicken without a head?

So, SA accountants: Is there inflation in SA or not?

If your answer is No, then fine: you are just a chicken without a head.

If your answer is Yes, there is inflation in SA, then I would like to know why you do not measure ALL constant items in SA – which is why you all earn those fantastic salaries and why you all have that elevated respect in the SA economy – in units of constant purchasing power as the IASB has authorized you to do 20 years ago when the Framework, Par 104 (a) was approved. It states:

“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”

SA accountants by valuing already existing constant items never or not fully updated at Historical Cost you unknowingly and unintentionally destroy about R200 billion PER ANNUM in their real value in the SA real economy.

When you freely change to measuring financial capital maintenance in units of constant purchasing power you will maintain existing real value to the amount of about R200 billion PER ANNUM for an unlimited period of time in the future. You will knowingly boost the SA real economy by at least R200 billion PER ANNUM for an unlimited period of time - ceteris paribus.

So, SA accountants: Is there inflation in SA or not?

Kindest regards,

Nicolaas Smith

Two when there are actually three

It is generally accepted that the economy is divided in two parts: the monetary economy and the non-monetary or real economy. It is also generally accepted that there are two basic economic items in the economy: monetary items and non-monetary items. Monetary items are money held and items with an underlying monetary nature. Non-monetary items are all items that are not monetary items.

No distinction is generally made between the valuation of variable real value non-monetary items, e.g. property, plant, equipment, inventory, etc valued at Historical Cost and constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, other items in Shareholders´ Equity and most items in the income statement (excluding items like salaries, wages, rents, etc. valued in units of constant purchasing power or inflation-adjusted) also valued at Historical Cost.

This is the result of the fact that the economy is based on the Historical Cost paradigm. Historical Cost is the traditional measurement basis in accounting. It is thus generally accepted for accountants to choose to implement the very destructive stable measuring unit assumption during non-hyperinflationary periods.

One of the basic principles in accounting is “The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”

Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.

Non-monetary items are not all fundamentally the same. Non-monetary items are subdivided into variable real value non-monetary items and constant real value non-monetary items. The three fundamentally different basic economic items are, in fact, monetary items, variable items and constant items although it is generally accepted that there are only two basic economic items, namely, monetary and non-monetary items.

Accountants regard all non-monetary items stated at Historical Cost, whether they are variable real value non-monetary HC items or constant real value non-monetary HC items to be fundamentally the same, namely, non-monetary items – or, items that are not monetary items - when they implement the very destructive stable measuring unit assumption as part of the traditional HCA model during non-hyperinflationary periods.

This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always destroys the real value of money over time. It is thus impossible for money to be stable in real value during inflation.

On the other hand, inflation has no effect on the real value of non-monetary items over time.

Kindest regards,

Nicolaas Smith

Tuesday, 1 September 2009

Fraternizing with the enemy

Whereas inflation is SA´s public enemy No 1, SA accountant’s stable measuring unit assumption is public enemy No 2.

SA accountants proudly live up to their deserved reputation as trusted custodians of real value in the case of the constant items salaries and wages. They very responsibly admit that the real value of salaries and wages would be destroyed if the destruction of the real value of the unstable medium of exchange in SA, the always depreciating Rand, is not compensated for by valuing remuneration items in units of constant purchasing power; i.e., inflation-adjusting them in a low inflation environment. They vigorously reject the stable measuring unit assumption in the case of salaries and wages.


Retained Profits are constant items exactly the same as salaries and wages. When it comes to valuing Retained Profits and other balance sheet constant items, SA accountants slavishly follow their mentor’s advice and implement their very destructive stable measuring unit assumption whereby they now suddenly ASSUME that the Rand is perfectly stable and always had been perfectly stable. They refuse point blank to measure financial capital maintenance in units of constant purchasing power as the IASB has authorized them to do 20 years ago. They thus unknowingly and unintentionally destroy the real value of Retained Profits in all SA companies at a rate equal to the rate of inflation. Thus unnecessary destruction of real value in constant items never updated amounts to about R200 billion per annum in the SA real economy.

Financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) in 1989 means inflation-adjusting all constant item accounts – income statement and balance sheet constant items – in a low inflation environment.
© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.