Pages

Tuesday, 24 November 2009

Trust me, I´m an accountant

Accountants unknowingly and unintentionally destroy at least R200 billion per annum in the real values of reported Retained Profits of most SA companies as well as in all SA companies that do not have 100% of Issued Share Capital and Share Premium Account values invested in revaluable fixed assets with their very destructive stable measuring unit assumption as part of the traditional Historical Cost Accounting model.

That is R200 billion per annum in Capital unknowingly destroyed by SA accountants assuming there is no such thing as inflation (value destruction) in the real value of the Rand when they value existing reported Retained Profits and other reported constant items never maintained during low inflation in nominal monetary units, i.e., at Historical Cost.

Inflation has no effect on reported Retained Profits, Issued Share Capital and Share Premium Account values which are all constant real value non-monetary items. Inflation can only destroy the real value of the Rand and other monetary items - nothing else. Inflation has on effect on the real value of non-monetary items.

SA accountants value the above items in nominal monetary units in terms of the SA Rand which is the monetary unit of account and functional currency in SA. They value them at their original Historical Costs over time in our low inflationary environment. These items´ nominal values thus stay the same because SA accountants simply assume there is no inflation in the Rand when they value them. They only make this assumption as far as balance sheet constant items and the majority of income statement items are concerned. Some income items they inflation-adjust, e.g. salaries, wages, rentals, etc.

SA accountants implement their infamous stable measuring unit assumption whereby they assume that changes in the purchasing power of the Rand is not sufficiently important to inflation-adjust these values. However, there is inflation in SA and their real values are thus being destroyed at a rate equal to the inflation rate because the Rand´s real value is, in fact, being destroyed by inflation.

SA accountants implement their very destructive stable measuring unit assumption because they refuse to measure them in units of constant purchasing power as they have been authorized to do 20 years ago by the IASB.

So, it is not inflation doing the destroying, but, SA accountants choosing the real value destroying Historical Cost Accounting model which includes the very destructive stable measuring unit assumption despite the fact that they have been authorized 20 years ago to stop this massive annual destruction by freely choosing to measure finacial capital maintenance in units of constant purchasing power - which they and all the boards of directors of alll JSE listed companies refuste to do.

Inflation can be whatever rate: 2% or 10% or 15% or 20% or 24% per annum - when SA accountants freely change over and choose to measure financial capital maintenance in units of constant purchasing power there will be no destruction at all in the real value of existing reported constant items.

So, it is very clear that it is not inflation doing the destroying, but, SA accountants unknowingly and unintentionally destroying about R200 billion per annum in existing reported constant items in SA companies simply because of the accounting model they choose; namely, the real value destroying traditional Historical Cost Accounting model which includes their very destructive stable measuring unit assumption.

The IASB authorized them 20 years ago to measure financial capital maintenance in units of constant purchasing power 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 and the boards of directors of all JSE listed companies refuse point blank to measure financial capital maintenance in units of constant purchasing power.
So, trust me, I´m an accountant: I´m destroying your company´s reported Retained Profits at the rate of inflation.

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

No reproduction without permission.