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Tuesday, 8 December 2009

Capital as a variable item and as a constant item

I am not dealing with the value of a business entity´s capital or stock as determined in the market.

As we all know, the term capital has many meanings. As far as it relates to a company it also refers to various different things.

The capital of a business entity has, amongst others, the following two meanings:

(1) The market capitalization of a company; i.e. the market value of one share times the number of shares issued. This "capital" or stock of a company is a variable real value non-monetary item. Its value is determined in the market at market price as per IFRS. I agree 100% with that.

(2) The shareholders´ equity which includes, issued share capital, share premium account, reported retained profits, retained losses, share discount account, capital reserves, revaluation reserve, etc. These items are all constant real value non-monetary items. Currently they are being valued in nominal monetary units by HC accountants world wide during low inflation with the exception of the accounting process of property revaluations via the revaluation reserve account. Only the real value of issued share capital and share premium account can be maintained via sufficient property revaluations via the revaluation reserve account. This real value maintenance can not be applied to other reported items in shareholders´equity, e.g. reported retained profits.

All items in shareholders´ equity are constant real value non-monetary items and - in order to maintain their real values constant during low and hyperinflation - their real values have to be valued in units of constant purchasing power during low inflation and hyperinflation by means of financial capital maintenance in units of constant purchasing power. When this is not done, i.e. when they are currently valued in nominal monetary units, their real values are being destroyed by HC accountants implementing their very destructive stable measuring unit assumption - with the exception of issued share capital and share premium account, the real values of which can be maintained indefinitely with sufficient unreported and hidden revaluable holding gains in fixed property.

I only deal with the valuation of constant real value non-monetary items in companies. I only deal with the "capital" of a company as defined in (2). As far as (1) is concerned, I agree 100% with its valuation in terms of IFRS; i.e., at market value.

Kindest regards,

Nicolaas Smith