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Monday, 28 December 2009

Destructive GAAP

SA accountants consider their unknowing destruction of the real value of existing reported constant items in SA companies by their free choice of implementing the stable measuring unit assumption as part of the traditional Historical Cost Accounting model to be similar to the cost of inflation which is not accounted under HCA during low inflation. They are consequently satisfied when it is also not accounted. They do not see the destruction of real value in companies´ profits and capital as a separate item from inflation. To them it is all part of the “erosion” caused by inflation. They are dead wrong. Inflation has no effect on the real value of non-monetary items. Inflation can only destroy the real value of money and other non-monetary items which are items with an underlying monetary nature.

The IASB authorized an alternative basic accounting model, financial capital maintenance in units of constant purchasing power in the Framework, Par 104 (a) which SA accountants are free to choose which would allow them to stop their unknowing destruction caused by their choice of the stable measuring unit assumption during low inflation.

SA accountants do not know they are destroying about R200 billion in real value each and every year when they freely choose, in terms of the Framework, Par 104 (a), an IASB authorized 700 year old traditional, generally accepted accounting model complaint with IFRS; consequently, they do not look for a solution: they ignore the other option in Par 104 (a), namely, financial capital maintenance in units of constant purchasing power.

The cost of inflation, i.e., the net monetary loss from holding monetary items is not accounted under HCA during low inflation. This is not the same as the cost of the stable measuring unit assumption: the unknowing destruction of constant items´ real values by SA accountants´ choice of measuring them in nominal monetary units implementing the stable measuring unit assumption during low inflation, when inflation can only destroy the real value of the Rand, the monetary unit of account. This is the cost of a destructive Generally Accepted Accounting Practice (GAAP) by SA accountants. This cost is also not accounted under HCA during low inflation. It thus appears to be the same as the net monetary loss - the cost of inflation. However, it is not the same, even though the IASB, FASB and most people think it is.

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