Pages

Monday, 21 December 2009

SA´s second enemy camouflaged by IFRS approval

It was stated that inflation destroys the value of non-monetary items which do not maintain their real values. I agreed at the time but later understood that this is wrong. Inflation has no effect on the real value on non-monetary items. To that way of thinking SA accountants are not doing the destroying, but inflation. That is dead wrong. SA accountants unnecessarily and unknowingly destroy about R200 billion per year in the real values of SA banks´ and companies´ reported constant items, e.g. reported Retained Profits, never maintained either under SA GAAP or with their free choice of measuring financial capital maintenance in nominal monetary units implementing the stable measuring unit assumption in terms of the IASB´s Framework, Par. 104 (a) which states that financial capital maintenance can be calculated in either units of constant purchasing power or in nominal monetary units.

According to that view, SA accountants simply do not record this destruction. That is dead right: they do not record it because they also mistakenly think it is caused by inflation and they can do nothing about it as their actions do not affect inflation. They mistakenly think the cost of the stable measuring unit assumption is similar to the cost of inflation: the net monetary loss from holding monetary items, the only harm caused - and able to be caused - by inflation, which is not accounted under HCA during low inflation. It is not the same.

What SA accountants ignore is the fact that the IASB authorized an alternative basic accounting model, financial capital maintenance in units of constant purchasing power in the Framework, Par. 104 (a) twenty years ago which they are free to choose which will allow them to stop their unknowing destruction of about R200 billion in the real value of SA banks´ and companies´ constant items which they unknowingly destroy each and every year by measuring them in nominal monetary units implementing their very destructive stable measuring unit assumption under HCA in SA´s low inflationary economy.

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. The latter is the cost of a destructive Generally Accepted Accounting Practice (GAAP) by SA accountants, namely, valuing constant items in nominal monetary units implementing the stable measuring unit assumption during low inflation. This cost is also not accounted under HCA during low inflation. It thus appears to be exactly the same as the net monetary loss - the cost of inflation. However, it is not the same, even though most people think it is.

The indisputable proof - from an accounting standards point of view - that inflation does not destroy the value of non-monetary items which do not maintain their real values is the fact that the cost of this destruction is not calculated as part of the net monetary loss in FAS 33: US Statement of Financial Accounting Standards No. 33 Financial Reporting and Changing Prices. It is thus a mistaken view. FAS 33 required the purchasing power gain or loss on net monetary items to be presented as supplementary information in published annual reports in companies using HCA during inflation.

IAS 29 also requires the calculation of the net monetary gain or loss from holding monetary items, but, during hyperinflation rejecting the stable measuring unit assumption; i.e. measuring all non-monetary items in units of constant purchasing power. There is no cost from the stable measuring unit assumption when it is not applied. In practice, it is normally exactly the opposite in hyperinflationary economies which do not follow the Brazilian example by indexing all non-monetary items. In practice, it is the stable measuring unit assumption that is applied even under hyperinflation which hyper-destroys the non-monetary or real economy together with hyperinflation in monetary items which hyper-destroys the monetary economy. The two enemies in the economy: the one seen as a monster, the other – wreaking maybe even more damage – a stealth enemy camouflaged by IFRS approval.

Copyright © 2005 - 2010 Nicolaas J Smith