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Tuesday, 19 January 2010

93.3% of internal financing unknowingly destroyed by SA accountants in banks and companies

It is generally the case that SA companies and banks do not invest 100% of the updated original real values of all contributions to their shareholders´ equity in fixed assets, e.g. land and buildings or other fixed property which are or can be revalued via the Revaluation Reserve to compensate for the real value shortfall in shareholders´ equity under Historical Cost Accounting rules during low inflation.

SA accountants thus generally unnecessarily, unknowingly and unintentionally destroy the real value of SA banks´ and companies´ reported retained earnings and other constant items never maintained at a rate equal to the annual rate of inflation (conservatively estimated at about R200 billion per annum) – all else being equal – when they choose to measure financial capital maintenance in nominal monetary units and implement their very destructive stable measuring unit assumption as part of the real value destroying traditional HCA model for an unlimited period of time during indefinite inflation.

SA accountants unnecessarily, unknowingly and unintentionally in this manner generally destroyed 93.3% of the real value of reported retained earnings that remained in SA banks and companies from January 1981 to Nov 2009 when they maintain their very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Valuing the three economic items

Economic items are economic values. They are made up of monetary items, variable items and constant items. SA accountants value, record, classify, summarize and report transactions and events involving economic items in terms of the depreciating Rand.

(1) The real value of the Rand and all other monetary items in the SA monetary economy generally changes every month during low inflation. Months of zero annual inflation are rare and generally not sustained over a significant period of time.

(2) The real value of variable items may change all the time, e.g. the price of foreign exchange, precious metals, quoted shares, commodities, properties, goods, services, etc.

(3) The real values of constant items stay the same (or are suppose to stay the same) all the time – all else being equal; e.g. salaries, wages, rentals, issued share capital, reported retained profits, shareholders equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc.

SA accountants have to take all three scenarios occurring simultaneously into account over time when they account economic activity and prepare and present financial reports.

Kindest regards,

Nicolaas Smith