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Monday, 18 January 2010

IFRS authorize both destruction and maintenance of real value in SA

Maintaining the real values of all constant items in the SA economy where our accountants use the double entry accounting model to account economic activity is only possible with the real value maintaining Constant ITEM Purchasing Power Accounting (CIPPA) model as authorized by the IASB twenty years ago in the Framework, Par 104 (a) (which is applicable in the absence of specific IFRS) during non-hyperinflationary periods.

Maintaining the real values of all constant items stable in the SA economy is not possible, at present, while SA accountants implement the real value destroying traditional HCA model under which they apply the very destructive stable measuring unit assumption as authorized by the IASB in the Framework, Par 104 (a) in 1989. SA accountants unnecessarily, unknowingly and unintentionally destroy real value on a massive scale in the SA real economy when they measure financial capital maintenance in nominal monetary units as part of traditional HCA.

This unnecessary, unknowing and unintentional destruction by SA accountants in the real value of constant items not fully or never maintained amounts to about R200 billion per annum for as long as they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation. When they freely choose to measure financial capital maintenance in units of constant purchasing power, amazingly also authorized by the IASB in the Framework, Par 104 (a) in 1989 they will knowingly maintain that plus/minus R200 billion in real value per annum by not destroying existing reported constant item real value of, for example, reported retained profits, with their very destructive stable measuring unit assumption during low inflation.

The real value of reported retained profits can be maintained constant during low inflation and deflation under IFRS but not under HCA although the HC model is also authorized under IFRS. Both the destruction and the maintenance of the real value of reported retained profits and all other reported constant items never maintained during low inflation are, paradoxically, authorized under IFRS. Accountants are free to choose the one or the other. Both are compliant with IFRS.

Kindest regards,

Nicolaas Smith