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Monday, 8 March 2010

Capital maintenance ignored by IASB and FASB

Inflation-adjusted balance sheet constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, Share premiums, Capital Reserves, General Reserves, all other items in Shareholders´ Equity, trade debtors, trade creditors, taxes payable, taxes receivable, salaries payable, salaries receivable, all other non-monetary payables, all other non-monetary receivables, etc in SA´s low inflation economy would be a blessing to everyone in SA when our accountants simply decide to change from their current implementation of their very destructive stable measuring unit assumption – which is based on a fallacy – and their financial capital maintenance in nominal monetary units per se which is impossible during inflation and another fallacy and freely choose to implement the real value maintaining financial capital maintenance in units of constant purchasing power model as approved by the IASB in the Framework, Par 104 (a) twenty one years ago. They would knowingly maintain - instead of currently unknowingly, unnecessarily and unintentionally destroy as they also did last year and all the years before and will do next year if they do not stop with their very destructive stable measuring unit assumption - at least R200 billion annually in constant item real value in the SA real economy for an unlimited period of time – all else being equal.
Financial capital maintenance in units of constant purchasing power authorized during low inflation

Financial capital maintenance in units of constant purchasing power during low inflation, despite being approved by the IASB in the Framework twenty one years ago, is completely ignored by accountants in non-hyperinflationary economies even though it would maintain instead of destroy the real values of not only all income statement constant items but also all balance sheet constant items in all companies that at least break even for an unlimited period of time during low inflation and deflation. Financial capital maintenance in units of constant purchasing power would stop SA accountants unknowingly destroying about R200 billion in the real value of constant items never maintained in the SA real economy each and every year. It would result in SA accountants knowingly boosting the SA real economy by at least R200 billion per annum for an unlimited period – all else being equal.

The reason accountants ignore financial capital maintenance in units of constant purchasing power is because any price-level accounting model is generally viewed by almost all accountants and accounting authorities as a 1970-style failed and discredited inflation accounting model that required all non-monetary items (variable real value non-monetary items and constant real value non-monetary items) to be inflation-adjusted by means of the CPI during high inflation. They, inexplicably and unbelievably, seemed not to understand, at all, the implications of the Framework, Par 104 (a) which the IASB authorized 21 years ago and which states:

“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”


Deloitte, one of the Big Four accounting and auditing multi-nationals, also ignore the paragraphs in the Framework that deal with the concepts of capital, capital maintenance and the determination of profit or loss in their presentation of the Framework on their site IAS Plus as at 13th February, 2010. http://www.iasplus.com/standard/framewk.htm

Deloitte do not even mention one word in their presentation of the Framework about the fact that companies can measure financial capital maintenance in units of constant purchasing power. This appears to be another example of the lack of understanding by accountants in general that an essential function of accounting is continuous maintenance of the constant purchasing power of capital by continuously maintaining the real value of all constant items at all levels of inflation and deflation which can only be achieved with the IASB approved financial capital maintenance in units of constant purchasing power model in the Framework, Par 104 (a) and IAS 29 with valuation of all non-monetary items at the daily parallel rate during hyperinflation.

Similarly the paragraphs in the Framework dealing with the concepts of capital, the concepts of financial capital maintenance and units of constant purchasing power were also omitted from the presentation of the Framework in the Wikipedia article on IFRS till they were added very recently. The whole of the Framework was summarized in the Wikipedia article, except those paragraphs.

The IASB and FASB are currently working on a joint project called Conceptual Framework. “The project's overall objective is to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged.” (IASB site). All items in the IASB´s current Framework are covered in this project, except the concepts of capital and capital maintenance. In response to a request for information about when the concepts of capital and capital maintenance would be covered in the current project the FASB project leader, who is not a spokesman for the Boards, stated: “I can only say that early on in the measurement phase the staff suggested that capital and capital maintenance be discussed in the measurement phase, as it was in the original FASB Conceptual Framework. However, to date the Boards have not taken a decision on where, or even whether, those topics will be included in the converged framework.”

The concept of financial capital maintenance in units of constant purchasing power during low inflation and deflation seems to have been correctly treated by the IASC Board twenty one years ago – and then simply just ignored by everyone.
Copyright © 2010 Nicolaas J Smith