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Wednesday, 10 March 2010

SA accounting profession clueless about CIPPA

The statement that financial capital maintenance can be measured in either constant purchasing power units or in nominal monetary units in the IASB´s Framework, Par 104 (a) means that Constant ITEM Purchasing Power Accounting has been authorized by the IASB since 1989 as an alternative to the traditional HCA model during periods of low inflation. This means that the international accounting profession has been in agreement regarding the use of CIPPA for financial capital maintenance in units of constant purchasing power during low inflation since 1989.

Income statement constant real value non-monetary items like salaries, wages, rentals, utilities, transport fees, etc are normally valued by accountants in units of constant purchasing power during low inflation in most economies including South Africa. Payments in money for these items are normally inflation-adjusted by means of the CPI to compensate for the destruction of the real value of the unstable monetary medium of exchange by inflation. Inflation is always and everywhere a monetary phenomenon and can only destroy the real value of money (the functional currency inside an economy) and other monetary items. Inflation can not and does not destroy the real value of non-monetary items. See GUCENME and ARSOY.

Constant real value non-monetary items´ real values can be maintained by accountants choosing the CIPPA model as per the IASB´s Framework during low inflation as authorized since 1989 instead of currently unknowingly being destroyed by them by the implementation of the traditional HCA model when they apply the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation. It is thus accountants´ choice of accounting model and not inflation that maintains or destroys the real value of constant real value non-monetary items like Retained Earnings, Issued Share capital, capital reserves, other shareholder equity items, etc when accountants choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.

Implementing the low inflation CIPPA model as approved in the Framework, Par 104 (a) means accountants choose to reject the stable measuring unit assumption which they implement when they choose to measure financial capital maintenance in nominal monetary units – also in terms of the Framework, Par 104 (a).

SA accountants do not select financial capital maintenance in units of constant purchasing power and SA accounting professors and lecturers do not teach SA accounting students to select the real value maintaining IASB approved alternative to the 700 year old very destructive generally accepted traditional Historical Cost Accounting model because

(1) they automatically assume that any price-level accounting model always refers to the CPP inflation accounting model,

(2) they do not understand the fact that they unknowingly destroy real value on a massive scale (at least R200 billion per annum) in the SA real economy when they select to measure financial capital maintenance in nominal monetary units, and

(3) they do not understand the fact that they can stop that by simply selecting the alternative approved by the IASB predecessor body, the IASC Board, 21 years ago, namely, the measurement of financial capital maintenance in units of constant purchasing power as approved in the Framework, Par 104 (a) which is compliant with IFRS and was adopted by the IASB in 2001.

(4) they believe and implement the IASB´s authorization of the fallacy that "Financial capital maintenance can be measured in nominal monetary units."

(5) they believe and implement the stable measuring unit assumption that is based on a fallacy.

(6) they believe the fallacy that "the erosion of business profits and capital is caused by inflation."

If they understood it, they would have stopped the stable measuring unit by now.
Copyright © 2010 Nicolaas J Smith