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Friday, 9 April 2010

Traditional Historical Cost Accounting is not an appropriate accounting policy for SA companies

Auditors state in the audit report that the directors´ responsibility for the financial statements includes selecting and applying appropriate accounting policies. The audit report also normally states under the Auditors´ Responsibility that an audit includes evaluating the appropriateness of accounting policies used in a company. So, both the directors and the auditors have a responsibility with regards to appropriate accounting policies for a company.

The implementation of the stable measuring unit assumption which is based on a fallacy and financial capital maintenance in nominal monetary units per se which is a fallacy during inflation and deflation means that the implementation of the HCA model is not an appropriate accounting policy for SA companies during inflation and deflation. The IASB already agrees that the stable measuring unit assumption and financial capital maintenance in nominal monetary units per se are not appropriate accounting policies in hyperinflationary economies.

IAS 29 Financial Reporting in Hyperinflationary Economies states that:

“In a hyperinflationary economy, reporting of operating results and financial
position in the local currency without restatement is not useful. Money loses
purchasing power at such a rate that comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading.” IAS 29 Par 2

Traditional Historical Cost Accounting is not an appropriate accounting policy for SA companies when it results in SA accountants unknowingly, unnecessarily and unintentionally destroying about R200 billion in the real value of constant real value non-monetary items, e.g. retained profits never maintained with sufficient revaluable fixed assets each and every year in the SA non-monetary economy.

No-one can disprove that.

The remedy, namely, financial capital maintenance in units of constant purchasing power has been authorized in International Financial Reporting Standards in the Framework, Par 104 (a) twenty one years ago.

No-one can disprove that.
Copyright © 2010 Nicolaas J Smith