Wednesday, 26 May 2010

Accountants are not simply record-keepers

The concept of the accountant as simply a record-keeper is very ingrained. A big problem. Many accounting professors still believe in that. I was quite surprised when I saw it first stated by an accounting professor in SA.

It is, however, quite easy to see that accountants value everything they account by just looking at the three basic economic items:

1. Monetary items are valued automatically by inflation or deflation: so, no problem. However, it appears "as if" accountants "only" record them. Why? Because they can only be stated at their original nominal historical cost values - DURING the current financial year or reporting period. Once they are in historical financial statements they have to be updated: to show their real values in the past in terms of the current value of money (the current ever changing CPI).

2. Variable items (property, plant, equipment, inventory, etc) are valued in terms of IFRS. It is a valuation at the current reporting date - not a recording 0f what happened in the past.

3. Constant items (capital, retained profits, debtors, creditors, etc): here is the big mistake - they have to be inflation adjusted, but, no-one does that under HCA: they state them at HC and thus value them like monetary items - and destroy their real values.

It is of course true that all financial statements issued one month after the reporting date are wrong in principle: the CPI (the value of the Rand) has changed.
Copyright © 2010 Nicolaas J Smith