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Tuesday, 18 May 2010

The critical difference

The critical difference with continuous financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago compared to other works about the understood need to replace the Historical Cost Accounting model is that it is clearly and undeniably shown that SA accountants unknowingly destroy real value with traditional HCA during low inflation – and lots of it every year: about R167 billion in SA per annum as long as inflation stays at 5% per annum.

Everyone knows and admits that real value is being destroyed in companies´ capital and profits. Everyone blames inflation.

“The erosion of business profits and invested capital caused by inflation”

as stated in the US Financial Accounting Standard FAS 33 is the third of the not yet extinct very popular accounting fallacies to be put to rest in this process.

It is not inflation doing the destroying.

It is impossible for inflation to destroy any non-monetary item.

Capital and profits are constant real value non-monetary items. Inflation can only destroy the real value of money (the Rand) and other Rand monetary items – nothing else.

It is SA accountants´ free choice of implementing the stable measuring unit assumption during low inflation that is doing the destroying.

The critical difference is that it is clearly proven that SA accountants destroy real value - about R167 billion per annum - in the real economy just by the way in which they do normal accounting.

The critical difference is that it is clearly proven that SA accountants would boost the SA real economy with about R167 billion per annum forever - or as long as inflation stays at 5% - when they freely change over to financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago.
Copyright © 2010 Nicolaas J Smith