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Thursday, 24 June 2010

Real value to be destroyed by SA accountants over the next 30 years - Part II

We can see from Table 3 what the difference would be when SA accountants freely decide to measure financial capital maintenance in units of constant purchasing power as the IASB-authorized them to do 21 years ago in the Framework, Par 104 (a).

The destruction of real value in constant items never maintained which SA accountants treat as monetary items would stop completely. There would only be real value destruction in the value of the Rand because of inflation. At 6.4% annual inflation only R124 billion in real value would be destroyed in the economy as a whole instead of the current about R324 billion over a period of 12 months. Over five years the cumulative total of real value destruction would drop from R1 620 billion to R 624 billion, over 10 years from R3 240 billion to R1 249 billion, over 20 years from R6 480 billion to R2 498 billion and over 30 years from R9 720 billion to R3 747 billion.

SA accountants unknowingly destroy existing real values in existing constant items never maintained with their very destructive stable measuring unit assumption. When they stop their stable measuring unit assumption they would knowingly maintain about R200 billion in existing constant item real values during every period of 12 months in the SA real economy amounting to R1 000 billion over 5 years, R 2 000 billion over 10 years, R4 000 over 20 years and R6 000 billion over 30 years. Boosting the SA real economy with these real values would make a significant difference to growth and employment in the economy over those periods.

Obviously a further reduction of inflation to an annual average of 4% would improve the SA monetary economy even more. Over 30 years it would maintain a further R1 140 billion in the monetary economy on top of the R6 000 to be gained when SA accountants freely switch over to financial capital maintenance in units of constant purchasing power.

There would never more be any destruction of real value in constant items never maintained because of a fundamentally flawed basic model of accounting under which SA accountants simply assume there is no such thing as inflation and never has been, only for the valuation of constant items, when they measure financial capital maintenance in units of constant purchasing power during low inflation. This is exactly the same as stating that there would never more be destruction of the real value of the Rand in the monetary economy at the level of R228 billion per annum (12 x 19 billion) as long as average annual inflation never again reaches 12%. There would be zero per cent real value destruction in constant items – all else being equal – with financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.

Stating that the SARB is responsible for limiting the destruction of the real value of the Rand and other monetary items by inflation to a maximum of 6 per cent or R117 billion per annum is the same as stating that the SARB is responsible for maintaining 94 percent or R1 808 billion of the R1 925 billion total per annum of the real value of the Rand and other monetary items in the SA monetary economy.

It is also the same as stating that SA accountants only unknowingly maintain 94 % or R3 133 billion per annum of the about R3 333 billion of the real value of constant items never maintained they unknowingly treat as monetary items in the SA constant item economy under the Historical Cost paradigm since they unknowingly destroy the remaining 6% or R200 billion annually of the real value of constant items never maintained. They would maintain the real value of the R3 333 billion in constant items constant forever in all SA companies at least breaking even – all else being equal – at all levels of inflation and deflation whether these companies have fixed assets or not.

It is evident from the above why Alan Greenspan stated that low inflation is what sustainable economic growth is built on.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith