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Wednesday, 9 June 2010

SA accountants are clueless about the destructive nature of the stable measuring unit assumption.

Increases in the general price level (inflation) destroy the real value of the Rand (the functional currency) and other monetary items with an underlying monetary nature (e.g. loans and bonds) equally in the monetary economy. However, inflation has no effect on the real value of variable real value non-monetary items (e.g. land, buildings, goods, commodities, cars, gold, real estate, inventories, finished goods, foreign exchange, etc) and constant real value non-monetary items (e.g. issued share capital, retained profits, capital reserves, other shareholder equity items, salaries, wages, rentals, pensions, trade debtors, trade creditors, taxes payable, taxes receivable, deferred tax assets, deferred tax liabilities, etc).

SA accountants freely choose to implement the stable measuring unit assumption during low inflation when they value constant items never maintained, e.g. companies´ capital and profits, in nominal monetary units; i.e. when they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par 104 (a) or in terms of SA GAAP.

SA accountants´ choice of implementing the stable measuring unit assumption instead of measuring constant items´ real values in units of constant purchasing power results in the real values of these constant real value non-monetary items never maintained with sufficient revaluable fixed assets being destroyed at a rate equal to the annual rate of inflation because inflation destroys the real value of the Rand which is the monetary measuring unit of account in the SA economy.


Copyright © 2010 Nicolaas J Smith