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Wednesday, 25 August 2010

"Is the process of financial reporting the same as a process of wealth creation?"

That was the question asked by CA007 after he came to accept financial capital maintenance in units of constant purchasing power during LOW inflation as authorized in IFRS in the Framework, Par 104 (a) in 1989 on our Mother of all Debates

This was my answer:

This one is easy to answer immediately:

The answer is NO.

I emphatically always state that accountants do not and can not create wealth or real value out of nothing: out of thin air: by simply passing some update or inflation-adjustment accounting entries. They never do.

Accountants can only MAINTAIN EXISTING real value, BUT, ONLY with measurement in units of constant purchasing power during low inflation and hyperinflation.

(OR - ONLY in the case of the real value of SHAREHOLDERS´ EQUITY - not the real value of any other constant real value non-monetary item under HCA - under HCA during low inflation - when 100% of all contributions to the equity balance is continuously invested in revaluable fixed assets with an equivalent updated real value (revalued or not) - something that is only generally the case with property, hospital and hotel companies. This is where the unknowing destruction of real value by accountants choosing to implement the stable measuring unit assumption, i.e. assuming that inflation is zero percent during actual low inflation of up to 25% during three years in a row - enters the picture: they unknowingly destroy real value in that portion of equity that is never backed or maintained by investment in revaluable fixed assets with an equivalent updated real value under HCA during low inflation.)

How do accountants maintain EXISTING constant real non-monetary value during low inflation?

By NOT DESTROYING IT: i.e by measuring it in units of constant purchasing power: i.e. the OPPOSITE of what they do under HCA when they assume that there is no inflation even if inflation is 25% per annum forever. They destroy the real value by measuring the constant real value non-monetary items in nominal montary units: exactly the same as monetary units: treating constant real value non-monetary items the same as cash.

The constant real non-monetary value must first legally exist, then, accountants can MAINTAIN (instead of destroy with applying the stable measuring unit assumption; i.e ASSUMING there is no inflation and measuring it in nominal monetary units during low inflation) its real value ONLY with measurement in units of constant purchasing power during low inflation and hyperinflation.

We must remember that accounting has that little-understood magic: it is double entry: for every debit there is an equivalent credit.

The existing constant real non-monetary value of all constant real value non-monetary items is only maintained constant in all entities that at least break even when all constant real value non-monetary items are measured in units of constant purchasing power, all variable items are correctly valued in terms of IFRS and the net monetary gain or loss from holding monetary items is accounted in the income statement during low inflation.

This requires the CORRECT definition of monetary items.

Why?

Because both I and the IASB agree that non-monetary items are all items that are not monetary items.

Thus: define monetary items wrongly - as it is defined incorrectly in IFRS and US GAAP and by PricewaterhouseCoopers, and, we have the wrong split (classification) of monetary and non-monetary items - as we do have at the moment.

Here is the correct definition of monetary items:

Monetary items are money held and items with an underlying monetary nature.

Here is the IFRS (wrong) definition of monetary items:

Monetery items are money held and items to be received of paid in money. IAS 29, Par 12

Almost all non-monetary items are also received or paid in money.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith