Monday, 28 April 2008

This is not the Historical Cost Debate

Real Value Accounting is something completely different from the very old Historical Cost Debate. That debate was about the valuing of mainly variable items. Real Value Accounting is only about the valuing of constant items.

It is not really unknown since it is similar to IAS 29 with monthly updating in terms of the Consumer Price Index in non-hyperinflationary economies and daily updating in terms of a daily index or the parallel rate in hyperinflationary economies like Zimbabwe. Very similar to the very successful Unidade Real de Valor in Brazil.

It is not a complex method once you forget historical costs and start thinking only in real values: only update all constant items. The rest is SA GAAP excluding the stable measuring unit assumption. Obviously all items have to be brought up to date to today´s real value. Brazil did it for 30 years from 1964 to 1994.

I want the average Joe to realize that SA Chartered Accountants are killing the real economy in SA with their silly assumption that the Rand is PERFECTLY stable ONLY for the purpose of valuing CONSTANT items NEVER or not fully updated, e.g. retained income. Retain income does not really concern the average Joe.

What does concern the average Joe/Jane in SA is that under Real Value Accounting his/her salary will automatically be updated monthly every time the new CPI value is published. Salaries will thus automatically be maintained at their real values thus maintaining internal demand in SA. So too personal, company and value added taxes thus maintaining the real value of government´s tax base. And so forth with all constant items in the SA economy.

This will increase SA GDP, increase the economic rate of growth and result in 0% inflation ONLY in the real economy. Tito Mboweni and the other wise people at the SARB will still have to lower cash inflation from its current very high 10.6% level keeping in mind that the total of all underlying values systems in SA determine the internal and external value of the Rand.

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