NO SUBSTANCE IN THE STATEMENT THAT CHOICES SA ACCOUNTANTS MAKE WON´T AFFECT THE ECONOMY
The debate of how to account for value has been around for decades.
Robert Kemp, CPA Professor, University of Virginia
The three fundamentally different basic economic items in the economy
1. variable items
2. monetary items and
3. constant items
are economic values. Each economic item is an economic value expressed in terms of money, i.e. the functional currency. SA accountants account economic transactions involving these three economic items in an organized manner when they implement a double entry accounting model: journal entries, general ledger accounts, trial balances, cash flow statements, income and expenses in the Profit and Loss Account, assets and liabilities in the Balance Sheet plus other financial, management and costing reports.
SA accountants value economic items when they account economic activity in the accounting records and prepare financial reports of SA economic entities based on the double entry accounting model. Accounting entries are valuations of the economic items (the debit items and the credit items) being accounted.
SA accountants do not simply record economic activity. Accounting is not just a scorekeeping or recordkeeping of economic events.
That concept of financial reporting has no substance. SA accountants value economic items when they account them. Subsequent accounting entries are part of generally accepted accounting practice of continuous valuation of the economic items originally valued and accounted over time as required by SA Generally Accepted Accounting Practice and IFRS implemented in conjunction with the IASB´s
Framework.
The measurement basis and concept of financial capital maintenance SA accountants choose - either real value destroying traditional Historical Cost nominal monetary units (their current choice) or real value maintaining units of constant purchasing power (the CIPPA model) - to value constant real value non-monetary items determine whether they unknowingly destroy or maintain their real values during low, high and hyperinflation. SA accountants are required by the IASB to implement
IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation. IAS 29 is based on the Constant Purchasing Power Accounting (CPPA) model. Inflation, being a uniquely monetary phenomenon, can not, by definition, destroy the real value of constant real value non-monetary items or variable real value non-monetary items. It is SA accountants’ choice of capital maintenance concept (accounting model) that determines whether they carry on currently unintentionally destroying real value in constant items never or not fully updated or maintain those values for an unlimited period of time – all else being equal.
When SA accountants apply the very destructive stable measuring unit assumption as part of the real value destroying traditional HCA model and value constant items at their HC nominal monetary values and these items are never or not fully updated or inflation-adjusted by means of the CPI over time in SA´s non-hyperinflationary environment, they unknowingly destroy their constant real non-monetary values at a rate equal to the rate of inflation. This is the case with all constant items never or not fully inflation-adjusted including the unintentional destruction by SA accountants of the real value of issued share capital in SA banks and companies which do not have variable real value non-monetary fixed property, plant and equipment that can be revalued at least equal to the updated original real value of all capital contributions under the HC paradigm.
When SA accountants choose to measure financial capital maintenance in real value maintaining units of constant purchasing power (the CIPPA model) – as they can freely do in terms of the IASB´s
Framework, Par. 104 (a) - they will maintain all constant item real values over time including issued share capital, whether entities have fixed property, plant and equipment to revalue or not.
When SA accountants value constant items in HC nominal monetary units – as they all currently do – they unknowingly destroy their real values at a rate equal to the inflation rate when they are never updated under the HC paradigm.
Variable Items
SA accountants value variable real value non-monetary items in terms of IFRS or SA GAAP. “
Listed companies use IFRS and the unlisted companies could use either IFRS or Statements of GAAP.”
IAS 16 deals with Property Plant & Equipment. It allows two methods of valuation or measurement; either historical cost or revaluation based on fair value. The charge for depreciation relates to the carrying value, whether historical cost or fair value. It is not acceptable under HCA to index up the original cost of an asset by reference to subsequent inflation or to base the depreciation charge on that indexed amount.
There are similar requirements in respect of intangible assets (IAS 38) and inventories
(IAS 2).
IAS 39 requires fair values to be applied in valuing investments and derivative financial instruments. A historical cost basis of accounting is not acceptable for these items.
The real values of variable real value non-monetary items, e.g. property, are not destroyed when accountants value them at Historical Cost in terms of IFRS or GAAP. These items will be valued at their market prices when they are eventually sold.
Monetary items
Low inflation is what long term sustainable economic growth is built on. Alan Greenspan.
SA accountants value monetary items at their original nominal monetary values; that is, at their original HC values since monetary items can not be updated or indexed during the current financial period for the purpose of
1. accounting their values during the reporting period,
2. determining the profit or loss for the reporting period, and
3. measuring financial capital maintenance in either nominal monetary units or constant purchasing power units
during inflation or deflation.
Inflation – not SA accountants - destroys the real value of SA monetary items over time. The internal real value of the Rand is automatically adjusted downwards as it is being destroyed by the economic process of inflation in SA´s inflationary economy as indicated by the rate of change in the CPI. Inflation destroys the real value of monetary items under any accounting model and also when no accounting model is implemented; that is, when a business does not account its economic activities; for example, street vendors. The accounting model has no affect on the real value of monetary items during the reporting period.
Double entry accounting cannot maintain the real value of monetary items during the reporting period. It is not an attribute of double entry accounting to maintain the real value of monetary items during the reporting period. Inflation destroys the real value of monetary items no matter which accounting model is used. That is why low inflation is so critical for long term sustainable economic growth.
Constant items
SA accountants can choose to measure financial capital maintenance in either nominal monetary units (the HCA model) or in real value maintaining units of constant purchasing power (the CIPPA model) as authorized by the IASB in the
Framework, Par. 104 (a).
It is very obvious that how SA accountants choose to measure financial capital maintenance does make a big difference to the real value of constant items. There is absolutely no substance in the statement that the choices accountants make won't affect the economy no matter
The accounting model SA accountants choose in terms of the
Framework, Par. 104 (a) is of critical importance. When they choose to measure financial capital maintenance in real value maintaining units of constant purchasing power they will maintain the real values of, for example, all SA banks´ and companies´ retained income values constant over time, all else being equal, instead of unknowingly destroying them, as the currently do. The
ONLY way SA accountants can maintain the real value of constant real value non-monetary items during inflation and deflation is by choosing a Constant Purchasing Power Accounting model as per the IASB´s
Framework, Par. 104 (a).
Not a single SA accountant in SA chooses to measure financial capital maintenance in real value maintaining units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a). SA accountants, unfortunately, choose to measure financial capital maintenance in nominal monetary units and thereby, unknowingly, destroy the real values of constant items at a rate equal to the rate of inflation when they are never or not fully updated over time when they implement the very destructive stable measuring unit assumption as part of the real value destroying HCA model. SA accountants are unknowingly killing the real economy at the rate of about R200 billion per annum – each and every year - as long as they carry on choosing to measure financial capital maintenance in nominal monetary units.
© 2005-2010 by Nicolaas J Smith. All rights reserved
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