Saturday, 15 November 2008

Accountants value economic activity

The three distinct economic items in the economy:

1. variable items
2. monetary items and
3. constant items
are all three economic values. Each economic item has an economic value expressed in terms of money. The accounting model deals with these three economic items in an organized manner: journal entries, trial balances, general ledger accounts, cash flow statements, items in the Profit and Loss Account, assets and liabilities in the balance sheet plus other financial, management and costing reports.

South African 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. Every accounting entry is a valuation of the economic items (the debit item and the credit item) being accounted.

SA accountants do not simply record economic activity. Accounting is not just a scorekeeping of economic events. Accountants value economic items when they account them. Subsequent accounting entries are part of continuous generally accepted accounting practices of valuation of the economic items originally valued and accounted over time as required by SA Generally Accepted Accounting Practices, International Accounting Standards and IFRSs applied in conjunction with the IASB´s Framework.

Variable Items

SA accountants value variable items in terms of IASs and IFRSs or SA GAAPs. No real value is unknowingly destroyed in the value of variable items by accountants choosing the traditional HCA model as long as the International Standards or GAAPs are implemented. “Listed companies use IFRS and the unlisted companies could use either IFRS or Statements of GAAP.”

Monetary items

SA accountants value monetary items at their original nominal monetary values; that is, at their original HC values since monetary items cannot be updated in current period accounts and financial reports published during the current period. Inflation – not accountants - destroys the real value of monetary items over time – currently at the high rate of 13% per annum. The real value of a monetary item is determined by the rate of inflation as indicated by the change in the CPI. Inflation destroys the 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.

Constant items

SA accountants choose to value constant items in either nominal monetary units or in units of constant purchasing power in terms of the Framework, Par. 104 (a):

“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”

How they value constant items does make a difference to the fundamental values of constant items. The accounting model accountants choose in terms of Par. 104 (a) is of critical importance. When SA accountants choose to measure financial capital maintenance in units of constant purchasing power they choose to value constant items in units of constant purchasing power, as provided for by IFRSs in the Framework, Par. 104 (a) and they maintain their real values over time. The only way SA accountants can maintain the real value of constant items during inflation or deflation is by choosing the Constant Purchasing Power Accounting model. Not a single SA accountant in SA chooses to measure financial capital maintenance in units of constant purchasing power as per Par. 104 (a). All SA accountants, unfortunately, choose to value constant items in nominal monetary units and thus, unknowingly, destroy their real values at the rate of inflation. In so doing, SA accountants are, for example, unknowingly destroying the real value of all retained earnings balances in all SA companies at the rate of inflation and unknowingly destroying the real value of issued share capital balances of companies with no Fixed Assets to revalue at least equal to the original real value of their issued share capital. SA accountants are unintentionally killing the real economy.

© 2005-2010 by Nicolaas J Smith. All rights reserved

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