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Monday, 3 August 2009

1.1% Drop in inflation lowers ABSAs 6 monthly real value destruction to R1.910 bn from R2.348 bn

Inflation can only destroy the real value of the Rand and other monetary items in the SA monetary economy.

Inflation can not destroy the real value of ABSA´s Retained Earnings.

ABSA´s board of directors selecting the historical cost accounting model unknowinly destroys the real value of the bank´s existing Retained Earnings at a rate equal to the rate of inflation by implementing the stable measuring unit assumption.

When ABSA´s board of directors choose to measure financial capital maintenance in units of constant purchasing power as the International Accounting Standard Board authorized them to do 20 years ago in the Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power", which is compliant with International Financial Reporting Standards (see IAS8.11), they will knowingly maintain the real value of the bank´s Retained Earnings no matter what the rate of inflation in SA instead of destroying the real value of the existing Retained Earnings at a rate equal to the rate of inflation as they are unknowingly doing right now.

ABSA had R40.665 billion in Retained Earnings at 31.12.08. ABSA´s board of directors selected the historical cost model to do the bank´s accounting. The group financial director, Jacques Schindehütte, continue to implement the stable measuring unit assumption and continue to unknowingly destroy group retained earnings at a rate equal to the rate of inflation.

Luckily for him and the board, inflation is down to 6.9% in June and he and they unknowingly only destroyed R1.910 billion in retained earnings in the 6 months to June 2009, instead of R2.438 billion if the inflation rate had stayed at 8.0% to June, 2009.

The 1.1% drop in the inflation rate means they unknowingly maintain R438 million in the existing real value of the bank´s Retained Earnings. That can now be paid out in a higher dividend or can be kept in the bank to grow the bank´s business.

Unfortunately, as long as the board of directors select the historical cost model to do the bank´s accounts, they will unkowingly keep on destroying even the value they now unknowingly maintain because of the drop in inflation.

Kindest regards,

Nicolaas Smith