Friday, 14 August 2009

Capital maintenance for dummies - like the IASB :-)

Capital maintenance for dummies - like the IASB

Capital is required to start a company. A company has an indefinite life - it is supposed to exist forever.

Capital is really saved-up wealth or saved-up real value.

Luckily double entry accounting makes capital into a constant item. It is like your salary or wage: its real value is a constant item.

But, if your salary is paid in ever-more-worthless-Rands (inflation or value-destruction at 6.9%) then your salary has to be inflation-adjusted to keep its real value the same.

This is what trade unions do. They make sure your salary is inflation adjusted every year.

This is very easy to understand. Everybody does it - world wide. That is, for salaries and wages and rentals and so on.

Enter the IASB. The International Accounting Standards Board.

Well, they are the world´s top accounants.

They are very responsible people.

They realize that money loses its real value at such a rapid rate during hyperinflation that all items that are not monetary items have to be inflation-adjusted by means of the Consumer Price Index. That is during hyperinflation.

However, during low inflation, the IASB change their story completely: now they suddenly come up with the story that you can maintain your capital in NOMINAL monetary units during low inflation.

Imagine that!

That is only possible when you invest 100% of your company´s capital in revaluable fixed assets. Companies normally don´t do that.

We all know that you cannot maintain the real value of your salary by keeping it the same during inflation.

Well, the same is true for companies´ capital and retained profits.

Not so, according to our friends at the IASB. According to them you can MAINTAIN your company´s retained profits in NOMINAL MONETARY UNITS.

They are nuts! :-)

That is completely impossible during inflation.

Well, they are not as dof as they appear to be. lol

They authorized our accountants in SA 20 years ago to maintain our companies´ capital and retained profits in units of constant purchasing power.

Fantastic! That is 100% correct!

Well. That is where the capital maintenance stops. :-(

Not a single SA accountant selects capital maintenance in units of constant purchasing power.

What a sad story. Instead they unknowingly destroy about R200 billion per year in real value in constant items never updated - each and every year!!)

Kindest regards,

Nicolaas Smith

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