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Saturday, 8 August 2009

The Market Monkey and the Real Value Accountant - Part 2

Market Monkey said:

heh heh.

You miss understand my disagreement NS.

I agree that the current accounting mis-states the true value of the firm's capital.

I just don't agree it has any relevance to the real world. I must be in the top 1.0% of the population who uses accounts to make real world decisions and value ... and I really don't care that the capital is stated at historic cost.

... and

I think that I would actually complain if units of constant purchasing power were used.

Why?

Well. I like having the raw data. I can then adjust it for inflation myself. If the accountants had to do the calculations for me then I wouldn't know what I'm dealing with? I might disagree with the inflation rate they have used ... the global CPI numbers are all already a load of hog wash with them being adjusted for "heuristics", leaving out key consumtion items etc.

Do you get my point and why I prefer the current system?

Keep a swinging,

MM.

P.s. Also just so there is no confusion; I'm not an accountant (i.e. CA), I just use accounts to make decisions and money.

Real Value Accountant said:

Hi Market Monkey,

We have to be professional here:

I never stated that historical cost accounting “misstates” the true value of the firm´s capital.

I state that historical cost accounting accountants unknowingly DESTROY the real value of constant items never updated. This includes the real value of firms´ issued share capital and retained earnings.

Your agreement that current accounting misstates the true value of the firm´s capital is the same as the hackneyed “historical cost accounting erodes the firm´s capital.”

I understand.

It is a very, very, very big step to agree that historical cost accountants unknowingly destroy real value on a massive scale in the real economy.

It is agreeing that the 500 year old Historical Cost paradigm is over.

It is similar to agreeing that the world is round when you have always believed it is flat.

I understand.

This is not going to happen overnight. I accept that.

I already proved to you in a previous comment on another post that historical cost accountants unknowingly destroy the real value of retained profits.

You simply refuse to accept that it makes any difference in the real world.

That is also fine with me.

You accept the mainstream, generally accepted view of things.

That is fine.

Let me show you where your mainstream approach will take you:

If SA trade unions manage to increase wages at rates of 26% and above and this is taken up generally in SA and SA enters into hyperinflation (26% annual inflation for three years in a row totalling 100% cumulative inflation) you will receive all your annual financial statements that you use in your work done in terms of IAS 29. That is, in terms of the IASB´s Constant Purchasing Power inflation accounting model under which ALL non-monetary items, variable and constant items, are inflation adjusted. These financial statements will have new items that you do not deal with during low inflation: net monetary losses and net monetary gains.

You will accept all that as will all accountants in SA because it is required by the IASB and IFRS. Like Turkey did recently.

Then, when SA gets out of hyperinflation back into low inflation again, then you and all SA accountants will suddenly again receive/produce financial statements devoid of net monetary gains and net monetary losses and no units of constant purchasing power for all constant items. As Turkey did recently.

[I do not promote IAS 29 Constant Purchasing Power inflation accounting during low inflation in SA by which ALL non-monetary items are inflation adjusted. I promote the IASB´s Constant ITEM Purchasing Power basic accounting model under which ONLY constant items are inflation-adjusted and variable items are valued in terms of IFRS.]

Then you and all SA accountants will suddenly state again that there is no such thing as net monetary gains and net monetary losses and that the Rand is perfectly stable, as you, Market Monkey, and all SA accountants state right now, as far as the valuation of Issued Share Capital, Retained Profits, Capital Reserves, Share Issue Premiums, Share Issue Discounts, all other items in Shareholders Equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc are concerned.

Horses for courses for you and SA accountants.

See what I mean?

How can investors and people in general have great faith in accounting when the above takes place. And it does – as you well know. It happened in the case of Turkey.

Below 26% annual inflation for 3 years in a row (the current low inflation situation): no net monetary gains and losses and the Rand is perfectly stable for the valuation of balance sheet constant items – i.e. implementing the stable measuring unit assumption as you and all SA accountants do at the moment.

At and above 26% annual inflation for 3 years in a row (recent Turkey-style hyperinflation of about 100 to 150%): net monetary gains and losses and no stable measuring unit assumption at all – just units of constant purchasing power.

It makes no sense at all.

The critical factor is to get to the point when you accept that historical cost accountants unknowingly destroy real value on a massive scale in the real economy.

Market Monkey, I do not know when you will be ready to accept that.

Most probably you will only accept it when the majority of companies in SA measure financial capital maintenance in units of constant purchasing power as approved by the IASB 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."

I understand and accept that. You are a mainstream person - not a doubter and searcher like me.

Kindest regards,

Nicolaas Smith

PS: Yes, Market Monkey, I can see why you prefer the current system. The problem is you do not understand that SA accountants unknowingly destroy about R200 billion in the SA real economy last year and this year and next year again if they carry on with their stable measuring unit assumption.

That is a helluva lot of real value to destroy each and every year. It will make a big difference to the SA real economy when that is not destroyed but maintained forever - year after year after year.

That is what you do not understand.

This is what Dr. Cemal KÜÇÜKSÖZEN, Head of the Accounting Standards Department of the
Capital Markets Board of Turkey stated in public in 2005 after he read the manuscript of my first book:

"I totally agree with you."

NS