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Tuesday, 25 August 2009

Accounting professor is dead wrong - Part 2

Continuing from yesterday’s blog:
The Framework for the Preparation and Presentation of Financial Statements Par. 104 (a) was approved by the International Accounting Standards Board’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.

SA accountants who prepare their companies´ accounts based on International Financial Reporting Standards during low inflation have to choose between Historical Cost Accounting and Constant ITEM Purchasing Power Accounting in terms of Par. 104 (a) which states:

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

SA accountants have to choose between implementing the constant purchasing power financial capital concept of invested purchasing power measured in units of constant purchasing power, the constant purchasing power financial capital maintenance concept and determining profit or loss in terms of units of constant purchasing power during non-hyperinflationary periods, on the one hand, or the traditional Historical Cost financial capital concept of invested money in nominal monetary units, the HC financial capital maintenance concept in nominal monetary units and the HC profit or loss determination concept in nominal monetary units during non-hyperinflationary periods.

SA accountants generally choose the real value destroying Historical Cost Accounting model when they implement the very destructive stable measuring unit assumption.

We all know that measuring an economic item in units of constant purchasing power maintains its real value constant as compared to measuring it in nominal monetary unit which results in its real value being destroyed at a rate equal to the rate of inflation.

The accounting professor states: “the choice of the measuring unit does not affect their fundamental value”

He is dead wrong in the case of constant items never updated.

He states: “ So its fine to represent value in terms of constant purchasing power and to argue that that would be a better method than using historic cost and maintaining a fiction as to the stability of the measuring unit - but that doesn't affect the nature of the underlying resources.”

He is dead wrong in the case of constant items never updated.

He states: “The choices accountants won't change that value & won't affect the economy (except indirectly insofar as investment decisions are based on the figures we present).”

He is dead wrong in the case of constant items never updated.

SA accountants unknowingly destroy about R200 billion PER ANNUM in the real value of constant items, for example, Retained Profits of all SA companies never updated during low inflation because they implement the very destructive stable measuring unit assumption as part of the real value destroying Historical Cost Accounting model.

They will boost the SA real economy by about R200 billion PER ANNUM for an unlimited period of time – ceteris paribus – when they reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the IASB 20 years ago.

They simply have to ignore that the accounting professor states that “to represent value in terms of constant purchasing power doesn't affect the nature of the underlying resources.”

He is dead wrong in the case of constant items never updated.

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