Sunday, 16 August 2009

Why don´t SA accountants follow the IASB then?

The reasons SA accountants do not follow the IASB are the same reasons the rest of the world´s accountants don´t follow the IASB:

Some examples:

1. Historical Cost Accounting has been around for 500 years.

2. Everybody uses Historical Cost Accounting.

3. Hardly anyone (this includes the IASB) understands that when accountants use the stable measuring unit assumption as part of Historical Cost Accounting they unknowingly destroy the real value of their company´s retained profits, for example.

When they get to realize it, they say it makes no difference in the real world - like Market Monkey says.

In fact, it costs SA about R200 billion in real value unknowingly destroyed by our accountants each and every year in this way.

4. Hardly anyone (this includes the IASB) understands that when they stop the stable measuring unit assumption they will maintain the real value of all constant items.

5. Hardly any accountants even know that they in fact choose between two basic accounting models when they do their accounts in terms of International Financial Reporting Standards. They do not even know there is a choice and that they in fact make that choice. Ask any accountant you know.

You see, the IASB made the mistake of giving them a choice between measuring financial capital maintenance in either nominal monetary units (the traditional Historical Cost Accounting model) or units of constant purchasing power.

No-one chooses constant purchasing power units. The reason for this is that during the high-inflation 1970´s companies unsuccessfully tried inflation accounting in units of constant purchasing power whereunder they inflation-adjusted all non-monetary items by means of the Consumer Price Index.

Most companies correctly complained that you cannot just inflation-adjust all non-monetary items (cars, phones, groceries, etc) during high inflation.

The IASB correctly formulated IAS 29 for the use of Constant Purchasing Power inflation accounting only during hyperinflation.

Now, whenever any accountant or accounting authority sees anything about units of constant purchasing power, they immediately think inflation accounting.
Before the IASB came about, accounting was based on Generally Accepted Accounting Practice. The IASB did not have the guts (tomates is what we say in Portuguese) to change the 500 year old Historical Cost Paradigm. If they remove the words "nominal monetary units" from the Framework, Par 104 (a) that states: "Financial capital maintenance can be measured in either NOMINAL MONETARY UNITS or in units of constant purchasing power." then they will cause a paradigm change: out with the Historical Cost paradigm and in with the Constant Purchasing Power paradigm.

But, that is a very big step. It will not happen overnight. I accept that.

Those are the main reasons.

Accounting authorities are doing a good job at the moment with fair value accounting: mark-to-market accounting.

After that they should tackle the stable measuring unit assumption - if South Africa has not yet taken the lead in getting it rejected by then.

But, we have to start somewhere and go one step at a time. Eventually we´ll get there. When, I don´t know.

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