Tuesday, 8 September 2009

Capital destruction in nominal monetary units

Capital is a constant real value non-monetary item. Its real value can be maintained constant forever in all companies at least breaking even - all else being equal - only when financial capital maintenance is measured in units of constant purchasing power during low inflation as the IASB authorized 20 years ago in the Framework, Par. 104 (a).

At continuous 6% annual inflation a nominal monetary item´s real value is destroyed as follows:

46% after 10 years
93% after 44 years
99% after 75 years

Capital´s real value can be maintained constant forever - ceteris paribus.

A SA accountant accounts capital once and it instantaneously loses its constant item status and is magically turned into a depreciating monetary item with the SA accountant unknowingly destroying its real value as set out above. This is the case in all SA companies which do not have 100% of all contributions to equity (excluding the revaluation reserve) invested in variable item fixed assets that can be or are revalued via the revaluation reserve.

In principle SA has never ever had and currently does not have any constant item Retained Profits. All SA´s supposedly "constant item" Retained Profits are simply CASH. Not cash in the bank earning interest but CASH as in notes and coins kept under the mattress with their real values being destroyed by inflation.

The IASB went to great lengths in IAS 29 to clearly define capital as a non-monetary item. That was a total waste of time in 1989 when it then went ahead to "approve" at the same time the impossible process of financial capital "maintenance" in nominal monetary units during low inflation.

Kindest regards,

Nicolaas Smith

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