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Thursday, 24 September 2009

Who destroy more real value: Inflation or SA Accountants?

100% of the inflation-adjusted original real values of all contributions to Shareholders´ Equity have to be invested in revaluable variable item fixed assets with an equivalent updated fair value (revalued or with unrecorded hidden holding gains) in order not to destroy Equity’s original real value under the traditional Historical Cost Accounting model implemented by all companies in South Africa.

The current real value of the nominal portion not invested as such will be destroyed at a rate equal to the rate of inflation when the constant item Equity is measured in nominal monetary units, i.e. implementing the stable measuring unit assumption as done by all SA accountants.

Most companies do not meet the 100% requirement. In practice this means that the real value of Retained Profits of all SA companies and banks are unknowingly and unintentionally being destroyed at a rate equal to the rate of inflation by SA accountants implementing the real value destroying traditional Historical Cost Accounting model.

Implementing the IASB approved alternative, namely, financial capital maintenance in units of constant purchasing power as authorized in 1989 in the Framework, Par. 104 (a), would stop this destruction forever under all levels of inflation and deflation whether a company has fixed assets or has no fixed assets at all.

SA accountants would maintain instead of currently destroy about R200 billion per annum in constant item real value in the SA real economy when they reject the stable measuring unit assumption as approved in Par. 104 (a).

One percent inflation destroys about R20 billion per annum in the real value of the Rand in SA.

6.4% inflation thus destroys about R128 billion per annum in the real value of the Rand.

SA accountants unknowingly and unintentionally destroy about R200 billion per annum in the real value of constant items not fully or never updated because they implement the stable measuring unit assumption.

Kindest regards

Nicolaas Smith

Summary: The only way you can prevent your accountant from destroying the real value of your capital and retained profits at the rate of inflation with traditional Historical Cost Accounting is to invest 100% of your capital and retained profits in fixed assets. Hardly any company does that. It means that most companies´ and banks´ retained profits are unknowingly being destroyed by their accountants.

Under the alternative units of constant purchasing power accounting during low inflation your accountant would maintain the real value of your capital and retained profits forever no matter what the rate of inflation and even if you have no fixed assets - as long as you break even.

SA accountants are unknowingly terrible destroyers with their stable measuring unit assumption.