Tuesday, 1 September 2009

Fraternizing with the enemy

Whereas inflation is SA´s public enemy No 1, SA accountant’s stable measuring unit assumption is public enemy No 2.

SA accountants proudly live up to their deserved reputation as trusted custodians of real value in the case of the constant items salaries and wages. They very responsibly admit that the real value of salaries and wages would be destroyed if the destruction of the real value of the unstable medium of exchange in SA, the always depreciating Rand, is not compensated for by valuing remuneration items in units of constant purchasing power; i.e., inflation-adjusting them in a low inflation environment. They vigorously reject the stable measuring unit assumption in the case of salaries and wages.

Retained Profits are constant items exactly the same as salaries and wages. When it comes to valuing Retained Profits and other balance sheet constant items, SA accountants slavishly follow their mentor’s advice and implement their very destructive stable measuring unit assumption whereby they now suddenly ASSUME that the Rand is perfectly stable and always had been perfectly stable. They refuse point blank to measure financial capital maintenance in units of constant purchasing power as the IASB has authorized them to do 20 years ago. They thus unknowingly and unintentionally destroy the real value of Retained Profits in all SA companies at a rate equal to the rate of inflation. Thus unnecessary destruction of real value in constant items never updated amounts to about R200 billion per annum in the SA real economy.

Financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) in 1989 means inflation-adjusting all constant item accounts – income statement and balance sheet constant items – in a low inflation environment.
© 2005-2010 by Nicolaas J Smith. All rights reserved

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