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Monday, 19 October 2009

Eskom: 1% Increase in inflation will cost SA an additional R53 billion per annum

Fin24.Com: Power price hikes fuel inflation

2009/10/18 11:45:00 AM Sake24.com reporter

"Johannesburg - Eskom's proposed electricity price hike will increase inflation by between a half and one percentage point.

Econometrix chief economist Dr Azar Jammine said South Africa will be fortunate if inflation falls to within the Reserve Bank's target range for the consumer price index of 3% to 6%.

"Inflation may fall below 6% in the second quarter of next year, but after that it will climb to 7% and stay there," Jammine told the annual congress of the South African Chamber of Commerce and Industry (SACCI) in Johannesburg on Friday."




A one percent increase in inflation will cost SA an additional R53 billion per year:

(1) Inflation will destroy an additional R20 billion in the real value of the Rand each and every year there after.

(2) SA accountants will unknowingly (?) destroy an additional about R33 billion in the real value of constant items never maintained in the SA real economy - e.g. in Retained Earnings - with their very destructive stable measuring unit assumption.

This will carry on for as long as the additional 1% increase stays in place and SA accountants keep on refusing to measure financial capital maintenance in units of constant purchasing power as they have been authorized to do by the International Accounting Standards Board in the Framework, Par. 104 (a) twenty years ago.

Increases in the price level (inflation) destroy the real value of money (the functional currency) and other monetary items with an underlying monetary nature (e.g. loans and bonds). However, inflation has no effect on the real value of variable real value non-monetary items (e.g. goods and commodities, like cars, gold, real estate, inventories, finished goods, foreign exchange, etc) and constant real value non-monetary items (e.g. issued share capital, retained profits, capital reserves, salaries, wages, rentals, pensions, trade debtors, trade creditors, taxes payable, taxes receivable, deferred tax assets, deferred tax liabilities, etc).

SA accountants choose to implement the stable measuring unit assumption during low inflation when they value constant items in fixed nominal monetary units. SA accountants´ choice of implementing the stable measuring unit assumption instead of measuring constant items´ real values in units of constant purchasing power results in the real values of these fixed constant real value non-monetary items being destroyed at a rate equal to the rate of inflation when they are never maintained during low inflation because inflation destroys the real value of money which is the monetary measuring unit of account. Constant items are treated like monetary items when their real values are never maintained as a result of the implementation of the stable measuring unit assumption as part of the traditional Historical cost accounting model.

“The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”

At 7% inflation the total real value destroyed in the SA economy would be:

R140 billion per annum by inflation in the real value of the Rand in the monetary economy.

R233 billion (estimate) unknowingly (?) destroyed by SA accountants in the real value of constant items never maintained in the SA non-monetary or real economy.

Total: R373 billion per annum

When SA accountants freely decide to measure financial capital maintenance in units of constant purchasing power as per the IASB´s Framework, Par. 104 (a), then the total annual destruction will be reduced from R373 billion to only R140 billion real value destruction by inflation in the real value of the Rand.

PS: Do you know an accountant?

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