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Friday, 30 October 2009

Hyperinflation in South Africa

IFRS compliant financial capital maintenance in units of constant purchasing power would always be a better accounting model than HCA during inflation.

SA accountants unknowingly destroy the real value of reported Retained Earnings at the rate of inflation under HCA implementing the stable measuring unit assumption in the SA real economy.

Rejecting the stable measuring unit assumption by measuring financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) in 1989 would stop this destruction of real value in Retained Earnings.

It would remove distortions in the real economy, improve economic stability and guarantee that no wipe-out of internal demand would be possible in the SA economy like what happened in the recent past in the Zimbabwean economy under very high rates of inflation.

Hyperinflation is still possible in SA in the Rand, but, with no stable measuring unit assumption and all constant items (including salaries, wages, rentals, shareholders´ equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc) being automatically updated in units of constant purchasing power, economic stability in the real economy would be guaranteed as it was in Brazil during 30 years of hyperinflation of up to 2000% per annum.

Brazil used indexation to maintain the real values of non-monetary items during the 30 years of hyperinflation in their internal currencies during that period.

Financial capital maintenance in units of constant purchasing power in terms of the Framework, Par. 104 (a), is the same as indexation, but, only in constant items - not in variable real value non-monetary items. The latter are valued in terms of IFRS or SA GAAP.

Retained Earnings can be updated under IFRS but not under HCA.

Kindest regards,

Nicolaas Smith