Wednesday, 23 December 2009

Blind leading the blind

In 2008 I agreed with the statement that inflation destroys the value of non-monetary items which do not maintain their real values. I agreed at the time but later I realized that it is wrong. Inflation has no effect on the real value on non-monetary items. It was stated that SA accountants are not doing the destroying, but inflation. That is dead wrong. They unknowingly destroy about R200 billion per year in the real values of SA banks´ and companies´ reported constant items, e.g. reported Retained Profits, never maintained, either under SA GAAP or implementing the stable measuring unit assumption.

SA accountants, it was stated, simply do not record this destruction. So, SA accountants know and admit that there is real value being destroyed. It is dead right when it is stated that they do not record this destruction. Why? Because SA accountants also mistakenly think it is caused by inflation. They maintain that it is the monetary authorities´ task to contain inflation which would reduce this cost. They mistakenly regard the destruction caused by their choice to implement the stable measuring unit assumption as “the erosion of business profits and invested capital caused by inflation” (FASB). They consider it to be similar to the cost of inflation which is not accounted under HCA during low inflation. They are consequently satisfied when it is also not accounted. They do not see it as a separate item. To them it is all part of the “erosion” caused by inflation.

Inflation is the well known enemy number one. SA accountants´ choice of the stable measuring unit assumption is the unknown but real enemy number two camouflaged by the fact that it has been authorized by the International Accounting Standard Board in International Financial Reporting Standards with its statement in the Framework, Par 104 (a) in 1989 that financial capital maintenance can be measured in nominal monetary units. That statement is only theoretically true as an accounting principle. It is impossible to maintain capital in nominal monetary units - per se - in our low inflationary economies.

IFRS are principles-based standards. That statement is only, in fact, true at sustainable zero inflation, an economic environment that has never been achieved in the past and is not likely to be achieved any time soon in the future - if ever. The IASB´s statment is generally false: it is false for all of economic history as well as the current state of the world and SA economy: it is thus generally false and can even be considered a fantasy. It´s result is the destruction by SA accountants - who freely choose the stable measuring unit assumption - of about R200 billion in the real value of SA banks´ and companies´ constant items never maintained in SA´s low inflation environment each and every year.
Almost like the blind leading the blind. Everybody blinded by an IFRS fantasy principle which is part of SA GAAP and the basis of the 700 year old traditional Historical Cost Accounting model.

All this can be stopped when SA accountants freely choose the other option also authorized by the IASB twenty years ago in the Framework, Par 104 (a):

"Financial capital maintenance can be measured in either nominal monetay units or units of constant purchasing power."

Copyright © 2005 - 2010 Nicolaas J Smith

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