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Friday, 11 December 2009

SA accountants blame inflation but admit it´s the stable measuring unit assumption

SA accountants unknowingly destroy the real value of reported Retained Profits in companies over time during low inflation implementing their very destructive stable measuring unit assumption as part of the real value destroying traditional HCA model in exactly the same way as the real value of your salary is destroyed over time during low inflation when your salary is measured in nominal monetary units, i.e. when it is not updated during low inflation.

The real value of your salary is also not destroyed by inflation because inflation can not destroy the real value of any non-monetary item and never has in the past. Your salary is a non-monetary item as defined by the IASB in IAS 29 where it is stated that all income statement items are non-monetary items, in fact, they are all constant real value non-monetary items. Inflation can only destroy the real value of money and other monetary items - nothing else.

It is SA accountants´ choice of measuring unit that destroys the real value of your salary when your salary is measured in nominal monetary units (actually SA accountants´ stable measuring unit assumption) because your salary can be measured in units of constant purchasing power, i.e. it can be inflation-adjusted. Then it will not matter what the rate of inflation is, the real value of your salary will always be maintained: 2% or 2000% like in the case of Brazil which during 30 years of hyperinflation of up to 2000% inflation per annum maintained their real or non-monetary economy stable with indexation (which is, in principle, the same as valuation in units of constant purchasing power) while they had up to 2000% annual inflation in their monetary economy.

It is exactly the same with reported Retained Profits.

SA accountants unnecessarily, unknowingly and unintentionally destroy the real value of all existing reported Retained Profits never maintained in all SA companies, currently at 5.9% per annum, with their very destructive stable measuring unit assumption - all else being equal. They can freely stop their continuous destruction of SA companies´ long term capital and investment base with its negative impact on economic growth and employment, by freely choosing to measure financial capital maintenance in units of constant purchasing power in terms of the IASB´s Framework, Par. 104 (a). SA accountants unknowingly destroy about R200 billion per annum in SA companies´ existing reported constant items never maintained in this manner.

SA accountants blame this on inflation.

SA accountants are very strongly under inflation illusion.


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