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Saturday, 12 December 2009

SA´s second economic enemy

There are two processes of systemic real value destruction in the SA economy, although it is generally accepted that there is only one economic enemy. This is a mistake. The first process is by the well known enemy inflation. This economic enemy manifests itself in the Rand´s store of value function and only destroys real value in the SA monetary economy. Inflation can only destroy the real value of the Rand and other monetary items in the SA monetary economy - nothing else. Inflation has no effect on the real value of non-monetary items.

The second economic enemy is SA accountants´ choice of traditional HCA which includes their very destructive stable measuring unit assumption. This second process of systemic real value destruction manifests itself in accountants´ stable measuring unit assumption only in the constant item part of the SA non-monetary or real economy when they freely choose to measure financial capital maintenance in nominal monetary units when they implement the traditional HCA model in most SA companies during low inflation.

Accountants (and everyone else) make the mistake of blaming the destruction of companies´ profits and capital by their choice of traditional HCA - which includes the stable measuring unit assumption - on inflation.

Accountants identify the problem, namely, that the real value of companies´ profits and capital are being destroyed over time during inflation when implementing HCA. They blame inflation.

The US Financial Accounting Standards Board blames inflation:

“In Mr. Mosso's view, conventional accounting measurements fail to capture the erosion of business profits and invested capital caused by inflation.”

Statement of Financial Accounting Standard No. 33, P. 24


They blame the wrong enemy. They blame inflation when it is in fact their free choice of traditional HCA; specifically the stable measuring unit assumption. When they freely choose financial capital maintenance in units of constant purchasing power, as the IASB authorized them 20 years ago, they would stop their unknowing and unintentional destruction forever. It is thus completely unnecessary and easily avoidable destruction by SA accountants´ choice of traditional HCA of the investment base and long term capital of SA banks and companies and their corollaries: sustainable economic growth and employment.

Everyone only sees one enemy in the economy being responsible for all of the invisible and untouchable systemic real value destruction in the economy. They think inflation is responsible for all real value destruction in the economy.

SA accountant feel that the SARB with its monetary policies and the SA government with its economic policies should lower inflation which would lower the destruction of companies´ profits and capital.

They are under inflation illusion: the mistaken belief that inflation destroys companies´ profits and capital when it is accountants´ choice of HCA - which includes the stable measuring unit assumption.

This second enemy is a stealth enemy since the way it operates is not understood by SA accountants and accounting lecturers at SA universities. If they understood it, they would have stopped it by now as they have been authorized by the IASB in the Framework, Par. 104 (a) in 1989.

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