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Tuesday, 23 February 2010

The Rand is an unstable monetary unit of account

SA accountants unknowingly destroy or maintain (please note: not create) the real value of constant real value non-monetary items (please note: not variable real value non-monetary items) depending on whether they choose the IASB approved traditional HCA model under which they implement their very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation or the IASB approved real value maintaining financial capital maintenance in units of constant purchasing power model under which they select to reject the stable measuring unit assumption at all levels of inflation and deflation for an unlimited period of time.

Inflation is a uniquely monetary phenomenon and can only destroy the real value of money and other monetary items over time. It has no effect on the real value of non-monetary items. See GUCENME and ARSOY above. SA accountants unknowingly, unintentionally and unwittingly do the destroying of the real value of constant items never maintained over time, e.g. Retained Earnings, Issued Share capital, other items in Shareholder’s Equity, etc when they choose the traditional HCA model during low inflationary periods.

It is correct, essential and compliant with IFRS to inflation-adjust or update constant real value non-monetary items by means of the CPI which is a general price index at all levels of inflation and deflation. The reason for this is that constant items are expressed in terms of money, i.e. in terms of an unstable monetary unit of account which is the same as the unstable monetary medium of exchange. Inflation destroys the real value of the unstable monetary medium of exchange - which is also the unstable monetary unit of account in accounting and the economy in general.

Constant items thus have to be updated or inflation-adjusted at a rate equal to the rate of inflation or deflation, i.e. valued in units of constant purchasing power, in order to maintain their real values constant during inflation and deflation because the unit of measure in accounting is an unstable monetary unit of account and consequently hardly ever absolutely stable during periods of inflation and deflation. Months of zero annual inflation are very few and far between. Sustainable zero inflation has never been achieved before and it does not seem very likely that it will be achieved any time soon in the future.

Kindest regards,

Nicolaas Smith

Copyright © 2010 Nicolaas J Smith