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Friday, 26 March 2010

Inflation at 5.7% pa. No way: SA accountants assume it is zero per cent - forever.

Statistics SA announces that the annual inflation rate came down to 5.7%

Gill Marcus reduces interest rates by half a per cent.

SA accountants say: No way: there is no such thing as inflation: inflation in SA is zero per cent, always has been zero per cent and will always in the future be zero per cent.
I state that all constant item accounts have to be adjusted during low inflation - as the IASB authorized 21 years ago.
The US Finanial Accounting Standard Board stated in FAS 33: "The erosion of business profits and invested capital caused by inflation" which is a complete fallacy.  In June, 2008 I also still believed it. Now I know it is a complete fallacy. Inflation per se has no direct effect and never in the past had any direct effect on any non-monetary item. Inflation is always and everywhere a monetary phenomenon. Inflation can only destroy or erode the real value of money and other monetary items - nothing else. The fact that the FASB, the IASB and most accountants believe that the erosion of business profits and invested capital is caused by inflation will never make it so.

So, although the IASB authorized SA accountants 21 years ago to measure financial capital maintenance in units of constant purchasing power during low inflation (see the Framework, Par 104 a) they refuse point blank to do it.

SA accountants will rather unknowingly destroy about R200 billion each and every year in SA companies´ capital and profits never maintained, than listen to the IASB and implement financial capital maintenance in units of constant purchasing power - as the IASB authorized them to do 21 years ago.
Yes, I do say they are terrible destroyers of real value in the SA constant item economy, albeit unknowingly and unintentionally. They still do it - year after year after year.

Gill Marcus said: "But growth in private sector fixed capital formation remains negative:" Of course it will remain negative with SA accountants unknowingly destroying about R200 billion pa in SA Shareholders´ Equity never maintained (SA´s fixed capital base) with their very destructive stable measuring unit assumption.

Copyright © 2010 Nicolaas J Smith