Pages

Saturday, 27 March 2010

It wasn't them

Accorging to The Economist Alan Greenspan and Ben Bernanke still do not believe monetary policy bears any blame for the crisis.

Part of the remedy for the crisis was strengthening banks’ capital. Most big banks implement IFRS; consequently their accountants have to make a critical choice in terms of the IASB´s Framework, Par 104 (a) authorized twenty one years ago which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.” Banks are given this choice during low inflation and deflation. They have to choose the one or the other when they choose a financial concept of capital as all banks do.

They all choose financial capital maintenance in nominal monetary units per se which is a complete fallacy during low inflation and deflation: it is impossible to maintain the real value of financial capital constant when measuring financial capital maintenance in nominal monetary units per se during low inflation and deflation. The only way banks can maintain the real value of their capital constant during low inflation is with 100% investment of the updated original real values of all contributions to shareholders´ equity in revaluable fixed assets with an equivalent updated fair value – revalued or not – under Historical Cost Accounting during low inflation.

Most probably not a single bank qualifies for the 100% investment rule. Most probably not a single bank qualifies for that rule even with respect to just equity excluding retained earnings. The portion of the updated real value of banks´ equity not covered by revaluable fixed assets under HCA is thus treated by their HC accountants as simply the same as a monetary item: i.e. they value it at Historical Cost as part of financial capital maintenance in nominal monetary units during low inflation. The real value of the portion not maintained with sufficient revaluable fixed assets is thus unknowingly, unnecessarily and unintentionally being destroyed at a rate equal to the annual rate of inflation by HC accountants implementing their very destructive stable measuring unit assumption (which is based on a fallacy) as part of financial capital maintenance in nominal monetary units (the IFRS authorized fallacy) during low inflation.

The real value of most probably all banks´ retained earnings is thus unnecessarily, unknowingly and unintentionally being destroyed by their accountant’s free choice of financial capital maintenance in units of nominal monetary units during low inflation as authorized in IFRS in the Framework, Par 104 (a) in 1989.

Amazingly the only and perfect remedy to the problem was authorized in IFRS as a free choice to accountants in the exact same IASB´s Framework, Par 104 (a) twenty one years ago, namely, financial capital maintenance in units of constant purchasing power during low inflation and deflation. All banks´ accountants are free to choose this option any time they want. If they had chosen that option in 1989, the world’s banking system would have been much more robust before, during and after the crisis. No-one stops them from doing it now.

HC accountants world wide are unnecessarily, unknowingly and unintentionally destroying hundreds of billion of Euros (perhaps much more) per annum in the real value of companies´ and banks´ shareholders´ equity never maintained with sufficient revaluable fixed assets at a rate equal to the annual rate of inflation year in year out while they implement traditional Historical Cost Accounting during low inflation. They will stop this unnecessary, unknowing and unintentional destruction forever the moment they freely choose financial capital maintenance in units of constant purchasing power during low inflation as authorized in IFRS in the Framework, Par 104 (a) any time they want. They will knowingly boost the world’s real economy with hundreds of billions of Euros (perhaps much more) per annum for an unlimited period of time when they freely switch over to financial capital maintenance in units of constant purchasing power as authorized in IFRS in the IASB´s Framework, Par 104 (a) twenty one years ago.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith