Audited annual financial statements provided by SA companies which prepare them using the traditional Historical Cost basis, i.e., when the board of directors choose to measure financial capital maintenance in nominal monetary units instead of in units of constant purchasing power in terms of the IASB´s Framework, Par 104 (a), are compliant with IFRS, but, do not fairly present the financial position of the companies as required by Art. 29.1(b) of the Companies Act.
The SA Companies Act, No 71 of 2008, Article 29.1 (b) states:
“If a company provides any financial statements, including any annual financial statements, to any person for any reason, those statements must-
(b) present fairly the state of affairs and business of the company, and explain the transactions and financial position of the business of the company;”
Audited financial statements prepared under the HC basis do not fairly present the financial position of SA companies, as required by the Companies Act, when the directors do not:
(1) state in the annual financial statements that their choice of the traditional Historical Cost basis which includes the very destructive stable measuring unit assumption, destroys the real value of constant real value non-monetary items never maintained, at a rate equal to the annual rate of inflation;
(2) state that this includes the destruction of the real value of Shareholders´ Equity when the company does not have sufficient fixed assets that are or can be revalued via the Revaluation Reserve equal to the updated original real value of all contributions to Shareholders’ Equity under the HC basis;
(3) state the percentage and amount of Shareholders´ Equity that are not being maintained; i.e., the percentage and amount of Shareholders´ Equity that are subject to real value destruction at a rate equal to the annual inflation rate because of the directors´ choice, in terms of the Framework, Par 104 (a), to maintain financial capital maintenance in nominal monetary units instead of in units of constant purchasing power – both methods being compliant with IFRS;
(4) state the amount of real value destroyed during the last and previous financial years in Shareholders´ Equity and all other constant items never maintained because of the directors´ choice to implement the Historical Cost Accounting model;
(5) state the updated total amount of real value destroyed from the company’s inception to date in this manner in at least Shareholders´ Equity never maintained as described above;
(6) state the change in the updated real value of Shareholders´ Equity if the directors should decide – as they are freely allowed to do at any time - to measure financial capital maintenance in units of constant purchasing power instead of in nominal monetary units (which is a very popular accounting fallacy approved by the IASB) as authorized by the IASB in the Framework, Par 104 (a);
(7) state the directors´ estimate of the amount of real value to be destroyed by their implementation of the stable measuring unit assumption (which is based on another popular accounting fallacy approved by the IASB) during the following accounting year under the HC basis;
(8) state that the real value calculated in (7) represents the amount of real value the company would gain during the following accounting year and every year there after for an unlimited period of time – ceteris paribus - when the directors´ choose to measure financial capital maintenance in units of constant purchasing power – which is compliant with IFRS – as provided in the Framework, Par 104 (a) in 1989 which they are free to choose any time they decide;
(9) state the directors´ reason(s) for choosing financial capital maintenance in real value destroying nominal monetary units instead of in real value maintaining units of constant purchasing power in terms of the IASB´s Framework, Par 104 (a).
See Comment Letter 32 to the International Accounting Standard Board´s Exposure Draft: Management Commentary.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
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