Monday, 17 May 2010

It is not inflation, but, SA accountants doing the destroying

SA accountants unknowingly destroy companies´ capital and profits with Historical Cost Accounting as authorized in IFRS
The unknowing, unnecessary and unintentional destruction by SA accountants of the real value of companies´ capital and profits never maintained constant with sufficient revaluable fixed assets under the Historical Cost Accounting model as a result of their free choice to implement the stable measuring unit assumption (which is based on a fallacy) as part of financial capital maintenance in nominal monetary units (another popular accounting fallacy) authorized by the International Accounting Standards Board in the Framework, Par 104 (a) in 1989 amounts to about R167 billion p.a. in the SA real economy for as long as annual inflation stays at 5% - all else being equal.

My objective is to encourage SA accountants to freely choose the other option authorized in International Financial Reporting Standards in exactly the same Framework, Par 104 (a) twenty one years ago, namely, financial capital maintenance in units of constant purchasing power during low inflation whereby they would knowingly maintain instead of unnecessarily destroy about R167 billion p.a. – ceteris paribus – in the SA real economy (for as long as annual inflation stays at 5%) in all entities that at least break even whether they own revaluable fixed assets or not and without the need for extra money or extra retained profits simply to maintain the constant real value of existing shareholders´ equity constant.

© 2010 Nicolaas J Smith

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