Monday, 24 May 2010

The real financial position of SA companies is not as SA accountants present it

New terms are defined in Constant ITEM Purchasing Power Accounting. The three basic economic items are

(a) monetary items,

(b) variable items and

(c) constant items.

The last one is one of the new concepts: constant real value non-monetary items.
The three accounting fallacies not yet extinct (on which IFRS are based) are:

(1) The stable measuring unit assumption – based on a fallacy;

(2) Financial capital maintenance in nominal monetary units since it is impossible to maintain the real value of capital constant with this concept per se under inflation and deflation; and

(3) The fallacy that the erosion of companies´ capital and profits is caused by inflation. Inflation can only destroy the real value of money and other monetary items – nothing else.

There is not just one systemic process of real value destruction in the economy, namely, inflation which destroys the real value of money and other monetary items.

SA accountants unknowingly destroy the real value of all constant items never maintained constant in the SA real economy amounting to about R167 billion per annum with their very destructive stable measuring unit assumption – the second enemy in the economy camouflaged by IFRS authorization and Generally Accepted Accounting Practice.

The maintenance of the constant purchasing power of capital with financial capital maintenance in units of constant purchasing power is consequently a basic objective of accounting/financial reporting.
Copyright © 2010 Nicolaas J Smith

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