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Thursday, 5 August 2010

Accountants do not understand what they are doing.

So, we have seen so far that accountants don’t really understand what they are doing: they simply just keep on doing what all accountants before them have been doing and what all accountants currently are doing: Historical Cost Accounting.

Naturally, they state that they do accounting in terms of IFRS and that IFRS pass through a very rigorous due process before they are approved. Well, the IASB and the FASB have been discussing Measurement for the last 6 years in their joint Conceptual Framework project and have not once discussed units of constant purchasing power as a primary measurement basis: very clear proof that they do not understand what they are doing.

If you knew what you were doing in basic accounting with the stable measuring unit assumption and if you understood the effects of measuring items in units of constant purchasing power, you would discuss units of constant purchasing power at least once during six years of high-level discussions about the concepts of measurement, wouldn´t you?

Measuring constant items, e.g. salaries, wages, rentals, equity, etc, in units of constant purchasing power does affect the nature of the underlying resources and does affect the economy.
Accountants are completely inconsistent: they measure salaries, wages, rentals, etc (constant items) in units of constant purchasing power, but they measure capital and retained profits (also constant items) in nominal monetary units.

Very inconsistent and very destructive.

Accountants ignore the whole problem by stating that this destruction of value is caused by inflation: they all believe that. The FASB, the IASB and everyone tell them that. They must be right.

They are dead wrong – as I have proved in the previous blogs.

How is this value destroyed: I have shown how in an example in a previous blog.

Basically, SA accountants unknowingly destroy the real value of all SA companies´ equity never covered or backed by revaluable fixed assets under HCA during inflation at a rate equal to the annual rate of inflation.

They all believe it is inflation doing the destroying.

We know now very clearly – confirmed by the two Turkish academics and Milton Friedman – that inflation can only destroy the real value of money and other monetary items – nothing else.

So that is settled then: accountants destroy real value with normal traditional Historical Cost Accounting to the tune of about R167 billion per annum in the SA real economy.

How can this be stopped?

See my next blog.
Copyright © 2010 Nicolaas J Smith