Hi,
CA007 stated in our mother of all debates:
"I state: Value DOES exist independently of how we ACCOUNTING measure it."
My reply was:
I spent a lot of time and I have prepared an excellent concise response to your statement that "value exist independently of how we accounting measure it".
I then realized that we first have to agree what the concept of a unit of constant purchasing power is, what the effect of applying it is, whether it is part of IFRS, whether it is generally accepted, does it work, does it not work, is there something like it, is it just a theoretical concept and no-one ever uses it, or is it used every day by billions of people - or not, is it never ever used, does no-one use it ever, has it ever been used in the past, does it appear in IFRS, how many times is it applied in IFRS - if at all, is it junk, is it real, does it affect the economy, does it have any effect, yes or no, what exactly is it, is there such a thing, or is it just my imagination, who supports it, etc, etc.
I will prepare a stament - with references to reliable third party source - although I am a bit worried that you may not accept them since you wish to regard what happened in Brazil during 30 years as "irrelevant".
We will have to agree that Brazil did exist during those 30 years from 1964 to 1994 and that 185 million people did measure all their non-monetary items DAILY in units of constant purchasing power and we will have to agree that it kept their internal non-monetary real market more or less stable while hyperinflation destroyed ONLY the real value of their money - not the real value of their non-monetary items. We also will have to agree that the reason why hyperinflation did not destroy the real value of all their non-monetary items was because they remeasured them DAILY in units of constant purchasing power. We will have to agree that it is impossible for hyperinflation to destroy any non-monetary item. We will have to agree that hyperinflation like inflation can only destroy the real value of money and other monetary items - nothing esle. We will have to agree that it was because they implemented measurement in units of constant purchasing power. We will have to agree that the Brazilian economy was not a barter economy during those 30 years as you claim. There may have been barter here and there on a miniscule scale, but the economy was not a barter economy. The whole economy remeasured all non-monetary items DAILY in units of constant purchasing power.
We will have to agree that this is not irrelevant as you say.
We did the same in Auto-Sueco (Angola) in 1996 where I worked in Luanda, Angola. I implemented it. It is not theory to me.
I know that various other South-American countries also used indexation during about the same period as Brazil - and even later.
If you are not prepared to agree that Brazil used the measurement of all non-monetary items during 30 years by means of units of constant purchasing power and that it had a real effect on their economy - totally different from the stable measuring unit assumption that you apply in your accounting - then I am prepared to research other cases of indexation - especially in South American countries.
This is all about units of constant purchasing power.
We will have to agree that it was because they rejected the stable measuring unit assumption - the basis of your accounting model, namely, HCA. We will have to agree that they did not apply HCA. We will have to agree that they rejected the stable measuring unit assumption - the fundamental basis of Historical Cost Accounting. We will have to agree that they maintained their NON-MONETARY OR REAL economy more or less stable BECAUSE they applied measurement in units of constant purchasing power. We will have to agree that they applied inflation-accounting and that it worked - that measurement in units of constant purchasing power did and does make a difference to the economy.
This is all about measurement in units of constant purchasing power and whether it makes a difference to the eonomy or not (for those who do not accept historical facts from the recent economic history of Brazil).
CA007, I wish to ask you: do you accept that there is a concept of units of constant purchasing power?
Yes or no?
Or do you regard the whole concept of units of contant purchasing power as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago (how long have you been an accountant?) as irrelevant as you regard 30 years of economic history in Brazil?
Par 104 (a) states: "Financial capital maintenance can be measured either in nominal monetary units OR UNITS OF CONSTANT PURCHASING POWER". (my capitals)
Par 104 (a) does not state "during hyperinflation". That is stated in IAS 29. Par 104 (a) thus applies under all levels of inflation and deflation - LOW inflation too.
CA007, do you accept measurement in units constant purchasing power during LOW inflation as authorized in IFRS?
Or, do you regard it as irrelevant?
During low inflation ONLY constant real value non-monetary items (NOT variable real value non-monetary items) are measured in units of constant purchasing power.
During hyperinflation ALL non-monetary items - both constant and variable items - are measured in units of constant purchasing power.
I do not wish to implement inflation-accounting in SA.
I wish SA accountants to measure ONLY constant items during LOW inflation as authorized in IFRS.
CA007, do you accept measurement in units constant purchasing power during LOW inflation as authorized in IFRS?
Or, do you regard it as irrelevant?
After I have your view about measurement in units of constant purchasing power, then I will be able to respond fully to your statement that value exist independently of how we accounting measure it. I am not running away from your statement. I will answer it in detail. You know already that I disagree with you. I intend to prove my point with historical facts and other facts.
You see, stating that what happened in Brazil during 30 years when an important country like Brazil as a whole maintained its whole non-monetary or real economy more or less stable - they even GREW economically - they had positive GDP growth - DURING hyperinflation of 2000 % per annum - by means of measuring all non-monetary items (variable and constant items - variable items too because they were in hyperinflation - this is not necessary during low inflation) by the accounting practice (authorized in IFRS) of measuring all non-monetary items in units of constant purchasing power which affected their economy in a massive way - they kept their non-monetary economy more or less stable during hyperinflation - by you stating that is irrelevant makes it very difficult to agree anything with you.
You can similarly state any fundamental fact is "irrelevant." It is difficult to agree on anything when one participant in the debate assumes the right to state proven historical facts are irrelevant.
What happened in Brazil during those 30 years is relevant to our discussion.
They did maintain the real value of all non-monetary items - variable and constant items - by measuring them in units of constant purchasing power - for 30 years: something they could not have done if they had implemented HCA, i.e. the stable measuring unit assumption during those 30 years. Value existed, yes, and they maintained those real values by means of measurement in units of constant purchasing power. If they had chosen HCA during those 30 years they would not have been able to maintain their real values: their choice of accounting model, not inflation, would have destroyed the real value.
Value thus does not simply exist irrespective of the ACCOUNTING measure we choose to implement over a period of time: during the financial year. When we choose HCA, we destroy the real value of constant items NEVER MAINTAINED during low inflation and hyperinflation - over the period of time of the financial year.
Measuring an item in units of constant purchasing power does maintain its real value - over time: the accounting period. As such it does affect the economy. The real value first has to exist. Measuring it in units of constant purchasing power (inflation-adjusting it) does maintain its existing real value during the accounting period during inflation. It is the choice of the accounting method, the choice of the measuring unit, namely, actually choosing measurement in units of constant purchasing power during inflation (rejecting the 3000 year old stable measuring unit assumption) that maintains the real value of the item - over time. By maintaining the real value - over time - by choosing the accounting method or measuring unit namely units of constant purchasing power, the existing real value is not destroyed - over time: the accounting period. It is not inflation doing the destroying in the non-monetary item. The real value of the non-monetary item is destroyed when the accountant chooses to measure its value in nominal monetary units during inflation - over a period of time: the accounting period. So, it is the choice of the accounting model or accounting method or measuring unit that is doing the destroying because when the accountant chooses measurement in units of constant purchasing power, the non-monetary item´s real value is maintained irrespective of the rate of inflation - always over time.
It is not inflation doing the destroying: it is the choice of applying the stable measuring unit assumption - over time during inflation. Measurement in units of constant purchasing power does affect the economy when it is applied over time. Measurement in units of constant purchasing power does not create real value over time where it NEVER existed. It simply MAINTAINS EXISTING real value in constant real value non-monetary items during low inflation - applied over time.
CA007,
Brazil was in high and hyperinflation for 30 years. Brazil was not a barter economy - as you believe - during those 30 years.
Venezuela is in hyperinflation now. Venezuela is not a barter economy now.
Zimbabwe was in hyperinflation for 18 or 19 years - Zimbabwe was not a barter economy.
The issue here is: does measuring a constant real value non-monetary item in units of constant purchasing power during low inflation affect the economy?
The answer is: yes.
It maintains the real value of the constant real value non-monetary item. It does not create new real value. It maintains it. It is the choice of measurement unit that maintains the real value: when the accountants chooses measurement in units of constant purchasing power during low inflation as authorized in IFRS in the Framework, Par 104 (a) DURING LOW INFLATION, then the real value of the non-monetary item is maintained, i.e. it is not destroyed. It is not inflation doing the destroying.
When the accountant chooses to measure the value of a constant real value non-monetary item in nominal monetary units, i.e. the accountant chooses to apply the stable measuring unit assumption during low inflation, i.e. the accountant chooses to assume there is no inflation DURING LOW INFLATION, then the implementation of that choice of measurement destroys the real value of the constant real value non-monetary item DURING INFLATION.
It is able to prove that measurement in units of constant purchasing power during low inflation maintains the real value of constant items in many ways.
It is able to prove that the accountant´s choice to implement the stable measuring unit assumption and not inflation is doing the destroying in many ways.
CA007´s reply was:
"You certainly know what you are talking about and I will need time to think it over.
I will concede: the Brazil example is not irrelevant to our debate.
Your question:
“ CA007, do you accept measurement in units constant purchasing power during LOW inflation as authorized in IFRS? “
My answer: Yes. I accept for both economic and financial reporting purposes
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
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