Audited HC Financial Reports do not fairly present the financial position of companies

Nine requirements


Audited annual financial statements provided by companies which prepare them using the traditional Historical Cost Accounting model, i.e., when the board of directors choose to measure financial capital maintenance in nominal monetary units during low inflation and deflation instead of in units of constant purchasing power in terms of the IASB´s Framework (1989), Par 104 (a), are compliant with IFRS, but, do not fairly present the financial position of the companies as required by legislation in most countries.

The SA Companies Act, No 71 of 2008, Article 29.1 (b), for example, 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 in terms of the HCA model do not fairly present the financial position of companies when the directors do not:

(1) state in the annual financial statements that their choice of the traditional Historical Cost Accounting model which includes the very erosive stable measuring unit assumption, erodes 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 erosion of the real value of Shareholders´ Equity when the company does not have sufficient revaluable 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 HCA model during low inflation;

(3) state the percentage and amount of Shareholders´ Equity that are not being maintained constant; i.e., the percentage and amount of Shareholders´ Equity that are subject to real value erosion at a rate equal to the annual inflation rate because of the directors´ choice, in terms of the Framework (1989), 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 eroded during the last and previous financial years in Shareholders´ Equity and all other constant real value non-monetary items never maintained constant because of the directors´ choice to implement the Historical Cost Accounting model;

(5) state the updated total amount of real value eroded from the company’s inception to date in this manner in at least Shareholders´ Equity never maintained constant 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 (1989), Par 104 (a);

(7) state the directors´ estimate of the amount of real value to be eroded 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 constant non-monetary real value calculated in (7) represents the amount of constant non-monetary real value the company would gain during the following accounting year and every year thereafter 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 (1989), Par 104 (a) which they are free to choose any time they decide;

(9) state the directors´ reason(s) for choosing financial capital maintenance in real value eroding nominal monetary units instead of in real value maintaining units of constant purchasing power during low inflation in terms of the IASB´s Framework (1989), Par 104 (a).

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