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Friday, 17 June 2011

Nine requirements for audited HC financial statement to fairly present an entity´s financial position

Nine requirements for audited HC financial statement to fairly present an entity´s financial position

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´ original Framework (1989), Par 104 (a), are compliant with IFRS, but, do not - in principle - fairly present the financial position of the companies.
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 - in principle - fairly present the financial position of companies during low inflation 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 constant real value of constant real value non–monetary items never maintained constant at a rate equal to the annual rate of inflation;

(2) state that this includes the erosion of the constant 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 with an updated fair value equal to the updated original constant real non-monetary value of all contributions to Shareholders’ Equity under the HCA model during low inflation;

(3) state the percentage and updated amount of constant real non-monetary value of Shareholders´ Equity that are not being maintained constant; i.e., the percentage and updated amount of constant real non-monetary value of Shareholders´ Equity that are subject to constant real value erosion at a rate equal to the annual inflation rate because of the directors´ free choice, in terms of the original Framework (1989), Par 104 (a), to measure financial capital maintenance in nominal monetary units (which is a popular accounting fallacy since it is impossible per se during inflation) – i.e. their free choice to implement the very erosive stable measuring unit assumption during inflation - instead of automatically maintaining the constant real value of Shareholders´ Equity constant for an indefinite period of time in units of constant purchasing power (both methods being compliant with IFRS) when their companies at least break even – ceteris paribus.

(4) state the amount of updated constant real non-monetary value eroded during the last and previous financial year in Shareholders´ Equity and all other constant real value non–monetary items never maintained constant because of the directors´ free choice to implement the Historical Cost Accounting model;

(5) state the updated total amount of constant real non-monetary 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 constant real non-monetary 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 which would automatically maintain the constant purchasing power of Shareholders´ equity constant forever in entities that at least break even during inflation and deflation – ceteris paribus - instead of in nominal monetary units also authorized in IFRS in the original Framework (1989), Par 104 (a);

(7) state the directors´ estimate of the amount of constant real non-monetary value to be eroded by their free choice to implement the very erosive stable measuring unit assumption (which is based on the popular accounting fallacy - also approved by the IASB - that changes in the purchasing power of money are not sufficiently important during low inflation and deflation to require financial capital maintenance in units of constant purchasing power) during the following accounting year under the HC basis;

(8) state that the updated constant real non–monetary value calculated in (7) represents the amount of constant real non–monetary value the company would gain during the following accounting year and every year thereafter for an unlimited period of time as long as the company at least break even during inflation and deflation – ceteris paribus – when the directors choose to measure financial capital maintenance in units of constant purchasing power as authorized in IFRS in the original Framework (1989), Par 104 (a) - which they are free to choose any time they decide;

(9) state the directors´ reason(s) for freely choosing financial capital maintenance in constant real value eroding nominal monetary units which is a fallacy since it is impossible per se during inflation and deflation instead of in real value maintaining units of constant purchasing power which would automatically maintain the constant purchasing power of Shareholders´ Equity constant forever in all entities that at least break even during inflation and deflation – ceteris paribus.


Nicolaas Smith

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