Audited Historical Cost annual financial statements do not fairly present the financial position of a company

1st Update: 24 June 2009

Audited annual financial statements provided by SA companies which prepare them using the traditional Historical Cost basis, i.e., when the directors choose to measure financial capital maintenance in nominal monetary units instead of in units of constant purchasing power in terms of the IASB´s Framework, Par. 104 (a), are compliant with IFRS, but, do not fairly present the financial position of the companies as required by Art. 29.1(b) of the Companies Act.



Article 29.1 (b) of the SA Companies Act, No 71 of 2008 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;”



SA company directors´ choice to measure financial capital maintenance in nominal monetary units, i.e., the traditional HC basis which includes implementing the very destructive stable measuring unit assumption, is compliant with IFRS. However, audited financial statements prepared under this basis do not fairly present the financial position of SA companies, as required by the Companies Act, when the directors do not:



(1) state in those annual financial statements that their choice of the traditional Historical Cost basis which includes the very destructive stable measuring unit assumption, destroys the real value of ONLY constant real value non-monetary items never maintained, at a rate equal to the annual rate of inflation and at a lower rate when they are not fully maintained.



(2) state that this includes the destruction of the real value of Shareholders´ Equity when the company does not have sufficient variable real value non-monetary items that are or can be revalued via the Revaluation Reserve or do not present sufficient hidden and unrecognised holding gains to compensate for the shortfall in real value in Shareholders’ Equity under the HC basis;



(3) state the percentage and amount of Shareholders´ Equity that is not being maintained; i.e., the percentage and amount of Shareholders´ Equity that is subject to real value destruction at a rate equal to the annual inflation rate because of the directors´ choice, in terms of the Framework, 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 destroyed during the last financial year in Shareholders´ Equity and all other constant items because of the directors´ choice to implement the HC basis;



(5) state the updated total amount of real value destroyed from the company’s start to date in this manner in at least Shareholders´ Equity never or not fully maintained;



(6) state the change in the updated real value of Shareholders´ Equity if the directors decide to measure financial capital maintenance in units of constant purchasing power instead of in nominal monetary units as provided in the Framework, Par. 104 (a) which is complaint with IFRS;



(7) state the directors´ estimate of the amount of real value to be destroyed by their implementation of the stable measuring unit assumption during the following accounting year under the HC basis;



(8) state that the real value calculated in (7) represents the amount of real value the company would gain during the following accounting year and every year there after for an unlimited period of time – ceteris paribus - if the directors´ choose to measure financial capital maintenance in units of constant purchasing power – which is compliant with IFRS – as provided in the Framework, Par. 104 (a);



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


It is obviously a million times better for company directors to choose to measure financial capital maintenance in constant purchasing power units as provided for in the IASB´s Framework, Par. 104 (a) which states: "Finacial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

Both bases are compliant with IFRS. Measuring financial capital maintenance in constant purchasing power units instead of in nominal monetary units stops the unknowing destruction by accountants of massive amounts in real value in constant real value non-monetary items never or not fully updated, for example, Retained Earnings, in the real economy.