As a result of a lack of understanding the destructive nature of their implementation of the very destructive stable measuring unit assumption, 1970-style CPP inflation accounting was not an accounting system implemented by accountants to correct or eliminate the destruction of the real value of constant items by the use of the stable measuring unit assumption, but, a failed attempt to simply make financial reports more understandable and more comparable with previous year statements during periods of high inflation by inflation-adjusting all non-monetary items equally in terms of the CPI.
Accountants simply do not understand that they unknowingly destroy real value on a massive scale in all constant items never maintained when they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation. In many cases they do not even know that they make that choice. Neither do they understand that they will stop that destruction by freely choosing to measure financial capital maintenance in units of constant purchasing power, as approved in the IASB Framework, Par 104 (a) in 1989.
Prof Geoffrey Whittington in his definitive work on inflation accounting in the beginning of the 1980´s, Inflation Accounting - An Introduction to the Debate, published in 1983, clearly indicated that with 1970-style CPP inflation accounting all non-monetary accounts (with no distinction being made between variable and constant real value non-monetary item accounts) were updated by means of the CPI.
"Constant Purchasing Power Accounting (CPP) is a consistent method of indexing accounts by means of a general index which reflects changes in the purchasing power of money. It therefore attempts to deal with the inflation problem in the sense in which this is popularly understood, as a decline in the value of the currency. It attempts to deal with this problem by converting all of the currency unit measurement in accounts into units at a common date by means of the index."
This eventually led to the failure of 1970-style CPP accounting as an inflation accounting model.
The destruction of real value in the real economy by SA accountants will stop when they stop their assumption that the rand is perfectly stable only for the purpose of accounting constant items never maintained.
Copyright © 2010 Nicolaas J Smith
Showing posts with label Constant items. Show all posts
Showing posts with label Constant items. Show all posts
Thursday, 4 March 2010
Friday, 8 January 2010
Constant items
There are three fundamentally different basic economic items in the economy: 1) monetary items 2) variable real value non-monetary items and 3) constant real value non-monetary items.
Variable items have variable values based on market demand and supply, and in companies their values are determined in terms of International Financial Reporting Standards if they are listed on the Johannesburg Stock Exchange and on SA Generally Accepted Accounting Practice if they are not listed on the JSE. Unlisted companies can also comply with IFRS if they so choose.
The second distinct economic item is a monetary item. That can be money and other monetary items like all money loans, capital amounts of mortages, etc. Money´s value is constant or stable in nominal value. The values on the notes and coins do not change.
Money and other monetary items´ real value has never ever been stable in the past and is not stable now. Money and other monetary items´ real value is determined by inflation and deflation. Inflation is always and everywhere the destruction of real value in money and other monetary values. 6% inflation in SA destroys about R120 billion in the real value of the Rand and other monetary items in the SA economy every year.
Now we come to the big surprise to you: there is a third distinctive basic fundamentally different economic item: constant real value non-monetary items. Examples are salaries, wages, rentals, issued share capital, reported retained profits, share premium account, capital reserves, all other items in shareholders´equity, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other payables and receivables, etc.
They all have constant real values - all else being equal. They have to be valued in units of constant purchasing power during inflation and deflation.
That is the ONLY way to keep their real values constant over time during inflation and deflation. When constant items are valued in nominal monetary units by SA accountants when they apply their very destructive stable measuring unit assumption (a very popular accounting fallacy approved by the International Accounting Standards Board) they destroy their real values at a rate equal to the rate of inflation because these constant items, like all other economic items in SA are expressed in the Rand which is a monetary medium of exchange and inflation destroys the real value of the Rand, not the real value of the constant items.
The real values of all constant items never maintained in the SA economy are unknowingly, unnecessarily and unintentionally being destroyed by SA accountants freely choosing the 700 year old generally accepted traditional Historical Cost Accounting model when they freely choose to measure financial capital maintenance in nominal monetary units (the second popular accounting fallacy approved by the IASB) in terms of the IASB´s Framework, Par 104 (a) which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”
You can thus see that the IASB authorized the accounting fallacy of financial capital maintenance in nominal monetary units (it is impossible to maintain the real value of capital stable in nominal monetary units per se during inflation and deflation) and its ONLY and PERFECT antidote in one and the same IFRS statement. SA accountants unknowingly destroy about R200 billion each and every year in the real values of existing reported constant items never maintained when they freely choose traditional HCA implementing the stable measuring unit assumption when they measure financial capital maintenance in nominal monetary units in terms of the Framework, Par 104 (a) in SA companies.
They would stop that destruction and boost the SA real economy by about R200 billion per annum for an unlimited period of time in the future when they freely choose financial capital maintenance in units of constant purchasing power as they have been authorized by the IASB in the Framework, Par 104 (a) twenty years ago in 1989. So, the SA constant item part of the SA real economy is full of millions of constant real value non-monetary items with constant real values.
When your salary is inflation-adjusted at least at the rate of inflation then its real value stays constant. The same should happen to all reported retained profits and capital in all SA banks and companies. Unfortunately it is not yet happening like that.
SA accountants blame inflation for the erosion of companies´ profits and capital, the third very popular accounting fallacy accepted by the IASB. They know and admit that this destruction - they always call it erosion - takes place: they and all other accountants world wide blame inflation instead of their own free choice of the traditional HCA model.
So, there are millions of constant items with stable or constant real values. The IASB proof is in Par 104 (a): Financial capital maintenance can be measured in units of CONSTANT purchasing power. Capital and all items in Shareholders´Equity are non-monetary items as defined by the IASB.
Since they can be measured in units of CONSTANT purchasing power to keep their real values CONSTANT, they are thus CONSTANT items.
Do you perhaps know any accountants? :-)
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Variable items have variable values based on market demand and supply, and in companies their values are determined in terms of International Financial Reporting Standards if they are listed on the Johannesburg Stock Exchange and on SA Generally Accepted Accounting Practice if they are not listed on the JSE. Unlisted companies can also comply with IFRS if they so choose.
The second distinct economic item is a monetary item. That can be money and other monetary items like all money loans, capital amounts of mortages, etc. Money´s value is constant or stable in nominal value. The values on the notes and coins do not change.
Money and other monetary items´ real value has never ever been stable in the past and is not stable now. Money and other monetary items´ real value is determined by inflation and deflation. Inflation is always and everywhere the destruction of real value in money and other monetary values. 6% inflation in SA destroys about R120 billion in the real value of the Rand and other monetary items in the SA economy every year.
Now we come to the big surprise to you: there is a third distinctive basic fundamentally different economic item: constant real value non-monetary items. Examples are salaries, wages, rentals, issued share capital, reported retained profits, share premium account, capital reserves, all other items in shareholders´equity, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other payables and receivables, etc.
They all have constant real values - all else being equal. They have to be valued in units of constant purchasing power during inflation and deflation.
That is the ONLY way to keep their real values constant over time during inflation and deflation. When constant items are valued in nominal monetary units by SA accountants when they apply their very destructive stable measuring unit assumption (a very popular accounting fallacy approved by the International Accounting Standards Board) they destroy their real values at a rate equal to the rate of inflation because these constant items, like all other economic items in SA are expressed in the Rand which is a monetary medium of exchange and inflation destroys the real value of the Rand, not the real value of the constant items.
The real values of all constant items never maintained in the SA economy are unknowingly, unnecessarily and unintentionally being destroyed by SA accountants freely choosing the 700 year old generally accepted traditional Historical Cost Accounting model when they freely choose to measure financial capital maintenance in nominal monetary units (the second popular accounting fallacy approved by the IASB) in terms of the IASB´s Framework, Par 104 (a) which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”
You can thus see that the IASB authorized the accounting fallacy of financial capital maintenance in nominal monetary units (it is impossible to maintain the real value of capital stable in nominal monetary units per se during inflation and deflation) and its ONLY and PERFECT antidote in one and the same IFRS statement. SA accountants unknowingly destroy about R200 billion each and every year in the real values of existing reported constant items never maintained when they freely choose traditional HCA implementing the stable measuring unit assumption when they measure financial capital maintenance in nominal monetary units in terms of the Framework, Par 104 (a) in SA companies.
They would stop that destruction and boost the SA real economy by about R200 billion per annum for an unlimited period of time in the future when they freely choose financial capital maintenance in units of constant purchasing power as they have been authorized by the IASB in the Framework, Par 104 (a) twenty years ago in 1989. So, the SA constant item part of the SA real economy is full of millions of constant real value non-monetary items with constant real values.
When your salary is inflation-adjusted at least at the rate of inflation then its real value stays constant. The same should happen to all reported retained profits and capital in all SA banks and companies. Unfortunately it is not yet happening like that.
SA accountants blame inflation for the erosion of companies´ profits and capital, the third very popular accounting fallacy accepted by the IASB. They know and admit that this destruction - they always call it erosion - takes place: they and all other accountants world wide blame inflation instead of their own free choice of the traditional HCA model.
So, there are millions of constant items with stable or constant real values. The IASB proof is in Par 104 (a): Financial capital maintenance can be measured in units of CONSTANT purchasing power. Capital and all items in Shareholders´Equity are non-monetary items as defined by the IASB.
Since they can be measured in units of CONSTANT purchasing power to keep their real values CONSTANT, they are thus CONSTANT items.
Do you perhaps know any accountants? :-)
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Friday, 20 November 2009
Constant items
The Framework, Par. 102 states that most companies choose a financial concept of capital to prepare their financial reports. An entity’s capital is the same as its equity or net assets when it adopts a financial concept of capital, for example invested purchasing power or invested money.
Par. 103 states that the needs of financial report users should determine the choice of the correct concept of capital by a company. If the users of financial reports are mainly concerned with the maintenance of nominal invested capital or the maintenance of the purchasing power of invested capital then a financial concept of capital should be chosen.
Par. 104 states that the concepts of capital stated in Par. 102 give origin to the financial capital maintenance concept. Par. 104 (a) then states that:
"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
The IASB clearly defines issued share capital, capital reserves, retained earnings, all other items in shareholders´ equity, all items in the income statement, provisions, etc as non-monetary items. Since these real value non-monetary items can be measured in units of constant purchasing power in terms of the Framework, Par. 104 (a), to implement a financial capital maintenance concept in units of constant purchasing power, they are obviously constant real value non-monetary items with constant real non-monetary values expressed in terms of a monetary unit of account over time in a low inflationary or deflationary economy.
Logic would thus imply and it is a fact that real value non-monetary items that are not measured in units of constant purchasing power during low inflation or deflation on a primary valuation basis but are valued in terms of specific IFRS at, for example, market value, fair value, recoverable value, net realisable value, present value, etc are not constant but variable real value non-monetary items, e.g. property, plant, equipment, shares, inventory, foreign exchange, etc.
Examples of constant items
All income statement items once they are accounted
Revenue
Cost of sales
Gross Profit
Investment revenues
Other gains and losses
Net monetary gains and losses
Share of profits of associates
Changes in inventories of finished goods and work in progress
Raw materials and consumables used
Depreciation and amortisation expense
Employee benefits expense
Distribution expenses
Marketing expenses
Occupancy expenses
Administration expenses
Finance costs
Consulting expense
Royalities
Other expenses
Profit before tax
Income tax expense
Profit for the year from continuing operations
Profit for the year from discontinued operations
Profit for the year
All balance sheet constant items
Deferred tax assets
Finance lease receivables
Trade and other non-monetary debtors
Provision for doubtful debts
Current tax assets
Issued share capital
Share premium
Share discount
Capital reserves
General reserve
Properties revaluation reserve
Investments revaluation reserve
Equity-settled employee benefits reserve
Hedging reserve
Foreign currency translation reserve
Retained earnings
Retirement benefit obligation
Deferred tax liabilities
Provisions
Employee benefits provision
Provision for rectification work
Provision for warranties
Onerous lease contract provision
Restructuring and termination costs provision
Decommissioning costs provision
Deferred Revenue
Trade and other non-monetary creditors
Current tax liabilities
The IASB only recognizes monetary and non-monetary items in the economy. The Board manages to side-step the split between variable and constant items with the stable measuring unit assumption which it accepts as part of HCA. Constant items are valued in nominal monetary units under HCA implementing the stable measuring unit assumption.
HCA makes no difference between variable real value non-monetary items and constant real value non-monetary items. Both variable and constant items are grouped together as simply non-monetary items as opposed to monetary items. Both variable items valued at HC (e.g. fixed property) and constant items valued at HC (Retained Earnings) are classified as simply non-monetary items under HCA.
Kindest regards,
Nicolaas Smit
Par. 103 states that the needs of financial report users should determine the choice of the correct concept of capital by a company. If the users of financial reports are mainly concerned with the maintenance of nominal invested capital or the maintenance of the purchasing power of invested capital then a financial concept of capital should be chosen.
Par. 104 states that the concepts of capital stated in Par. 102 give origin to the financial capital maintenance concept. Par. 104 (a) then states that:
"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
The IASB clearly defines issued share capital, capital reserves, retained earnings, all other items in shareholders´ equity, all items in the income statement, provisions, etc as non-monetary items. Since these real value non-monetary items can be measured in units of constant purchasing power in terms of the Framework, Par. 104 (a), to implement a financial capital maintenance concept in units of constant purchasing power, they are obviously constant real value non-monetary items with constant real non-monetary values expressed in terms of a monetary unit of account over time in a low inflationary or deflationary economy.
Logic would thus imply and it is a fact that real value non-monetary items that are not measured in units of constant purchasing power during low inflation or deflation on a primary valuation basis but are valued in terms of specific IFRS at, for example, market value, fair value, recoverable value, net realisable value, present value, etc are not constant but variable real value non-monetary items, e.g. property, plant, equipment, shares, inventory, foreign exchange, etc.
Examples of constant items
All income statement items once they are accounted
Revenue
Cost of sales
Gross Profit
Investment revenues
Other gains and losses
Net monetary gains and losses
Share of profits of associates
Changes in inventories of finished goods and work in progress
Raw materials and consumables used
Depreciation and amortisation expense
Employee benefits expense
Distribution expenses
Marketing expenses
Occupancy expenses
Administration expenses
Finance costs
Consulting expense
Royalities
Other expenses
Profit before tax
Income tax expense
Profit for the year from continuing operations
Profit for the year from discontinued operations
Profit for the year
All balance sheet constant items
Deferred tax assets
Finance lease receivables
Trade and other non-monetary debtors
Provision for doubtful debts
Current tax assets
Issued share capital
Share premium
Share discount
Capital reserves
General reserve
Properties revaluation reserve
Investments revaluation reserve
Equity-settled employee benefits reserve
Hedging reserve
Foreign currency translation reserve
Retained earnings
Retirement benefit obligation
Deferred tax liabilities
Provisions
Employee benefits provision
Provision for rectification work
Provision for warranties
Onerous lease contract provision
Restructuring and termination costs provision
Decommissioning costs provision
Deferred Revenue
Trade and other non-monetary creditors
Current tax liabilities
The IASB only recognizes monetary and non-monetary items in the economy. The Board manages to side-step the split between variable and constant items with the stable measuring unit assumption which it accepts as part of HCA. Constant items are valued in nominal monetary units under HCA implementing the stable measuring unit assumption.
HCA makes no difference between variable real value non-monetary items and constant real value non-monetary items. Both variable and constant items are grouped together as simply non-monetary items as opposed to monetary items. Both variable items valued at HC (e.g. fixed property) and constant items valued at HC (Retained Earnings) are classified as simply non-monetary items under HCA.
Kindest regards,
Nicolaas Smit
Thursday, 23 July 2009
Constant items
Geoffrey Whittington in his definitive work on inflation accounting in the beginning of the 1980´s, Inflation Accounting - An Introduction to the Debate, published in 1983, clearly indicated that with 1970-style CPP accounting all non-monetary accounts (with no distinction being made between variable and constant real value non-monetary item accounts) were updated by means of the CPI.
He stated that Constant Purchasing Power inflation accounting (CPP) was a method of inflation-adjusting all non-monetary accounts consistently by means of the Consumer Price Index which reflected changes in money’s purchasing power. 1970-style CPP inflation accounting tried to deal with the problem of inflation in the popularly understood sense, as a decrease in the real value of money. According to Whittington, CPP inflation accounting tried to solve this problem by inflation-adjusting all non-monetary items at the reporting date by means of the CPI.
This eventually led to the failure of 1970-style CPP accounting as an inflation accounting model.
SA accountants freely destroy real value in the real economy with their assumption that the rand is perfectly stable only for the purpose of accounting constant value items, and have absolutely no concern about the negative impact this has on sustainable economic growth.
The destruction of real value in the real economy by SA accountants will stop when they stop their assumption that the rand is perfectly stable only for the purpose of accounting constant items never or not fully updated.
Salaries, wages, rentals, etc are normally inflation-adjusted in South Africa and generally too in most economies.
Inflation-adjusted income statement constant real value non-monetary items, for example, salaries and wages, are – right this very moment - a blessing to users in SA – and all around the world - because they maintain the real value or purchasing power of salaries and wages during inflation as long as the inflation-adjustment is at least equal to inflation over the period in question. Millions of SA workers, their trade unions, the SA government, SA accountants and South Africans in general would agree that the practice of inflation-adjusting accounts in a low inflation environment is a blessing to users and does not insult them.
Inflation-adjusted balance sheet constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, etc in SA´s low inflation environment will be a blessing to everyone in SA when our accountants simply choose to change from their current implementation of the real value destroying traditional HCA model and freely choose to implement the real value maintaining Constant Item Purchasing Power Accounting model as approved in the IASB´s Framework, Par. 104 (a) twenty years ago. They would maintain - instead of currently destroy as they also did last year and all the years before - at least R200 billion annually in constant item real value in the SA real economy for an unlimited period – all else being equal.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
He stated that Constant Purchasing Power inflation accounting (CPP) was a method of inflation-adjusting all non-monetary accounts consistently by means of the Consumer Price Index which reflected changes in money’s purchasing power. 1970-style CPP inflation accounting tried to deal with the problem of inflation in the popularly understood sense, as a decrease in the real value of money. According to Whittington, CPP inflation accounting tried to solve this problem by inflation-adjusting all non-monetary items at the reporting date by means of the CPI.
This eventually led to the failure of 1970-style CPP accounting as an inflation accounting model.
SA accountants freely destroy real value in the real economy with their assumption that the rand is perfectly stable only for the purpose of accounting constant value items, and have absolutely no concern about the negative impact this has on sustainable economic growth.
The destruction of real value in the real economy by SA accountants will stop when they stop their assumption that the rand is perfectly stable only for the purpose of accounting constant items never or not fully updated.
Salaries, wages, rentals, etc are normally inflation-adjusted in South Africa and generally too in most economies.
Inflation-adjusted income statement constant real value non-monetary items, for example, salaries and wages, are – right this very moment - a blessing to users in SA – and all around the world - because they maintain the real value or purchasing power of salaries and wages during inflation as long as the inflation-adjustment is at least equal to inflation over the period in question. Millions of SA workers, their trade unions, the SA government, SA accountants and South Africans in general would agree that the practice of inflation-adjusting accounts in a low inflation environment is a blessing to users and does not insult them.
Inflation-adjusted balance sheet constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, etc in SA´s low inflation environment will be a blessing to everyone in SA when our accountants simply choose to change from their current implementation of the real value destroying traditional HCA model and freely choose to implement the real value maintaining Constant Item Purchasing Power Accounting model as approved in the IASB´s Framework, Par. 104 (a) twenty years ago. They would maintain - instead of currently destroy as they also did last year and all the years before - at least R200 billion annually in constant item real value in the SA real economy for an unlimited period – all else being equal.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
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