Financial reporting does not simply report on what took place

             Financial reporting does not simply report on what took place

            There is no substance in the statement that financial reporting simply reports on what took place. It can be correctly stated that the above statement has no substance when we refer to the IFRS-approved basic accounting option of continuous financial capital maintenance in units of constant purchasing power which requires the valuing of only constant real value non-monetary items in units of constant purchasing power during low inflation and deflation as orginally authorized in the Framework (1989), Par 104 (a) which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”

The first option in Par 104 , namely, financial capital maintenance in nominal monetary units during inflation and deflation is a fallacy: it is impossible to maintain the real value of capital constant in nominal monetary units per se during inflation and deflation. Continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation is generally applicable in the economy as a result of the absence of specific IFRS as per IAS 8, Par 11. However, that is not the same as comprehensive CPI-based adjustment of accounts themselves as accountants and accounting authorities automatically assume when financial capital maintenance in units of constant purchasing power during low inflation and deflation is suggested. Only constant real value non-monetary items (not variable real value non-monetary items) are continuously valued in units of constant purchasing power by continuously applying the CPI on a monthly basis during low inflation and deflation to implement a constant purchasing power capital concept of invested constant purchasing power and a constant purchasing power financial capital maintenance concept with measurement in units of constant purchasing power which includes a constant purchasing power profit or loss determination concept with the continuous valuation of only constant real value non-monetary items in units of constant purchasing power during low inflation and deflation.

The real values of banks´ and companies´ existing constant real value non-monetary items never maintained constant, e.g. retained profits, are unnecessarily, unknowingly and unintentionally being eroded at a rate equal to the annual rate of inflation when companies´  boards of directors choose to apply the stable measuring unit assumption as it forms part of the traditional HCA model during low inflation.

It is a fact that continuous financial capital maintenance in units of constant purchasing power (CIPPA) as originally authorized in IFRS in the Framework (1989), Par 104 (a), i.e. measurement of only constant real value non-monetary items (not variable items) in the economy in units of constant purchasing power during low inflation automatically remedies this unknowing, unintentional and unnecessary erosion by the application of the stable measuring unit assumption as it forms part of the HCA model in companies that at least break even whether they own revaluable fixed assets or not and without the requirement of extra capital from capital providers in the form of extra money or extra retained profits simply to maintain the existing constant real value of quity constant.

Nicolaas Smith

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Financial reporting does NOT simply report on what took place

There is a debate whether accountants simply record what happened in the past or whether they value economic items.


There are three different categories of basic economic items in a financial report:

I. Monetary items

We all report monetary items at their original nominal monetary amounts during the current financial period.

Let us assume the following: Telkom placed R100 million in a savings account in the bank on 2nd Jan 2008.

Their accountants left this item as posted on 02-01-2008. Telkom´s auditors checked this entry and stated that Telkom´s accounts fairly presented their business at their year end.

Monetary items are also VALUED by accountants at their original nominal monetary values because it is impossible to update or inflation-adjust money and other monetary items. Their real values are continuously being destroyed by inflation which means they are always VALUED at their current inflation-destroyed real values.

Simply reporting them as they took place originally and VALUING them are thus one and the same thing.


II. Constant items

Let us assume: In Jan 1981 one of the late honourable Anton Rupert´s original companies had R100 million in Retained Profits. That amount stayed in retained profits till today. It was part of the Remgro Retained Earnings value at 31st March 2009.

Remgro´s auditors verified the amount and stated that Remgro´s accounts fairly present their business.
The fact that that R100 million is only worth R6.8 million in real value today is absolutely no concern to anyone.

Well, to me it is.

The fact that SA accountants valued in the past and now value Retained Profits at Historical Cost with their silly stable measuring unit assumption thus transforming hundreds (thousands?) of billions of Rands of constant real value non-monetary items currently into simple old CASH (you know, like Rand notes and coins) means that Retained Profits, just like Monetary Items above, are simply being reported as they took place originally and that VALUING them and stating them at their original nominal monetary values are one and the same thing.
The simple undeniable fact that by valuing (simply reporting what took place in some people´s view) Retained Profits at Historical Cost by implementing that silly stable measuring unit assumption, SA accountants are destroying hundreds of billions of Rand (about R200 billion) PER ANNUM in the SA real economy apparently has not been realized yet. Luckily the IASB realized something 20 years ago when they approved the Framework, Par. 104 (a) as follows:

"Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
III. Variable Items

Let us assume: A company bought stock on Jan 1 2008 at R100 million. At its year end on 31.12.2008 the net realizable value of that stock was R10 million.

Their auditors said: No. The stock has to be shown at the lower of cost or net realizable value.

So:

Financial reporting does NOT simply report on what took place.

Let us assume: Big bucks bankers on Wall Street securitized USD 10 trillion in sub-prime mortages and sold it off all over the world.

.

Their auditors forced them to value those items at fair value.

So: 

Financial reporting does NOT simply report on what took place.

We can state a million examples of variable items not reported as they took place originally but VALUED in terms of IFRS or SA GAAP.

Copyright 2005-2010 by Nicolaas Smith