It is not inflation doing the destroying as the IASB, the FASB and SA accountants mistakenly believe.
It is SA accountants´ free choice of the very destructive stable measuring unit assumption during low inflation as it forms part of financial capital maintenance in nominal monetary units – the Historical Cost Accounting model – as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago.
SA accountants would knowingly maintain the real values of all constant real value non-monetary items constant (amounting to about R167 billion per year while inflation stays at about 4.8% per annum) in all companies that at least break even forever – all else being equal - no matter what the level of inflation or deflation when they reject the stable measuring unit assumption and implement financial capital maintenance in units of constant purchasing power during low inflation and deflation.
This would be done without requiring extra money or extra retained profits simply to maintain the existing constant real value of existing constant real value non-monetary items constant.
Copyright © 2010 Nicolaas J Smith
Showing posts with label It is not inflation doing the destroying. Show all posts
Showing posts with label It is not inflation doing the destroying. Show all posts
Thursday, 10 June 2010
Thursday, 1 April 2010
It is not inflation doing the destroying
Accountants simply assume that changes in the real value or constant purchasing power of the functional currency (money) are not sufficiently important for them to continuously measure financial capital maintenance in units of constant purchasing power as they have been authorized in IFRS in the Framework, Par 104 (a) in 1989 in low inflationary and deflationary economies for the purpose of valuing most constant items which they account as HC items; they measure them in nominal monetary units when they choose financial capital maintenance in nominal monetary units and implement the stable measuring unit assumption.
It is a generally accepted accounting practice for accountants not to apply the stable measuring unit assumption to the valuing of certain income statement constant items, namely salaries, wages, rentals, etc which they generally inflation-adjust annually. Accountants value all other income statement items and all balance sheet constant items in nominal monetary units when they implement financial capital maintenance in nominal monetary units during low inflation and deflation.
However, it is impossible to maintain the real value of financial capital constant with financial capital maintenance in nominal monetary units per se applying the stable measuring unit assumption during inflation and deflation. The measuring unit (money) is not perfectly stable during inflation and deflation. Inflation destroys the real value of money and other monetary items while deflation creates more real value in money and other monetary items over time. Sustainable zero annual inflation has never been achieved in the past and is not likely to be achieved any time soon in the future. Financial capital maintenance in nominal monetary units per se during inflation and deflation as authorized in IFRS in the Framework, Par 104 (a) is a popular accounting fallacy. IFRS should not be based on popular accounting fallacies as they currently are.
“Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity.” The Framework, Par 102
Shareholders´ Equity’s real value can only be maintained constant (excluding continuous additions of fresh capital or additional retained profits at the rate of inflation) with financial capital maintenance in nominal monetary units (traditional HCA) during low inflation when 100% of the updated original real value of all contributions to the Shareholders´ Equity balance are invested in revaluable fixed assets with an equivalent updated fair value – revalued or not. Valuing a revaluable fixed asset at HC (in nominal monetary units applying the stable measuring unit assumption) does not destroy its real value. It would normally be revalued when it is eventually sold or exchanged. It can also be revalued via the Revaluation Reserve before it is finally sold.
However, the portion of Shareholders´ Equity’s real value, under HCA, that is never maintained constant with sufficient revaluable fixed assets during low inflation, is unknowingly and unnecessarily being treated by accountants the same as a monetary item (e.g. cash). Accountants unknowingly, unnecessarily and unintentionally destroy its real value at a rate equal to the annual rate of inflation because they freely choose in terms of the Framework, Par 104 (a) - as authorized in IFRS - to implement financial capital maintenance in nominal monetary units and apply the stable measuring unit assumption during low inflation. Shareholders´ Equity´s value is expressed in terms of a monetary unit of account (the functional currency or money) and inflation destroys the real value of money.
It is not inflation doing the destroying: it is accountants´ free choice of financial capital maintenance in nominal monetary units when they implement their very destructive stable measuring unit assumption as authorized in IFRS in the Framework, Par 104 (a) during low inflation. When they freely choose the other option also authorized in the Framework, Par 104 (a), namely continuous financial capital maintenance in units of constant purchasing power, they would maintain the real value of all constant real value non-monetary items constant for an unlimited period of time – ceteris paribus – in all entities that at least break even whether these entities own revaluable fixed assets or not and without the requirement of additional capital or additional retained profits simply to maintain the existing constant real value of existing Shareholders´ Equity constant at all levels of inflation and deflation.
Inflation can only destroy the real value of money and other monetary items – nothing else. Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. Shareholders´ Equity is a constant real value non-monetary item.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Ümit GUCENME, Aylin P. ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 – 2005 (Bursa: Uludag University, 2005) 9.
http://www.mufad.org/index2.php?option=com_docman&task=doc_view&gid=9&Itemid=100
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
It is a generally accepted accounting practice for accountants not to apply the stable measuring unit assumption to the valuing of certain income statement constant items, namely salaries, wages, rentals, etc which they generally inflation-adjust annually. Accountants value all other income statement items and all balance sheet constant items in nominal monetary units when they implement financial capital maintenance in nominal monetary units during low inflation and deflation.
However, it is impossible to maintain the real value of financial capital constant with financial capital maintenance in nominal monetary units per se applying the stable measuring unit assumption during inflation and deflation. The measuring unit (money) is not perfectly stable during inflation and deflation. Inflation destroys the real value of money and other monetary items while deflation creates more real value in money and other monetary items over time. Sustainable zero annual inflation has never been achieved in the past and is not likely to be achieved any time soon in the future. Financial capital maintenance in nominal monetary units per se during inflation and deflation as authorized in IFRS in the Framework, Par 104 (a) is a popular accounting fallacy. IFRS should not be based on popular accounting fallacies as they currently are.
“Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity.” The Framework, Par 102
Shareholders´ Equity’s real value can only be maintained constant (excluding continuous additions of fresh capital or additional retained profits at the rate of inflation) with financial capital maintenance in nominal monetary units (traditional HCA) during low inflation when 100% of the updated original real value of all contributions to the Shareholders´ Equity balance are invested in revaluable fixed assets with an equivalent updated fair value – revalued or not. Valuing a revaluable fixed asset at HC (in nominal monetary units applying the stable measuring unit assumption) does not destroy its real value. It would normally be revalued when it is eventually sold or exchanged. It can also be revalued via the Revaluation Reserve before it is finally sold.
However, the portion of Shareholders´ Equity’s real value, under HCA, that is never maintained constant with sufficient revaluable fixed assets during low inflation, is unknowingly and unnecessarily being treated by accountants the same as a monetary item (e.g. cash). Accountants unknowingly, unnecessarily and unintentionally destroy its real value at a rate equal to the annual rate of inflation because they freely choose in terms of the Framework, Par 104 (a) - as authorized in IFRS - to implement financial capital maintenance in nominal monetary units and apply the stable measuring unit assumption during low inflation. Shareholders´ Equity´s value is expressed in terms of a monetary unit of account (the functional currency or money) and inflation destroys the real value of money.
It is not inflation doing the destroying: it is accountants´ free choice of financial capital maintenance in nominal monetary units when they implement their very destructive stable measuring unit assumption as authorized in IFRS in the Framework, Par 104 (a) during low inflation. When they freely choose the other option also authorized in the Framework, Par 104 (a), namely continuous financial capital maintenance in units of constant purchasing power, they would maintain the real value of all constant real value non-monetary items constant for an unlimited period of time – ceteris paribus – in all entities that at least break even whether these entities own revaluable fixed assets or not and without the requirement of additional capital or additional retained profits simply to maintain the existing constant real value of existing Shareholders´ Equity constant at all levels of inflation and deflation.
Inflation can only destroy the real value of money and other monetary items – nothing else. Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. Shareholders´ Equity is a constant real value non-monetary item.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Ümit GUCENME, Aylin P. ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 – 2005 (Bursa: Uludag University, 2005) 9.
http://www.mufad.org/index2.php?option=com_docman&task=doc_view&gid=9&Itemid=100
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Tuesday, 26 January 2010
It is not inflation doing the destroying
The understanding of the difference between the generally accepted accounting practice whereby SA accountants unnecessarily, unknowingly and unintentionally destroy the real values of only existing reported constant items never maintained only in the SA constant item economy with their free choice of implementing their very destructive stable measuring unit assumption during low inflation as authorized by the IASB when it approved the very popular accounting fallacy of financial capital maintenance in nominal monetary units during low inflation in the Framework, Par 104 (a) in 1989 and the destruction by the economic process of inflation of the real value of only money and other monetary items only in the monetary economy is an ongoing process. It has become clear to me, since September 2008, that inflation and hyperinflation only destroy the real value of money and other monetary items. Inflation and hyperinflation only have one – a monetary – component. It is clear to me now that it is not inflation that is causing (or hyperinflation that could cause) the destruction of the SA real economy or the real value of reported constant items never maintained in the SA real economy. It is clear to me now that inflation does not have a non-monetary component.
Copyright © 2005 - 2010 Nicolaas J Smith
Copyright © 2005 - 2010 Nicolaas J Smith
Monday, 14 September 2009
It is not inflation doing the destroying
It was stated in 2008 that there is no doubt that inflation destroys the real value of monetary as well as non-monetary items that do not maintain their real value in terms of purchasing power. Reference: This blog.
I agreed at the time. Subsequently it became very clear to me that inflation has no effect on the real value of non-monetary items over time. The understanding of the real value destroying effect of the stable measuring unit assumption on constant items never or not fully updated is a work in progress. Not inflation, per se, but SA accountants´ implementation of the very destructive stable measuring unit assumption during low inflation as it forms part of the real value destroying HCA model, destroys the real value of constant real value non-monetary items never or not fully updated over time.
There is no substance in the statement that inflation destroys the real value of non-monetary items which do not hold their real value over time. Inflation has no effect on the real value on non-monetary items over time.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof. Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
SA accountants unknowingly destroy or maintain (please note: not create) the real value of constant real value non-monetary items (please note: not variable real value non-monetary items) depending on whether they choose the IASB approved real value destroying traditional HCA model under which they implement the very destructive stable measuring unit assumption during non-hyperinflationary periods for an unlimited period of time during indefinite inflation or the IASB approved real value maintaining Constant ITEM Purchasing Power Accounting model under which they select to reject the stable measuring unit assumption at all levels of inflation and deflation for an unlimited period of time.
Inflation is a uniquely monetary phenomenon and can only destroy the real value of money and other monetary items over time. It has no effect on the real value of non-monetary items. See GUCENME and ARSOY above. SA accountants unknowingly, unintentionally and unwittingly do the destroying of the real value of constant items, e.g. Retained Earnings, Issued Share capital, other items in shareholder’s equity, salaries, wages, rentals, etc never or not fully updated or inflation-adjusted over time when they choose the real value destroying traditional HCA model during inflationary periods when they maintain the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
This includes the unknowing destruction by SA accountants of the real value of the Issued Share capital of SA companies and banks which do not have any or sufficient property or other variable real value non-monetary items to revalue to an amount at least equal to the updated original real value of all contributions to Shareholder’s Equity. SA accountants unknowingly destroy the real value of the Retained Earnings of all SA companies and banks and the real value of the Issued Share capital of SA companies with no variable real value non-monetary items to revalue continuously at a rate equal to the inflation rate while they continue implementing the very destructive stable measuring unit assumption during non-hyperinflationary conditions when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Summary: Inflation only destroys the real value of money. It has no effect on non-monetary items. Not inflation, but, SA accountants implementing the very destructive stable measuring unit assumption are unknowingly destroying the real value of constant items never updated in the SA real economy on a massive scale. The destruction stops when they value constant items in units of constant purchasing power.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
I agreed at the time. Subsequently it became very clear to me that inflation has no effect on the real value of non-monetary items over time. The understanding of the real value destroying effect of the stable measuring unit assumption on constant items never or not fully updated is a work in progress. Not inflation, per se, but SA accountants´ implementation of the very destructive stable measuring unit assumption during low inflation as it forms part of the real value destroying HCA model, destroys the real value of constant real value non-monetary items never or not fully updated over time.
There is no substance in the statement that inflation destroys the real value of non-monetary items which do not hold their real value over time. Inflation has no effect on the real value on non-monetary items over time.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof. Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
SA accountants unknowingly destroy or maintain (please note: not create) the real value of constant real value non-monetary items (please note: not variable real value non-monetary items) depending on whether they choose the IASB approved real value destroying traditional HCA model under which they implement the very destructive stable measuring unit assumption during non-hyperinflationary periods for an unlimited period of time during indefinite inflation or the IASB approved real value maintaining Constant ITEM Purchasing Power Accounting model under which they select to reject the stable measuring unit assumption at all levels of inflation and deflation for an unlimited period of time.
Inflation is a uniquely monetary phenomenon and can only destroy the real value of money and other monetary items over time. It has no effect on the real value of non-monetary items. See GUCENME and ARSOY above. SA accountants unknowingly, unintentionally and unwittingly do the destroying of the real value of constant items, e.g. Retained Earnings, Issued Share capital, other items in shareholder’s equity, salaries, wages, rentals, etc never or not fully updated or inflation-adjusted over time when they choose the real value destroying traditional HCA model during inflationary periods when they maintain the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
This includes the unknowing destruction by SA accountants of the real value of the Issued Share capital of SA companies and banks which do not have any or sufficient property or other variable real value non-monetary items to revalue to an amount at least equal to the updated original real value of all contributions to Shareholder’s Equity. SA accountants unknowingly destroy the real value of the Retained Earnings of all SA companies and banks and the real value of the Issued Share capital of SA companies with no variable real value non-monetary items to revalue continuously at a rate equal to the inflation rate while they continue implementing the very destructive stable measuring unit assumption during non-hyperinflationary conditions when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Summary: Inflation only destroys the real value of money. It has no effect on non-monetary items. Not inflation, but, SA accountants implementing the very destructive stable measuring unit assumption are unknowingly destroying the real value of constant items never updated in the SA real economy on a massive scale. The destruction stops when they value constant items in units of constant purchasing power.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
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