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Showing posts with label Valuing monetary items - Part 2. Show all posts
Showing posts with label Valuing monetary items - Part 2. Show all posts

Monday 26 July 2010

Valuing monetary items - Part 2

Valuing monetary items during deflation

Accountants value and account monetary items correctly at their original nominal monetary HC values during the current accounting period during deflation too. There is no other way to do it: see above. Money and monetary items gain in real value during deflation. Monetary items are thus always correctly valued at their current always higher real values during deflation when accountants account them at their original nominal monetary HC values. HC accountants do not calculate net monetary gains or losses during deflation either.

Valuing monetary items during hyperinflation

Accountants value monetary items at their nominal monetary HC values during the current accounting period during hyperinflation too. The real value of money and other monetary items are destroyed at the rate of hyperinflation which can be anything from 100 per cent per annum to 6 million per cent per annum or more as in the case of Zimbabwe recently. HC accountants have to calculate and account net monetary losses and gains during hyperinflation as required by IAS 29 Financial Reporting in Hyperinflationary Economies. This is in total contradiction to what is done during low inflation. The IASB admits that the net monetary loss or gain from holding net monetary assets or net monetary liabilities have to be calculated and accounted in the income statement, but, not during low inflation of up to 25% per annum.

Hyperinflation is defined by the IASB as 100% cumulative inflation over three years. That is 26% annual inflation for three years in a row. At 26% annual inflation for three years in a row companies have to calculate and account the cost of hyperinflation and write it off against profit, but, not at 22% or 15% or 6% inflation. At 22% annual inflation for three years or 81.6% cumulative inflation SA would not be in hyperinflation. However, 81.6% of the real value of the Rand, all other monetary items as well as the Retained Profits of 99.99% of SA´s listed and unlisted companies would be wiped out over the short period of three years. SA would not be in hyperinflation and SA accountants would carry on implementing the HCA model.

SA has been going along at 12% average annual inflation or 40% cumulative inflation over three years for at least the last 15 years before 2000 continuously implementing HCA.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith