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Showing posts with label stupid. Show all posts
Showing posts with label stupid. Show all posts

Friday 6 August 2010

It´s the stable measuring unit assumption, stupid!

We have seen so far that accountants implement the Historical Cost Accounting model because it is the traditional model for the last 3000 years – or more.

Historical Cost Accounting is based on the fallacy of financial capital maintenance in nominal monetary units: it is impossible to maintain the real value of financial capital constant in nominal monetary units per se during inflation and deflation.

They accept and admit that companies´ capital and retained profits are constantly being eroded (which is the same as destroyed). They all believe and are taught that this erosion is caused by inflation. They are told as much by the FASB and the IASB.

However:

It´s the stable measuring unit assumption, stupid! as Bill Clinton would have said.

Accountants unknowingly, unnecessarily and unintentionally destroy the real value of that portion of companies´ equity never maintained constant by sufficient revaluable fixed assets under HCA during inflation because they implement the stable measuring unit assumption.

They would stop this destruction when they freely change over to financial capital maintenance in units of constant purchasing power as they have been authorized in IFRS in the Framework, Par 104 (a) in 1989. It states:

“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”

When SA accountants do that they will knowingly maintain about R167 billion per annum in the SA real economy for as long as annual inflation stays at about 5%.
Copyright © 2010 Nicolaas J Smith

Tuesday 6 July 2010

It´s the real value, stupid!

Real value is the most important fundamental economic concept although it is the lesser studied and understood compared to the study of money. Money and real value are, unfortunately, not one and the same thing during inflation and deflation. Money and monetary items always have lower real values during inflation and higher real values during deflation under any accounting model.

Money is an invention. We can terminate its existence while real value is a fundamental economic concept, which exists, while we exist. Economies have already functioned without money. Barter economies operated without a medium of exchange. Cuba in the past bought oil from Venezuela and paid part in money and part by the provision of the services of sports coaches and medical doctors. Corn farmers in Argentina stored their corn in silos and paid for new pick-up trucks and other expensive mechanized farm implements with quantities of corn - the unit of real value Adam Smith described more than 230 years ago as a very stable unit of real value.

There will always be real value while the human race exists. The need for a medium of exchange, which is money’s first and basic function, is equally true. Money is one of the greatest human inventions of all time. It ranks on par with the invention of the wheel and the Gutenberg press in terms of importance to human development. Without money modern human development would have been very slow indeed.

Monetary items have the exact same attributes as money with the single exception that they are not actual bank notes and bank coins.

Non-monetary items are all items that are not monetary items.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Saturday 6 September 2008

It´s the stable measuring unit assumption, stupid!

I do not remember that I have ever stated that I “accuse” Chartered Accountants of destroying value. I state that CAs unknowingly, unintentionally and unwittingly destroy the real value of all constant real value non-monetary items never updated (e.g. Retained Earnings) or not fully updated in the South African real economy at the annual rate of inflation to a conservatively estimated amount of about R200 billion plus per annum when they choose to implement the stable measuring unit assumption – a Generally Accepted Accounting Practice – as part of the Historical Cost Accounting model.


It is the stable measuring unit assumption that destroys the real value of all “non-monetary items which do not hold their value in terms of purchasing power”.

Chartered Accountants choose to implement the stable measuring unit assumption. They are not forced to do that by the SA government - as you are now falsely implying. I have stated this to you before on this thread but you fail to specify where in the SA Companies Act, or SA GAAPs or IASB IFRSs CAs are forced to implement the stable measuring unit assumption. Since they are not – as you well know, you now falsely imply that they are forced by the SA government to do that. That is not true. The SA Government will not fall for your false statement.

I will give you a very clear example:

At the end of year one the company CA in a hypothetical company reported that there was, inter alia, R 1 million cash in a zero interest bank account and that the Retained Earnings balance was R 1 million. The CA decided that the company will do its accounting based on the Historical Cost Accounting model. The company was completely dormant during the second financial year. At the end of the second year the board of directors decided to pay the single owner a dividend of R1 million. Inflation was 13.4% at the end of the second year.

It is very clear that inflation destroy 13.4% of the real value of the R1 million in the zero interest bank account .

Since Retained Earnings is a non-monetary item which do not hold its value it is also very clear that the stable measuring unit assumption (whereby the CA assumed that the Rand was stable as far as the accounting of Retained Earnings was concerned) destroyed 13.4% of the real value of the R1 million Retained Earnings balance during the second year.

CAs choose to implement the stable measuring unit assumption. They are not forced by the SA government or by anyone or anything to do that. They can stop any time they want.

This happens in all SA companies with Retained Earnings balances in the companies.


SA accountants are killing the real economy to the tune of about R200 billion each and every year.

CAs implement the HCA model because choosing it as the basic accounting model is generally accepted. The destruction of real value in the real economy is thus an integral part of the HCA model. CAs unknowingly choose that when they choose the generally accepted HCA model.
The abandoning of the stable measuring unit assumption would obviously lead to zero inflation in the real economy – or zero destruction of real value in the real economy.
All constant items would maintain their real values.

It does nothing to inflation in the monetary economy.

But, it maintains the real value of all constant items in the real economy. That is: 0% inflation in the real economy or maintaining about R200 billion (or maybe even double that) plus in real value in the real economy forever. I can assure you that that would warm the SA government´s heart quite a lot – and everyone´s in South Africa.

It would also make a Zimbabwe situation in the SA economy impossible.

What I propose is not “Remeasuring reported results” of all accounts on a primary valuation basis but inflation-adjusting on a primary valuation basis only all constant real value non-monetary items as they are accounted on a day to day basis during the month and at every date the CPI value changes.
It is all about inflation-adjusted accounts, but, only all constant real value non-monetary items. Not variable items and monetary items on a primary valuation basis. Only constant items.
All salaries and wages and many other values are already inflation-adjusted in SA.

© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.