Inflation accounting is only implemented during hyperinflation

During the period of high inflation in the 1970´s accountants tried various inflation accounting models in an attempt to adjust company financial reports supposedly to reflect the apparent effect of high inflation on non-monetary items.

During that period inflation accounting described a range of accounting models designed to correct comparison problems arising from historical cost accounting in the presence of high and hyperinflation. It was and still is generally accepted that inflation affects the real value of non-monetary items. That is not true. Inflation has no effect on the real value of non-monetary items. Inflation is a uniquely monetary phenomenon. It is not inflation, but, SA accountants selecting the Historical Cost Accounting model and implementing the very destructive stable measuring unit assumption who unknowingly and unintentionally destroy the real value of SA constant real value non-monetary items never or not fully updated during non-hyperinflationary periods.

Inflation accounting models that were tried unsuccessfully in the 1970´s include Constant Purchasing Power inflation accounting (CPPA) and Current Cost Accounting.

The Financial Accounting Standards Board issued an exposure draft in the United States in January, 1975, that required supplemental financial reports on a Constant Purchasing Power inflation accounting price-level basis. The Securities and Exchange Commission in the USA proposed in 1976 the disclosure of the current replacement cost of amortizable, depletable and depreciable assets used for production as well as most inventories at the financial year-end. It also proposed the disclosure of the approximate value of amortization, depletion and depreciation as well as the approximate value of cost of sales that would have been accounted in terms of the current replacement cost of productive capacity and inventories.

Both supplemental Constant Purchasing Power inflation accounting financial statements and value accounting were experimented with in Canada. Australia tried both replacement-cost inflation accounting and CPP price-level inflation accounting. Netherland companies experimented with value accounting. Replacement-cost disclosures for equity capital financed items were considered in Germany. CPP inflation accounting supplemental financial statements were tried in Argentina. Brazil used various indexes to update constant and variable non-monetary items for the 30 years from 1964 to 1994. In the United Kingdom an original proposal of supplementary CPP financial accounting financial reports was replaced by the Sandilands Committee proposal for a value accounting approach for inventories, marketable securities and productive property.

South Africa had published a discussion paper on value accounting at the time.

Presently, inflation accounting describes a complete price-level inflation accounting model, namely the Constant Purchasing Power inflation accounting model defined in IAS 29 Financial Reporting in Hyperinflationary Economies required by the IASB to be implemented during hyperinflation. It serves to maintain the real values of all non-monetary items – variable and constant real value non-monetary items - by inflation-adjusting them by means of the CPI during hyperinflation which is an exceptional circumstance according to the IASB.

“In a hyperinflationary economy, reporting of operating results and financial position in the local currency without restatement is not useful. Money loses value at such a rate that comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading.” IAS 29.2

Constant ITEM Purchasing Power Accounting (CIPPA) during low inflation as authorized by the IASB in 1989 in the Framework, Par. 104 (a) which states

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

is not an inflation accounting model. It is a real value maintaining basic accounting model alternative to the real value destroying traditional Historical Cost Accounting model which includes the very destructive stable measuring unit assumption.

Kindest regards,

Nicolaas Smith

Gold price high current value changes monthly

Real value is a constant, but, inflation-adjusted Historical Cost nominal monetary values change every time the Consumer Price Index related to the measurement unit, the US Dollar in the case of the gold price, changes.

For example, the gold price high of $2352.80 (CPI 215.351 07-09) on 21st January, 1980:

If inflation should increase dramatically in the USA and the CPI increases to 250 then the inflation-adjusted value for the 21st Jan, 1980 high would change to $2731.

Historical Cost nominal monetary values change every time the current CPI changes. That is logical. As current money is worth less and less as its real value is destroyed by inflation, past Historical Cost nominal monetary values have to be adjusted accordingly.

Historical real values are constant but their current nominal monetary values change every time the CPI of the respective monetary measuring unit changes.

This does not apply to monetary item values during the current financial period.

Gold is not a monetary item. Gold is a variable real value non-monetary item with its price expressed in terms of the US Dollar which is the monetary medium of exchange used.

Kindest regards,

Nicolaas Smith

Money is the only unstable unit of measure

Money is the only unstable unit of measure


The unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation. This means that the unit of measure in accounting is not a stable unit of measure during inflation and deflation. Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measurement that is not an absolute value. It does not contain a fundamental constant. All other generally accepted units of measurement of time, distance, velocity, mass, momentum, energy and weight are absolute values, e.g. second, minute, hour, metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.

The South African Reserve Bank is the central bank of the Republic of South Africa. It regards its primary goal in the South African economic system as “the achievement and maintenance of price stability". SARB.

The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. SARB.

Price stability is a year-on-year increase in the Consumer Price Index of zero percent. A year-on-year increase in the CPI of above zero but below 2% is a high degree of price stability – it is not absolute price stability.

“The ECB´s Governing Council has announced a quantitative definition of price stability:

Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.

The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.”

http://www.ecb.int/mopo/strategy/pricestab/html/index.en.html

A below 2% year-on-year increase in the European Monetary Union’s harmonized CPI is the European Central Bank’s chosen definition of price stability. It is not the factual definition of absolute price stability. The SARB´s chosen definition of price stability is for “inflation to be within the target range of 3 to 6 per cent on a continuous basis”.

Accountants, on the other hand, simply assume that the unstable monetary unit of account or unstable monetary unit of measure is perfectly stable in non-hyperinflationary economies for the purpose of valuing constant real value non-monetary items. Changes in the general purchasing power or real value of the unstable monetary unit of measure (functional currency or money) are not considered to be sufficiently important to require adjustments to financial reports during non-hyperinflationary periods.

This led accountants to choose to measure financial capital maintenance in nominal monetary units and to choose to implement the real value destroying traditional Historical Cost Accounting model during non-hyperinflationary periods where under they select to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation. They value both variable items stated at Historical Cost in terms of SA GAAP or IFRS, as well as constant items also stated at Historical Cost in terms of the Historical Cost Accounting model, in nominal monetary units during non-hyperinflationary periods. Both HC variable and HC constant real value non-monetary items are thus considered by SA accountants to be simply HC non-monetary items.

There is a fixation in accounting that constant purchasing power inflation-adjustment simply means adjusting company financial statements mainly to make current year statements more comparable with previous year statements.

Inflation-adjustment is not automatically thought of as affecting the fundamental values of the underlying resources although that is what is done with world wide annual inflation-adjustment of salaries, wages, rentals, etc. The two processes are seen as different processes.

Kindest regards,

Nicolaas Smith

Real News - Relatively low gold price today

The gold price today at around $1000 is not a very high price compared to its previous all time real value high on 21 January, 1980. Imagine the psychological effect if the price must go up to its real value price in 1980.


US CPI

Jan 1980 77.8 Gold Price $850

Jul 2009 215.351 Inflation adjusted $2352

A $1000 gold price today (July 09 CPI) is equivalent to $361 in Jan 1980 or only 42% of the top real value price.

Kindest regards,

Nicolaas Smith

Capital destroyed by ABSA FirstRand and African Bank CAs

EXISTING real value unknowingly and unintentionally DESTROYED in three SA banks´ Retained Profits during their last financial year because their Boards of Directors refused to maintain - AT NO EXTRA COST - the real values of these banks´ EXISTING equity in units of constant purchasing power as it was freely in their power to do since the IASB authorized them to do that 20 years ago when it approved the Framework, Par. 104 (a) which states:

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

African Bank Group R 299 million


Chartered Accountants on the Board of Directors during last financial year:
David Woollam CA(SA)
David Gibbon CA(SA)
Brian Steele BCom, CA(SA), MBA

Independent Auditors during last financial year:
Deloitte & Touche
Partner: G M Pinnock CA(SA)

ABSA R 3 388 million

Chartered Accountants on the Board of Directors during last financial year::
Group Chief Executive: S F Booysen DCom (Acc), CA(SA)
D C Arnold CA(SA), FCMA, AMP
S A Fakie BCom CA(SA)
B P Connellan CA(SA)
J H Shindehutte Bcom (Hons), CA(SA), HDip Tax
Y Z Cuba BCom (Stats), BCom (Hons) (Acc), CA(SA)

Independent Auditors during last financial year:
PricewaterhouseCoopers Inc.
Director: T Winterboer CA(SA)
Ernst & Young Inc.
Director: E van Rooyen CA(SA)

FirstRand Group R 4 158 million

Chartered Accountants on the Board of Directors during last financial year:
L L Dippenaar MCom, CA(SA)
D M Falck CA(SA)
P M Goss BEcon (Hons), BAccSc (Hons), CA(SA)
S E Nxasana BCom, Bcompt (Hons), CA(SA)
A T Nzimande BCom, CA(SA)
R K Store CA(SA)

Independent auditors during last financial year:

PricewaterhouseCoopers Inc.
Director: F Tonelli CA(SA)


The above Board of Directors are unknowingly and unintentionally DESTROYING at least the same EXISTING amounts during the current financial year. They will carry on unknowingly (?) and unintentionally (?) DESTROYING these banks´ EXISTING real values in their EXISTING Retained Profits as long as they refuse to maintain these banks´ EXISTING Shareholders´ equity in units of constant purchasing power as they have been authorized to do by the IASB in 1989 and which is compliant with International Financial Reporting Standards.

The above applies to all SA banks and companies.

The above is valid when the above Boards of Directors refuse to measure financial capital maintenance in units of constant purchasin power during an indefinite period of time during indefinite low inflation.

The above amounts are the real values these Boards of Directors will maintain in these banks forever each and every year - ceteris paribus - as long as these banks break even as soon as they simply select to value all constant items in the banks in unit of constant purchasing power. It was authorized by the IASB 20 years ago and is compliant with IFRS. These Boards of Directors still refuse point blank to do it. They will rather stubbornly carry on destroying the banks´ capital.

Strange but true.

Kindest regards,

Nicolaas Smith

Capital destruction in nominal monetary units

Capital is a constant real value non-monetary item. Its real value can be maintained constant forever in all companies at least breaking even - all else being equal - only when financial capital maintenance is measured in units of constant purchasing power during low inflation as the IASB authorized 20 years ago in the Framework, Par. 104 (a).

At continuous 6% annual inflation a nominal monetary item´s real value is destroyed as follows:

46% after 10 years
93% after 44 years
99% after 75 years

Capital´s real value can be maintained constant forever - ceteris paribus.

A SA accountant accounts capital once and it instantaneously loses its constant item status and is magically turned into a depreciating monetary item with the SA accountant unknowingly destroying its real value as set out above. This is the case in all SA companies which do not have 100% of all contributions to equity (excluding the revaluation reserve) invested in variable item fixed assets that can be or are revalued via the revaluation reserve.

In principle SA has never ever had and currently does not have any constant item Retained Profits. All SA´s supposedly "constant item" Retained Profits are simply CASH. Not cash in the bank earning interest but CASH as in notes and coins kept under the mattress with their real values being destroyed by inflation.

The IASB went to great lengths in IAS 29 to clearly define capital as a non-monetary item. That was a total waste of time in 1989 when it then went ahead to "approve" at the same time the impossible process of financial capital "maintenance" in nominal monetary units during low inflation.

Kindest regards,

Nicolaas Smith

The art of turning capital into CASH in a flash

SA accountants are great performing artists. They get their biggest inspiration from the American Institute of Certified Public Accountants´ definition of accounting that starts with the words: The art of …

SA accountants have perfected the art of turning capital into CASH in a flash. They wait patiently for SA entrepreneurs to start companies to increase the wealth of the nation. Companies need accountants to do their books. SA accountants confidently step forward and state: Trust me, I’m an accountant.

SA entrepreneurs have to use some of the existing wealth of the nation to serve as the investment capital of their companies.

The entrepreneurs entrust the accounting of this investment capital to their trusted accountants. SA accountants confidently value this capital in nominal monetary units on the basis that the International Accounting Standards Board states that it is humanly possible to measure financial capital maintenance in nominal monetary units during low inflation. (It isn´t.)

No-one has told SA accountants up till now that this is only possible at zero inflation. They thus happily value SA entrepreneurs´ capital in nominal monetary units and instantaneously turn that hard earned capital into CASH.

We all know what happens to CASH: its real value is destroyed by inflation.

SA accountants unknowingly destroy the real value of shareholders´ equity never updated at a rate equal to the inflation rate. This is the case in all SA companies which do not have 100% of all contributions to equity (excluding the revaluation reserve) invested in variable item fixed assets that can be or are revalued via the revaluation reserve.

SA accountants do their famous stable measuring unit assumption trick and instantaneously turn SA entrepreneurs´ capital into plain old CASH the very first instant they account that capital in nominal monetary units during low inflation. Real value destroyed forever at a rate equal to the rate of inflation or for as long as they carry on with their infamous stable measuring unit assumption.

Snap: nominal monetary units, and it’s done: Capital to CASH in a flash.

Kindest regards,

Nicolaas Smith

PS The real value of R 1 000 000 in Retained Profits contributed on 1st Jan 1981 which are still in Retained Profits today but updated at the rate of inflation: R 14 882 000. Real value destroyed since 1981 R13 882 000.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.

PricewaterhouseCoopers clueless about monetary and constant item real value

Dr Roelof Botha, an economic adviser to PricewaterhouseCoopers, does not agree with these levels of increase. "In the private sector increases exceeding consumer price inflation (CPI) may be justified if the company's productivity increases.

If institutions like the Reserve Bank and the South African Revenue Service (Sars) - which have no effect on the country's productivity and add no value to the economy - award salary increases higher than the CPI, they violate their own principles. Fin24

Dr Roelof Botha from PricewaterhouseCoopers was commenting on the salary increases above the inflation rate at the SARB.

It is unbelievable that an economic adviser to PricewaterhouseCoopers would state that the SARB has no effect on the country´s productivity and add no value to the economy.

A 1% drop in the inflation rate maintains instead of destroy R20 billion per annum in the SA monetary economy. Tito Mboweni and his team at the SARB have succeeded in maintaining average annual inflation at 6% per annum for the last 10 years compared to 12% average annual inflation during the last 12 years of apartheid rule. They have thus maintained instead of destroyed R120 billion per annum in the SA monetary economy during the last 10 years.

Basically the SARB has added R120 billion PER ANNUM to the economy during the last 10 years. This will carry on in the future as long as inflation can be maintained at or below 6%.

PWC´s Dr Botha regards R120 billion per annum as "no value".

The 50% reduction in average annual inflation also reduced by 50% the amount of real value SA accountants at PricewaterhouseCoopers´ clients and all other SA companies unknowingly destroy in constant items never updated in the SA real economy. PWC signed most of their clients´ accounts off as "fairly presenting their businesses."

PricewaterhouseCoopers is not even remotely aware of the unknowing and unintentional destruction in the real value of constant items never updated by all the accountants at all their clients. PWC is blisfully lost in Historical Cost accounting - blindfolded by their complete support of the implementation of the very destructive stable measuring unit assumption in the SA economy.

PricewaterhouseCoopers´ Dr Botha will obviously state that Gideon Gono, the governor of the Reserve Bank of Zimbabwe had not the slightes effect on the Zimbabwean economy when he single handedly wiped out 100% of the real value of the Zimbabwe Dollar in the Zim monetary economy with hyperinflation at billions of percent and eliminated the ZimDollar completely from the Zim economy in that fashion.

The blatant lack of basic understanding of measurement of monetary as well as constant item real value in the SA economy by PricewaterhouseCoopers is shocking.

Kindest regards,

Nicolaas Smith

Third blank spot for SA accountants

We have already asked SA accountants

1. Is there inflation in SA or not?

2. Are there net monetary losses and gains during low inflation?

Now we can ask them: SA accountants how many basic economic items are there in the economy?

3. Two or three basic economic items?

SA accountants do accounting from the viewpoint that there are two basic items in the economy


Monetary items
Non-monetary items

They account variable items they value at Historical Cost, eg. stock when the Historical Cost of inventories is lower than net realizable value and Retained Profits - which is a constant item - both at Historical Cost. They make no difference between HC variable items and HC constant items.

Fact Check: There are three basic items in the economy:

Monetary items
Variable items
Constant items

SA accountants have never heard of constant items although they have been around for 500 years and they have been accounting them and unknowingly and unintentionally destroying their real values at the rate of inflation for the last 357 years.

Currently SA accountants unknowingly destroy about R200 billion PER ANNUM in the SA real economy because of their implementation of the stable measuring unit assumption during low inflation. The IASB authorized them to measure financial capital maintenance in units of constant purchasing power 20 years ago in the Framework, Par. 104 (a) which states:

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

SA accountants refuse point blank to measure financial capital maintenance in units of constant purchasing power.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.

Two when there are actually three

It is generally accepted that the economy is divided in two parts: the monetary economy and the non-monetary or real economy. It is also generally accepted that there are two basic economic items in the economy: monetary items and non-monetary items. Monetary items are money held and items with an underlying monetary nature. Non-monetary items are all items that are not monetary items.

No distinction is generally made between the valuation of variable real value non-monetary items, e.g. property, plant, equipment, inventory, etc valued at Historical Cost and constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, other items in Shareholders´ Equity and most items in the income statement (excluding items like salaries, wages, rents, etc. valued in units of constant purchasing power or inflation-adjusted) also valued at Historical Cost.

This is the result of the fact that the economy is based on the Historical Cost paradigm. Historical Cost is the traditional measurement basis in accounting. It is thus generally accepted for accountants to choose to implement the very destructive stable measuring unit assumption during non-hyperinflationary periods.

One of the basic principles in accounting is “The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”

Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.

Non-monetary items are not all fundamentally the same. Non-monetary items are subdivided into variable real value non-monetary items and constant real value non-monetary items. The three fundamentally different basic economic items are, in fact, monetary items, variable items and constant items although it is generally accepted that there are only two basic economic items, namely, monetary and non-monetary items.

Accountants regard all non-monetary items stated at Historical Cost, whether they are variable real value non-monetary HC items or constant real value non-monetary HC items to be fundamentally the same, namely, non-monetary items – or, items that are not monetary items - when they implement the very destructive stable measuring unit assumption as part of the traditional HCA model during non-hyperinflationary periods.

This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always destroys the real value of money over time. It is thus impossible for money to be stable in real value during inflation.

On the other hand, inflation has no effect on the real value of non-monetary items over time.

Kindest regards,

Nicolaas Smith

Fraternizing with the enemy

Whereas inflation is SA´s public enemy No 1, SA accountant’s stable measuring unit assumption is public enemy No 2.

SA accountants proudly live up to their deserved reputation as trusted custodians of real value in the case of the constant items salaries and wages. They very responsibly admit that the real value of salaries and wages would be destroyed if the destruction of the real value of the unstable medium of exchange in SA, the always depreciating Rand, is not compensated for by valuing remuneration items in units of constant purchasing power; i.e., inflation-adjusting them in a low inflation environment. They vigorously reject the stable measuring unit assumption in the case of salaries and wages.


Retained Profits are constant items exactly the same as salaries and wages. When it comes to valuing Retained Profits and other balance sheet constant items, SA accountants slavishly follow their mentor’s advice and implement their very destructive stable measuring unit assumption whereby they now suddenly ASSUME that the Rand is perfectly stable and always had been perfectly stable. They refuse point blank to measure financial capital maintenance in units of constant purchasing power as the IASB has authorized them to do 20 years ago. They thus unknowingly and unintentionally destroy the real value of Retained Profits in all SA companies at a rate equal to the rate of inflation. Thus unnecessary destruction of real value in constant items never updated amounts to about R200 billion per annum in the SA real economy.

Financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) in 1989 means inflation-adjusting all constant item accounts – income statement and balance sheet constant items – in a low inflation environment.
© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.

White elephant at fancy dress party

Inflation is undoubtedly SA´s public enemy No 1.

Luckily we have had Tito Mboweni (Julius, Mboweni is BLACK, please don’t forget that!!) over the last 10 years reducing the destruction of the real value of the Rand and all other monetary items to an annual average of 6% in the SA monetary economy.

That is half the 12% annual average during the last 12 years of WHITE apartheid rule.

With a 1% drop in inflation being equal to maintaining R20 billion in the real value of the Rand PER ANNUM it means that Tito maintained on average AN ADDITIONAL R120 billion PER ANNUM in the SA monetary economy. This will carry on into the future as long as average annual inflation stays at 6% or below.

This will have a permanent effect on the SA economy as a whole.

Let’s hope Gill Marcus can get it down another 3% to the bottom level of the SARB´s inflation targeting range. (Julius, not because she is WHITE, but because that would be very good for everyone in South Africa. Tito got it down to 6% now we should go lower. We should expect that from whoever is the next Governor of the SARB, whether this person is blue, orange or purple.)

That would maintain another R60 billion PER ANNUM in the SA monetary economy for as long as inflation can be maintained below 3% per annum.

Good luck to Gill Marcus.

Every year she achieves that, we can have a fancy dress party and go dressed/coloured in gold, platinum and sterling silver. Julius Malema has a standing invitation. He can come as a white elephant.

Kindest regards,

Nicolaas Smith

Constant purchasing power

Variable Items during low inflation and deflation

Variable items, eg. property, plant, equipment, inventories, quoted and unquoted shares, foreign exchange, etc are valued in terms of IFRS or SA GAAP during low inflation and deflation at, for example, market value, fair value, present value, recoverable value, net realizable value, etc.

They are not valued by anyone in units of constant purchasing power during low inflation and deflation.

Variable items during hyperinflation

Variable items are required by the IASB to be valued in units of constant purchasing power during hyperinflation in terms of IAS 29 Financial Reporting in Hyperinflationary Economies by inflation-adjusting their nominal values in terms of the change in the CPI.

Does this affect the nature of the underlying resources? Yes it does.

Turkey was in hyperinflation in 2004.

“In 2004, financial statements were restated and taxes were taken based on restated values.” Dr Cemal KÜÇÜKSÖZEN, Head of Accounting Standards Department, Capital Markets Board of Turkey.

Brazilian accountants valued non-monetary items in the entire Brazilian economyin units of constant purchasing power by inflation-adjusting them by means of variosindeces during various different governments during the 30 years from 1964 to 1994 thus maintaining their real values constant according to the Central Bank of Brazil.

Yes, to represent value in terms of constant purchasing power does affect the nature of the underlying resources.

The choices accountants make do change those values and do affect the economy: see Brazil and Trukey above.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission

Breaking news R5.879 billion additional loss at Eskom

Besides the R9.708 billion after tax loss reported in the 2009 Annual Report, Eskom lost another R5.879 billion in the real value of its Accumulated Profits from March 2008 till July 2009. This amount was unknowingly and unintentionally destroyed in the real value of Eskom´s Accumulated Profits by the accountants at Eskom implementing the stable measuring unit assumption.

Kindest regards,

Nicolaas Smith

Disinflation (inflation at a slower rate) continues in the SA monetary economy.

Disinflation (inflation at a slower rate) continues in the SA monetary economy.

The general increase in consumer prices in SA over the 12 months to the end of July, 2009 only led to the destruction on average of 6.7% of the real value of the Rand and all other monetary items in the SA monetary economy compared to 6.9% in the 12 month period to the end of June, 2009.

SA accountants unknowingly also only destroyed 6.7% of the real value of all Retained Profits in SA companies and SA banks over the 12 months to July, 2009 compared to the 6.9% in real value they were unknowingly destroying in all constant items never updated in the SA real economy in the 12 months to June, 2009.

The time it takes to destroy 50% of the real value of current Retained Profits stays at 11 years.

This unknowing destruction by SA accountants amounts to about R200 billion PER ANNUM.

This was because of their implementation of their very destructive stable measuring unit assumption and their refusal to change over to measuring financial capital maintenance in units of constant purchasing power as they were authorized to do 20 years ago by the IASB in the Framework, Par. 104 (a) which states:

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

Two of the “hidden forces of economic law on the side of destruction” as described by John Maynard Keynes thus had a slightly lesser destructive effect on the SA economy in the year to end July, 2009.

Cumulative inflation since April 1994 came to 166.5% in July, 2009.

62.5% of all the real value of Retained Profits in SA companies and banks in April, 1994 whichremained in Retained Profits till July, 2009 have thus been unknowingly and unintentionally been destroyed by SA accountants implementing their stable measuring unit assumption by which they assume cumulative inflation over that period was zero percent.

So too the real value of issued share capital of all SA companies with no fixed assets over that period.

Cumulative inflation since Jan 1981 came to 1382.2% in July, 2009.

93.3% of all the real value of Retained Profits in SA companies and banks in Jan, 1981 which remained in Retained Profits till July, 2009 have thus been unknowingly and unintentionally been destroyed by SA accountants implementing their stable measuring unit assumption by which they assume cumulative inflation over that period was zero percent.

So too the real value of issued share capital of all SA companies with no fixed assets over that period.

We all know that our accountants can freely stop their silly and very destructive stable measuring unit assumption any time they want.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.

Money cannot be valued in units of constant purchasing power

Units of constant purchasing power

There are three basic economic items in the economy:

1. Monetary items

2. Variable items

3. Constant items

We will analyse the possibility and the effect of valuing items in units of constant purchasing power in each case.

Monetary items

Inflation only destroys the real value of money and other monetary items over time.

Inflation has no effect on the real value of non-monetary items.

Money and other monetary items´ real values are destroyed at the rate of inflation over time in a low inflationary and in a hyperinflationary environment.

SA accountants VALUE money and other monetary items in nominal monetary units during the current financial period since that is the only way in which they can be valued under any accounting model.

It is impossible to update, inflation-adjust or restate money and other monetary items during the current financial period during low inflation, hyperinflation or deflation.

It is impossible to inflation-adjust money and other monetary items during the current financial period by means of units of constant purchasing power during low inflation, hyperinflation or deflation.

SA accountants can only VALUE monetary items in nominal monetary units, eg. bank account balances, capital amounts of bank loans, capital amounts of bank savings, car loans, housing loans, consumer loans, student loans, all other monetary loans, etc.

Monetary items cannot be valued in units of constant purchasing power during the current financial period under any accounting model.

Kindest regards,

Nicolaas Smith

Units of constant purchasing power for dummies

The two confirmed disbelievers in this area are the accounting professor and Market Monkey.

The accounting professor states:

“So its fine to represent value in terms of constant purchasing power and to argue that that would be a better method than using historic cost and maintaining a fiction as to the stability of the measuring unit - but that doesn't affect the nature of the underlying resources.”

Market Monkey says he is dead right.

The accounting professor and Market Monkey are both dead wrong.
Units of constant purchasing power

Inflation can only destroy the real value of money and other monetary items over time. Inflation has no effect on the real value of non-monetary items.

Stating or valuing economic items in nominal monetary units over time thus means that the real values of these items will be destroyed over time in an inflationary environment if they are monetary items or if they are treated as monetary items.

Valuing constant real value non-monetary items, eg. salaries, wages, etc., in units of constant purchasing power over time means that the real value of these items will be maintained constant over time since the nominal values are inflation-adjusted by means of the Consumer Price Index over time. This is the case with salaries and wages in South Africa. Everybody including the accounting professor and Market Monkey understand that.

There are three basic economic items in the economy:

1. Monetary items

2. Variable items

3. Constant items

We will analyse the possibility and the effect of valuing items in units of constant purchasing power in each case.

Monetary items

It is impossible to update or inflation-adjust money and other monetary items during the current financial period during low inflation or hyperinflation.

It is thus impossible to inflation-adjust money and other monetary items by means of units of constant purchasing power during low inflation or hyperinflation.

SA accountants can only VALUE monetary items in nominal monetary units, eg. bank account balances, capital amounts of bank loans, capital amounts of bank savings, car loans, housing loans, consumer loans, student loans, all other monetary loans, etc.

Since monetary items can ONLY be VALUED by SA accountants in nominal monetary units it also appears as if they in this case simply report on what happened in the past as the accounting professor and Market Monkey believe.

Monetary items thus cannot be valued in units of constant purchasing power during the current financial period.

The accounting professor, Market Monkey and I all agree on this item.

Sorry, no bun fight in the monetary item area.

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission

Accounting professor is dead wrong - Part 2

Continuing from yesterday’s blog:
The Framework for the Preparation and Presentation of Financial Statements Par. 104 (a) was approved by the International Accounting Standards Board’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.

SA accountants who prepare their companies´ accounts based on International Financial Reporting Standards during low inflation have to choose between Historical Cost Accounting and Constant ITEM Purchasing Power Accounting in terms of Par. 104 (a) which states:

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

SA accountants have to choose between implementing the constant purchasing power financial capital concept of invested purchasing power measured in units of constant purchasing power, the constant purchasing power financial capital maintenance concept and determining profit or loss in terms of units of constant purchasing power during non-hyperinflationary periods, on the one hand, or the traditional Historical Cost financial capital concept of invested money in nominal monetary units, the HC financial capital maintenance concept in nominal monetary units and the HC profit or loss determination concept in nominal monetary units during non-hyperinflationary periods.

SA accountants generally choose the real value destroying Historical Cost Accounting model when they implement the very destructive stable measuring unit assumption.

We all know that measuring an economic item in units of constant purchasing power maintains its real value constant as compared to measuring it in nominal monetary unit which results in its real value being destroyed at a rate equal to the rate of inflation.

The accounting professor states: “the choice of the measuring unit does not affect their fundamental value”

He is dead wrong in the case of constant items never updated.

He states: “ So its fine to represent value in terms of constant purchasing power and to argue that that would be a better method than using historic cost and maintaining a fiction as to the stability of the measuring unit - but that doesn't affect the nature of the underlying resources.”

He is dead wrong in the case of constant items never updated.

He states: “The choices accountants won't change that value & won't affect the economy (except indirectly insofar as investment decisions are based on the figures we present).”

He is dead wrong in the case of constant items never updated.

SA accountants unknowingly destroy about R200 billion PER ANNUM in the real value of constant items, for example, Retained Profits of all SA companies never updated during low inflation because they implement the very destructive stable measuring unit assumption as part of the real value destroying Historical Cost Accounting model.

They will boost the SA real economy by about R200 billion PER ANNUM for an unlimited period of time – ceteris paribus – when they reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the IASB 20 years ago.

They simply have to ignore that the accounting professor states that “to represent value in terms of constant purchasing power doesn't affect the nature of the underlying resources.”

He is dead wrong in the case of constant items never updated.

© 2005-2010 by 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

SA accountants only fail in one instance - but it costs us a fortune

There are three economic items in the economy:

1. Monetary items

2. Variable items

3. Constant items


1. Monetary Items

Monetary items are the easiest to value. Accountants do not have to do any calculations or follow any complicated rules in IFRS. They simply state the original nominal values during low inflation and during hyperinflation. That´s it.

Inflation destroys the real value of money and all other monetary items. Inflation keeps all monetary real values current at today´s rate. Very simple.

No-one can update any nominal monetary value during the current financial year.

So, it is the easiest thing in the world for accounants to value monetary items. They are automatically valued by inflation. They just state them at their original nominal values.

So, it is a fact: Accountants VALUE monetary items.

2. Variable Items

Accountants value variable items in terms of International Financial Reporting Standards at, for example, market value, fair value, recoverable value, present value and net realizable value during low inflation.

During hyperinflation, accountants have to value all variable items in units of constant purchasing power by inflation-adjusting them by means of the CPI. This is a requirement of the IASB in IAS 29 Financial Reporting in Hyperinflationary Economies.

No problems here either. Well, fair value mark-to-market procedures still have some way to go. But, the accounting authorities are working very hard to get this sorted out as soon as possible.

So, it is a fact: Accountants VALUE all variable items.

3. Constant items

Constant items are divided in two sub-groups:

a) Income statement items
b) Balance sheet constant items


Income statement items

Accountants value some (not all) income statement constant items, eg. salaries, wages, rents, etc in units of constant purchasing power during low inflation and thus maintain their real values constant - ceteris paribus.

The income statement items that are not inflation-adjusted during low inflation, accounants value at historical cost implementing the stable measuring unit assumption during low inflation.

During hyperinflation IAS 29 requires accountants to inflation-adjust not just some, but, all income statement items in units of constant purchasing power by means of the CPI. They thus maintain their real values constant - ceteris paribus.

So, it is a fact: Accountants VALUE income statement items either in units of constant purchasing power or at historical cost during low inflation. During hyperinflation all income statement items are VALUED in units of constant purchasing power.

Balance sheet constant items

Accountants have to value all balance sheet constant items in units of constant purchasing power during hyperinflation. Accountant thus maintain their real values constant during hyperinflation - ceteris paribus.

Accountants value all balance sheet constant items, eg. issued share capital, retained profits, all other items in shareholders´ equity, etc at historical cost during low inflation thus unknowingly and unintentionally destroying their real values at a rate equal to the inflation rate because these items are constant real value non-monetary items. Accountants thus value these items the same as simple old cash - in nominal monetary values at historical cost implementing their very destructive stable measuring unit assumption and unknowingly destroy their real values at a rate equal to the rate of inflation to the tune of about R200 billion per year in the SA real economy for an unlimited period of time as long as they carry on implementing the very destructive stable measuring unit assumption during indefinite inflation.

So, it is a fact: accountants VALUE all income statement and all balance sheet constant items.

Summary: SA accountants VALUE all items they account in a business.

Kindest regards,

Nicolaas Smith

PS When SA accountants choose to value all constant items during low inflation in units of constant purchasing power as they have been authorized by the IASB 20 years ago in the Framework, Par. 104 (a), they will boost the SA real economy by about R200 billion per annum forever - ceteris paribus

SA accountants value economic items - they do not simply report on what took place

There are three basic items in the economy:

1. Monetary items

2. Variable items

3. Constant items.


SA accountants value economic items when they account them and prepare financial reports.

Inflation destroys the real value of the Rand and all other Rand monetary items. Inflation has no effect on the real value of non-monetary items. Monetary items cannot be updated or inflation adjusted. SA accountants value monetary items at their original nominal monetary values during the accounting period.
Inflation is the enemy in the SA monetary economy. Tito Mboweni and soon Gill Marcus are inflation´s enemies.

SA accountants value variable items, e.g. property, plant, equipment, quoted and unquoted shares, foreign exchange, inventories, finished goods, etc. in terms of International Financial Reporting Standards at for example market value, fair value, recoverable value, present value and net realizable value.

There is no enemy in the SA variable item non-monetary economy.

Constant items are real value non-monetary items with constant real values over time. Examples are salaries, wages, rentals, issued share capital, retained profits, etc. SA accountant unfortunately value them at historical cost implementing the stable measuring unit assumption. SA accountants unknowingly destroy the real value of constant items never or not fully updated at a rate equal to the inflation rate. This amounts to about R200 billion in the SA real economy.

The stable measuring unit assumption is the enemy in the SA constant item economy.


SA accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated when they implement the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model for an unlimited period of time during indefinite inflation.

SA accountant will boost the SA real economy by about R200 billion for an unlimited period of time - ceteris paribus - when they freely reject the stable measuring unit assumption and measure financial capital maintenance in units of constant purchasing power as the IASB authorized them to do 20 years ago in the Framework, Par. 104 (a).


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

The second systemic economy-wide process of real value destruction

There was only one systemic economy-wide process of real value destruction operating in the economy before double entry accounting was invented.

The economic process of inflation destroyed the real value of money and other monetary items equally throughout the monetary economy at that time as it does today in economies subject to inflation.

There was no simultaneous second systemic economy-wide process as we experience today whereby accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated during indefinite inflation.

This includes the unknowing destruction by accountants of the real value of Shareholders´ Equity in companies without sufficient variable items that are or can be revalued via the Revaluation Reserve or without sufficient hidden and unrecognised holding gains to compensate for the real value shortfall in Shareholders´ Equity as we experience today because now accountants choose to maintain the very destructive stable measuring unit assumption for an unlimited period of time while they assume indefinite inflation – all else being equal.

The reason was that the real value destroying traditional Historical Cost Accounting model was not yet invented at that time.

We will go back to only one systemic economy-wide process of real value destruction operating in the economy, namely the economic process of inflation destroying the real value of money and other monetary items, when SA accountants reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the International Accounting Standards Board in the Framework for the Preparation and Presentation of Financial Statements, Par. 104 (a) in 1989 which states:

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

All constant items´ real values will be maintained for an indefinite period of time - ceteris paribus.

Kindest regards,

Nicolaas Smith

Trust me, I´m a SA accountant

Trust me, I am a SA accountant.

I will - unknowingly and unintentionally - destroy your Retained Profits at a rate equal to the rate of inflation (currently 6.9% - you can make your own calculations) as well as all your other constant real value non-monetary items never updated that I and all my fellow accountants (except Nicolaas Smith) - many of whom are CA(SA)s - value in nominal monetary units, i.e. at Historical Cost, implementing our very destructive stable measuring unit assumption as part of the traditional generally accepted real value destroying Historical Cost Accounting model as authorized by the IASB in the Framework, Par. 104 (a) which states:

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

In this way we unknowingly and unintentionally destroy at least R200 billion in the SA real economy each and every year as we did last year and as we will do for ever more as long as we implement our very destructive stable measuring unit assumption during indefinite inflation.

Signed: SA accountant

CAs are variable item value custodians and constant item value destroyers

Tito Mboweni is the custodian or guardian of the real value of the Rand. 

Accountants value all economic items in a business.

How they value those economic items is very important. Ultimately, there is only one correct value for any economic item.

They are thus all custodians or guardians of the real values in a business.

That is why they are paid such high salaries. They are paid for financial integrity.

It does not mean they are little value-gods.

There are some items still to be sorted out.

They do look after value very well (variable items that they value in terms of IFRS) - with the one exception of the real value of balance sheet constant items, eg. issued share capital of companies with no fixed assets and retained profits of all companies. These they unknowingly destroy at a rate equal to the inflation rate to the tune of about R200 billion per annum in the SA real economy.

CA´s unintentionally do this with their implementation of the stable measuring unit assumption.

In fact International Financial Reporting Standards reject the stable measuring unit assumption on two occasions:

1. In IAS 29 Financial Reporting In Hyperinflationary Economies.

2. In The Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."

When CAs start thinkging for themselves about what they are - unknowingly - doing to the SA real economy they will realize that by freely choosing to measure financial capital maitnenance in units of constant purchasing power as authorized by the IASB 20 years ago, they will boost the SA real economy by at least R200 billion per annum for an unlimited period of time instead of unknowingly and unintentionally destroying about R200 billion PER ANNUM for an unlimited period of time - each and every year - in the SA real economy (ceteris paribus) as they are unknowingly and unintentionally doing this year.

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

Why don´t SA accountants follow the IASB then?

The reasons SA accountants do not follow the IASB are the same reasons the rest of the world´s accountants don´t follow the IASB:

Some examples:

1. Historical Cost Accounting has been around for 500 years.

2. Everybody uses Historical Cost Accounting.

3. Hardly anyone (this includes the IASB) understands that when accountants use the stable measuring unit assumption as part of Historical Cost Accounting they unknowingly destroy the real value of their company´s retained profits, for example.

When they get to realize it, they say it makes no difference in the real world - like Market Monkey says.

In fact, it costs SA about R200 billion in real value unknowingly destroyed by our accountants each and every year in this way.

4. Hardly anyone (this includes the IASB) understands that when they stop the stable measuring unit assumption they will maintain the real value of all constant items.

5. Hardly any accountants even know that they in fact choose between two basic accounting models when they do their accounts in terms of International Financial Reporting Standards. They do not even know there is a choice and that they in fact make that choice. Ask any accountant you know.

You see, the IASB made the mistake of giving them a choice between measuring financial capital maintenance in either nominal monetary units (the traditional Historical Cost Accounting model) or units of constant purchasing power.

No-one chooses constant purchasing power units. The reason for this is that during the high-inflation 1970´s companies unsuccessfully tried inflation accounting in units of constant purchasing power whereunder they inflation-adjusted all non-monetary items by means of the Consumer Price Index.

Most companies correctly complained that you cannot just inflation-adjust all non-monetary items (cars, phones, groceries, etc) during high inflation.

The IASB correctly formulated IAS 29 for the use of Constant Purchasing Power inflation accounting only during hyperinflation.

Now, whenever any accountant or accounting authority sees anything about units of constant purchasing power, they immediately think inflation accounting.
Before the IASB came about, accounting was based on Generally Accepted Accounting Practice. The IASB did not have the guts (tomates is what we say in Portuguese) to change the 500 year old Historical Cost Paradigm. If they remove the words "nominal monetary units" from the Framework, Par 104 (a) that states: "Financial capital maintenance can be measured in either NOMINAL MONETARY UNITS or in units of constant purchasing power." then they will cause a paradigm change: out with the Historical Cost paradigm and in with the Constant Purchasing Power paradigm.

But, that is a very big step. It will not happen overnight. I accept that.

Those are the main reasons.

Accounting authorities are doing a good job at the moment with fair value accounting: mark-to-market accounting.

After that they should tackle the stable measuring unit assumption - if South Africa has not yet taken the lead in getting it rejected by then.

But, we have to start somewhere and go one step at a time. Eventually we´ll get there. When, I don´t know.


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

Fool proof accounting

Hi Motley Fool,

[Warning to Market Monkey: Do not read the following. If you do, you will turn into stone.]

As I was saying my dear Motley Fool,

I will teach you Constant Item Purchasing Power Accounting as defined by no other than our well known

The Motley Fool

Here we go: (this is what you call a liberal translation of the Motley Fool´s teachings about accounting. This translation is from The Motley Fool´s impeccible English to GobblyGook as sputtered by The Deluded Monkey.)

Accounting is double entry: For every debit there is a corresponding credit.

According to the Motley Fool

any particular entry

"should be worth more the next year due to the currency being worth less."

The Motley Fool´s exact words in inverted commas.

Since accounting is double entry the Motley Fool´s words hold true for BOTH sides of each set of debit and credit entries.

That´s it.

That, in broad principle, is the IASB´s Constant Item Purchasing Power Accounting.

"Due to the currency being worth less" all accounting items (entries) "should be worth more the next year" as per the Motley Fool.

There are three types of items in the economy:

1. Variable items. Cups etc. Their values are generally set in the market where inflation is taken into account in the price.

2. Monetary items: money, loans, etc. They cannot be inflation-adjusted. Thus you have a net monetary loss or gain.

3. Constant items: eg. salaries, capital, retained profits, etc.

As you know the real value of your salary is destroyed if it is not inflation-adjusted every year.

The same is true with capital and retained profits.

There you are: Constant Item Purchasing Power Accounting as per The Motley Fool.

Motley Fool, you are a genius!

Long live The Motley Fool!!

Kindest regards,

Deluded Monkey

PS: The Motley Fool´s famous statement:

"should be worth more the next year due to the currency being worth less."

signalled the end of the 5 century old Historical Cost paradigm.


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

One very deluded Historical Cost Market Monkey

Market Monkey said:

"The problem with your capital "raising" is that it doesn't raise any REAL money. You know. The stuff you use to actually buy things and services with. If you don't get the distinction between the funds raised via preference shares and an increase in funds due to an accounting change I'm gonna have to stop visiting and conclude you are one very deluded monkey. MM."
Real Value Accountant said:
"Hi Market Monkey,

I was getting worried. You have been very quiet lately. Thought you went off to meditate units of constant purchasing power in Tibet? :-)

You must believe me that I am not actually a snake oil salesman. I am just finishing off something I got involved in – by chance - 15 years ago trying to sort (and actually sorted out) out what was going on in the hyperinflationary Angolan economy. But, that´s another story.

What I state is actually correct and true. I did not invent this. The International Accounting Standards Board did. Read Paragraph 104 (a). It states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power." It is NOT of my making. I am just the messenger. I got involved by chance. I am simply the office messenger delivering the letters from the big bosses in London.

You are not up against me: you are taking on the IASB – Sir David and the boys in London – including Geoffrey Whittington, amongst others.

Why do you think the IASB approved financial capital maintenance in units of constant purchasing power if they had not subjected it to due process first? This is not of my making.

The IASB approved Constant ITEM Purchasing Power Accounting model (my name for it: the IASB formulated it in April, 1989. But, no-one has been using it for the last 20 years: so, there was no need for it to have a name; so, now I named it CIPPA) is not just an accounting change with no real world effect.

“A picture is worth a thousand words.”

So, I will try and show you some account “pictures”:

Your way of doing accounting: The Historical Cost Accounting model – used by all SA accountants:

Year One

Assets: Debit: Trade debtors R100 million
Liabilities: Credit: Capital R100 million

Your complete balance sheet.

After a year at 6.9% inflation and no activity for a year your auditors audit your accounts and give you an unqualified audit report in Year Two stating that the following FAIRLY reflects your business and your accounting is compliant with IFRS:

Year Two

Assets: Debit: Trade debtors R100 million
Liabilities: Credit: Capital R 100 million

Remember: this is after one year of no activity with inflation at 6.9%

Here are the IASB (not my) Constant Item Purchasing Power Accounting balance sheet which is also complaint with IFRS:

Year One

Assets: Debit: Trade Debtors R100 million (we assume today is 31.12 Year One)
Liabilities: Credit: Capital R100 million (we assume today is 31.12 Year One)

One year later with no activity and inflation at 6.9%:

Year Two

Assets: Debit: Trade Debtors R106.9 million (we assume today is 31.12 Year Two)
Liabilities: Credit: Capital R106.9 million (we assume today is 31.12 Year Two)

On 1st January Year Three you go and collect your R100 million from your debtors. We assume we are using the Historical Cost paradigm.
On 1st January Year Three the IASB go and collect their R106.9 million from their debtors. We assume we are using he Constant Purchasing Power paradigm.

The IASB collected ACTUAL Rands – the same as “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with.”

Sir David from the IASB likes rugby. He was in Cape Town at the time and the Boks were playing he All Blacks at Newlands. He took some of that R106.9 million of REAL Rands he collected from his trade debtors and bought a ticket to watch the Boks live at Newlands.

You only collected your miserable R100 million – destroyed in real value by 6.9% inflation. YOU did not have the extra Rands like “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with”, so you watched the game on TV at home.

YOU did not collect those REAL extra Rands. YOU collected you nominal monetary unit Historical Cost Rands destroyed at 6.9% by SA inflation.

Now, you want to tell me that under the IASB approved – not the Nicolaas Smith invented – Constant Item Purchasing Power Accounting model there is no “REAL money. You know. The stuff you use to actually buy things and services with.”

So, what I am promoting generates REAL FUNDS like “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with”.

Market Monkey, I´m sure you get it now.

As you can see: it is DOUBLE ENTRY ACCOUNTING. Real funds are generated because it is DOUBLE ENTRY ACCOUNTING. It is not just a one-sided accounting entry.

So, Market Monkey: who is deluded? You with your nominal historical cost monetary units destroyed at the rate of inflation (YOU may think they are worth the same as a year ago - I don´t know) or the IASB with their hands full of inflation adjusted constant real value non-monetary items in REAL Rands?
It is a complete paradigm change - as you may realize by now. This is also "by chance". When I got involved in 1994 I had no idea where this logical journey would lead me. I just take one logical step at a time.

Kindest regards,

Nicolaas Smith

Nedbank you will be real dummies not to accept my offer

Hi Nebank Board of Directors,

I see you intend to issue R1 billion non-core Tier 1 perpetual, non-cumulative, non-redeemable, non-participating Nedbank preference shares on which you will pay a dividend of 75% of the prime interest rate or .75 times 10.5% times R1 billion = R 78.75 million per annum - ceteris paribus.

Well, here is my deal for you:

I will show you how to increase your equity by R2.285 billion in perpetuity - AT NO COST.

Here it is: Simply measure your financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) twenty years ago. It is compliant with IFRS. Your auditors will still sign your accounts as normal.

Your total equity at June 2008 was R33.127 billion. Updating that at 6.9% to June 2009 will add R2.285 immediately to your equity.

Nice and easy, isn´t it. AT NO COST. (Your accountants are very bright people and will pick up Constant Item Purchasing Power Accounting very quickly.)

[Well, there is a small cost involved: you have to promise to buy a copy of my soon to be finished book for every member of your staff in South Africa.]

Nedbank, you will be real dummies not to accept my offer.

Kindest regards,

Nicolaas Smith

Capital maintenance for dummies - like the IASB :-)

Capital maintenance for dummies - like the IASB

Capital is required to start a company. A company has an indefinite life - it is supposed to exist forever.

Capital is really saved-up wealth or saved-up real value.

Luckily double entry accounting makes capital into a constant item. It is like your salary or wage: its real value is a constant item.

But, if your salary is paid in ever-more-worthless-Rands (inflation or value-destruction at 6.9%) then your salary has to be inflation-adjusted to keep its real value the same.

This is what trade unions do. They make sure your salary is inflation adjusted every year.

This is very easy to understand. Everybody does it - world wide. That is, for salaries and wages and rentals and so on.

Enter the IASB. The International Accounting Standards Board.

Well, they are the world´s top accounants.

They are very responsible people.

They realize that money loses its real value at such a rapid rate during hyperinflation that all items that are not monetary items have to be inflation-adjusted by means of the Consumer Price Index. That is during hyperinflation.

However, during low inflation, the IASB change their story completely: now they suddenly come up with the story that you can maintain your capital in NOMINAL monetary units during low inflation.

Imagine that!

That is only possible when you invest 100% of your company´s capital in revaluable fixed assets. Companies normally don´t do that.

We all know that you cannot maintain the real value of your salary by keeping it the same during inflation.

Well, the same is true for companies´ capital and retained profits.

Not so, according to our friends at the IASB. According to them you can MAINTAIN your company´s retained profits in NOMINAL MONETARY UNITS.

They are nuts! :-)

That is completely impossible during inflation.

Well, they are not as dof as they appear to be. lol

They authorized our accountants in SA 20 years ago to maintain our companies´ capital and retained profits in units of constant purchasing power.

Fantastic! That is 100% correct!

Well. That is where the capital maintenance stops. :-(

Not a single SA accountant selects capital maintenance in units of constant purchasing power.

What a sad story. Instead they unknowingly destroy about R200 billion per year in real value in constant items never updated - each and every year!!)

Kindest regards,

Nicolaas Smith

Constant ITEM Purchasing Power Accounting as a financial capital maintenance concept

Constant ITEM Purchasing Power Accounting, despite being approved by the IASB in the Framework, Par. 104 (a) twenty years ago, is almost completely ignored by most accountants in non-hyperinflationary economies even though it would maintain instead of destroy the real values of not only all income statement constant items but also all balance sheet constant real value non-monetary items for an unlimited period of time.

This is because any price-level accounting is generally viewed by almost all accountants and accounting authorities, but excluding the IASB, as a 1970-style failed and discredited inflation accounting model that requires all non-monetary items - variable real value non-monetary items and constant real value non-monetary items - to be inflation-adjusted by means of the CPI.

They – including the IASB - forego the opportunity to promote the substantial real value maintaining benefits of measuring financial capital maintenance in units of constant purchasing power in companies and the economy in general.

This results in the unknowing destruction by SA accountants of billions of Rand in real value in the SA real economy – in companies´ and banks´ Retained Earnings (to name just one item unknowingly destroyed by SA accountants like this) - year in year out because they choose to measure financial capital maintenance in nominal monetary units and implement the very destructive stable measuring unit assumption as part of the real value destroying Historical Cost Accounting model in SA when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.

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

Normal and inflation accounting - for dummies

Inflation accounting is used during very high inflation and hyperinflation.

Hyperinflation is at least 100% cumulative inflation after 3 years: i.e. 26% annual inflation for 3 years in a row.

The International Accounting Standards Board requires companies in a hyperinflationary economy to implement their Constant Purchasing Power inflation accounting (CPPA) model formulated in International Accounting Standard IAS 29.

It is quite a simple process.

All non-monetary items are inflation-adjusted by means of the CPI.

The IASB also authorized SA accountants 20 years ago to use Constant ITEM Purchasing Power Accounting (CIPPA) during low inflation.

With CIPPA companies inflation-adjust ONLY constant items, eg. salaries, wages, rentals, companies capital, retained profits, trade debtors, trade creditors, taxes payable, taxes receivable, etc during low inflation.

In this way companies maintain these items´ constant real values during low inflation.

But, SA accountants have to actually CHOOSE this Constant ITEM Purchasing Accounting model instead of the traditional Historical Cost Accounting model.

All SA accountants pick the traditional HCA model. They at least inflation-adjust salaries, wages, rentals and some other income statement items. They value all other constant items at historical cost and thus unknowingly destroy their real values at a rate equal to the rate of inflation.

Not a single SA accountant picks the CIPPA model because hardly any one of them even know that there is a choice.

Do you know an accountant? Ask him or her about the two choices in basic accounting during low inflation approved by the IASB. I don´t think you will find many who even know about the choice they make when they use International Financial Reporting Standards.

SA accountants unknowingly destroy about R200 billion PER ANNUM in this way.

When they pick the CIPPA model as authorized by the IASB 20 years ago, they will maintain that R200 billion PER ANNUM forever.

SA accountants  refuse point blank to do this.

They will rather unknowingly (?) destroy about R200 billion PER ANNUM in the SA real economy.

They are really unknowingly (??) doing us all in quite a bit.

Do you know any accountants?

© 2005-2010 by Nicolaas J Smith. All rights reserved

No reproduction without permission.

Constant Purchasing Power INFLATION ACCOUNTING

Constant Purchasing Power INFLATION ACCOUNTING

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 Constant Purchasing Power 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.

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.

Kindest regards,

Nicolaas Smith

SA accountant value destroyers - for dummies

Your company´s capital and Retained Profits are the same as your salaries and wages: constant real value non-monetary items. If your accountant refuses to update them at the inflation rate, then he or she destoys their real values at a rate equal to the inflation rate

It takes SA accountants currently just 11 years to unknowingly destroy 50% of the real value of all Retained Profits SA companies and SA banks hold back to supposedly "grow" their businesses as well as 50% of the real value of capital of companies with no fixed assets.

Accountants use their unbelievably destructive and unbelievably silly stable measuring unit assumption to do this.

This amounts to about R85 billion per annum just in the Retained Profits of JSE listed companies - each and every year: it will never stop during inflation with Historical Cost Accounting.

This will carry on forever if we (or the SA government) cannot get them to do what the International Accounting Standard Board authorized them to do 20 years ago: to reject their very silly stable measuring unit assumption and to maintain companies´ and banks´ investment capital and Retained Profits in units of constant purchasing power.

Basically SA accountants do everything perfectly right in accounting till they get to valuing companies´ capital and retained profits.

Then they suddenly pretend that they are very dumb. They pretend that there is no such thing as inflation. They pretend that the Rand is perfectly stable - that inflation is always zero percent. Can you believe that!?

Then they value companies capital and Retained Profits at historical cost thus unknowingly destroying these items´ real values at a rate equal to the rate of inflation.

It is not inflation destroying companies´ capital and Retained Profits. It is our accountants implementing their silly stable measuring unit assumption.

They can freely stop that any time they want and start boosting the SA real economy by about R200 billion PER ANNUM for an unlimited period of time: forever.

All they have to do is do what the IASB approved TWENTY YEARS AGO.

Do you know any accountants?

Kindest regards,

Nicolaas Smith

SA accountants´ most destructive weapon

I will have a chart about SA inflation in my second book that I am currently working on.

I show different aspects of inflation.

I have the chart on normal charting paper, at the moment, so I cannot show the chart here.

The one chart shows cumulative inflation of 162% since April 1994.


The other two charts are

(1) Percentage Real Value Destroyed since April 1994 and
(2) Percentage Real Value Left since April 1994 - the inverse of (1).

These two charts cross after 11 years at 50% with average annual inflation of 6% (Mboweni at the SARB).

It took SA accountants implementing the stable measuring unit assumption 11 years to destroy 50% of the real value of all the retained earnings SA companies had in April 1994 and that remained in those companies for those 11 years as well as 50% of the issued share capital of all SA companies with no fixed assets during those 11 years.

62% of the real value of all the retained earnings SA companies had on April 1994 and that remained in those companies till May 2009 and 62% of real value of the issued share capital of all SA companies with no fixed assets during the period April 1994 to May 2009 have been destroyed by SA accountants implementing the stable measuring unit assumption.

During the last 12 years of white apartheid rule with averge annual inflation at 12% it took only 5 years to destroy 50% of a company´s equity that remained in the company for that those 5 years. A much worse situation under apartheid.

SA accountants destroy the myth that companies have infinite life times under the Historical Cost paradigm with their very destructive stable measuring unit assumption.

The concept of companies´ infinite lives will be restored under the Constant Purchasing Power paradigm.

Kindest regards,

Nicolaas Smith

Accountants are clueless (for dummies :-)

During the high-inflation period in the 1970´s accountants also did not really know what was going on.

They had and still have no clue about what constant real value non-monetary items or simply constant items are.

Constant items is a new concept for them although they always deal with them.

They are not taught to think for themselves as far as accounting matters are concerned.

For example: most of them do not know why they implement the stable measuring unit assumption and what its effect is on constant items. Many accountants do not even know that they implement the stable measuring unit assumption. They just do Historical Cost Accounting because the whole world does it and it has always been done like that.

Geoffrey Whittington is considered to be one of the world´s leading experts on inflation accounting. He did not even mention the stable measuring unit assumption once in his book "Inflation Accounting" published in 1983. That is astonishing.

They are taught that the only correct way of doing accounting is what appears in International Financial Reporting Standards.

If something is compliant with IFRS - then it is correct. They don´t really know why, and they do not really care to know.

If something is not compliant with IFRS - then it is not correct. They don´t really know why, and they do not really care to know.

Even if something is in IFRS and no-one is doing it, they do not care to know why no-one does it. That applies to the fact that the IASB authorized financial capital maintenance in units of constant purchasing power during low inflation 20 years ago, but no-one uses it.

They are not taught to think for themselves about matters of accounting.

They are taught to do what is generally accepted and to implement IFRS. That is all that matters.

Kindest regards,

Nicolaas Smith

SA accountants are clueless about price-level accounting during low inflation

As a result of this lack of appreciating the destructive nature of their implementation of the very destructive stable measuring unit assumption, 1970-style Constant Purchasing Power inflation accounting was also 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 appreciate that they unknowingly destroy real value on a massive scale in all constant real value non-monetary items never or not fully updated when they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.

They also do not appreciate that they make that choice.

Neither do they appreciate 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.

Kindest regards,

Nicolaas Smith

Don´t shoot the messenger - again

Bertie quotes on his blog:

"They mention research by Arie de Geus, ex Shell, that shows the life expectancy of new firms in Europe or Japan to be less than 13yrs, down from 20 in the late 70s and early 80s."

Yes, and Historical Cost Accounting helps to destroy them.

We all learn as first year accounting students doing company law that a company has an infinite life-time - which it suppose to have.

However, that is not true under the current 500 year old Historical Cost paradigm.

Historical cost accountants implementing the stable measuring unit assumption unknowingly destroy all companies´ that do not have revaluable fixed assets with original updated real value equal to the updated original real value of all contributions to shareholders´ equity - at the rate of inflation.

Imagine 3M started 200 years ago. Imagine the USD 100 000 200 year old original issued share capital. Update that for inflation over the last 200 years in the USA and how many millions do you get?

But, that original USD 100 000 (for example) are still there in 3M´s books today at - what value do you think? Yes!! USD 100 000. It´s real value has been destroyed by all the 3M historical cost accountants over the last 200 years implementing the stable measuring unit assumption destroying 3M´s issued share capital, retained earnings and all other items in shareholders´ equity at the annual rate of inflation as they are doing right this moment.

I plan to stop that.

But, I am only the messenger.

The IASB has already approved real value maintain ing financial capital maintenance in units of constant purchasing power during low inflation 20 years ago in the Framework, Par. 104 (a) that states: "Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."

Not a single accountant does that world wide - for various reasons that happened over the last 500 years.

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

Net monetary gain or loss conundrum (for dummies :-)

The world´s top accounting authority (the International Accounting Standards Board or just the IASB) orders you to calculate what you lose or gain in real value from actually keeping cash or loans in your business during hyperinflation.

During normal low inflation they pretend that they are very dumb and just ignore the fact that you ALSO gain or lose real value from keeping cash or loans in your business - during low inflation.

But, they give you a choice of doing your accounting properly and not destroying the profits you make simply by the way you do normal traditional historical cost accounting.

If you pick this alternative, they tell you again - correctly - to calculate the gain or loss from keeping cash or loans in your business - now during actual normal low inflation.

They are thus a bit of a joke.

Under hyperinflation you MUST calculate this loss or gain from cash and loans.

But, during low inflation, you don'´t have to (and no-one does) - unless you pick the other, much better and correct way of doing your accounts (which NO-ONE picks).

Huh??

So, what is their story?

Are there losses and gains from keeping cash and loans in your business?

If yes, as it actually is, why are we only allowed to calculate and show this during hyperinflation and not with normal historical cost accounting during low inflation?

But, if we pick their much better and correct alternative, then we suddenly can calulate these monetary losses and gains - during low inflation?

It is one helluva big puzzle.

So you ask, what is the correct thing to do?

Pick the other better and correct way of doing your accounts (they - the BIG ACCOUNTING BOSSES approved it 20 years ago) with which you do not AUTOMATICALLY destroy your capital and profits you keep in your company as your accountant does right now with traditional Historical Cost Accounting during low inflation.

Here is the link for more info.

(New book coming soon - watch this space :-) [This time you´ll have to pay for it.]

If you want to email me (I´m available :-) realvalueaccounting@yahoo.com

Kindest regards,

Nicolaas Smith

Net monetary gain or loss conundrum

Accountants have to calculate the net monetary gain or loss from holding monetary items when they choose the Constant Item Purchasing Power Accounting model and measure financial capital maintenance in units of constant purchasing power in the same way as the IASB currently requires its calculation and accounting only during hyperinflation in IAS 29.

There are net monetary losses and net monetary gains during low inflation too, but they are not required to be calculated when accountants choose the traditional Historical Cost Accounting model.

It is an inexplicable contradiction that net monetary gains and losses are required by the IASB to be calculated and accounted during hyperinflation but not during non-hyperinflationary periods, especially when the IASB approved alternative to Historical Cost Accounting, namely Constant Item Purchasing Power Accounting does require their calculation and accounting during low inflation.

Kindest regards,

Nicolaas Smith

The Market Monkey and the Real Value Accountant - Part 2

Market Monkey said:

heh heh.

You miss understand my disagreement NS.

I agree that the current accounting mis-states the true value of the firm's capital.

I just don't agree it has any relevance to the real world. I must be in the top 1.0% of the population who uses accounts to make real world decisions and value ... and I really don't care that the capital is stated at historic cost.

... and

I think that I would actually complain if units of constant purchasing power were used.

Why?

Well. I like having the raw data. I can then adjust it for inflation myself. If the accountants had to do the calculations for me then I wouldn't know what I'm dealing with? I might disagree with the inflation rate they have used ... the global CPI numbers are all already a load of hog wash with them being adjusted for "heuristics", leaving out key consumtion items etc.

Do you get my point and why I prefer the current system?

Keep a swinging,

MM.

P.s. Also just so there is no confusion; I'm not an accountant (i.e. CA), I just use accounts to make decisions and money.

Real Value Accountant said:

Hi Market Monkey,

We have to be professional here:

I never stated that historical cost accounting “misstates” the true value of the firm´s capital.

I state that historical cost accounting accountants unknowingly DESTROY the real value of constant items never updated. This includes the real value of firms´ issued share capital and retained earnings.

Your agreement that current accounting misstates the true value of the firm´s capital is the same as the hackneyed “historical cost accounting erodes the firm´s capital.”

I understand.

It is a very, very, very big step to agree that historical cost accountants unknowingly destroy real value on a massive scale in the real economy.

It is agreeing that the 500 year old Historical Cost paradigm is over.

It is similar to agreeing that the world is round when you have always believed it is flat.

I understand.

This is not going to happen overnight. I accept that.

I already proved to you in a previous comment on another post that historical cost accountants unknowingly destroy the real value of retained profits.

You simply refuse to accept that it makes any difference in the real world.

That is also fine with me.

You accept the mainstream, generally accepted view of things.

That is fine.

Let me show you where your mainstream approach will take you:

If SA trade unions manage to increase wages at rates of 26% and above and this is taken up generally in SA and SA enters into hyperinflation (26% annual inflation for three years in a row totalling 100% cumulative inflation) you will receive all your annual financial statements that you use in your work done in terms of IAS 29. That is, in terms of the IASB´s Constant Purchasing Power inflation accounting model under which ALL non-monetary items, variable and constant items, are inflation adjusted. These financial statements will have new items that you do not deal with during low inflation: net monetary losses and net monetary gains.

You will accept all that as will all accountants in SA because it is required by the IASB and IFRS. Like Turkey did recently.

Then, when SA gets out of hyperinflation back into low inflation again, then you and all SA accountants will suddenly again receive/produce financial statements devoid of net monetary gains and net monetary losses and no units of constant purchasing power for all constant items. As Turkey did recently.

[I do not promote IAS 29 Constant Purchasing Power inflation accounting during low inflation in SA by which ALL non-monetary items are inflation adjusted. I promote the IASB´s Constant ITEM Purchasing Power basic accounting model under which ONLY constant items are inflation-adjusted and variable items are valued in terms of IFRS.]

Then you and all SA accountants will suddenly state again that there is no such thing as net monetary gains and net monetary losses and that the Rand is perfectly stable, as you, Market Monkey, and all SA accountants state right now, as far as the valuation of Issued Share Capital, Retained Profits, Capital Reserves, Share Issue Premiums, Share Issue Discounts, all other items in Shareholders Equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc are concerned.

Horses for courses for you and SA accountants.

See what I mean?

How can investors and people in general have great faith in accounting when the above takes place. And it does – as you well know. It happened in the case of Turkey.

Below 26% annual inflation for 3 years in a row (the current low inflation situation): no net monetary gains and losses and the Rand is perfectly stable for the valuation of balance sheet constant items – i.e. implementing the stable measuring unit assumption as you and all SA accountants do at the moment.

At and above 26% annual inflation for 3 years in a row (recent Turkey-style hyperinflation of about 100 to 150%): net monetary gains and losses and no stable measuring unit assumption at all – just units of constant purchasing power.

It makes no sense at all.

The critical factor is to get to the point when you accept that historical cost accountants unknowingly destroy real value on a massive scale in the real economy.

Market Monkey, I do not know when you will be ready to accept that.

Most probably you will only accept it when the majority of companies in SA measure financial capital maintenance in units of constant purchasing power as approved by the IASB 20 years ago in the Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."

I understand and accept that. You are a mainstream person - not a doubter and searcher like me.

Kindest regards,

Nicolaas Smith

PS: Yes, Market Monkey, I can see why you prefer the current system. The problem is you do not understand that SA accountants unknowingly destroy about R200 billion in the SA real economy last year and this year and next year again if they carry on with their stable measuring unit assumption.

That is a helluva lot of real value to destroy each and every year. It will make a big difference to the SA real economy when that is not destroyed but maintained forever - year after year after year.

That is what you do not understand.

This is what Dr. Cemal KÜÇÜKSÖZEN, Head of the Accounting Standards Department of the
Capital Markets Board of Turkey stated in public in 2005 after he read the manuscript of my first book:

"I totally agree with you."

NS

Julius, why are you not proud of Tito Mboweni?

Julius, Tito Mboweni is black.

He halved to 5.9% (REDUCE BY 50%) the average inflation in SA during 10 years compared to the last 12 years of white apartheid rule.

What better proof is there of black intelligence and excellence of unquestionable quality?

Julius, you have a short memory.

SA is proud of Tito Mboweni.

Why are you not?

Kindest regards,

Nicolaas Smith