The man in the street´s salary or wage is a constant real value non-monetary item.
When SA Chartered Accountants stop their assumption that the Rand is PERFECTLY stable (can you believe that!!) ONLY for the purpose of accounting CONSTANT items NEVER or NOT FULLY updated, namely their stable measuring unit assumption, then salaries will be automatically updated every month when the new CPI value is announced.
Salaries will automatically be maintained at their real values, that is, they will currently be updated at about 1.2% per month, every month. The man in the street will thus have more money to pay the higher installments on his house and car and higher prices for fuel, food and electricity. In economic terms: total internal demand will be maintained in the economy.
At the same time taxes will be updated monthly too. In economic terms: government´s tax receipts will maintain their real value over time.
At the same time companies´ issued share capital and retained income balances will be updated monthly too. In economic terms: the capital and investment base in the country will be maintained at its real value all the time:
In overall economic terms: probably hundreds of billions of Rand in real value will be maintianed in the SA REAL economy - instead of being destroyed by Chartered Accountants each and every year.
Result: 0% inflation or 0% destruction of REAL value in the REAL economy.
We will still have 10.6% inflation in money (the Rand).
For the man in the street: the real value of his salary will be maintained month after month - no matter what the rate of cash inflation. Internal demand in the economy will be maintained - no matter what the rate of cash inflation.
Brazil did that for 30 years from 1964 to 1994 with a DAILY index under hyperinflation. Their economy grew UNDER HYPERINFLATION.
For the man in the street: it will be IMPOSSIBLE for the SA REAL economy to be destroyed under inflation or HYPERINFLATION (see Brazil) no matter what the rate of inflation or hyperinflation in the Rand.
Wednesday, 14 May 2008
Friday, 9 May 2008
Variable real value non-monetary items
There are three distinct economic items in the South African economy:
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1. Variable items
2. Monetary items
3. Constant items
They are valued in three distinctly different ways by South African Chartered Accountants. CA´s do not simply account economic activity. They value economic items when they account them in the accounting records and prepare financial reports of SA economic entities.
Monetary items are money held and monetary values pertaining only to money.
Non-monetary items are all items that are not monetary items. This is perhaps one of the very few undisputed economic definitions.
Non-monetary items are sub-divided into:
(a) variable items and
(b) constant items.
Constant items only came about with the introduction of the double entry accounting model that was concluded about seven centuries ago. There were no constant items before the double entry accounting model.
Barter economies
The first economies functioned without money. They were barter economies. People bartered economic items they possessed or produced in excess of their own personal needs for other products they desired from other people who had an excess of the products they in turn possessed or produced.
The first economic items had variable values. A baker baking bread bartered her extra rolls of bread for rabbits that a hunter would barter. When the hunter had many rabbits to barter he would accept a certain number of bread rolls for a rabbit. When he had few rabbits to barter and he was the only hunter in that area, then he would trade the rabbits for more rolls of bread per rabbit.
Both the rabbits and the bread rolls had variable values depending on demand and supply. This applied to all economic items in barter economies.
Neither money nor the double entry accounting model was invented yet. There was no Historical Cost Accounting model. There was no stable measuring unit assumption. There was no inflation. There was no medium of exchange. There was no monetary unit of account. There were no financial reports: no profit and loss accounts and no balance sheets.
There were no monetary items and no constant items. Only variable items.
Money
Money was then invented over a long period of time. Eventually money came to fulfil three functions:
a. Medium of exchange
b. Store of value
c. Unit of account
At that stage there were two distinct economic items in the economy: variable items and monetary items. The double entry accounting model was still not invented yet with the result that there were no constant items.
Original monetary inflation, then being only the destruction of real value in money, appeared soon after money was invented. There was no Historical Cost Accounting inflation in constant items since there was no double entry accounting model and there were no constant items.
Double Entry Accounting
Finally the introduction of the double entry accounting model was concluded round about the year 1300. This resulted in the creation of the third distinct economic item: a constant real value non-monetary item.
Variable real value non-monetary items
The first distinct economic item is a variable item.
Economic items we see around us - excluding constant items that appear in accounting records and financial reports - that are not monetary items, are variable items.
Examples
Property, plant, equipment, all forms of vehicles, office and home furniture and fixtures, information technology equipment, consumables, office, home and factory materials, etc.
Investment property
Raw materials, work in progress and finished goods stocks
Foreign currency
Quoted and unquoted shares
Consumer goods and similar economic items owned by economic entities.
Under Constant Item Purchasing Power Accounting (CIPPA), variable items are valued at fair value or the lower of cost or net realisable value or recoverable value or market value or present value in terms of International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs) and South African Generally Accepted Accounting Practice (SA GAAP) excluding the stable measuring unit assumption in all the aforementioned.
CIPPA is exactly the same as Historical Cost Accounting excluding the stable measuring unit assumption, International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies and the definition of monetary items in International Accounting Standard IAS 21.
Under CIPPA variable items are updated every time the Consumer Price Index (CPI) changes between valuations.¹ Footnote: All aspects of hyperinflation are dealt with in the chapter on hyperinflation.
Variable items are adequately valued in terms of IFRSs and SA GAAP. Originally all variable items were valued at historical cost. SA accountants, like their counterparts in the rest of the world, excluding the United States of America, accept that certain variable items, e.g. property, cannot be valued at historical cost. They accept fair value valuation for these items.
SA accountants agree with accountants in the rest of the world that raw materials, work in progress and finished goods stocks cannot be valued simply at historical cost. They value them at the lower of cost or net realizable value.
SA accountants also agree with generally accepted accounting practice world wide to value shares quoted on the stock exchange not at the historical cost purchase price, but at the market value at the balance sheet date.
The same is true with variable items valued at recoverable value or present value. SA accountants agree that these items cannot be valued at historical cost.
Variable items´ real values are not being destroyed by SA Chartered Accountants as a result of their implementation of IFRSs and SA GAAP. The real values of these items are not being destroyed uniformly at, e.g., the inflation rate because of IFRSs and SA GAAP.
Neither the Historical Cost Accounting model nor inflation nor the combination of the two nor IFRSs nor SA GAAP is destroying the real value of variable items.
Buy the ebook for $2.99 or £1.53 or €2.68
Where real losses are made in dealing with variable items in SA, these losses are the result of business and private or public decisions, e.g. selling at a bad price, obsolescence, etc, etc. They do not result from the application of the traditional accounting model or from the combination of the Historical Cost Accounting model and inflation.
Buy the ebook for $2.99 or £1.53 or €2.68
1. Variable items
2. Monetary items
3. Constant items
They are valued in three distinctly different ways by South African Chartered Accountants. CA´s do not simply account economic activity. They value economic items when they account them in the accounting records and prepare financial reports of SA economic entities.
Monetary items are money held and monetary values pertaining only to money.
Non-monetary items are all items that are not monetary items. This is perhaps one of the very few undisputed economic definitions.
Non-monetary items are sub-divided into:
(a) variable items and
(b) constant items.
Constant items only came about with the introduction of the double entry accounting model that was concluded about seven centuries ago. There were no constant items before the double entry accounting model.
Barter economies
The first economies functioned without money. They were barter economies. People bartered economic items they possessed or produced in excess of their own personal needs for other products they desired from other people who had an excess of the products they in turn possessed or produced.
The first economic items had variable values. A baker baking bread bartered her extra rolls of bread for rabbits that a hunter would barter. When the hunter had many rabbits to barter he would accept a certain number of bread rolls for a rabbit. When he had few rabbits to barter and he was the only hunter in that area, then he would trade the rabbits for more rolls of bread per rabbit.
Both the rabbits and the bread rolls had variable values depending on demand and supply. This applied to all economic items in barter economies.
Neither money nor the double entry accounting model was invented yet. There was no Historical Cost Accounting model. There was no stable measuring unit assumption. There was no inflation. There was no medium of exchange. There was no monetary unit of account. There were no financial reports: no profit and loss accounts and no balance sheets.
There were no monetary items and no constant items. Only variable items.
Money
Money was then invented over a long period of time. Eventually money came to fulfil three functions:
a. Medium of exchange
b. Store of value
c. Unit of account
At that stage there were two distinct economic items in the economy: variable items and monetary items. The double entry accounting model was still not invented yet with the result that there were no constant items.
Original monetary inflation, then being only the destruction of real value in money, appeared soon after money was invented. There was no Historical Cost Accounting inflation in constant items since there was no double entry accounting model and there were no constant items.
Double Entry Accounting
Finally the introduction of the double entry accounting model was concluded round about the year 1300. This resulted in the creation of the third distinct economic item: a constant real value non-monetary item.
Variable real value non-monetary items
The first distinct economic item is a variable item.
Economic items we see around us - excluding constant items that appear in accounting records and financial reports - that are not monetary items, are variable items.
Examples
Property, plant, equipment, all forms of vehicles, office and home furniture and fixtures, information technology equipment, consumables, office, home and factory materials, etc.
Investment property
Raw materials, work in progress and finished goods stocks
Foreign currency
Quoted and unquoted shares
Consumer goods and similar economic items owned by economic entities.
Under Constant Item Purchasing Power Accounting (CIPPA), variable items are valued at fair value or the lower of cost or net realisable value or recoverable value or market value or present value in terms of International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs) and South African Generally Accepted Accounting Practice (SA GAAP) excluding the stable measuring unit assumption in all the aforementioned.
CIPPA is exactly the same as Historical Cost Accounting excluding the stable measuring unit assumption, International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies and the definition of monetary items in International Accounting Standard IAS 21.
Under CIPPA variable items are updated every time the Consumer Price Index (CPI) changes between valuations.¹ Footnote: All aspects of hyperinflation are dealt with in the chapter on hyperinflation.
Variable items are adequately valued in terms of IFRSs and SA GAAP. Originally all variable items were valued at historical cost. SA accountants, like their counterparts in the rest of the world, excluding the United States of America, accept that certain variable items, e.g. property, cannot be valued at historical cost. They accept fair value valuation for these items.
SA accountants agree with accountants in the rest of the world that raw materials, work in progress and finished goods stocks cannot be valued simply at historical cost. They value them at the lower of cost or net realizable value.
SA accountants also agree with generally accepted accounting practice world wide to value shares quoted on the stock exchange not at the historical cost purchase price, but at the market value at the balance sheet date.
The same is true with variable items valued at recoverable value or present value. SA accountants agree that these items cannot be valued at historical cost.
Variable items´ real values are not being destroyed by SA Chartered Accountants as a result of their implementation of IFRSs and SA GAAP. The real values of these items are not being destroyed uniformly at, e.g., the inflation rate because of IFRSs and SA GAAP.
Neither the Historical Cost Accounting model nor inflation nor the combination of the two nor IFRSs nor SA GAAP is destroying the real value of variable items.
Buy the ebook for $2.99 or £1.53 or €2.68
Where real losses are made in dealing with variable items in SA, these losses are the result of business and private or public decisions, e.g. selling at a bad price, obsolescence, etc, etc. They do not result from the application of the traditional accounting model or from the combination of the Historical Cost Accounting model and inflation.
Monday, 5 May 2008
Historical Cost
Historical cost is the original monetary value of an economic item.
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When an historical cost item, for example money or retained income, is never updated its real value is destroyed at the rate of inflation or hyperinflation. Money cannot be updated. Retained income is currently (April 2008) not updated in low inflationary economies as a result of the application of the stable measuring unit assumption.
Retained income is: The accumulated net income retained for reinvestment in a business, rather than being paid out in dividends to stockholders.[2]
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.” .[1]
The combination of the historical cost accounting model and low inflation is thus indirectly responsible for the destruction of the real value of retained income equal to the annual average value of retained income times the average annual rate of inflation. [3]
Historical cost does not generally reflect current market valuation.
"In most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued.”[2]
Different accounting standards may require that the real value of variable real value non-monetary items be updated to the market price (mark-to-market valuation) or some other estimate of value that better approximates the real value. [4]
Accounting standards may also have different methods required or allowed (even for different types of balance sheet assets or liabilities) as to how the resultant change in value of an asset or liability is recorded, as a part of income or as a direct change to shareholders' equity.
Historical cost principle
Under U.S. generally accepted accounting principles (US GAAP), the historical cost principle dictates that most assets and liabilities should be recorded at their historical cost. For example, a tract of land which was purchased 50 years ago for $10,000 may be worth $1 million today, but it will be recorded on the balance sheet at its historical cost of $10,000.
In the United States the historical cost principle is used because of its reliability and freedom from bias when compared to the fair market value principle. However, the application of the historical cost principle by the accounting profession results in the destruction of "hundreds of billions of dollars in retained income real value year in year out" [5]
- as well as in all other constant real value non-monetary items never or not fully updated throughout the world economy.
The International Accounting Standards Board only recognizes monetary and non-monetary items. [6] The IASB does not recognize constant real value non-monetary items.
The destruction of constant real value non-monetary items never updated by the application of the historical cost accounting model can be stopped by the revoking of the stable measuring unit assumption. This has been explicitily authorised by the IASB in International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies; but, only in hyperinflationary economies.
"Par 8 The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the balance sheet date.
Par 11 Balance sheet amounts not already expressed in terms of the measuring unit current at the balance sheet date are restated by applying a general price index.
Income statement
Par 26 This Standard requires that all items in the income statement are expressed in terms of the measuring unit current at the balance sheet date. Therefore all amounts need to be restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded in the financial statements."
"Once you are not in hyperinflation anymore, for example, 15% annual inflation for as many years as you want, then you are not allowed to update constant real value non-monetary items any more. Then you must destroy their real value again – at 15% per annum." [7]
"Par 38 When an economy ceases to be hyperinflationary and an entity discontinues the preparation and presentation of financial statements prepared in accordance with this Standard, ....."
Implied authorization by the IASB
Paragraph 40 of IAS 29 can be taken as revoking the stable measuring unit assumption in low inflationary economies as the word inflation is used instead of hyperinflation.
"Par 40 The disclosures required by this Standard are needed to make clear the basis of dealing with the effects of inflation in the financial statements."
Authorization to revoke the stable measuring unit assumption in low inflationary economies can also be taken to be implied from the IASB´s Framework for the Preparation and Presentation of Financial Statements, Concepts of Capital Maintenance and the Determination of Profit:
"Par 104. ......(a)....Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
The concept "units of constant purchasing power" [8] is generally taken as updating constant real value non-monetary items in terms of the monthly change in the Consumer Price Index in low inflationary economies and daily at a daily index rate (see Unidade Real de Valor: "The exchange rate of URVs to cruzeiros reais was recalculated and published daily by the government.") or the parallel exchange rate (in the absence of a daily index rate) in hyperinflationary economies (See Hyperinflation).
No economic entity needs authorization to maintain the real value he, she or it creates. Any country or business/organization can revoke the stable measuring unit assumption unilaterally to stop this unnecessary destruction of real value. See sovereignty and Adam Smith´s "invisible hand".
The combination of the historical cost accounting model and low inflation destroys real value on a massive scale in the world economy. [9]
Adjustment for current valuation
In the US, the Financial Accounting Standards Board allows current valuation for certain assets such as marketable securities, impaired assets, and derivatives.[3]
In contrast to US GAAP, under UK GAAP firms may revalue assets based on appraised market values. This can result in the recognition of unrealized gains as income.
The above are adjustments for current valuation of variable real value non-monetary items. Neither US GAAP nor the IASB explicitly allow the updating of constant real value non-monetary items, for example retained income, in low inflationary economies thus contributing to the continuous massive destruction of real value as described above. [10]
Adjustment for inflation
As PricewaterhouseCoopers described it in a paper on accounting in hyperinflationary environments:
Financial statements unadjusted for inflation in most countries are prepared on the basis of historical cost without regard to changes in the general level of prices. The individual assets, liabilities, shareholders’ equity, revenue, expenses and gains and losses are therefore stated at cost at the time at which these items were originated. The impact of inflation is ignored. This produces a meaningful result provided that there are no dramatic changes in the purchasing power of money.
Significant changes in the purchasing power of money mean that financial statements unadjusted for inflation are likely to be misleading. Amounts are not comparable between periods, and the gain or loss in general purchasing power that arises in the reporting period is not recorded. Financial statements unadjusted for inflation do not properly reflect the company’s position at the balance sheet date, the results of its operations or cash flows.[4]
During periods of severe monetary inflation, such as during the 1970s in the United States, accounting standard-setting bodies such as the Financial Accounting Standards Board have considered various new ways to present financial information. In the United States, as in all low inflationary economies, financial information regarding historical cost items are not adjusted for inflation.[5]
It is accepted in low inflationary economies that the historical cost model will undermine the accuracy of financial statements whenever inflation is non-zero, which means always. When inflation is low or moderate however, the inaccuracy is considered insufficiently important to warrant applying other methods. The IASB requires that hyperinflation accounting methods be used whenever cumulative inflation over a three-year period is greater than 100%. This limit has been criticized as too high and arbitrary.[6],[7]
Low or moderate 2% annual inflation is regarded as "price stability" by many entities including the European Central Bank.
"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."[11]
Low or moderate continuous 2% annual inflation will destroy 51% of the real value of money and retained income as well as all other constant real value non-monetary items never updated over 35 years as any inflation calculator will demonstrate. Low or moderate 2% inflation being "price stability" is thus a very dubious definition.
Alan Greenspan´s definition of price stability is very accurate:
"Price stability obtains when economic agents no longer take account of the prospective change in the general price level in their economic decision-making." [12]Page 1.
Buy the ebook for $2.99 or £1.53 or €2.68
The annual destruction under low or moderate inflation of 2% of the real value of retained income of all companies with retained income world wide amounts to hundreds of billions of Euros (March 2008 value). That is a significant amount of unnecessary and easily avoidable real value destruction in the world economy each and every year.
Buy the ebook for $2.99 or £1.53 or €2.68
When an historical cost item, for example money or retained income, is never updated its real value is destroyed at the rate of inflation or hyperinflation. Money cannot be updated. Retained income is currently (April 2008) not updated in low inflationary economies as a result of the application of the stable measuring unit assumption.
Retained income is: The accumulated net income retained for reinvestment in a business, rather than being paid out in dividends to stockholders.[2]
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.” .[1]
The combination of the historical cost accounting model and low inflation is thus indirectly responsible for the destruction of the real value of retained income equal to the annual average value of retained income times the average annual rate of inflation. [3]
Historical cost does not generally reflect current market valuation.
"In most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued.”[2]
Different accounting standards may require that the real value of variable real value non-monetary items be updated to the market price (mark-to-market valuation) or some other estimate of value that better approximates the real value. [4]
Accounting standards may also have different methods required or allowed (even for different types of balance sheet assets or liabilities) as to how the resultant change in value of an asset or liability is recorded, as a part of income or as a direct change to shareholders' equity.
Historical cost principle
Under U.S. generally accepted accounting principles (US GAAP), the historical cost principle dictates that most assets and liabilities should be recorded at their historical cost. For example, a tract of land which was purchased 50 years ago for $10,000 may be worth $1 million today, but it will be recorded on the balance sheet at its historical cost of $10,000.
In the United States the historical cost principle is used because of its reliability and freedom from bias when compared to the fair market value principle. However, the application of the historical cost principle by the accounting profession results in the destruction of "hundreds of billions of dollars in retained income real value year in year out" [5]
- as well as in all other constant real value non-monetary items never or not fully updated throughout the world economy.
The International Accounting Standards Board only recognizes monetary and non-monetary items. [6] The IASB does not recognize constant real value non-monetary items.
The destruction of constant real value non-monetary items never updated by the application of the historical cost accounting model can be stopped by the revoking of the stable measuring unit assumption. This has been explicitily authorised by the IASB in International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies; but, only in hyperinflationary economies.
"Par 8 The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the balance sheet date.
Par 11 Balance sheet amounts not already expressed in terms of the measuring unit current at the balance sheet date are restated by applying a general price index.
Income statement
Par 26 This Standard requires that all items in the income statement are expressed in terms of the measuring unit current at the balance sheet date. Therefore all amounts need to be restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded in the financial statements."
"Once you are not in hyperinflation anymore, for example, 15% annual inflation for as many years as you want, then you are not allowed to update constant real value non-monetary items any more. Then you must destroy their real value again – at 15% per annum." [7]
"Par 38 When an economy ceases to be hyperinflationary and an entity discontinues the preparation and presentation of financial statements prepared in accordance with this Standard, ....."
Implied authorization by the IASB
Paragraph 40 of IAS 29 can be taken as revoking the stable measuring unit assumption in low inflationary economies as the word inflation is used instead of hyperinflation.
"Par 40 The disclosures required by this Standard are needed to make clear the basis of dealing with the effects of inflation in the financial statements."
Authorization to revoke the stable measuring unit assumption in low inflationary economies can also be taken to be implied from the IASB´s Framework for the Preparation and Presentation of Financial Statements, Concepts of Capital Maintenance and the Determination of Profit:
"Par 104. ......(a)....Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
The concept "units of constant purchasing power" [8] is generally taken as updating constant real value non-monetary items in terms of the monthly change in the Consumer Price Index in low inflationary economies and daily at a daily index rate (see Unidade Real de Valor: "The exchange rate of URVs to cruzeiros reais was recalculated and published daily by the government.") or the parallel exchange rate (in the absence of a daily index rate) in hyperinflationary economies (See Hyperinflation).
No economic entity needs authorization to maintain the real value he, she or it creates. Any country or business/organization can revoke the stable measuring unit assumption unilaterally to stop this unnecessary destruction of real value. See sovereignty and Adam Smith´s "invisible hand".
The combination of the historical cost accounting model and low inflation destroys real value on a massive scale in the world economy. [9]
Adjustment for current valuation
In the US, the Financial Accounting Standards Board allows current valuation for certain assets such as marketable securities, impaired assets, and derivatives.[3]
In contrast to US GAAP, under UK GAAP firms may revalue assets based on appraised market values. This can result in the recognition of unrealized gains as income.
The above are adjustments for current valuation of variable real value non-monetary items. Neither US GAAP nor the IASB explicitly allow the updating of constant real value non-monetary items, for example retained income, in low inflationary economies thus contributing to the continuous massive destruction of real value as described above. [10]
Adjustment for inflation
As PricewaterhouseCoopers described it in a paper on accounting in hyperinflationary environments:
Financial statements unadjusted for inflation in most countries are prepared on the basis of historical cost without regard to changes in the general level of prices. The individual assets, liabilities, shareholders’ equity, revenue, expenses and gains and losses are therefore stated at cost at the time at which these items were originated. The impact of inflation is ignored. This produces a meaningful result provided that there are no dramatic changes in the purchasing power of money.
Significant changes in the purchasing power of money mean that financial statements unadjusted for inflation are likely to be misleading. Amounts are not comparable between periods, and the gain or loss in general purchasing power that arises in the reporting period is not recorded. Financial statements unadjusted for inflation do not properly reflect the company’s position at the balance sheet date, the results of its operations or cash flows.[4]
During periods of severe monetary inflation, such as during the 1970s in the United States, accounting standard-setting bodies such as the Financial Accounting Standards Board have considered various new ways to present financial information. In the United States, as in all low inflationary economies, financial information regarding historical cost items are not adjusted for inflation.[5]
It is accepted in low inflationary economies that the historical cost model will undermine the accuracy of financial statements whenever inflation is non-zero, which means always. When inflation is low or moderate however, the inaccuracy is considered insufficiently important to warrant applying other methods. The IASB requires that hyperinflation accounting methods be used whenever cumulative inflation over a three-year period is greater than 100%. This limit has been criticized as too high and arbitrary.[6],[7]
Low or moderate 2% annual inflation is regarded as "price stability" by many entities including the European Central Bank.
"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."[11]
Low or moderate continuous 2% annual inflation will destroy 51% of the real value of money and retained income as well as all other constant real value non-monetary items never updated over 35 years as any inflation calculator will demonstrate. Low or moderate 2% inflation being "price stability" is thus a very dubious definition.
Alan Greenspan´s definition of price stability is very accurate:
"Price stability obtains when economic agents no longer take account of the prospective change in the general price level in their economic decision-making." [12]Page 1.
Buy the ebook for $2.99 or £1.53 or €2.68
The annual destruction under low or moderate inflation of 2% of the real value of retained income of all companies with retained income world wide amounts to hundreds of billions of Euros (March 2008 value). That is a significant amount of unnecessary and easily avoidable real value destruction in the world economy each and every year.
Tuesday, 29 April 2008
SA Chartered Accountants, unwittingly, destroy real value on a huge scale
Reserve Bank governor Tito Mboweni recently hiked interest rates, despite real concern over the impact this will have on sustainable economic growth.
SA Chartered Accountants unintentionally destroy real value in the real economy on a huge scale with their assumption that the Rand is perfectly stable only for the purpose of accounting constant value items. This has an as yet unmeasured negative impact on Gross Domestic Product and sustainable economic growth.
There is an option that would make this destruction of the SA real economy by our Chartered Accountants impossible – if they so choose. They can also be ordered by their superiors in business and government to stop their very destructive assumption if they now knowingly carry on with this destruction.
Inflation results in the destruction of real value in monetary items and constant items over time.
Inflation has two components: a monetary component: monetary inflation and a non-monetary component: Historical Cost Accounting inflation. Chartered Accountants can stop the second component completely which will stop the destruction of real value in the real economy completely.
What causes monetary inflation is a very complex economic process which should be dominated by Tito Mboweni and the SARB as it is dominated by the Federal Reserve Bank, the European Central Bank and the Bank of England, for example.
Historical Cost Accounting inflation is caused by the combination of 10.6% (Mar 08) inflation and SA Chartered Accountants´ implementation of the stable measuring unit assumption (an Historical Cost Accounting practice) throughout the whole of the SA economy.
Monetary inflation will destroy 10.6% of the real value of all current (Mar 08) monetary items in SA over the next year - all else being equal.
Historical Cost Accounting inflation will result in the destruction by SA accountants during the next 12 months - all else being equal - as they did in previous years at the average rate of inflation, of:
(a) 10.6% of the real value of all listed and unlisted SA companies´ retained income, share premium, capital reserves and other [excluding (b)] constant real value non-monetary items never updated; plus
(b) 10.6% of the real value of the issued share capital of all SA companies with no well located and well maintained land and/or buildings or other variable real value non-monetary items able to be revalued at least equal to the original real value of each contribution of issued share capital; plus
(c) a further unknown amount (less than 10.6%) in the real value of constant real value non-monetary items not fully updated, e.g., salaries, wages, rents, fees, royalties, retainers, income taxes, company taxes, value added taxes and all other constant items not fully updated.
This will result in a reduction in GDP and the economic rate of growth in SA as it always did in the past and as it always will in the future as long as SA Chartered Accountants apply the stable measuring unit assumption only for this purpose.
The destruction of real value in the real economy by SA Chartered Accountants will stop when they stop their assumption that the Rand is perfectly stable only for the purpose of accounting constant items never or not fully updated.
We will still have 10.6% (Mar 08) cash inflation in the monetary economy – all else being equal – but we will have 0% inflation in the real economy with an (as for now unknown) increase in GDP and sustainable economic growth in SA when our CA´s stop the stable measuring unit assumption.
Inflation would then only have a monetary component, namely, monetary inflation.
Historical Cost Accounting inflation would be impossible since there would be no Historical Cost Accounting. All constant real value non-monetary items would automatically be updated every time the Consumer Price Index (CPI) changes.
SA Chartered Accountants would automatically maintain tens (probably even hundreds) of billions of Rands annually in real value in retained income and other constant value items when they update them monthly - instead of destroying real value on a massive scale in the SA real economy as they are currently doing and as they have always done in the past and as they will continue doing in the future if they do not stop that assumption.
No-one stops us from revoking the stable measuring unit assumption. The Historical Cost Accounting model is not required by SA law or by SA Generally Accepted Accounting Practice or by the International Accounting Standards Board or by International Financial Reporting Standards or by International Accounting Standards.
SA Chartered Accountants unintentionally destroy real value in the real economy on a huge scale with their assumption that the Rand is perfectly stable only for the purpose of accounting constant value items. This has an as yet unmeasured negative impact on Gross Domestic Product and sustainable economic growth.
There is an option that would make this destruction of the SA real economy by our Chartered Accountants impossible – if they so choose. They can also be ordered by their superiors in business and government to stop their very destructive assumption if they now knowingly carry on with this destruction.
Inflation results in the destruction of real value in monetary items and constant items over time.
Inflation has two components: a monetary component: monetary inflation and a non-monetary component: Historical Cost Accounting inflation. Chartered Accountants can stop the second component completely which will stop the destruction of real value in the real economy completely.
What causes monetary inflation is a very complex economic process which should be dominated by Tito Mboweni and the SARB as it is dominated by the Federal Reserve Bank, the European Central Bank and the Bank of England, for example.
Historical Cost Accounting inflation is caused by the combination of 10.6% (Mar 08) inflation and SA Chartered Accountants´ implementation of the stable measuring unit assumption (an Historical Cost Accounting practice) throughout the whole of the SA economy.
Monetary inflation will destroy 10.6% of the real value of all current (Mar 08) monetary items in SA over the next year - all else being equal.
Historical Cost Accounting inflation will result in the destruction by SA accountants during the next 12 months - all else being equal - as they did in previous years at the average rate of inflation, of:
(a) 10.6% of the real value of all listed and unlisted SA companies´ retained income, share premium, capital reserves and other [excluding (b)] constant real value non-monetary items never updated; plus
(b) 10.6% of the real value of the issued share capital of all SA companies with no well located and well maintained land and/or buildings or other variable real value non-monetary items able to be revalued at least equal to the original real value of each contribution of issued share capital; plus
(c) a further unknown amount (less than 10.6%) in the real value of constant real value non-monetary items not fully updated, e.g., salaries, wages, rents, fees, royalties, retainers, income taxes, company taxes, value added taxes and all other constant items not fully updated.
This will result in a reduction in GDP and the economic rate of growth in SA as it always did in the past and as it always will in the future as long as SA Chartered Accountants apply the stable measuring unit assumption only for this purpose.
The destruction of real value in the real economy by SA Chartered Accountants will stop when they stop their assumption that the Rand is perfectly stable only for the purpose of accounting constant items never or not fully updated.
We will still have 10.6% (Mar 08) cash inflation in the monetary economy – all else being equal – but we will have 0% inflation in the real economy with an (as for now unknown) increase in GDP and sustainable economic growth in SA when our CA´s stop the stable measuring unit assumption.
Inflation would then only have a monetary component, namely, monetary inflation.
Historical Cost Accounting inflation would be impossible since there would be no Historical Cost Accounting. All constant real value non-monetary items would automatically be updated every time the Consumer Price Index (CPI) changes.
SA Chartered Accountants would automatically maintain tens (probably even hundreds) of billions of Rands annually in real value in retained income and other constant value items when they update them monthly - instead of destroying real value on a massive scale in the SA real economy as they are currently doing and as they have always done in the past and as they will continue doing in the future if they do not stop that assumption.
No-one stops us from revoking the stable measuring unit assumption. The Historical Cost Accounting model is not required by SA law or by SA Generally Accepted Accounting Practice or by the International Accounting Standards Board or by International Financial Reporting Standards or by International Accounting Standards.
Monday, 28 April 2008
This is not the Historical Cost Debate
Real Value Accounting is something completely different from the very old Historical Cost Debate. That debate was about the valuing of mainly variable items. Real Value Accounting is only about the valuing of constant items.
It is not really unknown since it is similar to IAS 29 with monthly updating in terms of the Consumer Price Index in non-hyperinflationary economies and daily updating in terms of a daily index or the parallel rate in hyperinflationary economies like Zimbabwe. Very similar to the very successful Unidade Real de Valor in Brazil.
It is not a complex method once you forget historical costs and start thinking only in real values: only update all constant items. The rest is SA GAAP excluding the stable measuring unit assumption. Obviously all items have to be brought up to date to today´s real value. Brazil did it for 30 years from 1964 to 1994.
I want the average Joe to realize that SA Chartered Accountants are killing the real economy in SA with their silly assumption that the Rand is PERFECTLY stable ONLY for the purpose of valuing CONSTANT items NEVER or not fully updated, e.g. retained income. Retain income does not really concern the average Joe.
What does concern the average Joe/Jane in SA is that under Real Value Accounting his/her salary will automatically be updated monthly every time the new CPI value is published. Salaries will thus automatically be maintained at their real values thus maintaining internal demand in SA. So too personal, company and value added taxes thus maintaining the real value of government´s tax base. And so forth with all constant items in the SA economy.
This will increase SA GDP, increase the economic rate of growth and result in 0% inflation ONLY in the real economy. Tito Mboweni and the other wise people at the SARB will still have to lower cash inflation from its current very high 10.6% level keeping in mind that the total of all underlying values systems in SA determine the internal and external value of the Rand.
It is not really unknown since it is similar to IAS 29 with monthly updating in terms of the Consumer Price Index in non-hyperinflationary economies and daily updating in terms of a daily index or the parallel rate in hyperinflationary economies like Zimbabwe. Very similar to the very successful Unidade Real de Valor in Brazil.
It is not a complex method once you forget historical costs and start thinking only in real values: only update all constant items. The rest is SA GAAP excluding the stable measuring unit assumption. Obviously all items have to be brought up to date to today´s real value. Brazil did it for 30 years from 1964 to 1994.
I want the average Joe to realize that SA Chartered Accountants are killing the real economy in SA with their silly assumption that the Rand is PERFECTLY stable ONLY for the purpose of valuing CONSTANT items NEVER or not fully updated, e.g. retained income. Retain income does not really concern the average Joe.
What does concern the average Joe/Jane in SA is that under Real Value Accounting his/her salary will automatically be updated monthly every time the new CPI value is published. Salaries will thus automatically be maintained at their real values thus maintaining internal demand in SA. So too personal, company and value added taxes thus maintaining the real value of government´s tax base. And so forth with all constant items in the SA economy.
This will increase SA GDP, increase the economic rate of growth and result in 0% inflation ONLY in the real economy. Tito Mboweni and the other wise people at the SARB will still have to lower cash inflation from its current very high 10.6% level keeping in mind that the total of all underlying values systems in SA determine the internal and external value of the Rand.
Saturday, 26 April 2008
SA Chartered Accountants´s silly assumption
All underlying value systems determine the value of the Rand. It is not so easy to fix all of them at the same time.
Sometimes we do not even know how our actions are effecting the economy.
Like Chartered Accountants killing the real economy with their silly assumption that the Rand is perfectly stable (no inflation - can you believe that!!) ONLY for the purpose of accounting/valuing constant real value items like retained income. They destroy maybe hundreds of billions of Rand in retained income real value each and every year. AND, they do not even know they are doing it. Hardly anyone knows.
Stopping their silly assumption that the Rand is perfectly stable (no inflation) ONLY for that one purpose will pump maybe hundreds of billions of Rand into the SA economy - by maintaing the real value of retained income and other constant items instead of destroying them. It is simple maths.
Sometimes we do not even know how our actions are effecting the economy.
Like Chartered Accountants killing the real economy with their silly assumption that the Rand is perfectly stable (no inflation - can you believe that!!) ONLY for the purpose of accounting/valuing constant real value items like retained income. They destroy maybe hundreds of billions of Rand in retained income real value each and every year. AND, they do not even know they are doing it. Hardly anyone knows.
Stopping their silly assumption that the Rand is perfectly stable (no inflation) ONLY for that one purpose will pump maybe hundreds of billions of Rand into the SA economy - by maintaing the real value of retained income and other constant items instead of destroying them. It is simple maths.
Wednesday, 23 April 2008
A foreign currency is not money in South Africa
A foreign currency is not money in South Africa since it is not the generally accepted national unit of account.
Money has three functions:
1. Medium of exchange
2. Store of value
3. Unit of account
A foreign currency like the US Dollar or the Euro is a medium of exchange in South Africa. Some businesses and individuals will accept US Dollars or Euros as a means of payment, that is, as a medium of exchange because they can easily sell the foreign currency amounts at their local banks for Rands.
A "hard currency" is also a store of value in South Africa. The US Dollar and the Euro are “hard currencies” with daily changing market values. They are generally accepted world wide as a store of value. People know that there are daily small changes in their exchange values.
US Dollars or Euros are, however, not the generally accepted and legal national unit of account. They are thus not money in South Africa since they do not fulfil all three functions of money.
Foreign currencies are variable real value non-monetary items in South Africa.
The US Dollar is only money outside the United States of America in countries like Ecuador and Panama that have dollarized their economies. They use the US Dollar as their functional currency. They do not have their own national currencies. The US Dollar is both foreign exchange and functional currency only in countries that have dollarized their economies. That is not the case in South Africa.
Cabo Verde is planning to use the Euro as its national functional currency.
It appears very strange to state that the US Dollar or the Euro is not money. Technically speaking that is correct because an economic item can only be money if it fulfils all three functions of money. The Euro is only money in the European Monetary Union and the US Dollar is only money in the US and in countries that have dollarized their economies, e.g., Panama and Ecuador.
Money has three functions:
1. Medium of exchange
2. Store of value
3. Unit of account
A foreign currency like the US Dollar or the Euro is a medium of exchange in South Africa. Some businesses and individuals will accept US Dollars or Euros as a means of payment, that is, as a medium of exchange because they can easily sell the foreign currency amounts at their local banks for Rands.
A "hard currency" is also a store of value in South Africa. The US Dollar and the Euro are “hard currencies” with daily changing market values. They are generally accepted world wide as a store of value. People know that there are daily small changes in their exchange values.
US Dollars or Euros are, however, not the generally accepted and legal national unit of account. They are thus not money in South Africa since they do not fulfil all three functions of money.
Foreign currencies are variable real value non-monetary items in South Africa.
The US Dollar is only money outside the United States of America in countries like Ecuador and Panama that have dollarized their economies. They use the US Dollar as their functional currency. They do not have their own national currencies. The US Dollar is both foreign exchange and functional currency only in countries that have dollarized their economies. That is not the case in South Africa.
Cabo Verde is planning to use the Euro as its national functional currency.
It appears very strange to state that the US Dollar or the Euro is not money. Technically speaking that is correct because an economic item can only be money if it fulfils all three functions of money. The Euro is only money in the European Monetary Union and the US Dollar is only money in the US and in countries that have dollarized their economies, e.g., Panama and Ecuador.
Sunday, 20 April 2008
Inflation destroys R168 billion of real value in M3 and SA accountants some unknown value in the real economy.
SA can prevent the destruction of real value by non-monetary inflation in the real economy by banning the stable measuring unit assumption. Stated in another way: ban SA accountants´ silly assumption that money is perfectly stable only for the purpose of valuing constant real value non-monetary items never updated, eg. retained income, or not fully updated, eg. salaries, wages, taxes, etc.
The accounted part of the R168 billion destroyed in M3 would be taken to the profit and loss account as a net monetary loss. It is not presently done like that.
SA accountants currently destroy hundreds of billions of Rand in retained income real value and in all other constant values never of not fully updated each and every year. They are killing that part of the real economy. This is an unknown percentage lower than 10% per annum of the real economy. This destruction of real value only happens in constant real value non-monetary items never or not fully updated. Salaries and wages are not always fully updated, for example. The full 10% destruction only takes place in constant values never updated, eg. retained income.
That is one of SA´s structural problems. Another is the 3 to 6% inflation target. It should be targeted at an upper limit of 2% like in Europe and the US.
South Africa can maintain more than 98% of real value in the economy by limiting inflation to a maximum of 2%. That is how the major part of the world economy maintains more than 97% of real value at the moment.
Money has three functions:
1. Medium of exchange
2. Store of value
3. Unit of account
A central bank can maintian more than 98% of all real value by keeping inflation at 2%. This is the result of money´s third function.
At expected 10% inflation the SARB is maintaining more than 90% of real value in the real economy. How much more is not known. 10% of M3 or R168 billion is definitely being destroyed in the monetary economy. None of this real loss is accounted in SA at the moment.
SA accountants destroy an unknow value running into the hundreds of billions of Rand in all constant real value non-monetary items never or not fully updated, eg. retained income.
The accounted part of the R168 billion destroyed in M3 would be taken to the profit and loss account as a net monetary loss. It is not presently done like that.
SA accountants currently destroy hundreds of billions of Rand in retained income real value and in all other constant values never of not fully updated each and every year. They are killing that part of the real economy. This is an unknown percentage lower than 10% per annum of the real economy. This destruction of real value only happens in constant real value non-monetary items never or not fully updated. Salaries and wages are not always fully updated, for example. The full 10% destruction only takes place in constant values never updated, eg. retained income.
That is one of SA´s structural problems. Another is the 3 to 6% inflation target. It should be targeted at an upper limit of 2% like in Europe and the US.
South Africa can maintain more than 98% of real value in the economy by limiting inflation to a maximum of 2%. That is how the major part of the world economy maintains more than 97% of real value at the moment.
Money has three functions:
1. Medium of exchange
2. Store of value
3. Unit of account
A central bank can maintian more than 98% of all real value by keeping inflation at 2%. This is the result of money´s third function.
At expected 10% inflation the SARB is maintaining more than 90% of real value in the real economy. How much more is not known. 10% of M3 or R168 billion is definitely being destroyed in the monetary economy. None of this real loss is accounted in SA at the moment.
SA accountants destroy an unknow value running into the hundreds of billions of Rand in all constant real value non-monetary items never or not fully updated, eg. retained income.
Three distinct economic items
There are three distinct economic items in the economy:
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1. Variable real value non-monetary items
2. Monetary items
3. Constant real value non-monetary items
They are valued in distinctly different ways.
Monetary items are money held and monetary values pertaining only to money.
Non-monetary items are all items that are not monetary items.
Non-monetary items are sub-divided into variable real value non-monetary items and constant real value non-monetary items. Constant real value non-monetary items only came about with the introduction of the double entry accounting model.
The first economies
The first economies functioned without money. They were barter economies. People bartered economic items they produced or possessed for other economic items they wanted.
Those economic items had variable values. A baker baking bread bartered her extra rolls of bread for rabbits that a hunter would barter. When the hunter had many rabbits to barter he would accept a certain number of bread rolls for a rabbit. When he had few rabbits to barter and he was the only hunter in that area, then he would trade the rabbits for more rolls of bread per rabbit.
Both the rabbits and the bread rolls thus had variable values depending on demand and supply. This applied to all economic items in those barter economies.
Neither money nor the double entry accounting model was invented yet. There was no inflation. There was no medium of exchange. There was no monetary unit of account. There were no financial reports: no profit and loss account and no balance sheet.
There were no monetary items and no constant real value non-monetary items. Only variable real value non-monetary items.
The first economic item was thus a variable real value non-monetary item.
People in barter economies used a primitive system of demand and supply at a specific location where the barter transaction took place.
Money
Money was then invented over a long period of time. Eventually money came to fulfil three functions:
a. Medium of exchange
b. Unit of account
c. Store of value
At that stage there were two distinct economic items in the economy: variable real value non-monetary items and monetary items. The double entry accounting model was not perfected yet
The second distinct economic item was a monetary item. Inflation appeared soon after money was invented.
Double Entry Accounting
Finally the double entry accounting model was invented. This resulted in the creation of the third distinct economic item: a constant real value non-monetary item.
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Buy the ebook for $2.99 or £1.53 or €2.68
1. Variable real value non-monetary items
2. Monetary items
3. Constant real value non-monetary items
They are valued in distinctly different ways.
Monetary items are money held and monetary values pertaining only to money.
Non-monetary items are all items that are not monetary items.
Non-monetary items are sub-divided into variable real value non-monetary items and constant real value non-monetary items. Constant real value non-monetary items only came about with the introduction of the double entry accounting model.
The first economies
The first economies functioned without money. They were barter economies. People bartered economic items they produced or possessed for other economic items they wanted.
Those economic items had variable values. A baker baking bread bartered her extra rolls of bread for rabbits that a hunter would barter. When the hunter had many rabbits to barter he would accept a certain number of bread rolls for a rabbit. When he had few rabbits to barter and he was the only hunter in that area, then he would trade the rabbits for more rolls of bread per rabbit.
Both the rabbits and the bread rolls thus had variable values depending on demand and supply. This applied to all economic items in those barter economies.
Neither money nor the double entry accounting model was invented yet. There was no inflation. There was no medium of exchange. There was no monetary unit of account. There were no financial reports: no profit and loss account and no balance sheet.
There were no monetary items and no constant real value non-monetary items. Only variable real value non-monetary items.
The first economic item was thus a variable real value non-monetary item.
People in barter economies used a primitive system of demand and supply at a specific location where the barter transaction took place.
Money
Money was then invented over a long period of time. Eventually money came to fulfil three functions:
a. Medium of exchange
b. Unit of account
c. Store of value
At that stage there were two distinct economic items in the economy: variable real value non-monetary items and monetary items. The double entry accounting model was not perfected yet
The second distinct economic item was a monetary item. Inflation appeared soon after money was invented.
Double Entry Accounting
Finally the double entry accounting model was invented. This resulted in the creation of the third distinct economic item: a constant real value non-monetary item.
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Equilibrium for Zimbabwe
Equilibrium for Zimbabwe will come about when Zimbabwe copies Brazil and implements a Zim non-monetary index unit or Zim Real Value Unit based on the proven and very successful Brazilian Unidade Real de Valor that allowed Brazil to have a stable and growing economy in non-monetary items which gave them time to sort out how to kill cash hyperinflation in their money.
This is not a theory. It is an historic fact. It was a proven and very successful practice implemented in the 180 million people Brazilian economy.
What is required in Zimbabwe are two elements: a stable non-monetary index unit and a daily rate between the ZimDollar and this stable Real Value Unit.
The Zim Real Value Unit already exists. It is the USDollar.
The USD is a monetary item and the Zim Real Value Unit has to be a non-monetary index. That is correct. It is also true that the USD is 2% away from being a 100% stable index unit. 2% is nothing in the current hyperinflationary chaos in Zimbabwe.
The USD is the Zim Real Value Unit. Every non-monetary item in Zim is given a USD price. That is done by dividing the current ZimDollar purchase price or valuation of any Zim non-monetary item by the current Real Value Unit rate. Or it is simply given a USD price.
Now a a single daily Zim Real Value Unit rate is needed.
That also exists. It is called the Old Mutual Implied Rate. There are many parallel rates in Zimbabwe every day. Everybody haggles to get his or her best rate for his or her deal. So there are many, many USD parallel rates. There is no single USD rate for the whole country because the ZimDollar is not yet floated by the Reserve Bank of Zimbabwe.
The Old Mutual Implied Rate is calculated by dividing the Zimbabwe Stock Exchange price of the Old Mutual share by the London Stock Exchange Price for the same share. The answer is the Old Mutual Implied Rate for the Pound. Then a cross rate calculation is done for the USD rate.
That is the Old Mutual Implied Rate for the USD in Zimbabwe. A single rate is calculated by using the daily closing prices.That can be used as the single Real Value Unit Rate for the whole of Zimbabwe. There is no doubt about the daily closing rate when closing prices are used.
That is the equilibrium solution for Zimbabwe.
How will the OMIR be used for salaries. The worker and employer determine the salary in USD. Say USD 100 or USD 1000 or whatever the USD salary is. It will not change for a whole year in USD value.
Every time the salary is paid it is paid at that day´s OMIR. As prices go up the OMIR will go up and so will the salary. A worker will always receive the same salary in USD equivalent value.This way salaries and prices are linked.
This way all non-monetary items in the whole Zim economy are linked, just like with the Brazilian Unidade Real de Valor.
The Zim economy will return to being a stable economy in non-monetary items. Cash inflation will still depend on the strenght or weakness of the many underlying value systems in the Zim economy, namely the monetary system, economic system, banking system, government, justice system, education system, defence system, industrial policies and systems, etc, etc.
The Zim Real Value Unit will kill non-monetary inflation in all non-monetary items since they will all be valued at exactly the same Zim Real Value Unit rate.
The Zim economy will stabilise and the government and monetary authorities can work on the problems to kill cash hyperinflation in the ZimDollar.
This is not a theory. It is an historic fact. It was a proven and very successful practice implemented in the 180 million people Brazilian economy.
What is required in Zimbabwe are two elements: a stable non-monetary index unit and a daily rate between the ZimDollar and this stable Real Value Unit.
The Zim Real Value Unit already exists. It is the USDollar.
The USD is a monetary item and the Zim Real Value Unit has to be a non-monetary index. That is correct. It is also true that the USD is 2% away from being a 100% stable index unit. 2% is nothing in the current hyperinflationary chaos in Zimbabwe.
The USD is the Zim Real Value Unit. Every non-monetary item in Zim is given a USD price. That is done by dividing the current ZimDollar purchase price or valuation of any Zim non-monetary item by the current Real Value Unit rate. Or it is simply given a USD price.
Now a a single daily Zim Real Value Unit rate is needed.
That also exists. It is called the Old Mutual Implied Rate. There are many parallel rates in Zimbabwe every day. Everybody haggles to get his or her best rate for his or her deal. So there are many, many USD parallel rates. There is no single USD rate for the whole country because the ZimDollar is not yet floated by the Reserve Bank of Zimbabwe.
The Old Mutual Implied Rate is calculated by dividing the Zimbabwe Stock Exchange price of the Old Mutual share by the London Stock Exchange Price for the same share. The answer is the Old Mutual Implied Rate for the Pound. Then a cross rate calculation is done for the USD rate.
That is the Old Mutual Implied Rate for the USD in Zimbabwe. A single rate is calculated by using the daily closing prices.That can be used as the single Real Value Unit Rate for the whole of Zimbabwe. There is no doubt about the daily closing rate when closing prices are used.
That is the equilibrium solution for Zimbabwe.
How will the OMIR be used for salaries. The worker and employer determine the salary in USD. Say USD 100 or USD 1000 or whatever the USD salary is. It will not change for a whole year in USD value.
Every time the salary is paid it is paid at that day´s OMIR. As prices go up the OMIR will go up and so will the salary. A worker will always receive the same salary in USD equivalent value.This way salaries and prices are linked.
This way all non-monetary items in the whole Zim economy are linked, just like with the Brazilian Unidade Real de Valor.
The Zim economy will return to being a stable economy in non-monetary items. Cash inflation will still depend on the strenght or weakness of the many underlying value systems in the Zim economy, namely the monetary system, economic system, banking system, government, justice system, education system, defence system, industrial policies and systems, etc, etc.
The Zim Real Value Unit will kill non-monetary inflation in all non-monetary items since they will all be valued at exactly the same Zim Real Value Unit rate.
The Zim economy will stabilise and the government and monetary authorities can work on the problems to kill cash hyperinflation in the ZimDollar.
Saturday, 19 April 2008
A 2% month on month rise in inflation will lead to hyperinflation in SA in 3 yrs time.
The expected month on month rise in CPIX in South Africa is 1.2% for March, 2008.
A 2% month on month rise in inflation will lead to hyperinflation in SA in 3 years time.
Hyperinflation is defined by the International Accounting Standards Board as: "the cumulative inflation rate over three years is approaching, or exceeds, 100%."
Continuous 2% month on month inflation equals 26% inflation after 1 year and 100% cumulative inflation over three years.
Scary isn´t it?
Get SA accountants to stop the stable measuring unit assumption and high or hyperinflation will never be able to destroy the SA economy.
A 2% month on month rise in inflation will lead to hyperinflation in SA in 3 years time.
Hyperinflation is defined by the International Accounting Standards Board as: "the cumulative inflation rate over three years is approaching, or exceeds, 100%."
Continuous 2% month on month inflation equals 26% inflation after 1 year and 100% cumulative inflation over three years.
Scary isn´t it?
Get SA accountants to stop the stable measuring unit assumption and high or hyperinflation will never be able to destroy the SA economy.
Make the Zim experience impossible in SA
Make the destruction of the economy by high and hyperinflation impossible by banning SA accountants from assuming that money is PERFECTLY stable ONLY for the purpose of valuing CONSTANT value historical cost items, eg. retained income.
They will do it under hyperinflation because they are told to do that by the IASB.
They refuse to do it under non-hyperinflationary conditions because they are not told by the IASB to stop that silly assumption.
They will do it under hyperinflation because they are told to do that by the IASB.
They refuse to do it under non-hyperinflationary conditions because they are not told by the IASB to stop that silly assumption.
Killing the real economy
What SA needs is an inflation upper limit of 2% like the Euro. The inflation target of 3 to 6% is one of the main culprits of the current problems. Another is the 21% increase in money supply.
Young South Africans studying accounting at university are being taught to assume that there is no inflation as far as constant real value non-monetary items, eg. retained income, is concerned. As accounting students they will be taught that they have to assume that money is perfectly stable only for the purpose of valuing constant real value non-monetary items. When they become company accountants and do their companys´ accounts like that, they will be destroying their companys´ retained income as well as all other constant real value non-monetary items never updated at 9.8% per annum.
Since all accountants in SA are doing that they will be destroying hundreds of billions of Rand in retained income real value each and every year. They will be killing the real economy in SA as they are doing at present.
When they stop the stable measuring unit assumption they will be maintaining hundreds of billions of Rand of real value in the SA economy.
No-one can stop them from stopping the stable measuring unit assumption and maintaining the real economy instead of killing it.
Young South Africans studying accounting at university are being taught to assume that there is no inflation as far as constant real value non-monetary items, eg. retained income, is concerned. As accounting students they will be taught that they have to assume that money is perfectly stable only for the purpose of valuing constant real value non-monetary items. When they become company accountants and do their companys´ accounts like that, they will be destroying their companys´ retained income as well as all other constant real value non-monetary items never updated at 9.8% per annum.
Since all accountants in SA are doing that they will be destroying hundreds of billions of Rand in retained income real value each and every year. They will be killing the real economy in SA as they are doing at present.
When they stop the stable measuring unit assumption they will be maintaining hundreds of billions of Rand of real value in the SA economy.
No-one can stop them from stopping the stable measuring unit assumption and maintaining the real economy instead of killing it.
2% anchor for inflation
The SARB regards its primary goal in the South African economic system as " the achievement and maintenance of price stability".
Price stability is a year-on-year increase in the CPI of 0%.
A high degree of price stability is a year-on-year increase in the CPI of 2%.
The SARB has to change its primary goal in the South African economic system to be " the achievement and maintenance of a high degree of price stability of 2%".
Price stability is a year-on-year increase in the CPI of 0%.
A high degree of price stability is a year-on-year increase in the CPI of 2%.
The SARB has to change its primary goal in the South African economic system to be " the achievement and maintenance of a high degree of price stability of 2%".
Thursday, 17 April 2008
0% Inflation only in constant real value non-monetary items
South Africa
Year-on-year inflation February 2008: 9.8%
Actual Historical Cost Paradigm: Assumes 0% inflation only for constant real value non-monetary items NEVER updated, eg. retained income, accumulated losses, trade debtors, trade creditors, capital reserves, provisions, etc., while actual inflation is 9.8%.
Some constant real value non-monetary items are often not fully updated, eg. salaries, wages, rents, fees, royalties, value added taxes, income taxes, company taxes, etc.
Basket of consumer goods
Feb 2007 R100
Feb 2008 R109.8
1. Monetary Inflation 9.8% per annum (destruction of real value of money and other monetary items)
2. Non-monetary inflation (destruction of real value in constant real value non-monetary items never or not fully updated)
(A) 9.8% per annum only for constant real value non-monetary items never updated.
(B) Less than 9.8% per annum for constant real value non-monetary items not fully updated.
1. Monetary Items M3 Value Destroyed
9.8% or R1.714692 trillion x 0.098 = R168.039 billion
2. Non-monetary Items Value Destroyed by South African accountants
(a)Constant real value non-monetary items never updated
Eg. Retained Income
Value Destroyed 9.8% or R???.??? billion x 0.098 = R??.??? billion
Plus 9.8% of all other constant real value non-monetary items never updated.
(b) Constant real value non-monetary items not fully updated
Eg. salaries, wages, rents, fees, royalties, value added taxes, income taxes, company taxes, etc.
Value Destroyed ?% or R???.??? billion x 0.0? = R??.??? billion
Total: A few hundred billion Rand per annum: each and every year.
=====================================================================================
Real Value Paradigm: All (past and present) constant real value non-monetary items fully updated all the time to the latest CPI value in low inflationary economies (the latest parallel rate or daily index rate in hyperinflationary economies).
Basket of consumer goods for the purpose of calculating monetary inflation:
Feb 07 R100 Monetary cost
Feb 08 R109.8 Monetary cost
1. Monetary inflation 9.8%
Monetary Items M3
Value Destroyed
9.8% or R1.714692 trillion x 0.098= R168.039 billion
2. Non-monetary inflation: impossible: no historical costs.
Non-monetary inflation: 0%
Constant real value non-monetary items updated at 9.8%
Basket of consumer goods for the purpose of "calculating" non-monetary inflation only in constant real value non-monetary items:
Feb 07 R109.8 (Historical values restated to Feb 08 CPI rate) Perceived value only possible at the current value base.
Feb 08 R109.8 ALL CONSTANT real value non-monetary items automatically updated/maintained/not destroyed in the normal business practice at the CPI rate: the current value base.
Value Destroyed
Zero - in all constant real value non-monetary items
Value to be maintained by SA accountants in the economy when they stop their assumption that money is perfectly stable only for the purpose of valuing constant real value non-monetary items. They are allowed to stop this assumption and they will stop this assumption under hyperinflation but not under non-hyperinflationary conditions.:
9.8% of retained income plus 9.8% of all other constant real values previously never updated plus value maintained in all other constant real value non-monetary items previously not fully updated.
Total: A few hunderd billion Rand per annum: each and every year.
PS. I plan to calculate some actual values for the SA economy.
Year-on-year inflation February 2008: 9.8%
Actual Historical Cost Paradigm: Assumes 0% inflation only for constant real value non-monetary items NEVER updated, eg. retained income, accumulated losses, trade debtors, trade creditors, capital reserves, provisions, etc., while actual inflation is 9.8%.
Some constant real value non-monetary items are often not fully updated, eg. salaries, wages, rents, fees, royalties, value added taxes, income taxes, company taxes, etc.
Basket of consumer goods
Feb 2007 R100
Feb 2008 R109.8
1. Monetary Inflation 9.8% per annum (destruction of real value of money and other monetary items)
2. Non-monetary inflation (destruction of real value in constant real value non-monetary items never or not fully updated)
(A) 9.8% per annum only for constant real value non-monetary items never updated.
(B) Less than 9.8% per annum for constant real value non-monetary items not fully updated.
1. Monetary Items M3 Value Destroyed
9.8% or R1.714692 trillion x 0.098 = R168.039 billion
2. Non-monetary Items Value Destroyed by South African accountants
(a)Constant real value non-monetary items never updated
Eg. Retained Income
Value Destroyed 9.8% or R???.??? billion x 0.098 = R??.??? billion
Plus 9.8% of all other constant real value non-monetary items never updated.
(b) Constant real value non-monetary items not fully updated
Eg. salaries, wages, rents, fees, royalties, value added taxes, income taxes, company taxes, etc.
Value Destroyed ?% or R???.??? billion x 0.0? = R??.??? billion
Total: A few hundred billion Rand per annum: each and every year.
=====================================================================================
Real Value Paradigm: All (past and present) constant real value non-monetary items fully updated all the time to the latest CPI value in low inflationary economies (the latest parallel rate or daily index rate in hyperinflationary economies).
Basket of consumer goods for the purpose of calculating monetary inflation:
Feb 07 R100 Monetary cost
Feb 08 R109.8 Monetary cost
1. Monetary inflation 9.8%
Monetary Items M3
Value Destroyed
9.8% or R1.714692 trillion x 0.098= R168.039 billion
2. Non-monetary inflation: impossible: no historical costs.
Non-monetary inflation: 0%
Constant real value non-monetary items updated at 9.8%
Basket of consumer goods for the purpose of "calculating" non-monetary inflation only in constant real value non-monetary items:
Feb 07 R109.8 (Historical values restated to Feb 08 CPI rate) Perceived value only possible at the current value base.
Feb 08 R109.8 ALL CONSTANT real value non-monetary items automatically updated/maintained/not destroyed in the normal business practice at the CPI rate: the current value base.
Value Destroyed
Zero - in all constant real value non-monetary items
Value to be maintained by SA accountants in the economy when they stop their assumption that money is perfectly stable only for the purpose of valuing constant real value non-monetary items. They are allowed to stop this assumption and they will stop this assumption under hyperinflation but not under non-hyperinflationary conditions.:
9.8% of retained income plus 9.8% of all other constant real values previously never updated plus value maintained in all other constant real value non-monetary items previously not fully updated.
Total: A few hunderd billion Rand per annum: each and every year.
PS. I plan to calculate some actual values for the SA economy.
Tuesday, 15 April 2008
SA accountants destroy real value on a massive scale.
The real economy is being destroyed in the following manner: Accountants value VARIABLE real value non-monetary items correctly in terms of International Accounting Standards at market value or the lower of cost or realisable value or fair value or present value or recoverable value.
Unfortunately SA accountants assume that money is PERFECTLY stable ONLY for the purpose of valuing CONSTANT real value non-monetary items, eg. retained income. SA accountants thus destroy all CONSTANT real value non-monetary items NEVER updated, eg. retained income, at 9.8% per annum.
They also destroy some part (less than 9.8% per annum) of all other CONSTANT real value non-monetary items that are NOT FULLY updated, eg. salaries, wages, rent, fees, royalties, value added taxes, income taxes, company taxes, rates, issued share capital, etc.
When SA accountants stop their silly assumption that money is PERFECTLY stable ONLY for this single purpose, SA will have 0% inflation in all CONSTANT real value non-monetary items since they will all be updated at the monthly inflation rate.
SA accountants destroy real value on a massive scale. This is very easy to prove from company to company.
It is easy to stop too: just stop the stable measuring unit assumption, that is, stop assuming money is PERFECTLY stable ONLY for the purpose of valuing CONSTANT real value non-monetary items.
Unfortunately SA accountants assume that money is PERFECTLY stable ONLY for the purpose of valuing CONSTANT real value non-monetary items, eg. retained income. SA accountants thus destroy all CONSTANT real value non-monetary items NEVER updated, eg. retained income, at 9.8% per annum.
They also destroy some part (less than 9.8% per annum) of all other CONSTANT real value non-monetary items that are NOT FULLY updated, eg. salaries, wages, rent, fees, royalties, value added taxes, income taxes, company taxes, rates, issued share capital, etc.
When SA accountants stop their silly assumption that money is PERFECTLY stable ONLY for this single purpose, SA will have 0% inflation in all CONSTANT real value non-monetary items since they will all be updated at the monthly inflation rate.
SA accountants destroy real value on a massive scale. This is very easy to prove from company to company.
It is easy to stop too: just stop the stable measuring unit assumption, that is, stop assuming money is PERFECTLY stable ONLY for the purpose of valuing CONSTANT real value non-monetary items.
Saturday, 12 April 2008
Cash economy and real economy
Monetary economy = everything that is actually money and monetary values. Monetary values are accounted monetary items, eg, bank balances, bank loans made and given, financial instruments (not shares), debt instruments, bonds, treasury bonds, home loans, etc.
Very simply stated: money
Real economy or non-monetary economy = everything else in the economy: everything that is not money.
Eg. Property, plant, equipment, shares, stocks in the warehouse, finished goods. Also items like retained income, companies´issued share capital, reserves and provisions on balance sheets, trade debtors, trade creditors, etc.
These non-monetary items are divided in two sub-groups:
1. Variable real value non-monetary items. Eg: Property, plant, equipment, shares, stocks in the warehouse, finished goods, all items for sale, etc.
These items are adequately valued in terms of International Accounting Standards, eg. at fair value, market value, the lower of cost or net realisable value, present value or recoverable value.
There is thus no value destroyed by the accounting or vauluation method. They are adequately valued. No value is destroyed.
2. Constant real value non-monetary items.
Examples: Retained income, issued share capital values, capital reserves, trade debtors, trade creditors, all expenses and all income items in the profit and loss account.
Constant real value non-monetary items came about when the double entry accounting model was introduced in 1300.
Without the double entry accounting model there are no constant real value non-monetary items.
Accountants understand that there is an economic process called inflation and that inflation destroys the real value of money and that money is not stable in real value in inflationary economies.
Money is an historical cost item that you cannot update. Thus, inflation destroys its real value all the time.
Accountants unfortunately, at the same time, ASSUME that money is PERFECTLY stable (no inflation) ONLY for the purpose of valuing CONSTANT real value non-monetary items, eg. retained income.
They thus do NOT update CONSTANT real value non-monetary items, eg. retained income.
Thus, the real value of constant real value non-monetary items never updated, eg. retained income, is also destroyed, just like money, at the rate of inflation.
Under Real Value Accounting this silly and illogical assumption that money is perfectly stable ONLY for the purpose of valuing constant real value non-monetary items is ignored.
All constant real value non-monetary items are updated every time the Consumer Price Index changes under Real Value Accounting in non-hyperinflationary economies. In hyperinflationary economies this is done every time the parallel rate or a daily index rate changes.
This results in 0% inflation ONLY in all CONSTANT real value non-monetary items in the real economy: that is, no value destruction ONLY in that part of the real economy.
Very simply stated: money
Real economy or non-monetary economy = everything else in the economy: everything that is not money.
Eg. Property, plant, equipment, shares, stocks in the warehouse, finished goods. Also items like retained income, companies´issued share capital, reserves and provisions on balance sheets, trade debtors, trade creditors, etc.
These non-monetary items are divided in two sub-groups:
1. Variable real value non-monetary items. Eg: Property, plant, equipment, shares, stocks in the warehouse, finished goods, all items for sale, etc.
These items are adequately valued in terms of International Accounting Standards, eg. at fair value, market value, the lower of cost or net realisable value, present value or recoverable value.
There is thus no value destroyed by the accounting or vauluation method. They are adequately valued. No value is destroyed.
2. Constant real value non-monetary items.
Examples: Retained income, issued share capital values, capital reserves, trade debtors, trade creditors, all expenses and all income items in the profit and loss account.
Constant real value non-monetary items came about when the double entry accounting model was introduced in 1300.
Without the double entry accounting model there are no constant real value non-monetary items.
Accountants understand that there is an economic process called inflation and that inflation destroys the real value of money and that money is not stable in real value in inflationary economies.
Money is an historical cost item that you cannot update. Thus, inflation destroys its real value all the time.
Accountants unfortunately, at the same time, ASSUME that money is PERFECTLY stable (no inflation) ONLY for the purpose of valuing CONSTANT real value non-monetary items, eg. retained income.
They thus do NOT update CONSTANT real value non-monetary items, eg. retained income.
Thus, the real value of constant real value non-monetary items never updated, eg. retained income, is also destroyed, just like money, at the rate of inflation.
Under Real Value Accounting this silly and illogical assumption that money is perfectly stable ONLY for the purpose of valuing constant real value non-monetary items is ignored.
All constant real value non-monetary items are updated every time the Consumer Price Index changes under Real Value Accounting in non-hyperinflationary economies. In hyperinflationary economies this is done every time the parallel rate or a daily index rate changes.
This results in 0% inflation ONLY in all CONSTANT real value non-monetary items in the real economy: that is, no value destruction ONLY in that part of the real economy.
Monday, 7 April 2008
Constant real value non-monetary items defined in IFRS
The term constant real value non-monetary item is defined indirectly in IFRS.
Buy the ebook for $2.99 or £1.53 or €2.68
South African accountants are taught that there are only two distinct economic items in the economy, namely, monetary and non-monetary items and that the economy is divided in the monetary and non-monetary or real economy.
Monetary items are defined by the International Accounting Standards Board in IAS 29, Par. 12 as follows:
Monetary items are money held and items to be received or paid in money.
The second part of this definition is not correct. When you buy your mobile phone on credit, the trade debtor amount in the supplier´s accounts is not a monetary item just because it has to be paid in money. You can pay it in strawberries too, if the supplier will accept strawberries as payment. The trade debtor amount relates to the sale of a variable real value non-monetary item, namely your mobile phone. You did not borrow money from the supplier. The trade debt is a constant real value non-monetary item.
When inflation destroys the real value of your money at 15% per annum you have to pay 15% more money over a year to pay off the constant real value non-monetary item, the phone you bought. It is impossible for inflation to destroy the constant real non-monetary value of your phone as long as the real value of your phone is determined in a free market. Inflation is always and everywhere a monetary phenomenon - as per Milton Friedman. Money is only the monetary medium of exchange used for payment. Inflation can only destroy the real value of money and other monetary items. Inflation has no effect on the real value of non-monetary items. The debt is for the constant real non-monetary value of a constant real value non-monetary item mutually agreed and generally accepted to be paid in money - not for a monetary item. Money is simply the medium of exchange. You did not borrow money. You bought a non-monetary item.
IAS 29 clearly defines monetary and non-monetary items as per the IASB.
Here follows the correct definition of Monetary items:
Monetary items are money held and items with an underlying monetary nature.
The above is not an IASB definition.
Non-monetary items are all items that are not monetary items. This IASB definition is correct for non-monetary items as a generic term. It is however taken that there are thus only two distinct items in the economy: monetary and non-monetary items. The standard to be applied in hyperinflationary economies, International Accounting Standard IAS 29 Financial Reporing in Hyperinflationary Economies was developed on this basis.
It is not true that there are only two basic economic items as defined by the IASB. There are three fundamentally different basic economic items in the economy:
1. Variable real value non-monetary items
2. Monetary items
3. Constant real value non-monetary items
Constant real value non-monetary items are currently only recognized by definition and by name under
(1) Constant Item Purchasing Power Accounting article on Wikipedia,
(2) on this blog and
The IASB does not recognize constant real value non-monetary items directly by name or by definition, but, indirectly by implication. The fact that certain non-monetary items have constant real non-monetary values is implied by the IASB approval of the Constant ITEM Purchasing Power Accounting model in the Framework for the Preparation and Presentation of Financial Statements Par. 104 (a):
"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
The IASB clearly defines issued share capital, capital reserves, retained earnings, all other items in shareholders´ equity, all items in the income statement, provisions, etc as non-monetary items. Since these non-monetary items can be measured in units of constant purchasing power they are obviously constant real value non-monetary items with constant real non-monetary values expressed in terms of a monetary unit of account over time.
Logic would thus imply and it is a fact that non-monetary items that are not measured in units of constant purchasing power during low inflation on a primary valuation basis but are valued in terms of specific IFRS at, for example, market value, fair value, recoverable value, net realisable value, present value, etc are not constant but variable real value non-monetary items, e.g. property, plant, equipment, shares, inventory, foreign exchange, etc.
Constant real value non-monetary items are also implied by the fact that the IASB states in the Framework that accountants can choose to implement a financial capital concept of invested purchasing power where under they choose to measure financial capital maintenance in units of constant purchasing power (the real value maintaining Constant ITEM Purchasing Power Accounting model) instead of in traditional Historical Cost nominal monetary units (the real value destroying Historical Cost Accounting Model).
Buy the ebook for $2.99 or £1.53 or €2.68
Kindest regards,
Nicolaas Smith
Buy the ebook for $2.99 or £1.53 or €2.68
South African accountants are taught that there are only two distinct economic items in the economy, namely, monetary and non-monetary items and that the economy is divided in the monetary and non-monetary or real economy.
Monetary items are defined by the International Accounting Standards Board in IAS 29, Par. 12 as follows:
Monetary items are money held and items to be received or paid in money.
The second part of this definition is not correct. When you buy your mobile phone on credit, the trade debtor amount in the supplier´s accounts is not a monetary item just because it has to be paid in money. You can pay it in strawberries too, if the supplier will accept strawberries as payment. The trade debtor amount relates to the sale of a variable real value non-monetary item, namely your mobile phone. You did not borrow money from the supplier. The trade debt is a constant real value non-monetary item.
When inflation destroys the real value of your money at 15% per annum you have to pay 15% more money over a year to pay off the constant real value non-monetary item, the phone you bought. It is impossible for inflation to destroy the constant real non-monetary value of your phone as long as the real value of your phone is determined in a free market. Inflation is always and everywhere a monetary phenomenon - as per Milton Friedman. Money is only the monetary medium of exchange used for payment. Inflation can only destroy the real value of money and other monetary items. Inflation has no effect on the real value of non-monetary items. The debt is for the constant real non-monetary value of a constant real value non-monetary item mutually agreed and generally accepted to be paid in money - not for a monetary item. Money is simply the medium of exchange. You did not borrow money. You bought a non-monetary item.
IAS 29 clearly defines monetary and non-monetary items as per the IASB.
Here follows the correct definition of Monetary items:
Monetary items are money held and items with an underlying monetary nature.
The above is not an IASB definition.
Non-monetary items are all items that are not monetary items. This IASB definition is correct for non-monetary items as a generic term. It is however taken that there are thus only two distinct items in the economy: monetary and non-monetary items. The standard to be applied in hyperinflationary economies, International Accounting Standard IAS 29 Financial Reporing in Hyperinflationary Economies was developed on this basis.
It is not true that there are only two basic economic items as defined by the IASB. There are three fundamentally different basic economic items in the economy:
1. Variable real value non-monetary items
2. Monetary items
3. Constant real value non-monetary items
Constant real value non-monetary items are currently only recognized by definition and by name under
(1) Constant Item Purchasing Power Accounting article on Wikipedia,
(2) on this blog and
The IASB does not recognize constant real value non-monetary items directly by name or by definition, but, indirectly by implication. The fact that certain non-monetary items have constant real non-monetary values is implied by the IASB approval of the Constant ITEM Purchasing Power Accounting model in the Framework for the Preparation and Presentation of Financial Statements Par. 104 (a):
"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
The IASB clearly defines issued share capital, capital reserves, retained earnings, all other items in shareholders´ equity, all items in the income statement, provisions, etc as non-monetary items. Since these non-monetary items can be measured in units of constant purchasing power they are obviously constant real value non-monetary items with constant real non-monetary values expressed in terms of a monetary unit of account over time.
Logic would thus imply and it is a fact that non-monetary items that are not measured in units of constant purchasing power during low inflation on a primary valuation basis but are valued in terms of specific IFRS at, for example, market value, fair value, recoverable value, net realisable value, present value, etc are not constant but variable real value non-monetary items, e.g. property, plant, equipment, shares, inventory, foreign exchange, etc.
Constant real value non-monetary items are also implied by the fact that the IASB states in the Framework that accountants can choose to implement a financial capital concept of invested purchasing power where under they choose to measure financial capital maintenance in units of constant purchasing power (the real value maintaining Constant ITEM Purchasing Power Accounting model) instead of in traditional Historical Cost nominal monetary units (the real value destroying Historical Cost Accounting Model).
Buy the ebook for $2.99 or £1.53 or €2.68
Kindest regards,
Nicolaas Smith
Saturday, 5 April 2008
Historical Costs and Constant Values
Historical costs, eg. money, retained income, salaries, issued share capital and taxes NEVER updated in non-hyperinflationary economies (Historical Cost Accounting) have constant nominal values while their real values are being destroyed at the rate of inflation.
This results in the destruction of hundreds of billions of Euros in real value in the world economy each and every year because of the use of the Historical Cost Accounting model. This is simply in constant real value non-monetary items.
Variable real value non-monetary items are adequately valued in terms of International Accounting Standards. Real value is not generally destroyed in variable real value non-monetary items under IAS rules. The Historical Cost Accounting model only destroys real value in constant real value non-monetary items NEVER updated; for example, retained income as well as all other constant real value non-monetary items not fully or never updated.
Unfortunately the International Accounting Standards Board does not recognise constant real value non-monetary items. It only recognises monetary and non-monetary items - the latter including Historical Cost items. The IASB in this way contributes to the destruction of hundreds of billions of Euros in, for example, the real value of retained income world wide each and every year.
Under hyperinflation Historical Cost Accounting can destroy a complete economy as happened to the Zimbabwean economy over the past 14 years of hyperinflation. Historical Cost Accounting has destroyed many other economies in the past during hyperinflation. Eg. Jugoslavia, Germany during their hyperinflationary years and others.
Brazil is the only country in the world that was not destroyed by hyperinflation (30 years of it: 1964 to 1994) because they used a DAILY index to update all non-monetary items DAILY. The International Monetary Fund refuses to see the importance of this. That is why there is little hope that the IMF can help Zimbabwe to quickly get back to a stable monetary unit and a stable real economy. Their economists and accountants are too blinded by Historical Cost Accounting.
Constant values
for example
retained income
salaries
issued share capital
taxes
have constant real values.
Under Real Value Accounting they are subject to 0% inflation
while their nominal values are updated everytime the Consumer Price Index changes in non-hyperinflationary economies.
In hyperinflationary economies their nominal values (as well as all other non-monetary items) are updated DAILY at a DAILY index rate or the parallel rate - in the absence of a daily rate - when Real Value Accounting is used as the basic accounting model.
This results in the destruction of hundreds of billions of Euros in real value in the world economy each and every year because of the use of the Historical Cost Accounting model. This is simply in constant real value non-monetary items.
Variable real value non-monetary items are adequately valued in terms of International Accounting Standards. Real value is not generally destroyed in variable real value non-monetary items under IAS rules. The Historical Cost Accounting model only destroys real value in constant real value non-monetary items NEVER updated; for example, retained income as well as all other constant real value non-monetary items not fully or never updated.
Unfortunately the International Accounting Standards Board does not recognise constant real value non-monetary items. It only recognises monetary and non-monetary items - the latter including Historical Cost items. The IASB in this way contributes to the destruction of hundreds of billions of Euros in, for example, the real value of retained income world wide each and every year.
Under hyperinflation Historical Cost Accounting can destroy a complete economy as happened to the Zimbabwean economy over the past 14 years of hyperinflation. Historical Cost Accounting has destroyed many other economies in the past during hyperinflation. Eg. Jugoslavia, Germany during their hyperinflationary years and others.
Brazil is the only country in the world that was not destroyed by hyperinflation (30 years of it: 1964 to 1994) because they used a DAILY index to update all non-monetary items DAILY. The International Monetary Fund refuses to see the importance of this. That is why there is little hope that the IMF can help Zimbabwe to quickly get back to a stable monetary unit and a stable real economy. Their economists and accountants are too blinded by Historical Cost Accounting.
Constant values
for example
retained income
salaries
issued share capital
taxes
have constant real values.
Under Real Value Accounting they are subject to 0% inflation
while their nominal values are updated everytime the Consumer Price Index changes in non-hyperinflationary economies.
In hyperinflationary economies their nominal values (as well as all other non-monetary items) are updated DAILY at a DAILY index rate or the parallel rate - in the absence of a daily rate - when Real Value Accounting is used as the basic accounting model.
Wednesday, 2 April 2008
Robert Mugabe beaten by inflation.
He tried to kill off the inflation dragon with price freezes.
It was useless.
He had to bow down to the inflation monster as was predicted all along.
Inflation has already toppled many goverments in the past. It can now add Robert Mugabe´s Zanu PF goverment to that long list.
Banning/revoking the stable measuring unit assumption will make the destruction of any economy by high inflation or hyperinflation impossible.
The stable measuring unit assumption is revoked under Real Value Accounting.
It was useless.
He had to bow down to the inflation monster as was predicted all along.
Inflation has already toppled many goverments in the past. It can now add Robert Mugabe´s Zanu PF goverment to that long list.
Banning/revoking the stable measuring unit assumption will make the destruction of any economy by high inflation or hyperinflation impossible.
The stable measuring unit assumption is revoked under Real Value Accounting.
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