Everybody must be very happy to hear that Gill Marcus will be an enemy of inflation.
Milton Friedman stated correctly that inflation is always and everywhere a monetary phenomenon. Inflation only destroys the real value of the Rand and other monetary items in the SA monetary economy. Inflation has no effect on the real value of non-monetary items.
The economy consists of three parts:
1. The monetary economy - the Rand money supply and other monetary items like bank loans, credit card loans, home loans, student loans, etc.
2. The variable item economy - everything you see around you except actual money and bank/loan accounts: items with variable prices over time (cars, houses, products, etc)
3. The constant item economy - salaries, wages, rents, company issued share capital, retained profits in companies, trade debtors, trade creditors, taxes payable, taxes receivable, etc: items with constant real values over time (you know your salary or wage has a constant real value over time).
We all know that inflation is the enemy in the monetary economy. Inflation can only destroy the real value of the Rand and other monetary items - at 8% per annum at the moment. It has destroyed 93.2% of the real value of the Rand since January 1981. Cumulative inflation since then now runs at 1 354%. Taking it from another date: inflation has destroyed 61.9% of the real value of the Rand since April, 1994 because we have had 162% cumulative inflation since the start of the current government.
There are no enemies in the variable item economy because the market eventually kills all enemies to its proper working: variable items are mostly exchanged at market prices determined by supply and demand.
The enemy in the constant item economy has been killed off by COSATU and other trade unions in the past and in the present in salaries and wages. Trade unions ensured in the past and ensure in the present that the enemy of constant wages and salaries, accountants´ stable measuring unit assumption, is dead and stays dead. COSATU and other trade unions see to it that the real values of salaries and wages are measured in units of constant purchasing power. COSATU and other trade unions reject SA accountants´ stable measuring unit assumption: i.e. they see to it that salaries and wages are inflation-adjusted in a low inflation environment.
SA accountants´ stable measuring unit assumption whereby they simply assume there is no such thing as inflation (accountants simply assume the Rand is PERFECTLY stable for this purpose) is so ingrained in accountants´ minds that it has become a completely unknown enemy to the constant item economy as far as the valuation of SA companies´ issued share capital, retained profits, debtors, creditors, taxes payable, taxes receivable, etc are concerned.
Accountants - after very many years of pressure from trade unions - inflation-adjust salaries and wages in low inflation environments but they refuse point blank to measure financial capital maintenance in units of constant purchasing power although the International Accounting Standards Board authorized them to do exactly that 20 years ago in the Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
SA accountants simply refuse to reject their stable measuring unit assumption during low inflation.
So, what is the result of SA accountants´ stable measuring unit assumption: they refuse point blank to update the existing real values of SA banks´ and companies´ existing retained profits, for example. This means they unknowingly destroy the existing real value of all SA banks´ and companies´ existing retained profits at a rate equal to the annual rate of inflation because they value these items in Rands. This amounts to them unknowingly destroying about R85 billion PER ANNUM just in the existing real value of existing retained profits of companies listed on the Johannesburg Stock Exchange. They are unknowingly doing it right now.
It is conservatively estimated that they unknowingly destroy about R200 billion PER ANNUM in the existing real value of existing constant items never updated in the SA constant item economy. They are unknowingly doing it this year as they unknowingly did last year and as they unknowingly will do next year if they carry on with their stable measuring unit assumption.
What will happen when SA accountants follow the IASB´s advice given 20 years ago and stop their stable measuring unit assumption?
They will knowingly boost the existing SA constant item economy with at least R200 billion PER ANNUM for an unlimited period of time in the future - ceteris paribus - by simply maintaining instead of destroying existing real values in existing constant items. Now they destroy them with their stable measuring unit assumption. When they stop their stable measuring unit assumption they will maintain them.
SA accountants can not and do not create real value out of nothing by simply passing some accounting entries. They will boost the existing SA constant item economy by about R200 billion PER ANNUM for an unlimited period of time by not destroying existing real value in existing constant items as they did in the past and as they are doing right now whenever they stop their stable measuring unit assumption.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Saturday, 25 July 2009
Thursday, 23 July 2009
The stable measuring unit assumption is the enemy in the real economy
Fin24.com today reported that:
"Head of research at the South African Reserve Bank (Sarb), Dr Johan van den Heever, said Governor-elect Gill Marcus will be an enemy of inflation when she takes over on November 9. "
I am very happy to hear that.
I am sure that Gill Marcus and the SARB know that inflation is a uniquely monetary phenomenon and only destroys the real value of the Rand - currently at 8% per annum - and other monetary items in the SA monetary economy.
Inflation has no effect on the real value of non-monetary items.
"Purchasing power of non monetary items does not change in spite of variation in national currency value."
Prof. Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
http://www.mufad.org/index2.php?option=com_docman&task=doc_view&gid=9&Itemid=100
Inflation has no effect on the SA real or non-monetary economy. The Historical Cost Accounting model SA accountants and boards of directors of SA banks and companies choose has a devastating effect on the real value of constant real value non-monetary items never updated in the SA real economy, for example, the Retained Earnings of all SA banks and companies.
SA accountants unknowingly destroy a massive amount - conservatively estimated at about R200 billion per annum - in the real value of non-monetary items never updated in the SA real economy with their very destructive stable measuring unit assumption each and every year.
The stable measuring unit assumption is the enemy in the real economy.
When SA accountants measure financial capital maintenance in units of constant purchasing power as the International Accounting Standard Boards authorized them to do 20 years ago in the Framework, Par. 104 (a) which state that:
"Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
which is compliant with International Finanicial Reporting Standards, they will reject the stable measuring unit assumption and maintain instead of destroy about R200 billion in the real value of constant real value non-monetary items in the SA real economy for an unlimited period of time.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
"Head of research at the South African Reserve Bank (Sarb), Dr Johan van den Heever, said Governor-elect Gill Marcus will be an enemy of inflation when she takes over on November 9. "
I am very happy to hear that.
I am sure that Gill Marcus and the SARB know that inflation is a uniquely monetary phenomenon and only destroys the real value of the Rand - currently at 8% per annum - and other monetary items in the SA monetary economy.
Inflation has no effect on the real value of non-monetary items.
"Purchasing power of non monetary items does not change in spite of variation in national currency value."
Prof. Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
http://www.mufad.org/index2.php?option=com_docman&task=doc_view&gid=9&Itemid=100
Inflation has no effect on the SA real or non-monetary economy. The Historical Cost Accounting model SA accountants and boards of directors of SA banks and companies choose has a devastating effect on the real value of constant real value non-monetary items never updated in the SA real economy, for example, the Retained Earnings of all SA banks and companies.
SA accountants unknowingly destroy a massive amount - conservatively estimated at about R200 billion per annum - in the real value of non-monetary items never updated in the SA real economy with their very destructive stable measuring unit assumption each and every year.
The stable measuring unit assumption is the enemy in the real economy.
When SA accountants measure financial capital maintenance in units of constant purchasing power as the International Accounting Standard Boards authorized them to do 20 years ago in the Framework, Par. 104 (a) which state that:
"Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
which is compliant with International Finanicial Reporting Standards, they will reject the stable measuring unit assumption and maintain instead of destroy about R200 billion in the real value of constant real value non-monetary items in the SA real economy for an unlimited period of time.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Constant items
Geoffrey Whittington in his definitive work on inflation accounting in the beginning of the 1980´s, Inflation Accounting - An Introduction to the Debate, published in 1983, clearly indicated that with 1970-style CPP accounting all non-monetary accounts (with no distinction being made between variable and constant real value non-monetary item accounts) were updated by means of the CPI.
He stated that Constant Purchasing Power inflation accounting (CPP) was a method of inflation-adjusting all non-monetary accounts consistently by means of the Consumer Price Index which reflected changes in money’s purchasing power. 1970-style CPP inflation accounting tried to deal with the problem of inflation in the popularly understood sense, as a decrease in the real value of money. According to Whittington, CPP inflation accounting tried to solve this problem by inflation-adjusting all non-monetary items at the reporting date by means of the CPI.
This eventually led to the failure of 1970-style CPP accounting as an inflation accounting model.
SA accountants freely destroy real value in the real economy with their assumption that the rand is perfectly stable only for the purpose of accounting constant value items, and have absolutely no concern about the negative impact this has on sustainable economic growth.
The destruction of real value in the real economy by SA 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.
Salaries, wages, rentals, etc are normally inflation-adjusted in South Africa and generally too in most economies.
Inflation-adjusted income statement constant real value non-monetary items, for example, salaries and wages, are – right this very moment - a blessing to users in SA – and all around the world - because they maintain the real value or purchasing power of salaries and wages during inflation as long as the inflation-adjustment is at least equal to inflation over the period in question. Millions of SA workers, their trade unions, the SA government, SA accountants and South Africans in general would agree that the practice of inflation-adjusting accounts in a low inflation environment is a blessing to users and does not insult them.
Inflation-adjusted balance sheet constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, etc in SA´s low inflation environment will be a blessing to everyone in SA when our accountants simply choose to change from their current implementation of the real value destroying traditional HCA model and freely choose to implement the real value maintaining Constant Item Purchasing Power Accounting model as approved in the IASB´s Framework, Par. 104 (a) twenty years ago. They would maintain - instead of currently destroy as they also did last year and all the years before - at least R200 billion annually in constant item real value in the SA real economy for an unlimited period – all else being equal.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
He stated that Constant Purchasing Power inflation accounting (CPP) was a method of inflation-adjusting all non-monetary accounts consistently by means of the Consumer Price Index which reflected changes in money’s purchasing power. 1970-style CPP inflation accounting tried to deal with the problem of inflation in the popularly understood sense, as a decrease in the real value of money. According to Whittington, CPP inflation accounting tried to solve this problem by inflation-adjusting all non-monetary items at the reporting date by means of the CPI.
This eventually led to the failure of 1970-style CPP accounting as an inflation accounting model.
SA accountants freely destroy real value in the real economy with their assumption that the rand is perfectly stable only for the purpose of accounting constant value items, and have absolutely no concern about the negative impact this has on sustainable economic growth.
The destruction of real value in the real economy by SA 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.
Salaries, wages, rentals, etc are normally inflation-adjusted in South Africa and generally too in most economies.
Inflation-adjusted income statement constant real value non-monetary items, for example, salaries and wages, are – right this very moment - a blessing to users in SA – and all around the world - because they maintain the real value or purchasing power of salaries and wages during inflation as long as the inflation-adjustment is at least equal to inflation over the period in question. Millions of SA workers, their trade unions, the SA government, SA accountants and South Africans in general would agree that the practice of inflation-adjusting accounts in a low inflation environment is a blessing to users and does not insult them.
Inflation-adjusted balance sheet constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, etc in SA´s low inflation environment will be a blessing to everyone in SA when our accountants simply choose to change from their current implementation of the real value destroying traditional HCA model and freely choose to implement the real value maintaining Constant Item Purchasing Power Accounting model as approved in the IASB´s Framework, Par. 104 (a) twenty years ago. They would maintain - instead of currently destroy as they also did last year and all the years before - at least R200 billion annually in constant item real value in the SA real economy for an unlimited period – all else being equal.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Generally accepted inflation concepts
It is generally accepted and a fact that inflation destroys the real value of money (the internal functional currency) and other monetary items over time.
It is also generally accepted and a fact that hyperinflation can destroy the real value of a country’s entire monetary base as happened in Zimbabwe recently. That was the result of a massive increase in the volume and nominal value of bank notes in the country by Gideon Gono, the governor of the Reserve Bank of Zimbabwe, with an equivalent extreme rate of destruction of the real value of the Zimbabwe Dollar since the massive nominal increase in ZimDollar money supply was not the result of a concomitant increase in real value in the real or non-monetary economy of Zimbabwe.
It is generally accepted and a fact that inflation destroys the real value of the capital amounts of monetary savings and money lent over time.
It is generally accepted, but not a fact, that inflation erodes, which is the same as destroys, the real value of constant real value non-monetary items with fixed nominal payments over time, e.g. fixed salary, wage, rental payments, etc.
The constant real value non-monetary values of salaries, wages, rentals, etc are generally maintained, i.e. not destroyed, when accountants choose to measure the real value of these constant real value non-monetary items in units of constant purchasing power in terms of the CPI in most economies with payment in depreciating money during inflation.
It is not generally accepted, but a fact, that SA accountants unknowingly destroy the real value of Retained Earnings of all SA companies and banks over time when they choose to measure financial capital maintenance in nominal monetary units in terms of the real value destroying traditional HCA model during inflation when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation and these companies and banks have no revaluable variable items or insufficient revaluable variable items to maintain 100% of the updated original real value of all contributions to their Shareholders´ equity.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
It is also generally accepted and a fact that hyperinflation can destroy the real value of a country’s entire monetary base as happened in Zimbabwe recently. That was the result of a massive increase in the volume and nominal value of bank notes in the country by Gideon Gono, the governor of the Reserve Bank of Zimbabwe, with an equivalent extreme rate of destruction of the real value of the Zimbabwe Dollar since the massive nominal increase in ZimDollar money supply was not the result of a concomitant increase in real value in the real or non-monetary economy of Zimbabwe.
It is generally accepted and a fact that inflation destroys the real value of the capital amounts of monetary savings and money lent over time.
It is generally accepted, but not a fact, that inflation erodes, which is the same as destroys, the real value of constant real value non-monetary items with fixed nominal payments over time, e.g. fixed salary, wage, rental payments, etc.
The constant real value non-monetary values of salaries, wages, rentals, etc are generally maintained, i.e. not destroyed, when accountants choose to measure the real value of these constant real value non-monetary items in units of constant purchasing power in terms of the CPI in most economies with payment in depreciating money during inflation.
It is not generally accepted, but a fact, that SA accountants unknowingly destroy the real value of Retained Earnings of all SA companies and banks over time when they choose to measure financial capital maintenance in nominal monetary units in terms of the real value destroying traditional HCA model during inflation when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation and these companies and banks have no revaluable variable items or insufficient revaluable variable items to maintain 100% of the updated original real value of all contributions to their Shareholders´ equity.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Wednesday, 22 July 2009
The rejection of the stable measuring unit assumption
Accountants and accounting authorities do not appreciate that they can stop accountants destroying real value on a massive scale in the real economy by simply rejecting the stable measuring unit assumption when they choose the IFRS compliant Constant Item Purchasing Power Accounting model and measure financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.
IFRS do, however, already – 20 years ago - allow the rejection of the stable measuring unit assumption as an alternative to HCA at all levels of inflation and deflation. The IASB´s Framework, Par. 104 (a) states that financial capital maintenance can be calculated in either constant purchasing power units or in nominal monetary units. Par. 104 (a) was authorized by the IASB predecessor body, the International Accounting Standards Committee Board in April, 1989 and adopted by the IASB in 2001.
The stable measuring unit assumption is also rejected in IAS 29 Financial Reporting in Hyperinflationary Economies.
The Standards thus already reject the stable measuring unit assumption under two circumstances:
1.) In IAS 29 during hyperinflationary conditions with the IASB´s Constant Purchasing Power inflation accounting model which is a complete price-level inflation accounting model under which all non-monetary items, variable and constant items, are inflation-adjusted by means of the CPI during hyperinflation, and
2.) In the Framework, Par. 104 (a) in the implementation of the Constant Item Purchasing Power basic accounting model with the measurement of financial capital maintenance in units of constant purchasing power as an alternative to the real value destroying traditional HCA model when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.
IFRS already allow the rejection of the stable measuring unit assumption under two circumstances: (1) as an alternative to the real value destroying traditional basic HCA model under low inflation and (2) as a specific requirement by the IASB during hyperinflation – both items approved 20 years ago.
The IASB approved Framework, Par. 104 (a) which is applicable in this case since there is no specific IFRS relating to the valuation of Issued Share capital, Retained Earnings and other items in Shareholders´ Equity during non-hyperinflationary periods, allows accountants to reject the stable measuring unit assumption during all levels of inflation and deflation when they choose to measure financial capital maintenance in units of constant purchasing power as an alternative to measurement in nominal monetary units as applied in the traditional HCA model.
It is not generally appreciated by accountants that they are unknowingly responsible for the destruction of the real value of constant real value non-monetary items never or not fully updated or inflation-adjusted or maintained over time when they implement the real value destroying traditional HCA model: more specifically, the very destructive stable measuring unit assumption during periods of inflation when they maintain it for an unlimited period of time during indefinite inflation. This lack of appreciation also applies to economists, business people and the public in general.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
IFRS do, however, already – 20 years ago - allow the rejection of the stable measuring unit assumption as an alternative to HCA at all levels of inflation and deflation. The IASB´s Framework, Par. 104 (a) states that financial capital maintenance can be calculated in either constant purchasing power units or in nominal monetary units. Par. 104 (a) was authorized by the IASB predecessor body, the International Accounting Standards Committee Board in April, 1989 and adopted by the IASB in 2001.
The stable measuring unit assumption is also rejected in IAS 29 Financial Reporting in Hyperinflationary Economies.
The Standards thus already reject the stable measuring unit assumption under two circumstances:
1.) In IAS 29 during hyperinflationary conditions with the IASB´s Constant Purchasing Power inflation accounting model which is a complete price-level inflation accounting model under which all non-monetary items, variable and constant items, are inflation-adjusted by means of the CPI during hyperinflation, and
2.) In the Framework, Par. 104 (a) in the implementation of the Constant Item Purchasing Power basic accounting model with the measurement of financial capital maintenance in units of constant purchasing power as an alternative to the real value destroying traditional HCA model when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.
IFRS already allow the rejection of the stable measuring unit assumption under two circumstances: (1) as an alternative to the real value destroying traditional basic HCA model under low inflation and (2) as a specific requirement by the IASB during hyperinflation – both items approved 20 years ago.
The IASB approved Framework, Par. 104 (a) which is applicable in this case since there is no specific IFRS relating to the valuation of Issued Share capital, Retained Earnings and other items in Shareholders´ Equity during non-hyperinflationary periods, allows accountants to reject the stable measuring unit assumption during all levels of inflation and deflation when they choose to measure financial capital maintenance in units of constant purchasing power as an alternative to measurement in nominal monetary units as applied in the traditional HCA model.
It is not generally appreciated by accountants that they are unknowingly responsible for the destruction of the real value of constant real value non-monetary items never or not fully updated or inflation-adjusted or maintained over time when they implement the real value destroying traditional HCA model: more specifically, the very destructive stable measuring unit assumption during periods of inflation when they maintain it for an unlimited period of time during indefinite inflation. This lack of appreciation also applies to economists, business people and the public in general.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Monday, 20 July 2009
It is an essential function of accounting to maintain the real value of constant items during inflation
1970-style Constant Purchasing Power (CPP) inflation accounting was a popular but failed attempt at inflation accounting at that time. It was a form of inflation accounting which tried unsuccessfully to make corporate accounts more informative when comparing current transactions with previous transactions by updating ALL non-monetary items (without distinguishing between variable and constant real value non-monetary items) equally by means of the Consumer Price Index during high inflation.
Measurement in units of constant purchasing power was used for variable and constant balance sheet items during the high inflation 1970´s. 1970-style CPP inflation accounting was abandoned as a failed and discredited inflation accounting model for reasons explained below when general inflation decreased to low levels thereafter.
The function of financial accounting is not just “to convey value information about the economic resources of a business” as Harvey Kapnick stated in the 1976 Sax Lecture.
http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm
It is an essential function of accounting to maintain the real value of constant items during inflation and deflation. This can only be achieved by inflation-adjusting all constant items by means of the CPI as approved by the IASB in the Framework, Par. 104 (a) twenty years ago. Accountants have abdicated the essential financial capital maintenance function of accounting to their fiction that money is stable in real value during inflation and deflation. In so doing, they have in the past unknowingly destroyed and currently unknowingly destroy real value on a massive scale in the real economy when they implement the very destructive stable measuring unit assumption as part of the IASB approved real value destroying traditional Historical Cost Accounting model during non-hyperinflationary periods when they implement the stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Kindest regards,
Nicolaas Smith
Measurement in units of constant purchasing power was used for variable and constant balance sheet items during the high inflation 1970´s. 1970-style CPP inflation accounting was abandoned as a failed and discredited inflation accounting model for reasons explained below when general inflation decreased to low levels thereafter.
The function of financial accounting is not just “to convey value information about the economic resources of a business” as Harvey Kapnick stated in the 1976 Sax Lecture.
http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm
It is an essential function of accounting to maintain the real value of constant items during inflation and deflation. This can only be achieved by inflation-adjusting all constant items by means of the CPI as approved by the IASB in the Framework, Par. 104 (a) twenty years ago. Accountants have abdicated the essential financial capital maintenance function of accounting to their fiction that money is stable in real value during inflation and deflation. In so doing, they have in the past unknowingly destroyed and currently unknowingly destroy real value on a massive scale in the real economy when they implement the very destructive stable measuring unit assumption as part of the IASB approved real value destroying traditional Historical Cost Accounting model during non-hyperinflationary periods when they implement the stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Kindest regards,
Nicolaas Smith
Sunday, 19 July 2009
SA accountants´ stable measuring unit assumption costs SA about R200 billion each and every year
Hi,
I point out that SA accountants unknowingly destroy about R200 billion per annum in the SA real economy with their implementation of the very destructive stable measuring unit assumption as it forms part of the traditional Historical Cost Accounting model.
Simply put: SA accountants unknowingly destroy about R200 billion per annum doing normal traditional Historical Cost accounting.
They can maintain about R200 billion PER ANNUM for an unlimited period of time in the SA real economy by updating all constant items as they are allowed to do 20 years ago by the IASB.
Maintaining constant items´ real values during low and hyperinflation is an essential function of accounting.
It is hard to believe that the IASB only requires / mandates / demands that during hyperinflation with IAS 29.
The IASB leaves it as an option during low inflation.
That Historical Cost Mistake costs SA about R200 billion per annum.
Kindest regards,
Nicolaas Smith
I point out that SA accountants unknowingly destroy about R200 billion per annum in the SA real economy with their implementation of the very destructive stable measuring unit assumption as it forms part of the traditional Historical Cost Accounting model.
Simply put: SA accountants unknowingly destroy about R200 billion per annum doing normal traditional Historical Cost accounting.
They can maintain about R200 billion PER ANNUM for an unlimited period of time in the SA real economy by updating all constant items as they are allowed to do 20 years ago by the IASB.
Maintaining constant items´ real values during low and hyperinflation is an essential function of accounting.
It is hard to believe that the IASB only requires / mandates / demands that during hyperinflation with IAS 29.
The IASB leaves it as an option during low inflation.
That Historical Cost Mistake costs SA about R200 billion per annum.
Kindest regards,
Nicolaas Smith
The battle between sustainable growth and sustainable value destruction
My comment below was promptly removed from
The Sunday Times article : Gill Marcus to replace Mboweni at SARB
“In terms of the Constitution, the primary objective of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable growth,” Zuma said today. “ as per Bloombergs.
The implementation by SA accountants of the stable measuring unit assumption in their valuation of constant real value non-monetary items in the SA real economy is sustainable value destruction.
On the on hand, everyone in SA tries his or her best to contribute to sustainable growth in the SA economy.
At the very same time, SA accountants unknowingly perfected sustainable value destruction with their implementation of the stable measuring unit assumption. What brilliance in pervasive permanently sustainable value destruction throughout the whole economy: simply assume there is no inflation as far as constant items are concerned and you will destroy all of them never updated equally at the annual rate of inflation.
The stable measuring unit assumption: what a stroke of genius in sustainable value destruction.
For example: R3.338 billion at ABSA during 2008 under the Chairmanship of Gill Marcus. It is sustainable value destruction because ABSA´s accountants are unknowingly doing the same this year and will continue for an indefinite period of time as long as they implement the stable measuring unit assumption.
All SA accountants have to do to maintain about R200 billion in existing real value in the SA real economy and to stop unknowingly destroying about R200 billion in real value in the SA real economy is to freely select financial capital maintenance in units of constant purchasing power as they have been authorized to do 20 years ago when the IASB approved Par. 104 (a) in the Framework.
Kindest regards,
Nicolaas Smith
The Sunday Times article : Gill Marcus to replace Mboweni at SARB
“In terms of the Constitution, the primary objective of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable growth,” Zuma said today. “ as per Bloombergs.
The implementation by SA accountants of the stable measuring unit assumption in their valuation of constant real value non-monetary items in the SA real economy is sustainable value destruction.
On the on hand, everyone in SA tries his or her best to contribute to sustainable growth in the SA economy.
At the very same time, SA accountants unknowingly perfected sustainable value destruction with their implementation of the stable measuring unit assumption. What brilliance in pervasive permanently sustainable value destruction throughout the whole economy: simply assume there is no inflation as far as constant items are concerned and you will destroy all of them never updated equally at the annual rate of inflation.
The stable measuring unit assumption: what a stroke of genius in sustainable value destruction.
For example: R3.338 billion at ABSA during 2008 under the Chairmanship of Gill Marcus. It is sustainable value destruction because ABSA´s accountants are unknowingly doing the same this year and will continue for an indefinite period of time as long as they implement the stable measuring unit assumption.
All SA accountants have to do to maintain about R200 billion in existing real value in the SA real economy and to stop unknowingly destroying about R200 billion in real value in the SA real economy is to freely select financial capital maintenance in units of constant purchasing power as they have been authorized to do 20 years ago when the IASB approved Par. 104 (a) in the Framework.
Kindest regards,
Nicolaas Smith
Update to maintain
SA accountants do not discuss the possibility of destroying R85 bn in the real value of JSE listed companies´ Retained Profits.
They are doing it right now - as they did last year - and as they will do for as long as they refuse to update SA companies´ and banks´ Retained Earnings and Issued Share Capital as they can freely do in terms of the IASB´s Framework, Par. 104 (a) approved 20 years ago.
Makes you think, doesn´t it?
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
They are doing it right now - as they did last year - and as they will do for as long as they refuse to update SA companies´ and banks´ Retained Earnings and Issued Share Capital as they can freely do in terms of the IASB´s Framework, Par. 104 (a) approved 20 years ago.
Makes you think, doesn´t it?
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Cosatu: What do you want to do?
Cosatu: A 1% increase in the inflation target - ceteris paribus - destroys an extra R19.4 billion p.a. in the real value of M3.
SA accountants rejecting the stable measuring unit assumption - as they are allowed to do by IFRS - will add R85 bn per annum in the real value of Retained Earnings (SA real economy) in JSE companies.
Cosatu what do you want to do?
Destroy the monetary economy faster?
Sort out SA accountants and you grow the real economy by at least R85 bn per annum forever.
Kindest regards,
Nicolaas Smith
SA accountants rejecting the stable measuring unit assumption - as they are allowed to do by IFRS - will add R85 bn per annum in the real value of Retained Earnings (SA real economy) in JSE companies.
Cosatu what do you want to do?
Destroy the monetary economy faster?
Sort out SA accountants and you grow the real economy by at least R85 bn per annum forever.
Kindest regards,
Nicolaas Smith
Saturday, 18 July 2009
SA accountants unknowingly destroy the real value of constant items never updated
Inflation is a uniquely monetary phenomenon and can only destroy the real value of money and other monetary items over time. It has no effect on the real value of non-monetary items.
SA accountants unknowingly, unintentionally and unwittingly do the destroying of the real value of constant items, e.g. Retained Earnings, Issued Share capital, other items in shareholder’s equity, salaries, wages, rentals, etc never or not fully updated or inflation-adjusted over time when they choose the real value destroying traditional HCA model during inflationary periods when they maintain the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
This includes the unknowing destruction by SA accountants of the real value of the Issued Share capital of SA companies and banks which do not have any or sufficient property or other variable real value non-monetary items to revalue to an amount at least equal to the updated original real value of all contributions to Shareholder’s Equity.
SA accountants unknowingly destroy the real value of the Retained Earnings of all SA companies and banks and the real value of the Issued Share capital of SA companies with no variable real value non-monetary items to revalue continuously at a rate equal to the inflation rate while they continue implementing the very destructive stable measuring unit assumption during non-hyperinflationary conditions when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.
It is correct, essential and compliant with IFRS to inflation-adjust or update or maintain constant real value non-monetary items by means of the CPI which is a general price index during all levels of inflation and deflation. The reason for this is that non-monetary items - both variable and constant real value non-monetary items - are expressed in terms of money, i.e. in terms of an unstable monetary unit of account which is the same as the unstable monetary medium of exchange.
Inflation destroys the real value of the unstable monetary medium of exchange - which is also the unstable monetary unit of account in accounting and the economy in general. Constant real value non-monetary items thus have to be updated or maintained at a rate equal to the rate of inflation or deflation in order to maintain their real values constant during inflation and deflation respectively because the unstable unit of measure in accounting is an unstable monetary unit of account and consequently never absolutely stable during periods of inflation and deflation.
It is not correct for accountants to inflation-adjust by means of the CPI, which is a general price index, variable real value non-monetary items which are subject to product specific inflation or price increases (e.g. properties, shares, etc.) for the purpose of valuing these variable items during the accounting period on a primary valuation basis during non-hyperinflationary periods.
These variable real value non-monetary items are generally subject to market based real value changes determined by supply and demand. They incorporate product or item specific price changes or product specific inflation where the word inflation is used to simply mean a product or product group price increase instead of the general use of the word in economics to mean the destruction of the real value of money over time, i.e. a general destruction of the purchasing power of money which results in an increase in the general price level over time.
Kindest regards,
Nicolaas Smith
SA accountants unknowingly, unintentionally and unwittingly do the destroying of the real value of constant items, e.g. Retained Earnings, Issued Share capital, other items in shareholder’s equity, salaries, wages, rentals, etc never or not fully updated or inflation-adjusted over time when they choose the real value destroying traditional HCA model during inflationary periods when they maintain the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
This includes the unknowing destruction by SA accountants of the real value of the Issued Share capital of SA companies and banks which do not have any or sufficient property or other variable real value non-monetary items to revalue to an amount at least equal to the updated original real value of all contributions to Shareholder’s Equity.
SA accountants unknowingly destroy the real value of the Retained Earnings of all SA companies and banks and the real value of the Issued Share capital of SA companies with no variable real value non-monetary items to revalue continuously at a rate equal to the inflation rate while they continue implementing the very destructive stable measuring unit assumption during non-hyperinflationary conditions when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.
It is correct, essential and compliant with IFRS to inflation-adjust or update or maintain constant real value non-monetary items by means of the CPI which is a general price index during all levels of inflation and deflation. The reason for this is that non-monetary items - both variable and constant real value non-monetary items - are expressed in terms of money, i.e. in terms of an unstable monetary unit of account which is the same as the unstable monetary medium of exchange.
Inflation destroys the real value of the unstable monetary medium of exchange - which is also the unstable monetary unit of account in accounting and the economy in general. Constant real value non-monetary items thus have to be updated or maintained at a rate equal to the rate of inflation or deflation in order to maintain their real values constant during inflation and deflation respectively because the unstable unit of measure in accounting is an unstable monetary unit of account and consequently never absolutely stable during periods of inflation and deflation.
It is not correct for accountants to inflation-adjust by means of the CPI, which is a general price index, variable real value non-monetary items which are subject to product specific inflation or price increases (e.g. properties, shares, etc.) for the purpose of valuing these variable items during the accounting period on a primary valuation basis during non-hyperinflationary periods.
These variable real value non-monetary items are generally subject to market based real value changes determined by supply and demand. They incorporate product or item specific price changes or product specific inflation where the word inflation is used to simply mean a product or product group price increase instead of the general use of the word in economics to mean the destruction of the real value of money over time, i.e. a general destruction of the purchasing power of money which results in an increase in the general price level over time.
Kindest regards,
Nicolaas Smith
Thursday, 16 July 2009
The IASB´s Framework, Par. 104 (a) is not about inflation accounting. IAS 29 is.
During the period of high inflation in the 1970´s accountants tried various inflation accounting models in an attempt to adjust company financial reports supposedly to reflect the apparent effect of high inflation on non-monetary items.
During that period inflation accounting described a range of accounting models designed to correct comparison problems arising from historical cost accounting in the presence of high and hyperinflation.
It was and still is generally accepted that inflation affects the real value of non-monetary items. That is not true. Inflation has no effect on the real value of non-monetary items. Inflation is a uniquely monetary phenomenon.
It is not inflation, but, SA accountants selecting the Historical Cost Accounting model who unknowinlgy destroy the real value of SA constant real value non-monetary items never or not fully updated during non-hyperinflationary periods.
Inflation accounting models that were tried unsuccessfully in the 1970´s include Constant Purchasing Power inflation accounting and Current Cost Accounting.
The Financial Accounting Standards Board issued an exposure draft in the United States in January, 1975, that required supplemental financial reports on a Constant Purchasing Power inflation accounting price-level basis. The Securities and Exchange Commission in the USA proposed in 1976 the disclosure of the current replacement cost of amortizable, depletable and depreciable assets used for production as well as most inventories at the financial year-end. It also proposed the disclosure of the approximate value of amortization, depletion and depreciation as well as the approximate value of cost of sales that would have been accounted in terms of the current replacement cost of productive capacity and inventories. Both supplemental Constant Purchasing Power inflation accounting financial statements and value accounting were experimented with in Canada. Australia tried both replacement-cost inflation accounting and CPP price-level inflation accounting. Netherland companies experimented with value accounting. Replacement-cost disclosures for equity capital financed items were considered in Germany. CPP inflation accounting supplemental financial statements were tried in Argentina. Brazil used various indexes to update constant and variable non-monetary items for the 30 years from 1964 to 1994. In the United Kingdom an original proposal of supplementary CPP financial accounting financial reports was replaced by the Sandilands Committee proposal for a value accounting approach for inventories, marketable securities and productive property.
South Africa had published a discussion paper on value accounting at the time.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
During that period inflation accounting described a range of accounting models designed to correct comparison problems arising from historical cost accounting in the presence of high and hyperinflation.
It was and still is generally accepted that inflation affects the real value of non-monetary items. That is not true. Inflation has no effect on the real value of non-monetary items. Inflation is a uniquely monetary phenomenon.
It is not inflation, but, SA accountants selecting the Historical Cost Accounting model who unknowinlgy destroy the real value of SA constant real value non-monetary items never or not fully updated during non-hyperinflationary periods.
Inflation accounting models that were tried unsuccessfully in the 1970´s include Constant Purchasing Power inflation accounting and Current Cost Accounting.
The Financial Accounting Standards Board issued an exposure draft in the United States in January, 1975, that required supplemental financial reports on a Constant Purchasing Power inflation accounting price-level basis. The Securities and Exchange Commission in the USA proposed in 1976 the disclosure of the current replacement cost of amortizable, depletable and depreciable assets used for production as well as most inventories at the financial year-end. It also proposed the disclosure of the approximate value of amortization, depletion and depreciation as well as the approximate value of cost of sales that would have been accounted in terms of the current replacement cost of productive capacity and inventories. Both supplemental Constant Purchasing Power inflation accounting financial statements and value accounting were experimented with in Canada. Australia tried both replacement-cost inflation accounting and CPP price-level inflation accounting. Netherland companies experimented with value accounting. Replacement-cost disclosures for equity capital financed items were considered in Germany. CPP inflation accounting supplemental financial statements were tried in Argentina. Brazil used various indexes to update constant and variable non-monetary items for the 30 years from 1964 to 1994. In the United Kingdom an original proposal of supplementary CPP financial accounting financial reports was replaced by the Sandilands Committee proposal for a value accounting approach for inventories, marketable securities and productive property.
South Africa had published a discussion paper on value accounting at the time.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Wednesday, 15 July 2009
Constant real value non-monetary item is a new concept
The South African Reserve Bank is the central bank of the Republic of South Africa. It regards its primary goal in the South African economic system as “the achievement and maintenance of price stability". SARB.
The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. SARB.
Price stability is a year-on-year increase in the Consumer Price Index of zero percent. A year-on-year increase in the CPI of above zero but below 2% is a high degree of price stability – it is not absolute price stability.
“The ECB´s Governing Council has announced a quantitative definition of price stability:
Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.”
http://www.ecb.int/mopo/strategy/pricestab/html/index.en.html
A below 2% year-on-year increase in the European Monetary Union’s harmonized CPI is the European Central Bank’s chosen definition of price stability. It is not the factual definition of absolute price stability. The SARB´s chosen definition of price stability is for “inflation to be within the target range of 3 to 6 per cent on a continuous basis”.
Accountants, on the other hand, simply assume that the unstable monetary unit of account or unstable monetary unit of measure is perfectly stable in non-hyperinflationary economies for the purpose of valuing constant real value non-monetary items and variable real value non-monetary items they value at Historical Cost. Changes in the general purchasing power or real value of the unstable monetary unit of measure (functional currency or money) are not considered to be sufficiently important to require adjustments to financial reports during non-hyperinflationary periods.
This led accountants to choose to measure financial capital maintenance in nominal monetary units and to choose to implement the real value destroying traditional Historical Cost Accounting model during non-hyperinflationary periods where under they select to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation. They value both variable items stated at HC in terms of SA GAAP or IFRS, as well as constant items also stated at HC in terms of the HCA model, in nominal monetary units during non-hyperinflationary periods. Both HC variable and HC constant real value non-monetary items are thus considered by SA accountants to be simply HC non-monetary items.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. SARB.
Price stability is a year-on-year increase in the Consumer Price Index of zero percent. A year-on-year increase in the CPI of above zero but below 2% is a high degree of price stability – it is not absolute price stability.
“The ECB´s Governing Council has announced a quantitative definition of price stability:
Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.”
http://www.ecb.int/mopo/strategy/pricestab/html/index.en.html
A below 2% year-on-year increase in the European Monetary Union’s harmonized CPI is the European Central Bank’s chosen definition of price stability. It is not the factual definition of absolute price stability. The SARB´s chosen definition of price stability is for “inflation to be within the target range of 3 to 6 per cent on a continuous basis”.
Accountants, on the other hand, simply assume that the unstable monetary unit of account or unstable monetary unit of measure is perfectly stable in non-hyperinflationary economies for the purpose of valuing constant real value non-monetary items and variable real value non-monetary items they value at Historical Cost. Changes in the general purchasing power or real value of the unstable monetary unit of measure (functional currency or money) are not considered to be sufficiently important to require adjustments to financial reports during non-hyperinflationary periods.
This led accountants to choose to measure financial capital maintenance in nominal monetary units and to choose to implement the real value destroying traditional Historical Cost Accounting model during non-hyperinflationary periods where under they select to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation. They value both variable items stated at HC in terms of SA GAAP or IFRS, as well as constant items also stated at HC in terms of the HCA model, in nominal monetary units during non-hyperinflationary periods. Both HC variable and HC constant real value non-monetary items are thus considered by SA accountants to be simply HC non-monetary items.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Tuesday, 14 July 2009
Foshini fooling investors
Foshini published their Reviewed Unaudited Preliminary Condensed Results for the year ended 31 March 2009:
http://www.foschinigroup.co.za/ir/final_results/fr_2009/downloads/foschini_provincial_results_2009.pdf
First item under Salient Features:
• Retail turnover up 5,5% to R8,1 billion
In nominal terms, Yes!
But, we live in a real world.
In real terms:
• Retail turnover DOWN 2.8% to R8,1 billion
Who do they think they are fooling?
Foshini will most probably admit that all the nominal values they present in their results are obviously not real values.
I wonder if they will admit that all those nominal values are basically meaningless and that only their non-existent real values are the only meaningful values?
I also wonder whether they will own up to the fact that because their board of directors selected the historical cost basis to prepare their financial statements, their accountants have unknowingly destroyed R414 million (at May 09 CPI value) in the real value of their Retained Earingins during their 2008 financial year and that they are unknowingly destroying even more than that this current year?
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
http://www.foschinigroup.co.za/ir/final_results/fr_2009/downloads/foschini_provincial_results_2009.pdf
First item under Salient Features:
• Retail turnover up 5,5% to R8,1 billion
In nominal terms, Yes!
But, we live in a real world.
In real terms:
• Retail turnover DOWN 2.8% to R8,1 billion
Who do they think they are fooling?
Foshini will most probably admit that all the nominal values they present in their results are obviously not real values.
I wonder if they will admit that all those nominal values are basically meaningless and that only their non-existent real values are the only meaningful values?
I also wonder whether they will own up to the fact that because their board of directors selected the historical cost basis to prepare their financial statements, their accountants have unknowingly destroyed R414 million (at May 09 CPI value) in the real value of their Retained Earingins during their 2008 financial year and that they are unknowingly destroying even more than that this current year?
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Accountants´ unique unstable unit of account
Non-monetary items are not all fundamentally the same. Non-monetary items are subdivided into variable real value non-monetary items and constant real value non-monetary items. The three fundamentally different basic economic items are, in fact, monetary items, variable items and constant items although it is generally accepted that there are only two basic economic items, namely, monetary and non-monetary items.
Accountants regard all non-monetary items stated at Historical Cost, whether they are variable real value non-monetary HC items or constant real value non-monetary HC items to be fundamentally the same, namely, non-monetary items – or, items that are not monetary items - when they implement the very destructive stable measuring unit assumption as part of the traditional HCA model during non-hyperinflationary periods.
This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always destroys the real value of money over time. It is thus impossible for money to be stable in real value during inflation.
On the other hand, inflation has no effect on the real value of non-monetary items.
The unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation. This means that the unit of measure in accounting is not a stable unit of measure during inflation and deflation. Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measure that is not an absolute value. All other generally accepted units of measure are absolute values, e.g. metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Accountants regard all non-monetary items stated at Historical Cost, whether they are variable real value non-monetary HC items or constant real value non-monetary HC items to be fundamentally the same, namely, non-monetary items – or, items that are not monetary items - when they implement the very destructive stable measuring unit assumption as part of the traditional HCA model during non-hyperinflationary periods.
This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always destroys the real value of money over time. It is thus impossible for money to be stable in real value during inflation.
On the other hand, inflation has no effect on the real value of non-monetary items.
The unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation. This means that the unit of measure in accounting is not a stable unit of measure during inflation and deflation. Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measure that is not an absolute value. All other generally accepted units of measure are absolute values, e.g. metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Saturday, 11 July 2009
Accounting constant items never updated at historical cost destroys their real values
The third economic item is a constant real value non-monetary item.
Constant items are real value non-monetary items with constant values over time.
Examples are issued share capital, retained earnings, all other items in shareholders´ equity, trade debtors, trade creditors, taxes payable, taxes receivable, all income statement items, etc.
When constant items are never updated, their real values are destroyed by accountants implementing the stable measuring unit assumption.
Accountants normally update or inflation-adjust some income statement items, eg. salaries, wages, rentals, etc in all low inflation economies, including in SA.
The only way the real value of shareholders´equity can be maintained under Historical Cost Accounting is when 100% of the original updated real value of all contributions to shareholders´ equity are invested in revaluable fixed assets that are continuously revalued via the Revaluation Reserve.
It is very unlikely that any company invests 100% of the original updated real value of all contributions to shareholders´ equity in revaluable fixed assets.
This means that the real value of all retained earnings in all banks and companies are unknowingly being destroyed at a rate equal to the annual rate of inflation by SA accountants implementing the stable measuring unit assumption.
This amounts to about R200 billion per annum in the SA economy.
To be continued ......
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Constant items are real value non-monetary items with constant values over time.
Examples are issued share capital, retained earnings, all other items in shareholders´ equity, trade debtors, trade creditors, taxes payable, taxes receivable, all income statement items, etc.
When constant items are never updated, their real values are destroyed by accountants implementing the stable measuring unit assumption.
Accountants normally update or inflation-adjust some income statement items, eg. salaries, wages, rentals, etc in all low inflation economies, including in SA.
The only way the real value of shareholders´equity can be maintained under Historical Cost Accounting is when 100% of the original updated real value of all contributions to shareholders´ equity are invested in revaluable fixed assets that are continuously revalued via the Revaluation Reserve.
It is very unlikely that any company invests 100% of the original updated real value of all contributions to shareholders´ equity in revaluable fixed assets.
This means that the real value of all retained earnings in all banks and companies are unknowingly being destroyed at a rate equal to the annual rate of inflation by SA accountants implementing the stable measuring unit assumption.
This amounts to about R200 billion per annum in the SA economy.
To be continued ......
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Wednesday, 8 July 2009
Accounting a property value at historical cost does not destroy its real value.
The second economic item is a variable item.
Variable items are real value non-monetary items with variable real values over time.
Examples are property, plant equipment, inventory, quoted and unquoted shares, finished goods, foreign exchange, etc.
SA accountants value variable items correctly in term of SA Gaap or IFRS at, for example, market value, present value, fair value, recoverable value, net realizable value, etc.
SA accountants do not unknowingly destroy the real value of variable items because they value them at Historical Cost, for example.
When accountants value properties at historical cost, i.e. they show them at their original nominal values in the financial statements, they do not unkowingly destroy their real values.
When these properties are eventually sold, they will be priced at the market values at that time. No real value is unknowingly being destroyed like that.
Properties can be periodically revalued under Historical Cost Accounting rules and the increased values are debited to the property accounts and credited to the Revaluation Reserve account in the balance sheet.
Properties "valued" or stated at historical cost normally represent unknown hidden holding gains that are only realised when these properties are eventually sold in an open market.
To be continued .....
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Variable items are real value non-monetary items with variable real values over time.
Examples are property, plant equipment, inventory, quoted and unquoted shares, finished goods, foreign exchange, etc.
SA accountants value variable items correctly in term of SA Gaap or IFRS at, for example, market value, present value, fair value, recoverable value, net realizable value, etc.
SA accountants do not unknowingly destroy the real value of variable items because they value them at Historical Cost, for example.
When accountants value properties at historical cost, i.e. they show them at their original nominal values in the financial statements, they do not unkowingly destroy their real values.
When these properties are eventually sold, they will be priced at the market values at that time. No real value is unknowingly being destroyed like that.
Properties can be periodically revalued under Historical Cost Accounting rules and the increased values are debited to the property accounts and credited to the Revaluation Reserve account in the balance sheet.
Properties "valued" or stated at historical cost normally represent unknown hidden holding gains that are only realised when these properties are eventually sold in an open market.
To be continued .....
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Tuesday, 7 July 2009
Three, not two, fundamentally different items in the economy
Accountants are taught that there are only two fundamentally different items in the economy, namely, monetary and non-monetary items.
That is wrong.
There are three fundamentally different items in the economy:
1. Monetary items
2. Variable real value non-monetary items
3. Constant real value non-monetary items
Monetary items are money held and items with an underlying monetary nature.
Examples of monetary items in today’s economy are bank notes and coins, bank loans, bank account balances, treasury bills, commercial bonds, government bonds, mortgage bonds, student loans, car loans, consumer loans, credit card loans, notes payable, notes receivable, etc.
To be continued ......
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
That is wrong.
There are three fundamentally different items in the economy:
1. Monetary items
2. Variable real value non-monetary items
3. Constant real value non-monetary items
Monetary items are money held and items with an underlying monetary nature.
Examples of monetary items in today’s economy are bank notes and coins, bank loans, bank account balances, treasury bills, commercial bonds, government bonds, mortgage bonds, student loans, car loans, consumer loans, credit card loans, notes payable, notes receivable, etc.
To be continued ......
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Monday, 6 July 2009
The impact of inflation on the man in the street.
Milton Friedman correctly stated that "inflation is always and everwhere a monetary phenomenon." Inflation can only destroy the real value of the Rand and other monetary items like the real value of home loans originally made to home buyers. As inflation destroys the real value of the original loan amount at a higher rate than provided for by the bank at the time the loan was agreed, the bank has to increase interest on the loan to recover the updated real value of the loan plus a real profit margin.
Since inflation is only a monetary phenomenon, it is impossible - by definition - for inflation to have any effect on non-monetary items. Inflation has no effect on the real value of non-monetary items.
Inflation can only destroy the real value of money (the Rand) and other monetary items. Monetary items are money (Rands) held and items with an underlying monetary nature.
Non-monetary items are all items that are not monetary items.
Non-monetary items are sub-divided in variable real value non-monetary items and constant real value non-monetary items. Variable items are non-monetary items with variable real values over time. Variable items are items like property, plant, equipment, shares, inventory, finished goods, etc.
Variable items are correctly valued by our accountants in terms of SA Gaap or IFRS at for example fair value, market value, net realizable value, present value, recoverable value, etc. There are no unresovled problems (except the current developments in fair value) with the valuation of variable items.
Constant items are non-monetary items with constant real values over time. Constant items are items like issued share capital, retained earnings, share premium, share discount, capital reserves, all other items in shareholders´ equity, trade debtors, trade creditors, deferred tax assets and deferred tax liabilities, taxes payable, taxes receivable, all items in the profit and loss account, etc.
Our accountants value constant items at Historical Cost: i.e. they do not update their real values. The reason for this is that they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured either in nominal monetary units or in units of constant purchasing power."
Our accountants all choose nominal monetary units; i.e they all do their accounts based on the historical cost basis: i.e. they apply the stable measuring unit assumption. They assume that changes in the Rand´s purchasing power are not significant enough to require changes to the real values of constant items. They basically assume the Rand is perfectly stable ONLY for the valuation of the above constant items.
So what happens?
They correctly value certain income statement items in units of constant purchasing power. They thus inflation-adjust salaries, wages, rentals, etc annually like all other countries during low inflation.
BUT, when a SA company does not have revaluable property with an updated real value or hidden holding gains exactly equal to the original real value of all contributions to shareholders´ equity where they can continuously revalue the property or have sufficient holding gains to maintain shareholders´ equity´s real value, they destroy the real value of shareholders´ equity at a rate equal to the annual rate of inflation - because the Rand is the unstable unit of account in our economy - when these values are never updated or there is a lack of revaluable variable items during indefinite inflation.
It is not inflation destroying, for example R3 billion in the real value of ABSA´s retained earnings last year and the same this year. It is ABSA´s accountants valuing their retained earnings balance at historical cost because ABSA´s board of directors selected the historical cost basis for doing their accounts. ABSA´s board of directors can change their mind and select to measure financial capital maintenance in units of constant purchasing power as they can freely do in terms of the IASB´s Framework, Par. 104 (a) which is compliant with IFRS.
What will happen when ABSA do that? They will maintain about R3 billion in the real value of their retained earnings each and every year for an unlimited period of time - ceteris paribus - instead of destroying about that amount annually for an unlimited period of time - ceteris paribus - as they unknowingly and unintentionally did last year and as they unknowingly and unintentionally do this year..
What does this mean for the man in the street?
Our accountants unknowingly destroy about R200 billion annually in the SA real economy in this manner. This is a conservative estimate. When SA rejects the stable measuring unit assumption and implements finacial capital maintenance in units of constant purchasing power as provided for 20 years ago by the IASB in the Framework, Par. 104 (a) about R200 billion will be maintained in our real economy for an unlimited period of time. This is compliant with IFRS - see Par. 104 (a).
A boost of about R200 billion per annum for an unlimited period of time in the SA economy will lead to a stronger economy, more jobs, maintenance of investment capital in banks and companies, etc.
This will obviously benefit the man in the street.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Since inflation is only a monetary phenomenon, it is impossible - by definition - for inflation to have any effect on non-monetary items. Inflation has no effect on the real value of non-monetary items.
Inflation can only destroy the real value of money (the Rand) and other monetary items. Monetary items are money (Rands) held and items with an underlying monetary nature.
Non-monetary items are all items that are not monetary items.
Non-monetary items are sub-divided in variable real value non-monetary items and constant real value non-monetary items. Variable items are non-monetary items with variable real values over time. Variable items are items like property, plant, equipment, shares, inventory, finished goods, etc.
Variable items are correctly valued by our accountants in terms of SA Gaap or IFRS at for example fair value, market value, net realizable value, present value, recoverable value, etc. There are no unresovled problems (except the current developments in fair value) with the valuation of variable items.
Constant items are non-monetary items with constant real values over time. Constant items are items like issued share capital, retained earnings, share premium, share discount, capital reserves, all other items in shareholders´ equity, trade debtors, trade creditors, deferred tax assets and deferred tax liabilities, taxes payable, taxes receivable, all items in the profit and loss account, etc.
Our accountants value constant items at Historical Cost: i.e. they do not update their real values. The reason for this is that they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured either in nominal monetary units or in units of constant purchasing power."
Our accountants all choose nominal monetary units; i.e they all do their accounts based on the historical cost basis: i.e. they apply the stable measuring unit assumption. They assume that changes in the Rand´s purchasing power are not significant enough to require changes to the real values of constant items. They basically assume the Rand is perfectly stable ONLY for the valuation of the above constant items.
So what happens?
They correctly value certain income statement items in units of constant purchasing power. They thus inflation-adjust salaries, wages, rentals, etc annually like all other countries during low inflation.
BUT, when a SA company does not have revaluable property with an updated real value or hidden holding gains exactly equal to the original real value of all contributions to shareholders´ equity where they can continuously revalue the property or have sufficient holding gains to maintain shareholders´ equity´s real value, they destroy the real value of shareholders´ equity at a rate equal to the annual rate of inflation - because the Rand is the unstable unit of account in our economy - when these values are never updated or there is a lack of revaluable variable items during indefinite inflation.
It is not inflation destroying, for example R3 billion in the real value of ABSA´s retained earnings last year and the same this year. It is ABSA´s accountants valuing their retained earnings balance at historical cost because ABSA´s board of directors selected the historical cost basis for doing their accounts. ABSA´s board of directors can change their mind and select to measure financial capital maintenance in units of constant purchasing power as they can freely do in terms of the IASB´s Framework, Par. 104 (a) which is compliant with IFRS.
What will happen when ABSA do that? They will maintain about R3 billion in the real value of their retained earnings each and every year for an unlimited period of time - ceteris paribus - instead of destroying about that amount annually for an unlimited period of time - ceteris paribus - as they unknowingly and unintentionally did last year and as they unknowingly and unintentionally do this year..
What does this mean for the man in the street?
Our accountants unknowingly destroy about R200 billion annually in the SA real economy in this manner. This is a conservative estimate. When SA rejects the stable measuring unit assumption and implements finacial capital maintenance in units of constant purchasing power as provided for 20 years ago by the IASB in the Framework, Par. 104 (a) about R200 billion will be maintained in our real economy for an unlimited period of time. This is compliant with IFRS - see Par. 104 (a).
A boost of about R200 billion per annum for an unlimited period of time in the SA economy will lead to a stronger economy, more jobs, maintenance of investment capital in banks and companies, etc.
This will obviously benefit the man in the street.
© 2005-2010 by Nicolaas J Smith. All rights reserved
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Accountants´ unstable unit of account is the only unit of measure that is not an absolute value
Accountants regard all non-monetary items stated at Historical Cost, whether they are variable real value non-monetary HC items or constant real value non-monetary HC items to be fundamentally the same, namely, non-monetary items – or, items that are not monetary items - when they implement the very destructive stable measuring unit assumption as part of the traditional HCA model during non-hyperinflationary periods.
This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always destroys the real value of money over time. It is thus impossible for money to be stable in real value during inflation.
On the other hand, inflation has no effect on the real value of non-monetary items.
The unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation. This means that the unit of measure in accounting is not a stable unit of measure during inflation and deflation.
Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measure that is not an absolute value. All other generally accepted units of measure are absolute values, e.g. metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.
This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always destroys the real value of money over time. It is thus impossible for money to be stable in real value during inflation.
On the other hand, inflation has no effect on the real value of non-monetary items.
The unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation. This means that the unit of measure in accounting is not a stable unit of measure during inflation and deflation.
Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measure that is not an absolute value. All other generally accepted units of measure are absolute values, e.g. metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.
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