Capital maintenance for dummies - like the IASB
Capital is required to start a company. A company has an indefinite life - it is supposed to exist forever.
Capital is really saved-up wealth or saved-up real value.
Luckily double entry accounting makes capital into a constant item. It is like your salary or wage: its real value is a constant item.
But, if your salary is paid in ever-more-worthless-Rands (inflation or value-destruction at 6.9%) then your salary has to be inflation-adjusted to keep its real value the same.
This is what trade unions do. They make sure your salary is inflation adjusted every year.
This is very easy to understand. Everybody does it - world wide. That is, for salaries and wages and rentals and so on.
Enter the IASB. The International Accounting Standards Board.
Well, they are the world´s top accounants.
They are very responsible people.
They realize that money loses its real value at such a rapid rate during hyperinflation that all items that are not monetary items have to be inflation-adjusted by means of the Consumer Price Index. That is during hyperinflation.
However, during low inflation, the IASB change their story completely: now they suddenly come up with the story that you can maintain your capital in NOMINAL monetary units during low inflation.
Imagine that!
That is only possible when you invest 100% of your company´s capital in revaluable fixed assets. Companies normally don´t do that.
We all know that you cannot maintain the real value of your salary by keeping it the same during inflation.
Well, the same is true for companies´ capital and retained profits.
Not so, according to our friends at the IASB. According to them you can MAINTAIN your company´s retained profits in NOMINAL MONETARY UNITS.
They are nuts! :-)
That is completely impossible during inflation.
Well, they are not as dof as they appear to be. lol
They authorized our accountants in SA 20 years ago to maintain our companies´ capital and retained profits in units of constant purchasing power.
Fantastic! That is 100% correct!
Well. That is where the capital maintenance stops. :-(
Not a single SA accountant selects capital maintenance in units of constant purchasing power.
What a sad story. Instead they unknowingly destroy about R200 billion per year in real value in constant items never updated - each and every year!!)
Kindest regards,
Nicolaas Smith
Friday, 14 August 2009
Constant ITEM Purchasing Power Accounting as a financial capital maintenance concept
Constant ITEM Purchasing Power Accounting, despite being approved by the IASB in the Framework, Par. 104 (a) twenty years ago, is almost completely ignored by most accountants in non-hyperinflationary economies even though it would maintain instead of destroy the real values of not only all income statement constant items but also all balance sheet constant real value non-monetary items for an unlimited period of time.
This is because any price-level accounting is generally viewed by almost all accountants and accounting authorities, but excluding the IASB, as a 1970-style failed and discredited inflation accounting model that requires all non-monetary items - variable real value non-monetary items and constant real value non-monetary items - to be inflation-adjusted by means of the CPI.
They – including the IASB - forego the opportunity to promote the substantial real value maintaining benefits of measuring financial capital maintenance in units of constant purchasing power in companies and the economy in general.
This results in the unknowing destruction by SA accountants of billions of Rand in real value in the SA real economy – in companies´ and banks´ Retained Earnings (to name just one item unknowingly destroyed by SA accountants like this) - year in year out because they choose to measure financial capital maintenance in nominal monetary units and implement the very destructive stable measuring unit assumption as part of the real value destroying Historical Cost Accounting model in SA when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
This is because any price-level accounting is generally viewed by almost all accountants and accounting authorities, but excluding the IASB, as a 1970-style failed and discredited inflation accounting model that requires all non-monetary items - variable real value non-monetary items and constant real value non-monetary items - to be inflation-adjusted by means of the CPI.
They – including the IASB - forego the opportunity to promote the substantial real value maintaining benefits of measuring financial capital maintenance in units of constant purchasing power in companies and the economy in general.
This results in the unknowing destruction by SA accountants of billions of Rand in real value in the SA real economy – in companies´ and banks´ Retained Earnings (to name just one item unknowingly destroyed by SA accountants like this) - year in year out because they choose to measure financial capital maintenance in nominal monetary units and implement the very destructive stable measuring unit assumption as part of the real value destroying Historical Cost Accounting model in SA when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Wednesday, 12 August 2009
Normal and inflation accounting - for dummies
Inflation accounting is used during very high inflation and hyperinflation.
Hyperinflation is at least 100% cumulative inflation after 3 years: i.e. 26% annual inflation for 3 years in a row.
The International Accounting Standards Board requires companies in a hyperinflationary economy to implement their Constant Purchasing Power inflation accounting (CPPA) model formulated in International Accounting Standard IAS 29.
It is quite a simple process.
All non-monetary items are inflation-adjusted by means of the CPI.
The IASB also authorized SA accountants 20 years ago to use Constant ITEM Purchasing Power Accounting (CIPPA) during low inflation.
With CIPPA companies inflation-adjust ONLY constant items, eg. salaries, wages, rentals, companies capital, retained profits, trade debtors, trade creditors, taxes payable, taxes receivable, etc during low inflation.
In this way companies maintain these items´ constant real values during low inflation.
But, SA accountants have to actually CHOOSE this Constant ITEM Purchasing Accounting model instead of the traditional Historical Cost Accounting model.
All SA accountants pick the traditional HCA model. They at least inflation-adjust salaries, wages, rentals and some other income statement items. They value all other constant items at historical cost and thus unknowingly destroy their real values at a rate equal to the rate of inflation.
Not a single SA accountant picks the CIPPA model because hardly any one of them even know that there is a choice.
Do you know an accountant? Ask him or her about the two choices in basic accounting during low inflation approved by the IASB. I don´t think you will find many who even know about the choice they make when they use International Financial Reporting Standards.
SA accountants unknowingly destroy about R200 billion PER ANNUM in this way.
When they pick the CIPPA model as authorized by the IASB 20 years ago, they will maintain that R200 billion PER ANNUM forever.
SA accountants refuse point blank to do this.
They will rather unknowingly (?) destroy about R200 billion PER ANNUM in the SA real economy.
They are really unknowingly (??) doing us all in quite a bit.
Do you know any accountants?
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Hyperinflation is at least 100% cumulative inflation after 3 years: i.e. 26% annual inflation for 3 years in a row.
The International Accounting Standards Board requires companies in a hyperinflationary economy to implement their Constant Purchasing Power inflation accounting (CPPA) model formulated in International Accounting Standard IAS 29.
It is quite a simple process.
All non-monetary items are inflation-adjusted by means of the CPI.
The IASB also authorized SA accountants 20 years ago to use Constant ITEM Purchasing Power Accounting (CIPPA) during low inflation.
With CIPPA companies inflation-adjust ONLY constant items, eg. salaries, wages, rentals, companies capital, retained profits, trade debtors, trade creditors, taxes payable, taxes receivable, etc during low inflation.
In this way companies maintain these items´ constant real values during low inflation.
But, SA accountants have to actually CHOOSE this Constant ITEM Purchasing Accounting model instead of the traditional Historical Cost Accounting model.
All SA accountants pick the traditional HCA model. They at least inflation-adjust salaries, wages, rentals and some other income statement items. They value all other constant items at historical cost and thus unknowingly destroy their real values at a rate equal to the rate of inflation.
Not a single SA accountant picks the CIPPA model because hardly any one of them even know that there is a choice.
Do you know an accountant? Ask him or her about the two choices in basic accounting during low inflation approved by the IASB. I don´t think you will find many who even know about the choice they make when they use International Financial Reporting Standards.
SA accountants unknowingly destroy about R200 billion PER ANNUM in this way.
When they pick the CIPPA model as authorized by the IASB 20 years ago, they will maintain that R200 billion PER ANNUM forever.
SA accountants refuse point blank to do this.
They will rather unknowingly (?) destroy about R200 billion PER ANNUM in the SA real economy.
They are really unknowingly (??) doing us all in quite a bit.
Do you know any accountants?
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Constant Purchasing Power INFLATION ACCOUNTING
Constant Purchasing Power INFLATION ACCOUNTING
Geoffrey Whittington in his definitive work on inflation accounting in the beginning of the 1980´s, Inflation Accounting - An Introduction to the Debate, published in 1983, clearly indicated that with 1970-style Constant Purchasing Power inflation accounting ALL non-monetary accounts (with no distinction being made between variable and constant real value non-monetary item accounts) were updated by means of the CPI.
He stated that Constant Purchasing Power inflation accounting (CPP) was a method of inflation-adjusting all non-monetary accounts consistently by means of the Consumer Price Index which reflected changes in money’s purchasing power.
1970-style CPP inflation accounting tried to deal with the problem of inflation in the popularly understood sense, as a decrease in the real value of money. According to Whittington, CPP inflation accounting tried to solve this problem by inflation-adjusting all non-monetary items at the reporting date by means of the CPI.
Kindest regards,
Nicolaas Smith
Geoffrey Whittington in his definitive work on inflation accounting in the beginning of the 1980´s, Inflation Accounting - An Introduction to the Debate, published in 1983, clearly indicated that with 1970-style Constant Purchasing Power inflation accounting ALL non-monetary accounts (with no distinction being made between variable and constant real value non-monetary item accounts) were updated by means of the CPI.
He stated that Constant Purchasing Power inflation accounting (CPP) was a method of inflation-adjusting all non-monetary accounts consistently by means of the Consumer Price Index which reflected changes in money’s purchasing power.
1970-style CPP inflation accounting tried to deal with the problem of inflation in the popularly understood sense, as a decrease in the real value of money. According to Whittington, CPP inflation accounting tried to solve this problem by inflation-adjusting all non-monetary items at the reporting date by means of the CPI.
Kindest regards,
Nicolaas Smith
SA accountant value destroyers - for dummies
Your company´s capital and Retained Profits are the same as your salaries and wages: constant real value non-monetary items. If your accountant refuses to update them at the inflation rate, then he or she destoys their real values at a rate equal to the inflation rate
It takes SA accountants currently just 11 years to unknowingly destroy 50% of the real value of all Retained Profits SA companies and SA banks hold back to supposedly "grow" their businesses as well as 50% of the real value of capital of companies with no fixed assets.
Accountants use their unbelievably destructive and unbelievably silly stable measuring unit assumption to do this.
This amounts to about R85 billion per annum just in the Retained Profits of JSE listed companies - each and every year: it will never stop during inflation with Historical Cost Accounting.
This will carry on forever if we (or the SA government) cannot get them to do what the International Accounting Standard Board authorized them to do 20 years ago: to reject their very silly stable measuring unit assumption and to maintain companies´ and banks´ investment capital and Retained Profits in units of constant purchasing power.
Basically SA accountants do everything perfectly right in accounting till they get to valuing companies´ capital and retained profits.
Then they suddenly pretend that they are very dumb. They pretend that there is no such thing as inflation. They pretend that the Rand is perfectly stable - that inflation is always zero percent. Can you believe that!?
Then they value companies capital and Retained Profits at historical cost thus unknowingly destroying these items´ real values at a rate equal to the rate of inflation.
It is not inflation destroying companies´ capital and Retained Profits. It is our accountants implementing their silly stable measuring unit assumption.
They can freely stop that any time they want and start boosting the SA real economy by about R200 billion PER ANNUM for an unlimited period of time: forever.
All they have to do is do what the IASB approved TWENTY YEARS AGO.
Do you know any accountants?
Kindest regards,
Nicolaas Smith
It takes SA accountants currently just 11 years to unknowingly destroy 50% of the real value of all Retained Profits SA companies and SA banks hold back to supposedly "grow" their businesses as well as 50% of the real value of capital of companies with no fixed assets.
Accountants use their unbelievably destructive and unbelievably silly stable measuring unit assumption to do this.
This amounts to about R85 billion per annum just in the Retained Profits of JSE listed companies - each and every year: it will never stop during inflation with Historical Cost Accounting.
This will carry on forever if we (or the SA government) cannot get them to do what the International Accounting Standard Board authorized them to do 20 years ago: to reject their very silly stable measuring unit assumption and to maintain companies´ and banks´ investment capital and Retained Profits in units of constant purchasing power.
Basically SA accountants do everything perfectly right in accounting till they get to valuing companies´ capital and retained profits.
Then they suddenly pretend that they are very dumb. They pretend that there is no such thing as inflation. They pretend that the Rand is perfectly stable - that inflation is always zero percent. Can you believe that!?
Then they value companies capital and Retained Profits at historical cost thus unknowingly destroying these items´ real values at a rate equal to the rate of inflation.
It is not inflation destroying companies´ capital and Retained Profits. It is our accountants implementing their silly stable measuring unit assumption.
They can freely stop that any time they want and start boosting the SA real economy by about R200 billion PER ANNUM for an unlimited period of time: forever.
All they have to do is do what the IASB approved TWENTY YEARS AGO.
Do you know any accountants?
Kindest regards,
Nicolaas Smith
SA accountants´ most destructive weapon
I will have a chart about SA inflation in my second book that I am currently working on.
I show different aspects of inflation.
I have the chart on normal charting paper, at the moment, so I cannot show the chart here.
The one chart shows cumulative inflation of 162% since April 1994.
The other two charts are
(1) Percentage Real Value Destroyed since April 1994 and
(2) Percentage Real Value Left since April 1994 - the inverse of (1).
These two charts cross after 11 years at 50% with average annual inflation of 6% (Mboweni at the SARB).
It took SA accountants implementing the stable measuring unit assumption 11 years to destroy 50% of the real value of all the retained earnings SA companies had in April 1994 and that remained in those companies for those 11 years as well as 50% of the issued share capital of all SA companies with no fixed assets during those 11 years.
62% of the real value of all the retained earnings SA companies had on April 1994 and that remained in those companies till May 2009 and 62% of real value of the issued share capital of all SA companies with no fixed assets during the period April 1994 to May 2009 have been destroyed by SA accountants implementing the stable measuring unit assumption.
During the last 12 years of white apartheid rule with averge annual inflation at 12% it took only 5 years to destroy 50% of a company´s equity that remained in the company for that those 5 years. A much worse situation under apartheid.
SA accountants destroy the myth that companies have infinite life times under the Historical Cost paradigm with their very destructive stable measuring unit assumption.
The concept of companies´ infinite lives will be restored under the Constant Purchasing Power paradigm.
Kindest regards,
Nicolaas Smith
I show different aspects of inflation.
I have the chart on normal charting paper, at the moment, so I cannot show the chart here.
The one chart shows cumulative inflation of 162% since April 1994.
The other two charts are
(1) Percentage Real Value Destroyed since April 1994 and
(2) Percentage Real Value Left since April 1994 - the inverse of (1).
These two charts cross after 11 years at 50% with average annual inflation of 6% (Mboweni at the SARB).
It took SA accountants implementing the stable measuring unit assumption 11 years to destroy 50% of the real value of all the retained earnings SA companies had in April 1994 and that remained in those companies for those 11 years as well as 50% of the issued share capital of all SA companies with no fixed assets during those 11 years.
62% of the real value of all the retained earnings SA companies had on April 1994 and that remained in those companies till May 2009 and 62% of real value of the issued share capital of all SA companies with no fixed assets during the period April 1994 to May 2009 have been destroyed by SA accountants implementing the stable measuring unit assumption.
During the last 12 years of white apartheid rule with averge annual inflation at 12% it took only 5 years to destroy 50% of a company´s equity that remained in the company for that those 5 years. A much worse situation under apartheid.
SA accountants destroy the myth that companies have infinite life times under the Historical Cost paradigm with their very destructive stable measuring unit assumption.
The concept of companies´ infinite lives will be restored under the Constant Purchasing Power paradigm.
Kindest regards,
Nicolaas Smith
Monday, 10 August 2009
Accountants are clueless (for dummies :-)
During the high-inflation period in the 1970´s accountants also did not really know what was going on.
They had and still have no clue about what constant real value non-monetary items or simply constant items are.
Constant items is a new concept for them although they always deal with them.
They are not taught to think for themselves as far as accounting matters are concerned.
For example: most of them do not know why they implement the stable measuring unit assumption and what its effect is on constant items. Many accountants do not even know that they implement the stable measuring unit assumption. They just do Historical Cost Accounting because the whole world does it and it has always been done like that.
Geoffrey Whittington is considered to be one of the world´s leading experts on inflation accounting. He did not even mention the stable measuring unit assumption once in his book "Inflation Accounting" published in 1983. That is astonishing.
They are taught that the only correct way of doing accounting is what appears in International Financial Reporting Standards.
If something is compliant with IFRS - then it is correct. They don´t really know why, and they do not really care to know.
If something is not compliant with IFRS - then it is not correct. They don´t really know why, and they do not really care to know.
Even if something is in IFRS and no-one is doing it, they do not care to know why no-one does it. That applies to the fact that the IASB authorized financial capital maintenance in units of constant purchasing power during low inflation 20 years ago, but no-one uses it.
They are not taught to think for themselves about matters of accounting.
They are taught to do what is generally accepted and to implement IFRS. That is all that matters.
Kindest regards,
Nicolaas Smith
They had and still have no clue about what constant real value non-monetary items or simply constant items are.
Constant items is a new concept for them although they always deal with them.
They are not taught to think for themselves as far as accounting matters are concerned.
For example: most of them do not know why they implement the stable measuring unit assumption and what its effect is on constant items. Many accountants do not even know that they implement the stable measuring unit assumption. They just do Historical Cost Accounting because the whole world does it and it has always been done like that.
Geoffrey Whittington is considered to be one of the world´s leading experts on inflation accounting. He did not even mention the stable measuring unit assumption once in his book "Inflation Accounting" published in 1983. That is astonishing.
They are taught that the only correct way of doing accounting is what appears in International Financial Reporting Standards.
If something is compliant with IFRS - then it is correct. They don´t really know why, and they do not really care to know.
If something is not compliant with IFRS - then it is not correct. They don´t really know why, and they do not really care to know.
Even if something is in IFRS and no-one is doing it, they do not care to know why no-one does it. That applies to the fact that the IASB authorized financial capital maintenance in units of constant purchasing power during low inflation 20 years ago, but no-one uses it.
They are not taught to think for themselves about matters of accounting.
They are taught to do what is generally accepted and to implement IFRS. That is all that matters.
Kindest regards,
Nicolaas Smith
SA accountants are clueless about price-level accounting during low inflation
As a result of this lack of appreciating the destructive nature of their implementation of the very destructive stable measuring unit assumption, 1970-style Constant Purchasing Power inflation accounting was also not an accounting system implemented by accountants to correct or eliminate the destruction of the real value of constant items by the use of the stable measuring unit assumption, but, a failed attempt to simply make financial reports more understandable and more comparable with previous year statements during periods of high inflation by inflation-adjusting all non-monetary items equally in terms of the CPI.
Accountants simply do not appreciate that they unknowingly destroy real value on a massive scale in all constant real value non-monetary items never or not fully updated when they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
They also do not appreciate that they make that choice.
Neither do they appreciate that they will stop that destruction by freely choosing to measure financial capital maintenance in units of constant purchasing power, as approved in the IASB Framework, Par. 104 (a) in 1989.
Kindest regards,
Nicolaas Smith
Accountants simply do not appreciate that they unknowingly destroy real value on a massive scale in all constant real value non-monetary items never or not fully updated when they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
They also do not appreciate that they make that choice.
Neither do they appreciate that they will stop that destruction by freely choosing to measure financial capital maintenance in units of constant purchasing power, as approved in the IASB Framework, Par. 104 (a) in 1989.
Kindest regards,
Nicolaas Smith
Saturday, 8 August 2009
Don´t shoot the messenger - again
Bertie quotes on his blog:
"They mention research by Arie de Geus, ex Shell, that shows the life expectancy of new firms in Europe or Japan to be less than 13yrs, down from 20 in the late 70s and early 80s."
Yes, and Historical Cost Accounting helps to destroy them.
We all learn as first year accounting students doing company law that a company has an infinite life-time - which it suppose to have.
However, that is not true under the current 500 year old Historical Cost paradigm.
Historical cost accountants implementing the stable measuring unit assumption unknowingly destroy all companies´ that do not have revaluable fixed assets with original updated real value equal to the updated original real value of all contributions to shareholders´ equity - at the rate of inflation.
Imagine 3M started 200 years ago. Imagine the USD 100 000 200 year old original issued share capital. Update that for inflation over the last 200 years in the USA and how many millions do you get?
But, that original USD 100 000 (for example) are still there in 3M´s books today at - what value do you think? Yes!! USD 100 000. It´s real value has been destroyed by all the 3M historical cost accountants over the last 200 years implementing the stable measuring unit assumption destroying 3M´s issued share capital, retained earnings and all other items in shareholders´ equity at the annual rate of inflation as they are doing right this moment.
I plan to stop that.
But, I am only the messenger.
The IASB has already approved real value maintain ing financial capital maintenance in units of constant purchasing power during low inflation 20 years ago in the Framework, Par. 104 (a) that states: "Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
Not a single accountant does that world wide - for various reasons that happened over the last 500 years.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
"They mention research by Arie de Geus, ex Shell, that shows the life expectancy of new firms in Europe or Japan to be less than 13yrs, down from 20 in the late 70s and early 80s."
Yes, and Historical Cost Accounting helps to destroy them.
We all learn as first year accounting students doing company law that a company has an infinite life-time - which it suppose to have.
However, that is not true under the current 500 year old Historical Cost paradigm.
Historical cost accountants implementing the stable measuring unit assumption unknowingly destroy all companies´ that do not have revaluable fixed assets with original updated real value equal to the updated original real value of all contributions to shareholders´ equity - at the rate of inflation.
Imagine 3M started 200 years ago. Imagine the USD 100 000 200 year old original issued share capital. Update that for inflation over the last 200 years in the USA and how many millions do you get?
But, that original USD 100 000 (for example) are still there in 3M´s books today at - what value do you think? Yes!! USD 100 000. It´s real value has been destroyed by all the 3M historical cost accountants over the last 200 years implementing the stable measuring unit assumption destroying 3M´s issued share capital, retained earnings and all other items in shareholders´ equity at the annual rate of inflation as they are doing right this moment.
I plan to stop that.
But, I am only the messenger.
The IASB has already approved real value maintain ing financial capital maintenance in units of constant purchasing power during low inflation 20 years ago in the Framework, Par. 104 (a) that states: "Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
Not a single accountant does that world wide - for various reasons that happened over the last 500 years.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Net monetary gain or loss conundrum (for dummies :-)
The world´s top accounting authority (the International Accounting Standards Board or just the IASB) orders you to calculate what you lose or gain in real value from actually keeping cash or loans in your business during hyperinflation.
During normal low inflation they pretend that they are very dumb and just ignore the fact that you ALSO gain or lose real value from keeping cash or loans in your business - during low inflation.
But, they give you a choice of doing your accounting properly and not destroying the profits you make simply by the way you do normal traditional historical cost accounting.
If you pick this alternative, they tell you again - correctly - to calculate the gain or loss from keeping cash or loans in your business - now during actual normal low inflation.
They are thus a bit of a joke.
Under hyperinflation you MUST calculate this loss or gain from cash and loans.
But, during low inflation, you don'´t have to (and no-one does) - unless you pick the other, much better and correct way of doing your accounts (which NO-ONE picks).
Huh??
So, what is their story?
Are there losses and gains from keeping cash and loans in your business?
If yes, as it actually is, why are we only allowed to calculate and show this during hyperinflation and not with normal historical cost accounting during low inflation?
But, if we pick their much better and correct alternative, then we suddenly can calulate these monetary losses and gains - during low inflation?
It is one helluva big puzzle.
So you ask, what is the correct thing to do?
Pick the other better and correct way of doing your accounts (they - the BIG ACCOUNTING BOSSES approved it 20 years ago) with which you do not AUTOMATICALLY destroy your capital and profits you keep in your company as your accountant does right now with traditional Historical Cost Accounting during low inflation.
Here is the link for more info.
(New book coming soon - watch this space :-) [This time you´ll have to pay for it.]
If you want to email me (I´m available :-) realvalueaccounting@yahoo.com
Kindest regards,
Nicolaas Smith
During normal low inflation they pretend that they are very dumb and just ignore the fact that you ALSO gain or lose real value from keeping cash or loans in your business - during low inflation.
But, they give you a choice of doing your accounting properly and not destroying the profits you make simply by the way you do normal traditional historical cost accounting.
If you pick this alternative, they tell you again - correctly - to calculate the gain or loss from keeping cash or loans in your business - now during actual normal low inflation.
They are thus a bit of a joke.
Under hyperinflation you MUST calculate this loss or gain from cash and loans.
But, during low inflation, you don'´t have to (and no-one does) - unless you pick the other, much better and correct way of doing your accounts (which NO-ONE picks).
Huh??
So, what is their story?
Are there losses and gains from keeping cash and loans in your business?
If yes, as it actually is, why are we only allowed to calculate and show this during hyperinflation and not with normal historical cost accounting during low inflation?
But, if we pick their much better and correct alternative, then we suddenly can calulate these monetary losses and gains - during low inflation?
It is one helluva big puzzle.
So you ask, what is the correct thing to do?
Pick the other better and correct way of doing your accounts (they - the BIG ACCOUNTING BOSSES approved it 20 years ago) with which you do not AUTOMATICALLY destroy your capital and profits you keep in your company as your accountant does right now with traditional Historical Cost Accounting during low inflation.
Here is the link for more info.
(New book coming soon - watch this space :-) [This time you´ll have to pay for it.]
If you want to email me (I´m available :-) realvalueaccounting@yahoo.com
Kindest regards,
Nicolaas Smith
Net monetary gain or loss conundrum
Accountants have to calculate the net monetary gain or loss from holding monetary items when they choose the Constant Item Purchasing Power Accounting model and measure financial capital maintenance in units of constant purchasing power in the same way as the IASB currently requires its calculation and accounting only during hyperinflation in IAS 29.
There are net monetary losses and net monetary gains during low inflation too, but they are not required to be calculated when accountants choose the traditional Historical Cost Accounting model.
It is an inexplicable contradiction that net monetary gains and losses are required by the IASB to be calculated and accounted during hyperinflation but not during non-hyperinflationary periods, especially when the IASB approved alternative to Historical Cost Accounting, namely Constant Item Purchasing Power Accounting does require their calculation and accounting during low inflation.
Kindest regards,
Nicolaas Smith
There are net monetary losses and net monetary gains during low inflation too, but they are not required to be calculated when accountants choose the traditional Historical Cost Accounting model.
It is an inexplicable contradiction that net monetary gains and losses are required by the IASB to be calculated and accounted during hyperinflation but not during non-hyperinflationary periods, especially when the IASB approved alternative to Historical Cost Accounting, namely Constant Item Purchasing Power Accounting does require their calculation and accounting during low inflation.
Kindest regards,
Nicolaas Smith
The Market Monkey and the Real Value Accountant - Part 2
Market Monkey said:
heh heh.
You miss understand my disagreement NS.
I agree that the current accounting mis-states the true value of the firm's capital.
I just don't agree it has any relevance to the real world. I must be in the top 1.0% of the population who uses accounts to make real world decisions and value ... and I really don't care that the capital is stated at historic cost.
... and
I think that I would actually complain if units of constant purchasing power were used.
Why?
Well. I like having the raw data. I can then adjust it for inflation myself. If the accountants had to do the calculations for me then I wouldn't know what I'm dealing with? I might disagree with the inflation rate they have used ... the global CPI numbers are all already a load of hog wash with them being adjusted for "heuristics", leaving out key consumtion items etc.
Do you get my point and why I prefer the current system?
Keep a swinging,
MM.
P.s. Also just so there is no confusion; I'm not an accountant (i.e. CA), I just use accounts to make decisions and money.
Real Value Accountant said:
Hi Market Monkey,
We have to be professional here:
I never stated that historical cost accounting “misstates” the true value of the firm´s capital.
I state that historical cost accounting accountants unknowingly DESTROY the real value of constant items never updated. This includes the real value of firms´ issued share capital and retained earnings.
Your agreement that current accounting misstates the true value of the firm´s capital is the same as the hackneyed “historical cost accounting erodes the firm´s capital.”
I understand.
It is a very, very, very big step to agree that historical cost accountants unknowingly destroy real value on a massive scale in the real economy.
It is agreeing that the 500 year old Historical Cost paradigm is over.
It is similar to agreeing that the world is round when you have always believed it is flat.
I understand.
This is not going to happen overnight. I accept that.
I already proved to you in a previous comment on another post that historical cost accountants unknowingly destroy the real value of retained profits.
You simply refuse to accept that it makes any difference in the real world.
That is also fine with me.
You accept the mainstream, generally accepted view of things.
That is fine.
Let me show you where your mainstream approach will take you:
If SA trade unions manage to increase wages at rates of 26% and above and this is taken up generally in SA and SA enters into hyperinflation (26% annual inflation for three years in a row totalling 100% cumulative inflation) you will receive all your annual financial statements that you use in your work done in terms of IAS 29. That is, in terms of the IASB´s Constant Purchasing Power inflation accounting model under which ALL non-monetary items, variable and constant items, are inflation adjusted. These financial statements will have new items that you do not deal with during low inflation: net monetary losses and net monetary gains.
You will accept all that as will all accountants in SA because it is required by the IASB and IFRS. Like Turkey did recently.
Then, when SA gets out of hyperinflation back into low inflation again, then you and all SA accountants will suddenly again receive/produce financial statements devoid of net monetary gains and net monetary losses and no units of constant purchasing power for all constant items. As Turkey did recently.
[I do not promote IAS 29 Constant Purchasing Power inflation accounting during low inflation in SA by which ALL non-monetary items are inflation adjusted. I promote the IASB´s Constant ITEM Purchasing Power basic accounting model under which ONLY constant items are inflation-adjusted and variable items are valued in terms of IFRS.]
Then you and all SA accountants will suddenly state again that there is no such thing as net monetary gains and net monetary losses and that the Rand is perfectly stable, as you, Market Monkey, and all SA accountants state right now, as far as the valuation of Issued Share Capital, Retained Profits, Capital Reserves, Share Issue Premiums, Share Issue Discounts, all other items in Shareholders Equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc are concerned.
Horses for courses for you and SA accountants.
See what I mean?
How can investors and people in general have great faith in accounting when the above takes place. And it does – as you well know. It happened in the case of Turkey.
Below 26% annual inflation for 3 years in a row (the current low inflation situation): no net monetary gains and losses and the Rand is perfectly stable for the valuation of balance sheet constant items – i.e. implementing the stable measuring unit assumption as you and all SA accountants do at the moment.
At and above 26% annual inflation for 3 years in a row (recent Turkey-style hyperinflation of about 100 to 150%): net monetary gains and losses and no stable measuring unit assumption at all – just units of constant purchasing power.
It makes no sense at all.
The critical factor is to get to the point when you accept that historical cost accountants unknowingly destroy real value on a massive scale in the real economy.
Market Monkey, I do not know when you will be ready to accept that.
Most probably you will only accept it when the majority of companies in SA measure financial capital maintenance in units of constant purchasing power as approved by the IASB 20 years ago in the Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
I understand and accept that. You are a mainstream person - not a doubter and searcher like me.
Kindest regards,
Nicolaas Smith
PS: Yes, Market Monkey, I can see why you prefer the current system. The problem is you do not understand that SA accountants unknowingly destroy about R200 billion in the SA real economy last year and this year and next year again if they carry on with their stable measuring unit assumption.
That is a helluva lot of real value to destroy each and every year. It will make a big difference to the SA real economy when that is not destroyed but maintained forever - year after year after year.
That is what you do not understand.
This is what Dr. Cemal KÜÇÜKSÖZEN, Head of the Accounting Standards Department of the
Capital Markets Board of Turkey stated in public in 2005 after he read the manuscript of my first book:
"I totally agree with you."
NS
heh heh.
You miss understand my disagreement NS.
I agree that the current accounting mis-states the true value of the firm's capital.
I just don't agree it has any relevance to the real world. I must be in the top 1.0% of the population who uses accounts to make real world decisions and value ... and I really don't care that the capital is stated at historic cost.
... and
I think that I would actually complain if units of constant purchasing power were used.
Why?
Well. I like having the raw data. I can then adjust it for inflation myself. If the accountants had to do the calculations for me then I wouldn't know what I'm dealing with? I might disagree with the inflation rate they have used ... the global CPI numbers are all already a load of hog wash with them being adjusted for "heuristics", leaving out key consumtion items etc.
Do you get my point and why I prefer the current system?
Keep a swinging,
MM.
P.s. Also just so there is no confusion; I'm not an accountant (i.e. CA), I just use accounts to make decisions and money.
Real Value Accountant said:
Hi Market Monkey,
We have to be professional here:
I never stated that historical cost accounting “misstates” the true value of the firm´s capital.
I state that historical cost accounting accountants unknowingly DESTROY the real value of constant items never updated. This includes the real value of firms´ issued share capital and retained earnings.
Your agreement that current accounting misstates the true value of the firm´s capital is the same as the hackneyed “historical cost accounting erodes the firm´s capital.”
I understand.
It is a very, very, very big step to agree that historical cost accountants unknowingly destroy real value on a massive scale in the real economy.
It is agreeing that the 500 year old Historical Cost paradigm is over.
It is similar to agreeing that the world is round when you have always believed it is flat.
I understand.
This is not going to happen overnight. I accept that.
I already proved to you in a previous comment on another post that historical cost accountants unknowingly destroy the real value of retained profits.
You simply refuse to accept that it makes any difference in the real world.
That is also fine with me.
You accept the mainstream, generally accepted view of things.
That is fine.
Let me show you where your mainstream approach will take you:
If SA trade unions manage to increase wages at rates of 26% and above and this is taken up generally in SA and SA enters into hyperinflation (26% annual inflation for three years in a row totalling 100% cumulative inflation) you will receive all your annual financial statements that you use in your work done in terms of IAS 29. That is, in terms of the IASB´s Constant Purchasing Power inflation accounting model under which ALL non-monetary items, variable and constant items, are inflation adjusted. These financial statements will have new items that you do not deal with during low inflation: net monetary losses and net monetary gains.
You will accept all that as will all accountants in SA because it is required by the IASB and IFRS. Like Turkey did recently.
Then, when SA gets out of hyperinflation back into low inflation again, then you and all SA accountants will suddenly again receive/produce financial statements devoid of net monetary gains and net monetary losses and no units of constant purchasing power for all constant items. As Turkey did recently.
[I do not promote IAS 29 Constant Purchasing Power inflation accounting during low inflation in SA by which ALL non-monetary items are inflation adjusted. I promote the IASB´s Constant ITEM Purchasing Power basic accounting model under which ONLY constant items are inflation-adjusted and variable items are valued in terms of IFRS.]
Then you and all SA accountants will suddenly state again that there is no such thing as net monetary gains and net monetary losses and that the Rand is perfectly stable, as you, Market Monkey, and all SA accountants state right now, as far as the valuation of Issued Share Capital, Retained Profits, Capital Reserves, Share Issue Premiums, Share Issue Discounts, all other items in Shareholders Equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc are concerned.
Horses for courses for you and SA accountants.
See what I mean?
How can investors and people in general have great faith in accounting when the above takes place. And it does – as you well know. It happened in the case of Turkey.
Below 26% annual inflation for 3 years in a row (the current low inflation situation): no net monetary gains and losses and the Rand is perfectly stable for the valuation of balance sheet constant items – i.e. implementing the stable measuring unit assumption as you and all SA accountants do at the moment.
At and above 26% annual inflation for 3 years in a row (recent Turkey-style hyperinflation of about 100 to 150%): net monetary gains and losses and no stable measuring unit assumption at all – just units of constant purchasing power.
It makes no sense at all.
The critical factor is to get to the point when you accept that historical cost accountants unknowingly destroy real value on a massive scale in the real economy.
Market Monkey, I do not know when you will be ready to accept that.
Most probably you will only accept it when the majority of companies in SA measure financial capital maintenance in units of constant purchasing power as approved by the IASB 20 years ago in the Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
I understand and accept that. You are a mainstream person - not a doubter and searcher like me.
Kindest regards,
Nicolaas Smith
PS: Yes, Market Monkey, I can see why you prefer the current system. The problem is you do not understand that SA accountants unknowingly destroy about R200 billion in the SA real economy last year and this year and next year again if they carry on with their stable measuring unit assumption.
That is a helluva lot of real value to destroy each and every year. It will make a big difference to the SA real economy when that is not destroyed but maintained forever - year after year after year.
That is what you do not understand.
This is what Dr. Cemal KÜÇÜKSÖZEN, Head of the Accounting Standards Department of the
Capital Markets Board of Turkey stated in public in 2005 after he read the manuscript of my first book:
"I totally agree with you."
NS
Friday, 7 August 2009
Julius, why are you not proud of Tito Mboweni?
Julius, Tito Mboweni is black.
He halved to 5.9% (REDUCE BY 50%) the average inflation in SA during 10 years compared to the last 12 years of white apartheid rule.
What better proof is there of black intelligence and excellence of unquestionable quality?
Julius, you have a short memory.
SA is proud of Tito Mboweni.
Why are you not?
Kindest regards,
Nicolaas Smith
He halved to 5.9% (REDUCE BY 50%) the average inflation in SA during 10 years compared to the last 12 years of white apartheid rule.
What better proof is there of black intelligence and excellence of unquestionable quality?
Julius, you have a short memory.
SA is proud of Tito Mboweni.
Why are you not?
Kindest regards,
Nicolaas Smith
Thursday, 6 August 2009
The Investor and the Real Value Accountant
Port Elizabeth Coat of Arms
Investor said:
"They will not create new real value out of nothing by just passing some accounting entries. They will boost the SA real economy BY NOT DESTROYING EXISTING REAL VALUE"
I don't get it? how do book keeping entries not destroy wealth. I ddon't get the connection at all. Please explain in lay man's terms so I can follow the mechanics.
Real Value Accountant said:
Hi Investor,
How is my beloved PE? Still windy? I see on Google Earth that Sardinia Bay is still the same. Theesecombe (where I grew up) and Kragga Kamma have changed a bit. So has Lorraine. Where do you stay in PE? Did you go to UPE? Which schools did you attend?
Your questions:
Let me start off by saying that I did not invent financial capital maintenance in units of constant purchasing power. The International Accounting Standards Board formulated it in 1989 in the Framework, Par. 104 (a) and other paragraphs in the Framework.
How do bookkeeping entries not destroy value – in lay man’s terms?
As follows:
Let´s start with your salary. Your salary is an income statement constant item as opposed to a balance sheet constant item.
Bookkeeping is double entry; that is, for every debit there is a credit.
Dr Salaries R20 000
Cr Salaries payable R20 000
Your salary in Year 1.
Inflation 6.9%
Entries for Year 2
Dr Salaries (R20 000 X 1.069) R21 380
Cr Salaries payable R21 380
Your salary was updated at 6.9% from R20 000 to R21 380. In real value it is exactly the same thing. You got no increase. Simply an inflation-adjustment of your basic salary.
Your salary was inflation-adjusted because it´s real value was measured in units of constant purchasing power as all salaries are world wide.
Bookkeeping entries in Year 2 – the inflation-adjusted values – means the real value of your salary was NOT destroyed.
If your salary was NOT updated in Year 2 and you were still paid R20 000 you will agree that the real value of your salary would have been destroyed by 6.9%.
Not because of inflation, but because your accountant measured the real value of your salary in nominal monetary units or at historical cost. Your accountant applied the stable measuring unit assumption and assumed, just for the purpose of valuing your salary, that there was no such thing as inflation. He or she assumed that the Rand was perfectly stable. So it is his or her selection of the historical cost measurement basis that destroyed the real value of your salary.
Your accountant can also, as they all actually do, measure the real value of your salary in units of constant purchasing power and maintain its real value no matter what the rate of inflation is. So it is not inflation that is destroying your salary when it is not updated, but the measuring basis your accountant chooses.
World wide all accountants select the historical cost accounting model, BUT, they value salaries, NOT at historical cost, but in units of constant purchasing power.
However, they do NOT value retained profits, which is also a constant item, in units of constant purchasing power, like they do with your salary. All of them value retained profits during low inflation at historical cost.
So, you know that they destroy retained profits´ real value at a rate equal to the inflation rate exactly as they would have done with your salary if they had not inflation-adjusted it in Year 2.
Bookkeeping for Retained Profits
Year 1
Retained Profits R 40.665 billion (ABSA´s balance at 31.12.08)
Year 2
Retained Profits R40.665 billion (That 31.12.08 value in ABSA´s books carried forward to 31.12.09) under historical cost accounting.
Real value destroyed by ABSA´s board of director´s decision to implement the historical cost accounting model:
R40.665 x 0.069 (if inflation stays at 6.9 % for the whole of 2009) = R 2.806 billion
So, when ABSA´s board decides to select financial capital maintenance in units of constant purchasing power as the IASB authorized them to do in the Framework, Par. 104 (a) twenty year ago, the entries will be as follows:
ABSA 31.12.2008
Retained Profits R40.665 billion
ABSA 31.12.2009
Retained Profits R43.471 billion
You will ask: where does that value come from. It is not new value. It is simple existing real value maintained by inflation-adjusting the real value.
But, you will say: accounting is double entry.
Yes, you are right.
Let us assume ABSA´s balance sheet is as follows:
ABSA at 31.12.2008 under their current Historical Cost Accounting model as selected by their current board of directors.
Assets Liabilities
Trade Debtors R40.665 billion Retained Profits R40.665 billion
Nothing changes during the whole of 2009
ABSA at 31.12.2009 under their current Historical Cost Accounting model as selected by their current board of directors.
Assets Liabilities
Trade Debtors R40.665 billion Retained Profits R40.665 billion
Everything stays exactly the same.
We all know that everything did not stay exactly the same. We all know that that R40.665 billion in Retained profits and R40.665 billion in Trade Debtors are not the same in real value after a year of 6.9% inflation.
But, that is how things are done. So, that´s it then. SA accountants destroy R200 billion per annum in this way.
Their auditors will sign the above accounts off as fairly representing the ABSA business with accounts drawn up on the historical cost basis and compliant with IFRS.
If ABSA´s board of directors suddenly wakes up to the billions of real value they are destroying year after year (or if the SA government forces them to stop the real value destruction), they will select to measure financial capital maintenance in units of constant purchasing power in terms of the Framework, Par. 104 (a) which is fully complaint with IFRS.
Their accounts will then be as follows:
ABSA at 31.12.2008 under Constant Item Purchasing Power Accounting
Assets Liabilities
Trade Debtors R40.665 billion Retained Profits R40.665 billion
Nothing changes during the whole of 2009 except that inflation for the whole year was 6.9%.
ABSA at 31.12.2008 under Constant Item Purchasing Power Accounting
Assets Liabilities
Trade Debtors R43.471 billion Retained Profits R43.471 billion
Their auditors will sign the above accounts off as fairly representing the ABSA business with accounts drawn up on the Constant Item Purchasing Power Accounting basis and compliant with IFRS.
So, you can see that ABSA under current historical cost accounting lost R2.806 billion by not updating their Trade Debtors and their Retained Profits as they should have.
This loss is not stated anywhere. It just happens - like the loss in the real value of the Rand.
Under historical cost accounting during low inflation, the net monetary loss caused by inflation in the real value of the Rand is not stated anywhere.
But, lo and behold: let SA get into hyperinflation which is 26% inflation for 3 years in a row, and suddenly: hey presto: net monetary loss will appear in all financial reports and constant purchasing power accounting everywhere.
But, only during hyperinflation. Out of hyperinflation and all SA accountants will state that there is no such thing as a net monetary loss.
What a joke accounting seems to be. Anything goes, as long as everyone is doing it.
Nobody has much faith in economists after the last financial crisis.
Imagine what this is going to do to the image of accountants. They are killing the real economy left, right and centre. All of them, everywhere. The least damage would be done if accountants admit the Historical Cost Mistake quickly and then ban Historical Cost Accounting.
If the SA government can grasp the amount of real value destroyed by SA accountants in the SA real economy each and every year, they should ban Historical Cost Accounting in SA.
Their auditors will sign the above accounts off as fairly representing the ABSA business with accounts drawn up on the Constant Item Purchasing Power Accounting basis and compliant with IFRS.
Investor, I hope you understand the above.
Give my regards to all in PE,
Nicolaas Smith
Investor said:
"They will not create new real value out of nothing by just passing some accounting entries. They will boost the SA real economy BY NOT DESTROYING EXISTING REAL VALUE"
I don't get it? how do book keeping entries not destroy wealth. I ddon't get the connection at all. Please explain in lay man's terms so I can follow the mechanics.
Real Value Accountant said:
Hi Investor,
How is my beloved PE? Still windy? I see on Google Earth that Sardinia Bay is still the same. Theesecombe (where I grew up) and Kragga Kamma have changed a bit. So has Lorraine. Where do you stay in PE? Did you go to UPE? Which schools did you attend?
Your questions:
Let me start off by saying that I did not invent financial capital maintenance in units of constant purchasing power. The International Accounting Standards Board formulated it in 1989 in the Framework, Par. 104 (a) and other paragraphs in the Framework.
How do bookkeeping entries not destroy value – in lay man’s terms?
As follows:
Let´s start with your salary. Your salary is an income statement constant item as opposed to a balance sheet constant item.
Bookkeeping is double entry; that is, for every debit there is a credit.
Dr Salaries R20 000
Cr Salaries payable R20 000
Your salary in Year 1.
Inflation 6.9%
Entries for Year 2
Dr Salaries (R20 000 X 1.069) R21 380
Cr Salaries payable R21 380
Your salary was updated at 6.9% from R20 000 to R21 380. In real value it is exactly the same thing. You got no increase. Simply an inflation-adjustment of your basic salary.
Your salary was inflation-adjusted because it´s real value was measured in units of constant purchasing power as all salaries are world wide.
Bookkeeping entries in Year 2 – the inflation-adjusted values – means the real value of your salary was NOT destroyed.
If your salary was NOT updated in Year 2 and you were still paid R20 000 you will agree that the real value of your salary would have been destroyed by 6.9%.
Not because of inflation, but because your accountant measured the real value of your salary in nominal monetary units or at historical cost. Your accountant applied the stable measuring unit assumption and assumed, just for the purpose of valuing your salary, that there was no such thing as inflation. He or she assumed that the Rand was perfectly stable. So it is his or her selection of the historical cost measurement basis that destroyed the real value of your salary.
Your accountant can also, as they all actually do, measure the real value of your salary in units of constant purchasing power and maintain its real value no matter what the rate of inflation is. So it is not inflation that is destroying your salary when it is not updated, but the measuring basis your accountant chooses.
World wide all accountants select the historical cost accounting model, BUT, they value salaries, NOT at historical cost, but in units of constant purchasing power.
However, they do NOT value retained profits, which is also a constant item, in units of constant purchasing power, like they do with your salary. All of them value retained profits during low inflation at historical cost.
So, you know that they destroy retained profits´ real value at a rate equal to the inflation rate exactly as they would have done with your salary if they had not inflation-adjusted it in Year 2.
Bookkeeping for Retained Profits
Year 1
Retained Profits R 40.665 billion (ABSA´s balance at 31.12.08)
Year 2
Retained Profits R40.665 billion (That 31.12.08 value in ABSA´s books carried forward to 31.12.09) under historical cost accounting.
Real value destroyed by ABSA´s board of director´s decision to implement the historical cost accounting model:
R40.665 x 0.069 (if inflation stays at 6.9 % for the whole of 2009) = R 2.806 billion
So, when ABSA´s board decides to select financial capital maintenance in units of constant purchasing power as the IASB authorized them to do in the Framework, Par. 104 (a) twenty year ago, the entries will be as follows:
ABSA 31.12.2008
Retained Profits R40.665 billion
ABSA 31.12.2009
Retained Profits R43.471 billion
You will ask: where does that value come from. It is not new value. It is simple existing real value maintained by inflation-adjusting the real value.
But, you will say: accounting is double entry.
Yes, you are right.
Let us assume ABSA´s balance sheet is as follows:
ABSA at 31.12.2008 under their current Historical Cost Accounting model as selected by their current board of directors.
Assets Liabilities
Trade Debtors R40.665 billion Retained Profits R40.665 billion
Nothing changes during the whole of 2009
ABSA at 31.12.2009 under their current Historical Cost Accounting model as selected by their current board of directors.
Assets Liabilities
Trade Debtors R40.665 billion Retained Profits R40.665 billion
Everything stays exactly the same.
We all know that everything did not stay exactly the same. We all know that that R40.665 billion in Retained profits and R40.665 billion in Trade Debtors are not the same in real value after a year of 6.9% inflation.
But, that is how things are done. So, that´s it then. SA accountants destroy R200 billion per annum in this way.
Their auditors will sign the above accounts off as fairly representing the ABSA business with accounts drawn up on the historical cost basis and compliant with IFRS.
If ABSA´s board of directors suddenly wakes up to the billions of real value they are destroying year after year (or if the SA government forces them to stop the real value destruction), they will select to measure financial capital maintenance in units of constant purchasing power in terms of the Framework, Par. 104 (a) which is fully complaint with IFRS.
Their accounts will then be as follows:
ABSA at 31.12.2008 under Constant Item Purchasing Power Accounting
Assets Liabilities
Trade Debtors R40.665 billion Retained Profits R40.665 billion
Nothing changes during the whole of 2009 except that inflation for the whole year was 6.9%.
ABSA at 31.12.2008 under Constant Item Purchasing Power Accounting
Assets Liabilities
Trade Debtors R43.471 billion Retained Profits R43.471 billion
Their auditors will sign the above accounts off as fairly representing the ABSA business with accounts drawn up on the Constant Item Purchasing Power Accounting basis and compliant with IFRS.
So, you can see that ABSA under current historical cost accounting lost R2.806 billion by not updating their Trade Debtors and their Retained Profits as they should have.
This loss is not stated anywhere. It just happens - like the loss in the real value of the Rand.
Under historical cost accounting during low inflation, the net monetary loss caused by inflation in the real value of the Rand is not stated anywhere.
But, lo and behold: let SA get into hyperinflation which is 26% inflation for 3 years in a row, and suddenly: hey presto: net monetary loss will appear in all financial reports and constant purchasing power accounting everywhere.
But, only during hyperinflation. Out of hyperinflation and all SA accountants will state that there is no such thing as a net monetary loss.
What a joke accounting seems to be. Anything goes, as long as everyone is doing it.
Nobody has much faith in economists after the last financial crisis.
Imagine what this is going to do to the image of accountants. They are killing the real economy left, right and centre. All of them, everywhere. The least damage would be done if accountants admit the Historical Cost Mistake quickly and then ban Historical Cost Accounting.
If the SA government can grasp the amount of real value destroyed by SA accountants in the SA real economy each and every year, they should ban Historical Cost Accounting in SA.
Their auditors will sign the above accounts off as fairly representing the ABSA business with accounts drawn up on the Constant Item Purchasing Power Accounting basis and compliant with IFRS.
Investor, I hope you understand the above.
Give my regards to all in PE,
Nicolaas Smith
Tuesday, 4 August 2009
Capital maintenance for dummies
Companies´ capital and retained profits are like salaries: constant items.
When your salary is not inflation-adjusted, its real vlaue is destroyed at the rate of inflation. We all know that. No-one disagrees. Not even Market Monkey :-)
Exactly the same is true for companies´ capital and retained profits.
No-one inflation adjusts companies´ capital and retained profits during low inflation.
Result: SA accountants unknowingly destroy the real value of companies´ capital and retained profits by not inflation-adjusting them.
This amounts to about R200 billion for SA per annum.
When SA accountants inflation-adjust companies´ capital and retained profits they will boost the SA real economy by at least R200 billion PER ANNUM forever - year after year after year.
They will not create new real value out of nothing by just passing some accounting entries. They will boost the SA real economy BY NOT DESTROYING EXISTING REAL VALUE as they unknowingly do at the moment in all SA banks and companies with their stable measuring unit assumption. They value capital and retained profits at historical cost. They refuse point blank to inflation-adjust them.
You all work so hard to create that capital and retained profits and make SA grow. SA accountants unknowingly and unintentionally quietly simply destroy their real values at the rate of inflation right under your noses - year after year after year.
Inflation-adjusting capital and retained profits during low inflation was authorized by the International Accounting Standards Board 20 years ago. It is compliant with International Financial Reporting Standards.
That would be wonderful for everybody in SA, wouldn´t it?
Stronger banks and companies meaning a stonger economy with more investment capital available meaning more jobs and more growth.
Kindest regards,
Nicolaas Smith
When your salary is not inflation-adjusted, its real vlaue is destroyed at the rate of inflation. We all know that. No-one disagrees. Not even Market Monkey :-)
Exactly the same is true for companies´ capital and retained profits.
No-one inflation adjusts companies´ capital and retained profits during low inflation.
Result: SA accountants unknowingly destroy the real value of companies´ capital and retained profits by not inflation-adjusting them.
This amounts to about R200 billion for SA per annum.
When SA accountants inflation-adjust companies´ capital and retained profits they will boost the SA real economy by at least R200 billion PER ANNUM forever - year after year after year.
They will not create new real value out of nothing by just passing some accounting entries. They will boost the SA real economy BY NOT DESTROYING EXISTING REAL VALUE as they unknowingly do at the moment in all SA banks and companies with their stable measuring unit assumption. They value capital and retained profits at historical cost. They refuse point blank to inflation-adjust them.
You all work so hard to create that capital and retained profits and make SA grow. SA accountants unknowingly and unintentionally quietly simply destroy their real values at the rate of inflation right under your noses - year after year after year.
Inflation-adjusting capital and retained profits during low inflation was authorized by the International Accounting Standards Board 20 years ago. It is compliant with International Financial Reporting Standards.
That would be wonderful for everybody in SA, wouldn´t it?
Stronger banks and companies meaning a stonger economy with more investment capital available meaning more jobs and more growth.
Kindest regards,
Nicolaas Smith
Monday, 3 August 2009
1.1% Drop in inflation lowers ABSAs 6 monthly real value destruction to R1.910 bn from R2.348 bn
Inflation can only destroy the real value of the Rand and other monetary items in the SA monetary economy.
Inflation can not destroy the real value of ABSA´s Retained Earnings.
ABSA´s board of directors selecting the historical cost accounting model unknowinly destroys the real value of the bank´s existing Retained Earnings at a rate equal to the rate of inflation by implementing the stable measuring unit assumption.
When ABSA´s board of directors choose to measure financial capital maintenance in units of constant purchasing power as the International Accounting Standard Board authorized them to do 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", which is compliant with International Financial Reporting Standards (see IAS8.11), they will knowingly maintain the real value of the bank´s Retained Earnings no matter what the rate of inflation in SA instead of destroying the real value of the existing Retained Earnings at a rate equal to the rate of inflation as they are unknowingly doing right now.
ABSA had R40.665 billion in Retained Earnings at 31.12.08. ABSA´s board of directors selected the historical cost model to do the bank´s accounting. The group financial director, Jacques Schindehütte, continue to implement the stable measuring unit assumption and continue to unknowingly destroy group retained earnings at a rate equal to the rate of inflation.
Luckily for him and the board, inflation is down to 6.9% in June and he and they unknowingly only destroyed R1.910 billion in retained earnings in the 6 months to June 2009, instead of R2.438 billion if the inflation rate had stayed at 8.0% to June, 2009.
The 1.1% drop in the inflation rate means they unknowingly maintain R438 million in the existing real value of the bank´s Retained Earnings. That can now be paid out in a higher dividend or can be kept in the bank to grow the bank´s business.
Unfortunately, as long as the board of directors select the historical cost model to do the bank´s accounts, they will unkowingly keep on destroying even the value they now unknowingly maintain because of the drop in inflation.
Kindest regards,
Nicolaas Smith
Inflation can not destroy the real value of ABSA´s Retained Earnings.
ABSA´s board of directors selecting the historical cost accounting model unknowinly destroys the real value of the bank´s existing Retained Earnings at a rate equal to the rate of inflation by implementing the stable measuring unit assumption.
When ABSA´s board of directors choose to measure financial capital maintenance in units of constant purchasing power as the International Accounting Standard Board authorized them to do 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", which is compliant with International Financial Reporting Standards (see IAS8.11), they will knowingly maintain the real value of the bank´s Retained Earnings no matter what the rate of inflation in SA instead of destroying the real value of the existing Retained Earnings at a rate equal to the rate of inflation as they are unknowingly doing right now.
ABSA had R40.665 billion in Retained Earnings at 31.12.08. ABSA´s board of directors selected the historical cost model to do the bank´s accounting. The group financial director, Jacques Schindehütte, continue to implement the stable measuring unit assumption and continue to unknowingly destroy group retained earnings at a rate equal to the rate of inflation.
Luckily for him and the board, inflation is down to 6.9% in June and he and they unknowingly only destroyed R1.910 billion in retained earnings in the 6 months to June 2009, instead of R2.438 billion if the inflation rate had stayed at 8.0% to June, 2009.
The 1.1% drop in the inflation rate means they unknowingly maintain R438 million in the existing real value of the bank´s Retained Earnings. That can now be paid out in a higher dividend or can be kept in the bank to grow the bank´s business.
Unfortunately, as long as the board of directors select the historical cost model to do the bank´s accounts, they will unkowingly keep on destroying even the value they now unknowingly maintain because of the drop in inflation.
Kindest regards,
Nicolaas Smith
Saturday, 1 August 2009
The Market Monkey and the Real Value Accountant
Market Monkey said:
Sorry NS but I'm kinda in the other camp.
I don't believe historic cost accounting destroys any real world value.
The people using the accounts to either [a] determine the company's market value, [b] determine the dividend or [c] determine next years salaries all adjust the figures to take inflation into account.
For me the accounts are just records and I much prefer them to be historic cost because then I know what I'm dealing with and I can make my own adjustments. I use accounts on a daily basis and I am 100% sure which method I prefer ... and constant purchasing power accounting ain't it.
Best luck with ya crusade though.
MM.
The Real Value Accountant said:
Hi Market Monkey,
First of all: you use constant ITEM purchasing power accounting – not constant purchasing power accounting - every day and you do not even know it. We’ll come to that later.
You are 100% correct in (a) that inflation is taken into account by investors on the JSE in determining the real value of a company’s market value - a variable real value non-monetary item. The function of financial accounting as presented in the financial statements is not to value the business as a whole, but to convey value information about the economic resources of a business. This distinction recognizes the need to segregate the accounting function from the investor function. Thus, a company’s market value can be higher or lower than the company’s net book value.
You are also 100% correct that inflation is taken into account to determine next year´s salaries. Salaries are constant real value non-monetary items. Salaries, wages, rentals and many other Income Statement constant real value non-monetary items are valued in terms of units of constant purchasing power by all companies in all economies world wide – generally speaking. You do not seem to realize that measurement in units of constant purchasing power has been used for this purpose for ages.
You are 100% wrong as far as (b) is concerned in the non-hyperinflationary world: the fact that inflation destroys the real value of the Rand is not taken into account by anyone in SA for determining the dividend. They simply use what is in the Retained Earnings account. They value Retained Earnings as you agree they should value it: at historical cost although the IASB authorized them 20 years ago to value it in real value maintaining units of constant purchasing power. You and SA accountants refuse to do that.
You will agree with me that R100 000 kept at home for a year in brand new notes will have lost 6.9% of their real value one year from now – ceteris paribus. You will agree with me that not accounting but inflation destroys the real value of the Rand.
You will also agree with me that if you close your company’s accounts today and you have R100 000 in net after tax profits and you decide not to declare the R100 000 in dividend to yourself as sole-owner of the company but rather keep it in the company as retained earnings and you then pay that dividend to yourself in a year’s time you will receive R100 000 in nominal value but 6.9% less in real value – all else being equal. You will agree with me that your decision to use historical cost accounting – more exactly the stable measuring unit assumption whereby you do not update retained earnings in your books – resulted in historical cost accounting – and not inflation - destroying 6.9% of the real value of your retained earnings over the next year – as it is doing to all companies´ retained earnings in SA.
Why? Because you could have chosen in terms of the IASB´s Framework, Par. 104 (a) – approved 20 years ago – to measure your financial capital maintenance in units of constant purchasing power. Par. 104 (a) states: “Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
You can inflation-adjust all constant items in your business – no matter what the rate of inflation. So, it is not inflation that is destroying the real value of your retained earnings. It is your selection of the historical cost accounting model. When you choose constant ITEM purchasing power accounting you maintain the real value of your retained earnings forever – ceteris paribus.
This is not 1970-style Constant Purchasing Power INFLATION accounting whereby ALL non-monetary items are inflation adjusted.
This is Constant ITEM Purchasing Power BASIC accounting whereby ONLY constant items are inflation adjusted – as approved by the IASB 20 year ago and which is compliant with IFRS.
So, there you have it Market Monkey: you agree with me that historical cost accounting destroys value. Easy, isn’t it?
Btw: the total real value destroyed in this fashion by SA accountants implementing historical cost accounting for SA as a whole is conservatively estimated at about R200 billion PER ANNUM.
When they switch over to constant ITEM purchasing power accounting they will maintain R200 billion PER ANNUM in the SA real economy FOREVER – ceteris paribus.
I am sure you will agree with me that maintaining existing R200 billion PER ANNUM instead of each and every year destroying that value - as SA accountant are unknowingly doing right now - will make quite a difference to the SA real economy.
So, now I have proved to you - without any doubt - that
"historic cost accounting destroys real world value."
We all live and learn.
I´m sure you will be able to teach me many things about the market that I previously did not understand.
Kindest regards
Nicolaas Smith
Sorry NS but I'm kinda in the other camp.
I don't believe historic cost accounting destroys any real world value.
The people using the accounts to either [a] determine the company's market value, [b] determine the dividend or [c] determine next years salaries all adjust the figures to take inflation into account.
For me the accounts are just records and I much prefer them to be historic cost because then I know what I'm dealing with and I can make my own adjustments. I use accounts on a daily basis and I am 100% sure which method I prefer ... and constant purchasing power accounting ain't it.
Best luck with ya crusade though.
MM.
The Real Value Accountant said:
Hi Market Monkey,
First of all: you use constant ITEM purchasing power accounting – not constant purchasing power accounting - every day and you do not even know it. We’ll come to that later.
You are 100% correct in (a) that inflation is taken into account by investors on the JSE in determining the real value of a company’s market value - a variable real value non-monetary item. The function of financial accounting as presented in the financial statements is not to value the business as a whole, but to convey value information about the economic resources of a business. This distinction recognizes the need to segregate the accounting function from the investor function. Thus, a company’s market value can be higher or lower than the company’s net book value.
You are also 100% correct that inflation is taken into account to determine next year´s salaries. Salaries are constant real value non-monetary items. Salaries, wages, rentals and many other Income Statement constant real value non-monetary items are valued in terms of units of constant purchasing power by all companies in all economies world wide – generally speaking. You do not seem to realize that measurement in units of constant purchasing power has been used for this purpose for ages.
You are 100% wrong as far as (b) is concerned in the non-hyperinflationary world: the fact that inflation destroys the real value of the Rand is not taken into account by anyone in SA for determining the dividend. They simply use what is in the Retained Earnings account. They value Retained Earnings as you agree they should value it: at historical cost although the IASB authorized them 20 years ago to value it in real value maintaining units of constant purchasing power. You and SA accountants refuse to do that.
You will agree with me that R100 000 kept at home for a year in brand new notes will have lost 6.9% of their real value one year from now – ceteris paribus. You will agree with me that not accounting but inflation destroys the real value of the Rand.
You will also agree with me that if you close your company’s accounts today and you have R100 000 in net after tax profits and you decide not to declare the R100 000 in dividend to yourself as sole-owner of the company but rather keep it in the company as retained earnings and you then pay that dividend to yourself in a year’s time you will receive R100 000 in nominal value but 6.9% less in real value – all else being equal. You will agree with me that your decision to use historical cost accounting – more exactly the stable measuring unit assumption whereby you do not update retained earnings in your books – resulted in historical cost accounting – and not inflation - destroying 6.9% of the real value of your retained earnings over the next year – as it is doing to all companies´ retained earnings in SA.
Why? Because you could have chosen in terms of the IASB´s Framework, Par. 104 (a) – approved 20 years ago – to measure your financial capital maintenance in units of constant purchasing power. Par. 104 (a) states: “Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
You can inflation-adjust all constant items in your business – no matter what the rate of inflation. So, it is not inflation that is destroying the real value of your retained earnings. It is your selection of the historical cost accounting model. When you choose constant ITEM purchasing power accounting you maintain the real value of your retained earnings forever – ceteris paribus.
This is not 1970-style Constant Purchasing Power INFLATION accounting whereby ALL non-monetary items are inflation adjusted.
This is Constant ITEM Purchasing Power BASIC accounting whereby ONLY constant items are inflation adjusted – as approved by the IASB 20 year ago and which is compliant with IFRS.
So, there you have it Market Monkey: you agree with me that historical cost accounting destroys value. Easy, isn’t it?
Btw: the total real value destroyed in this fashion by SA accountants implementing historical cost accounting for SA as a whole is conservatively estimated at about R200 billion PER ANNUM.
When they switch over to constant ITEM purchasing power accounting they will maintain R200 billion PER ANNUM in the SA real economy FOREVER – ceteris paribus.
I am sure you will agree with me that maintaining existing R200 billion PER ANNUM instead of each and every year destroying that value - as SA accountant are unknowingly doing right now - will make quite a difference to the SA real economy.
So, now I have proved to you - without any doubt - that
"historic cost accounting destroys real world value."
We all live and learn.
I´m sure you will be able to teach me many things about the market that I previously did not understand.
Kindest regards
Nicolaas Smith
Friday, 31 July 2009
Trust me, I´m an accountant: I will destroy your retained profits at a rate equal to the inflation rate.
AccountingWeb has a headline on the web at the moment:
Trust me. I am an accountant.
Well, that is the historical cost accounting fantasy story.
Here is the real value real story:
Trust me. I am an accountant. I will destroy all your constant items never updated at a rate equal to the rate of inflation.
Kindest regards,
Nicolaas Smith
Trust me. I am an accountant.
Well, that is the historical cost accounting fantasy story.
Here is the real value real story:
Trust me. I am an accountant. I will destroy all your constant items never updated at a rate equal to the rate of inflation.
Kindest regards,
Nicolaas Smith
6.1 percent real increase in salaries is good for internal demand. Hope it is not inflationary.
A 13% nominal increase for municipal workers is a 6.1% real increase with annual inflation at 6.9%.
That is good for internal demand in the SA economy. Workers will have 6.9% more real value to spend in the internal economy.
It would be wonderful if the trade unions and workers could find a way to force SA accountants to abandon their silly stable measuring unit assumption.
That would boost the SA real economy by R200 billion each and every year forever.
Just imagine how many extra jobs would be created with a R200 billion boost in the real economy each and every year for an unlimited period of time.
It must be remembered that if shops now push up all prices by 13% then workers will have a zero increase in real value. The real value of their salaries will stay exactly the same. They will have no increase at all.
Let´s see how the battle between shops and Gill Marcus turn out eventually.
It will obviously be a disaster if inflation increases to 13 % again.
Kindest regards,
Nicolaas Smith
That is good for internal demand in the SA economy. Workers will have 6.9% more real value to spend in the internal economy.
It would be wonderful if the trade unions and workers could find a way to force SA accountants to abandon their silly stable measuring unit assumption.
That would boost the SA real economy by R200 billion each and every year forever.
Just imagine how many extra jobs would be created with a R200 billion boost in the real economy each and every year for an unlimited period of time.
It must be remembered that if shops now push up all prices by 13% then workers will have a zero increase in real value. The real value of their salaries will stay exactly the same. They will have no increase at all.
Let´s see how the battle between shops and Gill Marcus turn out eventually.
It will obviously be a disaster if inflation increases to 13 % again.
Kindest regards,
Nicolaas Smith
Wednesday, 29 July 2009
A 1% drop in inflation
A 1% drop in inflation means that R19.5 billion will be maintained in the real value of the SA money supply (real value of the Rand) over the next year - if nothing else changes.
It also means that SA accountants will unknowingly destroy 1% or about R850 million less in the real value of the existing retained profits of JSE listed companies with their stable measuring unit assumption.
They will unknowingly only destroy about R84.15 billion in existing JSE retained profits over the next year - ceteris paribus.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
It also means that SA accountants will unknowingly destroy 1% or about R850 million less in the real value of the existing retained profits of JSE listed companies with their stable measuring unit assumption.
They will unknowingly only destroy about R84.15 billion in existing JSE retained profits over the next year - ceteris paribus.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
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