Continuing from yesterday’s blog:
The Framework for the Preparation and Presentation of Financial Statements Par. 104 (a) was approved by the International Accounting Standards Board’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.
SA accountants who prepare their companies´ accounts based on International Financial Reporting Standards during low inflation have to choose between Historical Cost Accounting and Constant ITEM Purchasing Power Accounting in terms of Par. 104 (a) which states:
“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
SA accountants have to choose between implementing the constant purchasing power financial capital concept of invested purchasing power measured in units of constant purchasing power, the constant purchasing power financial capital maintenance concept and determining profit or loss in terms of units of constant purchasing power during non-hyperinflationary periods, on the one hand, or the traditional Historical Cost financial capital concept of invested money in nominal monetary units, the HC financial capital maintenance concept in nominal monetary units and the HC profit or loss determination concept in nominal monetary units during non-hyperinflationary periods.
SA accountants generally choose the real value destroying Historical Cost Accounting model when they implement the very destructive stable measuring unit assumption.
We all know that measuring an economic item in units of constant purchasing power maintains its real value constant as compared to measuring it in nominal monetary unit which results in its real value being destroyed at a rate equal to the rate of inflation.
The accounting professor states: “the choice of the measuring unit does not affect their fundamental value”
He is dead wrong in the case of constant items never updated.
He states: “ So its fine to represent value in terms of constant purchasing power and to argue that that would be a better method than using historic cost and maintaining a fiction as to the stability of the measuring unit - but that doesn't affect the nature of the underlying resources.”
He is dead wrong in the case of constant items never updated.
He states: “The choices accountants won't change that value & won't affect the economy (except indirectly insofar as investment decisions are based on the figures we present).”
He is dead wrong in the case of constant items never updated.
SA accountants unknowingly destroy about R200 billion PER ANNUM in the real value of constant items, for example, Retained Profits of all SA companies never updated during low inflation because they implement the very destructive stable measuring unit assumption as part of the real value destroying Historical Cost Accounting model.
They will boost the SA real economy by about R200 billion PER ANNUM for an unlimited period of time – ceteris paribus – when they reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the IASB 20 years ago.
They simply have to ignore that the accounting professor states that “to represent value in terms of constant purchasing power doesn't affect the nature of the underlying resources.”
He is dead wrong in the case of constant items never updated.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Tuesday, 25 August 2009
Monday, 24 August 2009
Financial reporting does NOT simply report on what took place
There is a debate whether accountants simply record what happened in the past or whether they value economic items.
There are three different categories of basic economic items in a financial report:
I. Monetary items
We all report monetary items at their original nominal monetary amounts during the current financial period.
Let us assume the following: Telkom placed R100 million in a savings account in the bank on 2nd Jan 2008.
Their accountants left this item as posted on 02-01-2008. Telkom´s auditors checked this entry and stated that Telkom´s accounts fairly presented their business at their year end.
Monetary items are also VALUED by accountants at their original nominal monetary values because it is impossible to update or inflation-adjust money and other monetary items. Their real values are continuously being destroyed by inflation which means they are always VALUED at their current inflation-destroyed real values.
Simply reporting them as they took place originally and VALUING them are thus one and the same thing.
II. Constant items
Let us assume: In Jan 1981 one of the late honourable Anton Rupert´s original companies had R100 million in Retained Profits. That amount stayed in retained profits till today. It was part of the Remgro Retained Earnings value at 31st March 2009.
Remgro´s auditors verified the amount and stated that Remgro´s accounts fairly present their business.
The fact that that R100 million is only worth R6.8 million in real value today is absolutely no concern to anyone.
Well, to me it is.
The fact that SA accountants valued in the past and now value Retained Profits at Historical Cost with their silly stable measuring unit assumption thus transforming hundreds (thousands?) of billions of Rands of constant real value non-monetary items currently into simple old CASH (you know, like Rand notes and coins) means that Retained Profits, just like Monetary Items above, are simply being reported as they took place originally and that VALUING them and stating them at their original nominal monetary values are one and the same thing.
The simple undeniable fact that by valuing (simply reporting what took place in some people´s view) Retained Profits at Historical Cost by implementing that silly stable measuring unit assumption, SA accountants are destroying hundreds of billions of Rand (about R200 billion) PER ANNUM in the SA real economy apparently has not been realized yet. Luckily the IASB realized something 20 years ago when they approved the Framework, Par. 104 (a) as follows:
"Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
III. Variable Items
Let us assume: A company bought stock on Jan 1 2008 at R100 million. At its year end on 31.12.2008 the net realizable value of that stock was R10 million.
Their auditors said: No. The stock has to be shown at the lower of cost or net realizable value.
So:
Financial reporting does NOT simply report on what took place.
Let us assume: Big bucks bankers on Wall Street securitized USD 10 trillion in sub-prime mortages and sold it off all over the world.
.
Their auditors forced them to value those items at fair value.
So:
Financial reporting does NOT simply report on what took place.
We can state a million examples of variable items not reported as they took place originally but VALUED in terms of IFRS or SA GAAP.
Copyright 2005-2010 by Nicolaas Smith
There are three different categories of basic economic items in a financial report:
I. Monetary items
We all report monetary items at their original nominal monetary amounts during the current financial period.
Let us assume the following: Telkom placed R100 million in a savings account in the bank on 2nd Jan 2008.
Their accountants left this item as posted on 02-01-2008. Telkom´s auditors checked this entry and stated that Telkom´s accounts fairly presented their business at their year end.
Monetary items are also VALUED by accountants at their original nominal monetary values because it is impossible to update or inflation-adjust money and other monetary items. Their real values are continuously being destroyed by inflation which means they are always VALUED at their current inflation-destroyed real values.
Simply reporting them as they took place originally and VALUING them are thus one and the same thing.
II. Constant items
Let us assume: In Jan 1981 one of the late honourable Anton Rupert´s original companies had R100 million in Retained Profits. That amount stayed in retained profits till today. It was part of the Remgro Retained Earnings value at 31st March 2009.
Remgro´s auditors verified the amount and stated that Remgro´s accounts fairly present their business.
The fact that that R100 million is only worth R6.8 million in real value today is absolutely no concern to anyone.
Well, to me it is.
The fact that SA accountants valued in the past and now value Retained Profits at Historical Cost with their silly stable measuring unit assumption thus transforming hundreds (thousands?) of billions of Rands of constant real value non-monetary items currently into simple old CASH (you know, like Rand notes and coins) means that Retained Profits, just like Monetary Items above, are simply being reported as they took place originally and that VALUING them and stating them at their original nominal monetary values are one and the same thing.
The simple undeniable fact that by valuing (simply reporting what took place in some people´s view) Retained Profits at Historical Cost by implementing that silly stable measuring unit assumption, SA accountants are destroying hundreds of billions of Rand (about R200 billion) PER ANNUM in the SA real economy apparently has not been realized yet. Luckily the IASB realized something 20 years ago when they approved the Framework, Par. 104 (a) as follows:
"Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
III. Variable Items
Let us assume: A company bought stock on Jan 1 2008 at R100 million. At its year end on 31.12.2008 the net realizable value of that stock was R10 million.
Their auditors said: No. The stock has to be shown at the lower of cost or net realizable value.
So:
Financial reporting does NOT simply report on what took place.
Let us assume: Big bucks bankers on Wall Street securitized USD 10 trillion in sub-prime mortages and sold it off all over the world.
.
Their auditors forced them to value those items at fair value.
So:
Financial reporting does NOT simply report on what took place.
We can state a million examples of variable items not reported as they took place originally but VALUED in terms of IFRS or SA GAAP.
Copyright 2005-2010 by Nicolaas Smith
Friday, 21 August 2009
SA accountants only fail in one instance - but it costs us a fortune
There are three economic items in the economy:
1. Monetary items
2. Variable items
3. Constant items
1. Monetary Items
Monetary items are the easiest to value. Accountants do not have to do any calculations or follow any complicated rules in IFRS. They simply state the original nominal values during low inflation and during hyperinflation. That´s it.
Inflation destroys the real value of money and all other monetary items. Inflation keeps all monetary real values current at today´s rate. Very simple.
No-one can update any nominal monetary value during the current financial year.
So, it is the easiest thing in the world for accounants to value monetary items. They are automatically valued by inflation. They just state them at their original nominal values.
So, it is a fact: Accountants VALUE monetary items.
2. Variable Items
Accountants value variable items in terms of International Financial Reporting Standards at, for example, market value, fair value, recoverable value, present value and net realizable value during low inflation.
During hyperinflation, accountants have to value all variable items in units of constant purchasing power by inflation-adjusting them by means of the CPI. This is a requirement of the IASB in IAS 29 Financial Reporting in Hyperinflationary Economies.
No problems here either. Well, fair value mark-to-market procedures still have some way to go. But, the accounting authorities are working very hard to get this sorted out as soon as possible.
So, it is a fact: Accountants VALUE all variable items.
3. Constant items
Constant items are divided in two sub-groups:
a) Income statement items
b) Balance sheet constant items
Income statement items
Accountants value some (not all) income statement constant items, eg. salaries, wages, rents, etc in units of constant purchasing power during low inflation and thus maintain their real values constant - ceteris paribus.
The income statement items that are not inflation-adjusted during low inflation, accounants value at historical cost implementing the stable measuring unit assumption during low inflation.
During hyperinflation IAS 29 requires accountants to inflation-adjust not just some, but, all income statement items in units of constant purchasing power by means of the CPI. They thus maintain their real values constant - ceteris paribus.
So, it is a fact: Accountants VALUE income statement items either in units of constant purchasing power or at historical cost during low inflation. During hyperinflation all income statement items are VALUED in units of constant purchasing power.
Balance sheet constant items
Accountants have to value all balance sheet constant items in units of constant purchasing power during hyperinflation. Accountant thus maintain their real values constant during hyperinflation - ceteris paribus.
Accountants value all balance sheet constant items, eg. issued share capital, retained profits, all other items in shareholders´ equity, etc at historical cost during low inflation thus unknowingly and unintentionally destroying their real values at a rate equal to the inflation rate because these items are constant real value non-monetary items. Accountants thus value these items the same as simple old cash - in nominal monetary values at historical cost implementing their very destructive stable measuring unit assumption and unknowingly destroy their real values at a rate equal to the rate of inflation to the tune of about R200 billion per year in the SA real economy for an unlimited period of time as long as they carry on implementing the very destructive stable measuring unit assumption during indefinite inflation.
So, it is a fact: accountants VALUE all income statement and all balance sheet constant items.
Summary: SA accountants VALUE all items they account in a business.
Kindest regards,
Nicolaas Smith
PS When SA accountants choose to value all constant items during low inflation in units of constant purchasing power as they have been authorized by the IASB 20 years ago in the Framework, Par. 104 (a), they will boost the SA real economy by about R200 billion per annum forever - ceteris paribus
1. Monetary items
2. Variable items
3. Constant items
1. Monetary Items
Monetary items are the easiest to value. Accountants do not have to do any calculations or follow any complicated rules in IFRS. They simply state the original nominal values during low inflation and during hyperinflation. That´s it.
Inflation destroys the real value of money and all other monetary items. Inflation keeps all monetary real values current at today´s rate. Very simple.
No-one can update any nominal monetary value during the current financial year.
So, it is the easiest thing in the world for accounants to value monetary items. They are automatically valued by inflation. They just state them at their original nominal values.
So, it is a fact: Accountants VALUE monetary items.
2. Variable Items
Accountants value variable items in terms of International Financial Reporting Standards at, for example, market value, fair value, recoverable value, present value and net realizable value during low inflation.
During hyperinflation, accountants have to value all variable items in units of constant purchasing power by inflation-adjusting them by means of the CPI. This is a requirement of the IASB in IAS 29 Financial Reporting in Hyperinflationary Economies.
No problems here either. Well, fair value mark-to-market procedures still have some way to go. But, the accounting authorities are working very hard to get this sorted out as soon as possible.
So, it is a fact: Accountants VALUE all variable items.
3. Constant items
Constant items are divided in two sub-groups:
a) Income statement items
b) Balance sheet constant items
Income statement items
Accountants value some (not all) income statement constant items, eg. salaries, wages, rents, etc in units of constant purchasing power during low inflation and thus maintain their real values constant - ceteris paribus.
The income statement items that are not inflation-adjusted during low inflation, accounants value at historical cost implementing the stable measuring unit assumption during low inflation.
During hyperinflation IAS 29 requires accountants to inflation-adjust not just some, but, all income statement items in units of constant purchasing power by means of the CPI. They thus maintain their real values constant - ceteris paribus.
So, it is a fact: Accountants VALUE income statement items either in units of constant purchasing power or at historical cost during low inflation. During hyperinflation all income statement items are VALUED in units of constant purchasing power.
Balance sheet constant items
Accountants have to value all balance sheet constant items in units of constant purchasing power during hyperinflation. Accountant thus maintain their real values constant during hyperinflation - ceteris paribus.
Accountants value all balance sheet constant items, eg. issued share capital, retained profits, all other items in shareholders´ equity, etc at historical cost during low inflation thus unknowingly and unintentionally destroying their real values at a rate equal to the inflation rate because these items are constant real value non-monetary items. Accountants thus value these items the same as simple old cash - in nominal monetary values at historical cost implementing their very destructive stable measuring unit assumption and unknowingly destroy their real values at a rate equal to the rate of inflation to the tune of about R200 billion per year in the SA real economy for an unlimited period of time as long as they carry on implementing the very destructive stable measuring unit assumption during indefinite inflation.
So, it is a fact: accountants VALUE all income statement and all balance sheet constant items.
Summary: SA accountants VALUE all items they account in a business.
Kindest regards,
Nicolaas Smith
PS When SA accountants choose to value all constant items during low inflation in units of constant purchasing power as they have been authorized by the IASB 20 years ago in the Framework, Par. 104 (a), they will boost the SA real economy by about R200 billion per annum forever - ceteris paribus
Thursday, 20 August 2009
SA accountants value economic items - they do not simply report on what took place
There are three basic items in the economy:
1. Monetary items
2. Variable items
3. Constant items.
SA accountants value economic items when they account them and prepare financial reports.
Inflation destroys the real value of the Rand and all other Rand monetary items. Inflation has no effect on the real value of non-monetary items. Monetary items cannot be updated or inflation adjusted. SA accountants value monetary items at their original nominal monetary values during the accounting period.
Inflation is the enemy in the SA monetary economy. Tito Mboweni and soon Gill Marcus are inflation´s enemies.
SA accountants value variable items, e.g. property, plant, equipment, quoted and unquoted shares, foreign exchange, inventories, finished goods, etc. in terms of International Financial Reporting Standards at for example market value, fair value, recoverable value, present value and net realizable value.
There is no enemy in the SA variable item non-monetary economy.
Constant items are real value non-monetary items with constant real values over time. Examples are salaries, wages, rentals, issued share capital, retained profits, etc. SA accountant unfortunately value them at historical cost implementing the stable measuring unit assumption. SA accountants unknowingly destroy the real value of constant items never or not fully updated at a rate equal to the inflation rate. This amounts to about R200 billion in the SA real economy.
The stable measuring unit assumption is the enemy in the SA constant item economy.
SA accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated when they implement the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model for an unlimited period of time during indefinite inflation.
SA accountant will boost the SA real economy by about R200 billion for an unlimited period of time - ceteris paribus - when they freely reject the stable measuring unit assumption and measure financial capital maintenance in units of constant purchasing power as the IASB authorized them to do 20 years ago in the Framework, Par. 104 (a).
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
1. Monetary items
2. Variable items
3. Constant items.
SA accountants value economic items when they account them and prepare financial reports.
Inflation destroys the real value of the Rand and all other Rand monetary items. Inflation has no effect on the real value of non-monetary items. Monetary items cannot be updated or inflation adjusted. SA accountants value monetary items at their original nominal monetary values during the accounting period.
Inflation is the enemy in the SA monetary economy. Tito Mboweni and soon Gill Marcus are inflation´s enemies.
SA accountants value variable items, e.g. property, plant, equipment, quoted and unquoted shares, foreign exchange, inventories, finished goods, etc. in terms of International Financial Reporting Standards at for example market value, fair value, recoverable value, present value and net realizable value.
There is no enemy in the SA variable item non-monetary economy.
Constant items are real value non-monetary items with constant real values over time. Examples are salaries, wages, rentals, issued share capital, retained profits, etc. SA accountant unfortunately value them at historical cost implementing the stable measuring unit assumption. SA accountants unknowingly destroy the real value of constant items never or not fully updated at a rate equal to the inflation rate. This amounts to about R200 billion in the SA real economy.
The stable measuring unit assumption is the enemy in the SA constant item economy.
SA accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated when they implement the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model for an unlimited period of time during indefinite inflation.
SA accountant will boost the SA real economy by about R200 billion for an unlimited period of time - ceteris paribus - when they freely reject the stable measuring unit assumption and measure financial capital maintenance in units of constant purchasing power as the IASB authorized them to do 20 years ago in the Framework, Par. 104 (a).
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
The second systemic economy-wide process of real value destruction
There was only one systemic economy-wide process of real value destruction operating in the economy before double entry accounting was invented.
The economic process of inflation destroyed the real value of money and other monetary items equally throughout the monetary economy at that time as it does today in economies subject to inflation.
There was no simultaneous second systemic economy-wide process as we experience today whereby accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated during indefinite inflation.
This includes the unknowing destruction by accountants of the real value of Shareholders´ Equity in companies without sufficient variable items that are or can be revalued via the Revaluation Reserve or without sufficient hidden and unrecognised holding gains to compensate for the real value shortfall in Shareholders´ Equity as we experience today because now accountants choose to maintain the very destructive stable measuring unit assumption for an unlimited period of time while they assume indefinite inflation – all else being equal.
The reason was that the real value destroying traditional Historical Cost Accounting model was not yet invented at that time.
We will go back to only one systemic economy-wide process of real value destruction operating in the economy, namely the economic process of inflation destroying the real value of money and other monetary items, when SA accountants reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the International Accounting Standards Board in the Framework for the Preparation and Presentation of Financial Statements, Par. 104 (a) in 1989 which states:
"Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
All constant items´ real values will be maintained for an indefinite period of time - ceteris paribus.
Kindest regards,
Nicolaas Smith
The economic process of inflation destroyed the real value of money and other monetary items equally throughout the monetary economy at that time as it does today in economies subject to inflation.
There was no simultaneous second systemic economy-wide process as we experience today whereby accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated during indefinite inflation.
This includes the unknowing destruction by accountants of the real value of Shareholders´ Equity in companies without sufficient variable items that are or can be revalued via the Revaluation Reserve or without sufficient hidden and unrecognised holding gains to compensate for the real value shortfall in Shareholders´ Equity as we experience today because now accountants choose to maintain the very destructive stable measuring unit assumption for an unlimited period of time while they assume indefinite inflation – all else being equal.
The reason was that the real value destroying traditional Historical Cost Accounting model was not yet invented at that time.
We will go back to only one systemic economy-wide process of real value destruction operating in the economy, namely the economic process of inflation destroying the real value of money and other monetary items, when SA accountants reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the International Accounting Standards Board in the Framework for the Preparation and Presentation of Financial Statements, Par. 104 (a) in 1989 which states:
"Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
All constant items´ real values will be maintained for an indefinite period of time - ceteris paribus.
Kindest regards,
Nicolaas Smith
Tuesday, 18 August 2009
Trust me, I´m a SA accountant
Trust me, I am a SA accountant.
I will - unknowingly and unintentionally - destroy your Retained Profits at a rate equal to the rate of inflation (currently 6.9% - you can make your own calculations) as well as all your other constant real value non-monetary items never updated that I and all my fellow accountants (except Nicolaas Smith) - many of whom are CA(SA)s - value in nominal monetary units, i.e. at Historical Cost, implementing our very destructive stable measuring unit assumption as part of the traditional generally accepted real value destroying Historical Cost Accounting model as authorized by the IASB in the Framework, Par. 104 (a) which states:
"Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
In this way we unknowingly and unintentionally destroy at least R200 billion in the SA real economy each and every year as we did last year and as we will do for ever more as long as we implement our very destructive stable measuring unit assumption during indefinite inflation.
Signed: SA accountant
I will - unknowingly and unintentionally - destroy your Retained Profits at a rate equal to the rate of inflation (currently 6.9% - you can make your own calculations) as well as all your other constant real value non-monetary items never updated that I and all my fellow accountants (except Nicolaas Smith) - many of whom are CA(SA)s - value in nominal monetary units, i.e. at Historical Cost, implementing our very destructive stable measuring unit assumption as part of the traditional generally accepted real value destroying Historical Cost Accounting model as authorized by the IASB in the Framework, Par. 104 (a) which states:
"Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
In this way we unknowingly and unintentionally destroy at least R200 billion in the SA real economy each and every year as we did last year and as we will do for ever more as long as we implement our very destructive stable measuring unit assumption during indefinite inflation.
Signed: SA accountant
CAs are variable item value custodians and constant item value destroyers
Tito Mboweni is the custodian or guardian of the real value of the Rand.
Accountants value all economic items in a business.
How they value those economic items is very important. Ultimately, there is only one correct value for any economic item.
They are thus all custodians or guardians of the real values in a business.
That is why they are paid such high salaries. They are paid for financial integrity.
It does not mean they are little value-gods.
There are some items still to be sorted out.
They do look after value very well (variable items that they value in terms of IFRS) - with the one exception of the real value of balance sheet constant items, eg. issued share capital of companies with no fixed assets and retained profits of all companies. These they unknowingly destroy at a rate equal to the inflation rate to the tune of about R200 billion per annum in the SA real economy.
CA´s unintentionally do this with their implementation of the stable measuring unit assumption.
In fact International Financial Reporting Standards reject the stable measuring unit assumption on two occasions:
1. In IAS 29 Financial Reporting In Hyperinflationary Economies.
2. In The Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
When CAs start thinkging for themselves about what they are - unknowingly - doing to the SA real economy they will realize that by freely choosing to measure financial capital maitnenance in units of constant purchasing power as authorized by the IASB 20 years ago, they will boost the SA real economy by at least R200 billion per annum for an unlimited period of time instead of unknowingly and unintentionally destroying about R200 billion PER ANNUM for an unlimited period of time - each and every year - in the SA real economy (ceteris paribus) as they are unknowingly and unintentionally doing this year.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Accountants value all economic items in a business.
How they value those economic items is very important. Ultimately, there is only one correct value for any economic item.
They are thus all custodians or guardians of the real values in a business.
That is why they are paid such high salaries. They are paid for financial integrity.
It does not mean they are little value-gods.
There are some items still to be sorted out.
They do look after value very well (variable items that they value in terms of IFRS) - with the one exception of the real value of balance sheet constant items, eg. issued share capital of companies with no fixed assets and retained profits of all companies. These they unknowingly destroy at a rate equal to the inflation rate to the tune of about R200 billion per annum in the SA real economy.
CA´s unintentionally do this with their implementation of the stable measuring unit assumption.
In fact International Financial Reporting Standards reject the stable measuring unit assumption on two occasions:
1. In IAS 29 Financial Reporting In Hyperinflationary Economies.
2. In The Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
When CAs start thinkging for themselves about what they are - unknowingly - doing to the SA real economy they will realize that by freely choosing to measure financial capital maitnenance in units of constant purchasing power as authorized by the IASB 20 years ago, they will boost the SA real economy by at least R200 billion per annum for an unlimited period of time instead of unknowingly and unintentionally destroying about R200 billion PER ANNUM for an unlimited period of time - each and every year - in the SA real economy (ceteris paribus) as they are unknowingly and unintentionally doing this year.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Sunday, 16 August 2009
Why don´t SA accountants follow the IASB then?
The reasons SA accountants do not follow the IASB are the same reasons the rest of the world´s accountants don´t follow the IASB:
Some examples:
1. Historical Cost Accounting has been around for 500 years.
2. Everybody uses Historical Cost Accounting.
3. Hardly anyone (this includes the IASB) understands that when accountants use the stable measuring unit assumption as part of Historical Cost Accounting they unknowingly destroy the real value of their company´s retained profits, for example.
When they get to realize it, they say it makes no difference in the real world - like Market Monkey says.
In fact, it costs SA about R200 billion in real value unknowingly destroyed by our accountants each and every year in this way.
4. Hardly anyone (this includes the IASB) understands that when they stop the stable measuring unit assumption they will maintain the real value of all constant items.
5. Hardly any accountants even know that they in fact choose between two basic accounting models when they do their accounts in terms of International Financial Reporting Standards. They do not even know there is a choice and that they in fact make that choice. Ask any accountant you know.
You see, the IASB made the mistake of giving them a choice between measuring financial capital maintenance in either nominal monetary units (the traditional Historical Cost Accounting model) or units of constant purchasing power.
No-one chooses constant purchasing power units. The reason for this is that during the high-inflation 1970´s companies unsuccessfully tried inflation accounting in units of constant purchasing power whereunder they inflation-adjusted all non-monetary items by means of the Consumer Price Index.
Most companies correctly complained that you cannot just inflation-adjust all non-monetary items (cars, phones, groceries, etc) during high inflation.
The IASB correctly formulated IAS 29 for the use of Constant Purchasing Power inflation accounting only during hyperinflation.
Now, whenever any accountant or accounting authority sees anything about units of constant purchasing power, they immediately think inflation accounting.
Before the IASB came about, accounting was based on Generally Accepted Accounting Practice. The IASB did not have the guts (tomates is what we say in Portuguese) to change the 500 year old Historical Cost Paradigm. If they remove the words "nominal monetary units" from the Framework, Par 104 (a) that states: "Financial capital maintenance can be measured in either NOMINAL MONETARY UNITS or in units of constant purchasing power." then they will cause a paradigm change: out with the Historical Cost paradigm and in with the Constant Purchasing Power paradigm.
But, that is a very big step. It will not happen overnight. I accept that.
Those are the main reasons.
Accounting authorities are doing a good job at the moment with fair value accounting: mark-to-market accounting.
After that they should tackle the stable measuring unit assumption - if South Africa has not yet taken the lead in getting it rejected by then.
But, we have to start somewhere and go one step at a time. Eventually we´ll get there. When, I don´t know.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Some examples:
1. Historical Cost Accounting has been around for 500 years.
2. Everybody uses Historical Cost Accounting.
3. Hardly anyone (this includes the IASB) understands that when accountants use the stable measuring unit assumption as part of Historical Cost Accounting they unknowingly destroy the real value of their company´s retained profits, for example.
When they get to realize it, they say it makes no difference in the real world - like Market Monkey says.
In fact, it costs SA about R200 billion in real value unknowingly destroyed by our accountants each and every year in this way.
4. Hardly anyone (this includes the IASB) understands that when they stop the stable measuring unit assumption they will maintain the real value of all constant items.
5. Hardly any accountants even know that they in fact choose between two basic accounting models when they do their accounts in terms of International Financial Reporting Standards. They do not even know there is a choice and that they in fact make that choice. Ask any accountant you know.
You see, the IASB made the mistake of giving them a choice between measuring financial capital maintenance in either nominal monetary units (the traditional Historical Cost Accounting model) or units of constant purchasing power.
No-one chooses constant purchasing power units. The reason for this is that during the high-inflation 1970´s companies unsuccessfully tried inflation accounting in units of constant purchasing power whereunder they inflation-adjusted all non-monetary items by means of the Consumer Price Index.
Most companies correctly complained that you cannot just inflation-adjust all non-monetary items (cars, phones, groceries, etc) during high inflation.
The IASB correctly formulated IAS 29 for the use of Constant Purchasing Power inflation accounting only during hyperinflation.
Now, whenever any accountant or accounting authority sees anything about units of constant purchasing power, they immediately think inflation accounting.
Before the IASB came about, accounting was based on Generally Accepted Accounting Practice. The IASB did not have the guts (tomates is what we say in Portuguese) to change the 500 year old Historical Cost Paradigm. If they remove the words "nominal monetary units" from the Framework, Par 104 (a) that states: "Financial capital maintenance can be measured in either NOMINAL MONETARY UNITS or in units of constant purchasing power." then they will cause a paradigm change: out with the Historical Cost paradigm and in with the Constant Purchasing Power paradigm.
But, that is a very big step. It will not happen overnight. I accept that.
Those are the main reasons.
Accounting authorities are doing a good job at the moment with fair value accounting: mark-to-market accounting.
After that they should tackle the stable measuring unit assumption - if South Africa has not yet taken the lead in getting it rejected by then.
But, we have to start somewhere and go one step at a time. Eventually we´ll get there. When, I don´t know.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Fool proof accounting
Hi Motley Fool,
[Warning to Market Monkey: Do not read the following. If you do, you will turn into stone.]
As I was saying my dear Motley Fool,
I will teach you Constant Item Purchasing Power Accounting as defined by no other than our well known
The Motley Fool
Here we go: (this is what you call a liberal translation of the Motley Fool´s teachings about accounting. This translation is from The Motley Fool´s impeccible English to GobblyGook as sputtered by The Deluded Monkey.)
Accounting is double entry: For every debit there is a corresponding credit.
According to the Motley Fool
any particular entry
"should be worth more the next year due to the currency being worth less."
The Motley Fool´s exact words in inverted commas.
Since accounting is double entry the Motley Fool´s words hold true for BOTH sides of each set of debit and credit entries.
That´s it.
That, in broad principle, is the IASB´s Constant Item Purchasing Power Accounting.
"Due to the currency being worth less" all accounting items (entries) "should be worth more the next year" as per the Motley Fool.
There are three types of items in the economy:
1. Variable items. Cups etc. Their values are generally set in the market where inflation is taken into account in the price.
2. Monetary items: money, loans, etc. They cannot be inflation-adjusted. Thus you have a net monetary loss or gain.
3. Constant items: eg. salaries, capital, retained profits, etc.
As you know the real value of your salary is destroyed if it is not inflation-adjusted every year.
The same is true with capital and retained profits.
There you are: Constant Item Purchasing Power Accounting as per The Motley Fool.
Motley Fool, you are a genius!
Long live The Motley Fool!!
Kindest regards,
Deluded Monkey
PS: The Motley Fool´s famous statement:
"should be worth more the next year due to the currency being worth less."
signalled the end of the 5 century old Historical Cost paradigm.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
[Warning to Market Monkey: Do not read the following. If you do, you will turn into stone.]
As I was saying my dear Motley Fool,
I will teach you Constant Item Purchasing Power Accounting as defined by no other than our well known
The Motley Fool
Here we go: (this is what you call a liberal translation of the Motley Fool´s teachings about accounting. This translation is from The Motley Fool´s impeccible English to GobblyGook as sputtered by The Deluded Monkey.)
Accounting is double entry: For every debit there is a corresponding credit.
According to the Motley Fool
any particular entry
"should be worth more the next year due to the currency being worth less."
The Motley Fool´s exact words in inverted commas.
Since accounting is double entry the Motley Fool´s words hold true for BOTH sides of each set of debit and credit entries.
That´s it.
That, in broad principle, is the IASB´s Constant Item Purchasing Power Accounting.
"Due to the currency being worth less" all accounting items (entries) "should be worth more the next year" as per the Motley Fool.
There are three types of items in the economy:
1. Variable items. Cups etc. Their values are generally set in the market where inflation is taken into account in the price.
2. Monetary items: money, loans, etc. They cannot be inflation-adjusted. Thus you have a net monetary loss or gain.
3. Constant items: eg. salaries, capital, retained profits, etc.
As you know the real value of your salary is destroyed if it is not inflation-adjusted every year.
The same is true with capital and retained profits.
There you are: Constant Item Purchasing Power Accounting as per The Motley Fool.
Motley Fool, you are a genius!
Long live The Motley Fool!!
Kindest regards,
Deluded Monkey
PS: The Motley Fool´s famous statement:
"should be worth more the next year due to the currency being worth less."
signalled the end of the 5 century old Historical Cost paradigm.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Friday, 14 August 2009
One very deluded Historical Cost Market Monkey
Market Monkey said:
"The problem with your capital "raising" is that it doesn't raise any REAL money. You know. The stuff you use to actually buy things and services with. If you don't get the distinction between the funds raised via preference shares and an increase in funds due to an accounting change I'm gonna have to stop visiting and conclude you are one very deluded monkey. MM."
Real Value Accountant said:
"Hi Market Monkey,
I was getting worried. You have been very quiet lately. Thought you went off to meditate units of constant purchasing power in Tibet? :-)
You must believe me that I am not actually a snake oil salesman. I am just finishing off something I got involved in – by chance - 15 years ago trying to sort (and actually sorted out) out what was going on in the hyperinflationary Angolan economy. But, that´s another story.
What I state is actually correct and true. I did not invent this. The International Accounting Standards Board did. Read Paragraph 104 (a). It states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power." It is NOT of my making. I am just the messenger. I got involved by chance. I am simply the office messenger delivering the letters from the big bosses in London.
You are not up against me: you are taking on the IASB – Sir David and the boys in London – including Geoffrey Whittington, amongst others.
Why do you think the IASB approved financial capital maintenance in units of constant purchasing power if they had not subjected it to due process first? This is not of my making.
The IASB approved Constant ITEM Purchasing Power Accounting model (my name for it: the IASB formulated it in April, 1989. But, no-one has been using it for the last 20 years: so, there was no need for it to have a name; so, now I named it CIPPA) is not just an accounting change with no real world effect.
“A picture is worth a thousand words.”
So, I will try and show you some account “pictures”:
Your way of doing accounting: The Historical Cost Accounting model – used by all SA accountants:
Year One
Assets: Debit: Trade debtors R100 million
Liabilities: Credit: Capital R100 million
Your complete balance sheet.
After a year at 6.9% inflation and no activity for a year your auditors audit your accounts and give you an unqualified audit report in Year Two stating that the following FAIRLY reflects your business and your accounting is compliant with IFRS:
Year Two
Assets: Debit: Trade debtors R100 million
Liabilities: Credit: Capital R 100 million
Remember: this is after one year of no activity with inflation at 6.9%
Here are the IASB (not my) Constant Item Purchasing Power Accounting balance sheet which is also complaint with IFRS:
Year One
Assets: Debit: Trade Debtors R100 million (we assume today is 31.12 Year One)
Liabilities: Credit: Capital R100 million (we assume today is 31.12 Year One)
One year later with no activity and inflation at 6.9%:
Year Two
Assets: Debit: Trade Debtors R106.9 million (we assume today is 31.12 Year Two)
Liabilities: Credit: Capital R106.9 million (we assume today is 31.12 Year Two)
On 1st January Year Three you go and collect your R100 million from your debtors. We assume we are using the Historical Cost paradigm.
On 1st January Year Three the IASB go and collect their R106.9 million from their debtors. We assume we are using he Constant Purchasing Power paradigm.
The IASB collected ACTUAL Rands – the same as “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with.”
Sir David from the IASB likes rugby. He was in Cape Town at the time and the Boks were playing he All Blacks at Newlands. He took some of that R106.9 million of REAL Rands he collected from his trade debtors and bought a ticket to watch the Boks live at Newlands.
You only collected your miserable R100 million – destroyed in real value by 6.9% inflation. YOU did not have the extra Rands like “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with”, so you watched the game on TV at home.
YOU did not collect those REAL extra Rands. YOU collected you nominal monetary unit Historical Cost Rands destroyed at 6.9% by SA inflation.
Now, you want to tell me that under the IASB approved – not the Nicolaas Smith invented – Constant Item Purchasing Power Accounting model there is no “REAL money. You know. The stuff you use to actually buy things and services with.”
So, what I am promoting generates REAL FUNDS like “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with”.
Market Monkey, I´m sure you get it now.
As you can see: it is DOUBLE ENTRY ACCOUNTING. Real funds are generated because it is DOUBLE ENTRY ACCOUNTING. It is not just a one-sided accounting entry.
So, Market Monkey: who is deluded? You with your nominal historical cost monetary units destroyed at the rate of inflation (YOU may think they are worth the same as a year ago - I don´t know) or the IASB with their hands full of inflation adjusted constant real value non-monetary items in REAL Rands?
It is a complete paradigm change - as you may realize by now. This is also "by chance". When I got involved in 1994 I had no idea where this logical journey would lead me. I just take one logical step at a time.
Kindest regards,
Nicolaas Smith
"The problem with your capital "raising" is that it doesn't raise any REAL money. You know. The stuff you use to actually buy things and services with. If you don't get the distinction between the funds raised via preference shares and an increase in funds due to an accounting change I'm gonna have to stop visiting and conclude you are one very deluded monkey. MM."
Real Value Accountant said:
"Hi Market Monkey,
I was getting worried. You have been very quiet lately. Thought you went off to meditate units of constant purchasing power in Tibet? :-)
You must believe me that I am not actually a snake oil salesman. I am just finishing off something I got involved in – by chance - 15 years ago trying to sort (and actually sorted out) out what was going on in the hyperinflationary Angolan economy. But, that´s another story.
What I state is actually correct and true. I did not invent this. The International Accounting Standards Board did. Read Paragraph 104 (a). It states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power." It is NOT of my making. I am just the messenger. I got involved by chance. I am simply the office messenger delivering the letters from the big bosses in London.
You are not up against me: you are taking on the IASB – Sir David and the boys in London – including Geoffrey Whittington, amongst others.
Why do you think the IASB approved financial capital maintenance in units of constant purchasing power if they had not subjected it to due process first? This is not of my making.
The IASB approved Constant ITEM Purchasing Power Accounting model (my name for it: the IASB formulated it in April, 1989. But, no-one has been using it for the last 20 years: so, there was no need for it to have a name; so, now I named it CIPPA) is not just an accounting change with no real world effect.
“A picture is worth a thousand words.”
So, I will try and show you some account “pictures”:
Your way of doing accounting: The Historical Cost Accounting model – used by all SA accountants:
Year One
Assets: Debit: Trade debtors R100 million
Liabilities: Credit: Capital R100 million
Your complete balance sheet.
After a year at 6.9% inflation and no activity for a year your auditors audit your accounts and give you an unqualified audit report in Year Two stating that the following FAIRLY reflects your business and your accounting is compliant with IFRS:
Year Two
Assets: Debit: Trade debtors R100 million
Liabilities: Credit: Capital R 100 million
Remember: this is after one year of no activity with inflation at 6.9%
Here are the IASB (not my) Constant Item Purchasing Power Accounting balance sheet which is also complaint with IFRS:
Year One
Assets: Debit: Trade Debtors R100 million (we assume today is 31.12 Year One)
Liabilities: Credit: Capital R100 million (we assume today is 31.12 Year One)
One year later with no activity and inflation at 6.9%:
Year Two
Assets: Debit: Trade Debtors R106.9 million (we assume today is 31.12 Year Two)
Liabilities: Credit: Capital R106.9 million (we assume today is 31.12 Year Two)
On 1st January Year Three you go and collect your R100 million from your debtors. We assume we are using the Historical Cost paradigm.
On 1st January Year Three the IASB go and collect their R106.9 million from their debtors. We assume we are using he Constant Purchasing Power paradigm.
The IASB collected ACTUAL Rands – the same as “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with.”
Sir David from the IASB likes rugby. He was in Cape Town at the time and the Boks were playing he All Blacks at Newlands. He took some of that R106.9 million of REAL Rands he collected from his trade debtors and bought a ticket to watch the Boks live at Newlands.
You only collected your miserable R100 million – destroyed in real value by 6.9% inflation. YOU did not have the extra Rands like “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with”, so you watched the game on TV at home.
YOU did not collect those REAL extra Rands. YOU collected you nominal monetary unit Historical Cost Rands destroyed at 6.9% by SA inflation.
Now, you want to tell me that under the IASB approved – not the Nicolaas Smith invented – Constant Item Purchasing Power Accounting model there is no “REAL money. You know. The stuff you use to actually buy things and services with.”
So, what I am promoting generates REAL FUNDS like “funds raised via preference shares. REAL money. You know. The stuff you use to actually buy things and services with”.
Market Monkey, I´m sure you get it now.
As you can see: it is DOUBLE ENTRY ACCOUNTING. Real funds are generated because it is DOUBLE ENTRY ACCOUNTING. It is not just a one-sided accounting entry.
So, Market Monkey: who is deluded? You with your nominal historical cost monetary units destroyed at the rate of inflation (YOU may think they are worth the same as a year ago - I don´t know) or the IASB with their hands full of inflation adjusted constant real value non-monetary items in REAL Rands?
It is a complete paradigm change - as you may realize by now. This is also "by chance". When I got involved in 1994 I had no idea where this logical journey would lead me. I just take one logical step at a time.
Kindest regards,
Nicolaas Smith
Nedbank you will be real dummies not to accept my offer
Hi Nebank Board of Directors,
I see you intend to issue R1 billion non-core Tier 1 perpetual, non-cumulative, non-redeemable, non-participating Nedbank preference shares on which you will pay a dividend of 75% of the prime interest rate or .75 times 10.5% times R1 billion = R 78.75 million per annum - ceteris paribus.
Well, here is my deal for you:
I will show you how to increase your equity by R2.285 billion in perpetuity - AT NO COST.
Here it is: Simply measure your financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) twenty years ago. It is compliant with IFRS. Your auditors will still sign your accounts as normal.
Your total equity at June 2008 was R33.127 billion. Updating that at 6.9% to June 2009 will add R2.285 immediately to your equity.
Nice and easy, isn´t it. AT NO COST. (Your accountants are very bright people and will pick up Constant Item Purchasing Power Accounting very quickly.)
[Well, there is a small cost involved: you have to promise to buy a copy of my soon to be finished book for every member of your staff in South Africa.]
Nedbank, you will be real dummies not to accept my offer.
Kindest regards,
Nicolaas Smith
I see you intend to issue R1 billion non-core Tier 1 perpetual, non-cumulative, non-redeemable, non-participating Nedbank preference shares on which you will pay a dividend of 75% of the prime interest rate or .75 times 10.5% times R1 billion = R 78.75 million per annum - ceteris paribus.
Well, here is my deal for you:
I will show you how to increase your equity by R2.285 billion in perpetuity - AT NO COST.
Here it is: Simply measure your financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) twenty years ago. It is compliant with IFRS. Your auditors will still sign your accounts as normal.
Your total equity at June 2008 was R33.127 billion. Updating that at 6.9% to June 2009 will add R2.285 immediately to your equity.
Nice and easy, isn´t it. AT NO COST. (Your accountants are very bright people and will pick up Constant Item Purchasing Power Accounting very quickly.)
[Well, there is a small cost involved: you have to promise to buy a copy of my soon to be finished book for every member of your staff in South Africa.]
Nedbank, you will be real dummies not to accept my offer.
Kindest regards,
Nicolaas Smith
Capital maintenance for dummies - like the IASB :-)
Capital maintenance for dummies - like the IASB
Capital is required to start a company. A company has an indefinite life - it is supposed to exist forever.
Capital is really saved-up wealth or saved-up real value.
Luckily double entry accounting makes capital into a constant item. It is like your salary or wage: its real value is a constant item.
But, if your salary is paid in ever-more-worthless-Rands (inflation or value-destruction at 6.9%) then your salary has to be inflation-adjusted to keep its real value the same.
This is what trade unions do. They make sure your salary is inflation adjusted every year.
This is very easy to understand. Everybody does it - world wide. That is, for salaries and wages and rentals and so on.
Enter the IASB. The International Accounting Standards Board.
Well, they are the world´s top accounants.
They are very responsible people.
They realize that money loses its real value at such a rapid rate during hyperinflation that all items that are not monetary items have to be inflation-adjusted by means of the Consumer Price Index. That is during hyperinflation.
However, during low inflation, the IASB change their story completely: now they suddenly come up with the story that you can maintain your capital in NOMINAL monetary units during low inflation.
Imagine that!
That is only possible when you invest 100% of your company´s capital in revaluable fixed assets. Companies normally don´t do that.
We all know that you cannot maintain the real value of your salary by keeping it the same during inflation.
Well, the same is true for companies´ capital and retained profits.
Not so, according to our friends at the IASB. According to them you can MAINTAIN your company´s retained profits in NOMINAL MONETARY UNITS.
They are nuts! :-)
That is completely impossible during inflation.
Well, they are not as dof as they appear to be. lol
They authorized our accountants in SA 20 years ago to maintain our companies´ capital and retained profits in units of constant purchasing power.
Fantastic! That is 100% correct!
Well. That is where the capital maintenance stops. :-(
Not a single SA accountant selects capital maintenance in units of constant purchasing power.
What a sad story. Instead they unknowingly destroy about R200 billion per year in real value in constant items never updated - each and every year!!)
Kindest regards,
Nicolaas Smith
Capital is required to start a company. A company has an indefinite life - it is supposed to exist forever.
Capital is really saved-up wealth or saved-up real value.
Luckily double entry accounting makes capital into a constant item. It is like your salary or wage: its real value is a constant item.
But, if your salary is paid in ever-more-worthless-Rands (inflation or value-destruction at 6.9%) then your salary has to be inflation-adjusted to keep its real value the same.
This is what trade unions do. They make sure your salary is inflation adjusted every year.
This is very easy to understand. Everybody does it - world wide. That is, for salaries and wages and rentals and so on.
Enter the IASB. The International Accounting Standards Board.
Well, they are the world´s top accounants.
They are very responsible people.
They realize that money loses its real value at such a rapid rate during hyperinflation that all items that are not monetary items have to be inflation-adjusted by means of the Consumer Price Index. That is during hyperinflation.
However, during low inflation, the IASB change their story completely: now they suddenly come up with the story that you can maintain your capital in NOMINAL monetary units during low inflation.
Imagine that!
That is only possible when you invest 100% of your company´s capital in revaluable fixed assets. Companies normally don´t do that.
We all know that you cannot maintain the real value of your salary by keeping it the same during inflation.
Well, the same is true for companies´ capital and retained profits.
Not so, according to our friends at the IASB. According to them you can MAINTAIN your company´s retained profits in NOMINAL MONETARY UNITS.
They are nuts! :-)
That is completely impossible during inflation.
Well, they are not as dof as they appear to be. lol
They authorized our accountants in SA 20 years ago to maintain our companies´ capital and retained profits in units of constant purchasing power.
Fantastic! That is 100% correct!
Well. That is where the capital maintenance stops. :-(
Not a single SA accountant selects capital maintenance in units of constant purchasing power.
What a sad story. Instead they unknowingly destroy about R200 billion per year in real value in constant items never updated - each and every year!!)
Kindest regards,
Nicolaas Smith
Constant ITEM Purchasing Power Accounting as a financial capital maintenance concept
Constant ITEM Purchasing Power Accounting, despite being approved by the IASB in the Framework, Par. 104 (a) twenty years ago, is almost completely ignored by most accountants in non-hyperinflationary economies even though it would maintain instead of destroy the real values of not only all income statement constant items but also all balance sheet constant real value non-monetary items for an unlimited period of time.
This is because any price-level accounting is generally viewed by almost all accountants and accounting authorities, but excluding the IASB, as a 1970-style failed and discredited inflation accounting model that requires all non-monetary items - variable real value non-monetary items and constant real value non-monetary items - to be inflation-adjusted by means of the CPI.
They – including the IASB - forego the opportunity to promote the substantial real value maintaining benefits of measuring financial capital maintenance in units of constant purchasing power in companies and the economy in general.
This results in the unknowing destruction by SA accountants of billions of Rand in real value in the SA real economy – in companies´ and banks´ Retained Earnings (to name just one item unknowingly destroyed by SA accountants like this) - year in year out because they choose to measure financial capital maintenance in nominal monetary units and implement the very destructive stable measuring unit assumption as part of the real value destroying Historical Cost Accounting model in SA when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
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
Subscribe to:
Posts (Atom)