SA accountants unknowingly destroy companies´ capital and profits with Historical Cost Accounting as authorized in IFRS
The unknowing, unnecessary and unintentional destruction by SA accountants of the real value of companies´ capital and profits never maintained constant with sufficient revaluable fixed assets under the Historical Cost Accounting model as a result of their free choice to implement the stable measuring unit assumption (which is based on a fallacy) as part of financial capital maintenance in nominal monetary units (another popular accounting fallacy) authorized by the International Accounting Standards Board in the Framework, Par 104 (a) in 1989 amounts to about R167 billion p.a. in the SA real economy for as long as annual inflation stays at 5% - all else being equal.
My objective is to encourage SA accountants to freely choose the other option authorized in International Financial Reporting Standards in exactly the same Framework, Par 104 (a) twenty one years ago, namely, financial capital maintenance in units of constant purchasing power during low inflation whereby they would knowingly maintain instead of unnecessarily destroy about R167 billion p.a. – ceteris paribus – in the SA real economy (for as long as annual inflation stays at 5%) in all entities that at least break even whether they own revaluable fixed assets or not and without the need for extra money or extra retained profits simply to maintain the constant real value of existing shareholders´ equity constant.
© 2010 Nicolaas J Smith
Monday, 17 May 2010
Friday, 14 May 2010
Everyone blames inflation
Accountants (and everyone else) make the mistake of blaming the destruction of companies´ profits and capital by their choice of traditional HCA - which includes the stable measuring unit assumption - on inflation.
Accountants identify the problem, namely, that the real values of companies´ profits and capital are being destroyed over time when implementing HCA during low inflation. They make the mistake of blaming inflation instead of their own free choice of the stable measuring unit assumption. This is camouflaged by IFRS approval in the Framework, Par 104 (a) of the stable measuring unit assumption- the stealth enemy in the SA economy wreaking more havoc than inflation, its convenient cover.
The US Financial Accounting Standards Board also blames inflation:
“In Mr. Mosso's view, conventional accounting measurements fail to capture the erosion of business profits and invested capital caused by inflation.” Statement of Financial Accounting Standard No. 33, P. 24
Everyone only sees one enemy being responsible for all of the invisible and untouchable systemic real value destruction in the economy. They think inflation is responsible for all real value destruction.
SA accountants confused by inflation illusion (just like everyone else), further feel that the SARB with its monetary policies and the SA government with its economic policies should "influence" inflation which would then "influence reported results” by inflation. But, it is not inflation destroying the real value of companies´ profits and capital, it is accountants´ choice of traditional HCA which includes their very destructive stable measuring unit assumption. This second enemy is a stealth enemy camouflaged by IFRS approval in the Framework, Par 104 (a) since the way it operates is not understood by SA accountants and accounting lecturers at SA universities. If they understood it, they would have stopped it by now with financial capital maintenance in units of constant purchasing power as they had been authorized by the IASB in the Framework, Par 104 (a) in 1989.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Accountants identify the problem, namely, that the real values of companies´ profits and capital are being destroyed over time when implementing HCA during low inflation. They make the mistake of blaming inflation instead of their own free choice of the stable measuring unit assumption. This is camouflaged by IFRS approval in the Framework, Par 104 (a) of the stable measuring unit assumption- the stealth enemy in the SA economy wreaking more havoc than inflation, its convenient cover.
The US Financial Accounting Standards Board also blames inflation:
“In Mr. Mosso's view, conventional accounting measurements fail to capture the erosion of business profits and invested capital caused by inflation.” Statement of Financial Accounting Standard No. 33, P. 24
Everyone only sees one enemy being responsible for all of the invisible and untouchable systemic real value destruction in the economy. They think inflation is responsible for all real value destruction.
SA accountants confused by inflation illusion (just like everyone else), further feel that the SARB with its monetary policies and the SA government with its economic policies should "influence" inflation which would then "influence reported results” by inflation. But, it is not inflation destroying the real value of companies´ profits and capital, it is accountants´ choice of traditional HCA which includes their very destructive stable measuring unit assumption. This second enemy is a stealth enemy camouflaged by IFRS approval in the Framework, Par 104 (a) since the way it operates is not understood by SA accountants and accounting lecturers at SA universities. If they understood it, they would have stopped it by now with financial capital maintenance in units of constant purchasing power as they had been authorized by the IASB in the Framework, Par 104 (a) in 1989.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Thursday, 13 May 2010
IASB: It is not possible to prepare financial statements in accordance with IFRSs during a period of chronic hyperinflation.
The following is a copy of the IASB´s latest update:
IAS 29 Financial Reporting in Hyperinflationary Economies — Reporting in accordance with IFRSs after a period of chronic hyperinflation
The Committee received a request for clarification on how an entity should resume presenting financial statements in accordance with IFRSs after a period when it did not comply with IAS 29. The request identifies an entity whose functional currency is the currency of a hyperinflationary economy. The entity is unable to comply with IAS 29 because the general price index relating to the entity’s functional currency is unavailable and the functional currency lacks exchangeability, that is, the entity’s functional currency is suffering from chronic hyperinflation. The entity’s functional currency then changes to a non-hyperinflationary currency.
The Committee noted that current IFRSs do not provide guidance relating to the issue and that it is not possible to prepare financial statements in accordance with IFRSs during a period of chronic hyperinflation.
The Committee reached a tentative conclusion that IAS 29 should be amended to provide guidance on how an entity shall prepare and present an opening statement of financial position at the date when the entity’s functional currency ceases to be a currency that is suffering from chronic hyperinflation. This guidance, which is different to the two approaches proposed in the request, would require the entity to:
- measure assets and liabilities on a fair value as deemed cost basis at that date.
- apply all applicable IFRSs prospectively from that date.
- be deemed a new accounting entity from that date. Consequently, there is no comparative information for the new accounting entity, for periods before that date.
The Committee requested the staff present the proposed draft wording for this amendment at the next meeting and an analysis of how the proposed draft wording addresses other potential issues identified by the Committee in relation to the request.
===================================================================================
It is interesting that the IASB finds that it is not possible to prepare financial statements in accordance with IFRS during a period of chronic hyperinflation.
1) The entity is unable to comply with IAS 29 because the general price index relating to the entity’s functional currency is unavailable.
I assume that the entity is a Zimbabwean entity. In Zimbabwe the general price index was not available but the parallel rate was available daily. The entity could use the parallel rate.
2) The functional currency lacks exchangeability, that is, the entity’s functional currency is suffering from chronic hyperinflation.
There is normally a parallel rate that should be used or the entity should designate the US Dollar as its functional currency in the hyperinflationary economy. American multinational do that.
The above problem can be solved by simply Dollarizing the entities daily operations and financial reporting.
Nicolaas Smith
IAS 29 Financial Reporting in Hyperinflationary Economies — Reporting in accordance with IFRSs after a period of chronic hyperinflation
The Committee received a request for clarification on how an entity should resume presenting financial statements in accordance with IFRSs after a period when it did not comply with IAS 29. The request identifies an entity whose functional currency is the currency of a hyperinflationary economy. The entity is unable to comply with IAS 29 because the general price index relating to the entity’s functional currency is unavailable and the functional currency lacks exchangeability, that is, the entity’s functional currency is suffering from chronic hyperinflation. The entity’s functional currency then changes to a non-hyperinflationary currency.
The Committee noted that current IFRSs do not provide guidance relating to the issue and that it is not possible to prepare financial statements in accordance with IFRSs during a period of chronic hyperinflation.
The Committee reached a tentative conclusion that IAS 29 should be amended to provide guidance on how an entity shall prepare and present an opening statement of financial position at the date when the entity’s functional currency ceases to be a currency that is suffering from chronic hyperinflation. This guidance, which is different to the two approaches proposed in the request, would require the entity to:
- measure assets and liabilities on a fair value as deemed cost basis at that date.
- apply all applicable IFRSs prospectively from that date.
- be deemed a new accounting entity from that date. Consequently, there is no comparative information for the new accounting entity, for periods before that date.
The Committee requested the staff present the proposed draft wording for this amendment at the next meeting and an analysis of how the proposed draft wording addresses other potential issues identified by the Committee in relation to the request.
===================================================================================
It is interesting that the IASB finds that it is not possible to prepare financial statements in accordance with IFRS during a period of chronic hyperinflation.
1) The entity is unable to comply with IAS 29 because the general price index relating to the entity’s functional currency is unavailable.
I assume that the entity is a Zimbabwean entity. In Zimbabwe the general price index was not available but the parallel rate was available daily. The entity could use the parallel rate.
2) The functional currency lacks exchangeability, that is, the entity’s functional currency is suffering from chronic hyperinflation.
There is normally a parallel rate that should be used or the entity should designate the US Dollar as its functional currency in the hyperinflationary economy. American multinational do that.
The above problem can be solved by simply Dollarizing the entities daily operations and financial reporting.
Nicolaas Smith
Wednesday, 12 May 2010
Stealth enemy camouflaged by IFRS authorization and general acceptance
Constant items never maintained are treated like monetary items when their nominal values are never updated as a result of the implementation of the stable measuring unit assumption as part of the traditional Historical cost accounting model during low inflation and deflation.
“The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”
Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.
The second enemy is SA accountants´ stable measuring unit assumption. Financial capital maintenance in units of constant purchasing power as authorized in the IASB´s Framework, Par 104 (a) in 1989 is the enemy of the stable measuring unit assumption during low inflation and deflation. In principle, SA accountants assume the unit of measure, the Rand, is perfectly stable during low inflation and deflation; that is, they assume that changes in its general purchasing power are not sufficiently important to require the inflation-adjustment of the nominal values of all constant items in the SA real economy in order to maintain their real values constant. In so doing, they unknowingly, unintentionally and completely unnecessarily destroy the real values of constant items never maintained during low inflation to the amount of about R167 billion in the SA constant item economy each and every year while they implement the HCA model and inflation remains at 5%.
SA accountants´ stable measuring unit assumption is a stealth enemy camouflaged by GAAP, IASB authorization which makes it IFRS compliant and the generally accepted accounting fallacy that the erosion (destruction) of companies´ capital and profits is caused by inflation: hardly anyone knows or understands that when SA accountants implement their very destructive stable measuring unit assumption they are unknowingly, unintentionally and unnecessarily destroying the real values of constant items never maintained at a rate equal to the rate of inflation under HCA during low inflation. Some people who already know about it claim that it makes no difference to the economy. SA accountants unknowingly destroying about R167 billion per annum in the SA real economy do make a difference. They do not understand that SA accountants unknowingly actually destroy existing real value on a significant scale in the SA constant item economy year in year out.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
“The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”
Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.
The second enemy is SA accountants´ stable measuring unit assumption. Financial capital maintenance in units of constant purchasing power as authorized in the IASB´s Framework, Par 104 (a) in 1989 is the enemy of the stable measuring unit assumption during low inflation and deflation. In principle, SA accountants assume the unit of measure, the Rand, is perfectly stable during low inflation and deflation; that is, they assume that changes in its general purchasing power are not sufficiently important to require the inflation-adjustment of the nominal values of all constant items in the SA real economy in order to maintain their real values constant. In so doing, they unknowingly, unintentionally and completely unnecessarily destroy the real values of constant items never maintained during low inflation to the amount of about R167 billion in the SA constant item economy each and every year while they implement the HCA model and inflation remains at 5%.
SA accountants´ stable measuring unit assumption is a stealth enemy camouflaged by GAAP, IASB authorization which makes it IFRS compliant and the generally accepted accounting fallacy that the erosion (destruction) of companies´ capital and profits is caused by inflation: hardly anyone knows or understands that when SA accountants implement their very destructive stable measuring unit assumption they are unknowingly, unintentionally and unnecessarily destroying the real values of constant items never maintained at a rate equal to the rate of inflation under HCA during low inflation. Some people who already know about it claim that it makes no difference to the economy. SA accountants unknowingly destroying about R167 billion per annum in the SA real economy do make a difference. They do not understand that SA accountants unknowingly actually destroy existing real value on a significant scale in the SA constant item economy year in year out.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Monday, 10 May 2010
SA´s second enemy
There are two processes of systemic real value destruction in the SA economy, although everybody thinks there is only one economic enemy. This is a mistake. The one enemy is well known. It is inflation. This economic enemy manifests itself in the Rand´s store of value function and only destroys real value in the SA monetary economy at the rate of inflation. Inflation is the enemy in the monetary economy and the Governor of the Reserve Bank is the enemy of inflation. Inflation per se has no effect on the real value of non-monetary items.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
Inflation, by itself, cannot destroy the real value of variable real value non-monetary items or constant real value non-monetary items items. It is impossible. Inflation is destroying the real value of the Rand and all other monetary items only in the SA monetary economy at the rate of 5.1 % per annum, at the moment (value date: March, 2010 CPI 111.1). The actual amount of real value destroyed in the real value of Rand notes and coins and other monetary items (bank loans, other monetary loans and deposits, etc) over the twelve months to March, 2010 amounted to about R102 billion.
The second process of real value destruction – the second enemy - is the unknowing, unintentional and completely unnecessary destruction by SA accountants of the real value of only constant items never maintained only in the SA constant item economy. This is the result of their implementation of the very destructive stable measuring unit assumption during low inflation as part of the traditional Historical Cost Accounting model used by most, if not all, SA companies.
Increases in the general price level (inflation) destroy the real value of the Rand (the functional currency) and other monetary items with an underlying monetary nature (e.g. loans and bonds). However, inflation has no effect on the real value of variable real value non-monetary items (e.g. land, buildings, goods, commodities, cars, gold, real estate, inventories, finished goods, foreign exchange, etc) and constant real value non-monetary items (e.g. issued share capital, retained profits, capital reserves, other shareholder equity items, salaries, wages, rentals, pensions, trade debtors, trade creditors, taxes payable, taxes receivable, deferred tax assets, deferred tax liabilities, etc).
SA accountants freely choose to implement the stable measuring unit assumption during low inflation when they value constant items never maintained, e.g. companies´ capital and profits, in nominal monetary units; i.e. when they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par 104 (a) or in terms of SA GAAP. SA accountants´ choice of implementing the stable measuring unit assumption instead of measuring constant items´ real values in units of constant purchasing power results in the real values of these constant real value non-monetary items never maintained with sufficient revaluable fixed property being destroyed at a rate equal to the annual rate of inflation because inflation destroys the real value of the Rand which is the monetary measuring unit of account in the SA economy.
It is not inflation doing the destroying as the IASB, the FASB and most accountants mistakenly believe. It is SA accountants´ free choice of the very destructive stable measuring unit assumption during low inflation. They will knowingly maintain the real values of all constant items constant (amounting to about R167 billion per year) in all companies that at least break even forever – all else being equal - no matter what the level of inflation or deflation when they reject the stable measuring unit assumption and implement financial capital maintenance in units of constant purchasing power during low inflation and deflation.
Copyright © 2010 Nicolaas J Smith
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
Inflation, by itself, cannot destroy the real value of variable real value non-monetary items or constant real value non-monetary items items. It is impossible. Inflation is destroying the real value of the Rand and all other monetary items only in the SA monetary economy at the rate of 5.1 % per annum, at the moment (value date: March, 2010 CPI 111.1). The actual amount of real value destroyed in the real value of Rand notes and coins and other monetary items (bank loans, other monetary loans and deposits, etc) over the twelve months to March, 2010 amounted to about R102 billion.
The second process of real value destruction – the second enemy - is the unknowing, unintentional and completely unnecessary destruction by SA accountants of the real value of only constant items never maintained only in the SA constant item economy. This is the result of their implementation of the very destructive stable measuring unit assumption during low inflation as part of the traditional Historical Cost Accounting model used by most, if not all, SA companies.
Increases in the general price level (inflation) destroy the real value of the Rand (the functional currency) and other monetary items with an underlying monetary nature (e.g. loans and bonds). However, inflation has no effect on the real value of variable real value non-monetary items (e.g. land, buildings, goods, commodities, cars, gold, real estate, inventories, finished goods, foreign exchange, etc) and constant real value non-monetary items (e.g. issued share capital, retained profits, capital reserves, other shareholder equity items, salaries, wages, rentals, pensions, trade debtors, trade creditors, taxes payable, taxes receivable, deferred tax assets, deferred tax liabilities, etc).
SA accountants freely choose to implement the stable measuring unit assumption during low inflation when they value constant items never maintained, e.g. companies´ capital and profits, in nominal monetary units; i.e. when they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par 104 (a) or in terms of SA GAAP. SA accountants´ choice of implementing the stable measuring unit assumption instead of measuring constant items´ real values in units of constant purchasing power results in the real values of these constant real value non-monetary items never maintained with sufficient revaluable fixed property being destroyed at a rate equal to the annual rate of inflation because inflation destroys the real value of the Rand which is the monetary measuring unit of account in the SA economy.
It is not inflation doing the destroying as the IASB, the FASB and most accountants mistakenly believe. It is SA accountants´ free choice of the very destructive stable measuring unit assumption during low inflation. They will knowingly maintain the real values of all constant items constant (amounting to about R167 billion per year) in all companies that at least break even forever – all else being equal - no matter what the level of inflation or deflation when they reject the stable measuring unit assumption and implement financial capital maintenance in units of constant purchasing power during low inflation and deflation.
Copyright © 2010 Nicolaas J Smith
Saturday, 8 May 2010
Protecting yourself against automatic real value loss in Venezuela´s hyperinflationary economy
You can protect yourself against real loss in a hyperinflationary economy by avoiding automatic real value destruction by the two enemies in the economy. The first enemy you know very well. The second enemy you do not know. The second enemy is camouflaged by general acceptance and authorization in International Financial Reporting Standards; so, you do not know that the second enemy is automatically destroying your wealt: during low inflation, but, obviously much, much faster during hyperinflation.
The first enemy is inflation or hyperinflation, which is simply inflation at a much, much higher rate. What I state about hyperinflation, applies to low inflation too. Hyperinflation can only automatically destroy the real value of Bolivars OVER TIME: nothing, nothing else. So, keep no Bolivars OVER TIME and you lose no real value. As simple as that.
Put your wealth in non-monetary items that will keep pace with the parallel rate as well as with inflation. The best non-monetary items to buy in Venezuela are actual US Dollars. I don´t know whether it is legal to hold US Dollars in Venezuela. I am not promoting anything that is illegal in Venezuela.
There are not just two basic economic items in the economy as it is generally accepted, namely monetary and non-monetary items. There are three fundamentally different basic items in the economy.
(1) Monetary items, e.g. Bolivar notes and coins and loans in Bolivars;
(2) Variable real value non-monetary items, e.g. land, buildings, machines, cars, raw material stock, finished goods stock, US Dollars, etc.; Variale items´ prices are ideally set in the free market, e.g. at the parallel rate or at the other market rates in Venezuela. If you work at the 4.3 rate then you have to update these prices a the monthly inflation rate. If you work at th parallel rate then you have to continuously update these values at the parallel rate – if that is legal in Venezuela. I do not promote anything that is illegal in Venezuela.
(3) Constant real value non-monetary items, e.g. issued share capital, retained profits, capital reserves, debtors, creditors, taxes payable, taxes receivable, royalties payable, royalties receivable, dividends payable, dividends receivable, etc. Constant items have to be updated monthly at the inflation rate if you work at the 4.3 rate and at the parallel rate if you work at the parallel rate. I don´t know if it is legal to update at the parallel rate in Venezuela. I do not promote anything that is illegal in Venezuela.
The second invisible, untouchable enemy is the stable measuring unit assumption: Venezuelan accountants assume there is no hyperinflation at all and they do not update cost prices, raw material stock prices, companies´ capital, companies´ retained profits, companies´ capital reserves, debtors, creditors, taxes payable, taxes receivable, salaries payable, salaries receivable, etc. The whole world have been doing this for the last 700 years. So, no-one realizes that accountants are unknowingly destroying that portion of their shareholders´ equity in companies that is never backed by revaluable fixed property under the Historical Cost Accounting model.
So, to avoid automatic real value destruction in monetary items, you must not hold Bolivars over time.
If you cannot keep your wealth in USD then you have to keep your wealth in products whose prices keep pace with the parallel rate as well as inflation. The best is land and buildings. Otherwise products whose prices are updated in terms of the parallel rate – if that is legal.
If you have your wealth only in products whose prices are updated in the market in Venezuela at the parallel rate, neither an increase in the parallel rate nor devaluation will affect you. Your prices (wealth) are automatically updated at the parallel rate. You can never lose any real value.
When you trade you have to update your costs – at the inflation rate if you deal at 4.3 and at the parallel rate if you trade at the parallel rate. You obviously update you selling prices all the time too – if that is legal.
Your accountant has to update all your constant items in your business – capital, retained profits, capital reserves, trade debtors, trade creditors, provisions, taxes payable, taxes receivable, all non-monetary item payable and all non-monetary item payables either at the inflation rate – if you use the 4.3 rate or at the parallel rate if you use the parallel rate if that is allowed.
I do not know whether it is legal to update your values at the parallel rate in Venezuela. I do not promote anything that is illegal in Venezuela.
When you update all your variable and constant items as above, you also have to calculate the net monetary gain or loss from holding Bolivars in order to make your books balance.
The above is Constant Purchasing Power Accounting (CPPA) during hyperinflation and Constant ITEM Purchasing Power Accounting (CIPPA) during low inflation. CPPA is required during hyperinflation in IAS 29 Financial Reporting in Hyperinflationary Economies and CIPPA is authorized in International Financial Reporting Standards during low inflation in the Framework, Par 104 (a) twenty one years ago in 1989 which states: “Financial capital maintenance can be measured in nominal monetary units (traditional Historical Cost Accounting that all accountants in Venezuela implement) or units of constant purchasing power” which is CIPPA as it appears in the Wikipedia article Constant Purchasing Power Accounting.
http://en.wikipedia.org/wiki/Constant_Purchasing_Power_Accounting
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
The first enemy is inflation or hyperinflation, which is simply inflation at a much, much higher rate. What I state about hyperinflation, applies to low inflation too. Hyperinflation can only automatically destroy the real value of Bolivars OVER TIME: nothing, nothing else. So, keep no Bolivars OVER TIME and you lose no real value. As simple as that.
Put your wealth in non-monetary items that will keep pace with the parallel rate as well as with inflation. The best non-monetary items to buy in Venezuela are actual US Dollars. I don´t know whether it is legal to hold US Dollars in Venezuela. I am not promoting anything that is illegal in Venezuela.
There are not just two basic economic items in the economy as it is generally accepted, namely monetary and non-monetary items. There are three fundamentally different basic items in the economy.
(1) Monetary items, e.g. Bolivar notes and coins and loans in Bolivars;
(2) Variable real value non-monetary items, e.g. land, buildings, machines, cars, raw material stock, finished goods stock, US Dollars, etc.; Variale items´ prices are ideally set in the free market, e.g. at the parallel rate or at the other market rates in Venezuela. If you work at the 4.3 rate then you have to update these prices a the monthly inflation rate. If you work at th parallel rate then you have to continuously update these values at the parallel rate – if that is legal in Venezuela. I do not promote anything that is illegal in Venezuela.
(3) Constant real value non-monetary items, e.g. issued share capital, retained profits, capital reserves, debtors, creditors, taxes payable, taxes receivable, royalties payable, royalties receivable, dividends payable, dividends receivable, etc. Constant items have to be updated monthly at the inflation rate if you work at the 4.3 rate and at the parallel rate if you work at the parallel rate. I don´t know if it is legal to update at the parallel rate in Venezuela. I do not promote anything that is illegal in Venezuela.
The second invisible, untouchable enemy is the stable measuring unit assumption: Venezuelan accountants assume there is no hyperinflation at all and they do not update cost prices, raw material stock prices, companies´ capital, companies´ retained profits, companies´ capital reserves, debtors, creditors, taxes payable, taxes receivable, salaries payable, salaries receivable, etc. The whole world have been doing this for the last 700 years. So, no-one realizes that accountants are unknowingly destroying that portion of their shareholders´ equity in companies that is never backed by revaluable fixed property under the Historical Cost Accounting model.
So, to avoid automatic real value destruction in monetary items, you must not hold Bolivars over time.
If you cannot keep your wealth in USD then you have to keep your wealth in products whose prices keep pace with the parallel rate as well as inflation. The best is land and buildings. Otherwise products whose prices are updated in terms of the parallel rate – if that is legal.
If you have your wealth only in products whose prices are updated in the market in Venezuela at the parallel rate, neither an increase in the parallel rate nor devaluation will affect you. Your prices (wealth) are automatically updated at the parallel rate. You can never lose any real value.
When you trade you have to update your costs – at the inflation rate if you deal at 4.3 and at the parallel rate if you trade at the parallel rate. You obviously update you selling prices all the time too – if that is legal.
Your accountant has to update all your constant items in your business – capital, retained profits, capital reserves, trade debtors, trade creditors, provisions, taxes payable, taxes receivable, all non-monetary item payable and all non-monetary item payables either at the inflation rate – if you use the 4.3 rate or at the parallel rate if you use the parallel rate if that is allowed.
I do not know whether it is legal to update your values at the parallel rate in Venezuela. I do not promote anything that is illegal in Venezuela.
When you update all your variable and constant items as above, you also have to calculate the net monetary gain or loss from holding Bolivars in order to make your books balance.
The above is Constant Purchasing Power Accounting (CPPA) during hyperinflation and Constant ITEM Purchasing Power Accounting (CIPPA) during low inflation. CPPA is required during hyperinflation in IAS 29 Financial Reporting in Hyperinflationary Economies and CIPPA is authorized in International Financial Reporting Standards during low inflation in the Framework, Par 104 (a) twenty one years ago in 1989 which states: “Financial capital maintenance can be measured in nominal monetary units (traditional Historical Cost Accounting that all accountants in Venezuela implement) or units of constant purchasing power” which is CIPPA as it appears in the Wikipedia article Constant Purchasing Power Accounting.
http://en.wikipedia.org/wiki/Constant_Purchasing_Power_Accounting
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
The SARB talks 3 to 6% but everybody is happy with 6 or below
We know that inflation is always and everywhere the destruction of real value in money and other monetary items over time. We also know that inflation has no effect on the real value of non-monetary items over time.
The maintenance of price stability (still) means that the primary task of a central bank in a first world economy is to limit the destruction of real value in money and other monetary items by inflation to a maximum of 2 percent per annum within an economy or common monetary area. Continuous two per cent annual inflation destroys 2% of the real value of money and other monetary items per annum and 51% over 35 years.
Under the current Historical Cost paradigm it also means that accountants unknowingly destroy 2% per annum of the real value of constant real value non-monetary items never maintained, e.g. companies´ capital and profits never maintained constant with sufficient revaluable fixed properties, and 51% over 35 years time with their very destructive stable measuring unit assumption as implemented under HCA. This unknowing destruction by accountants would be eliminated completely when accountants freely choose to measure financial capital maintenance in units of constant purchasing power during low inflation as they have been authorized in IFRS in the Framework, Par 104 (a) in 1989.
SARB
“The South African Reserve Bank is the central bank of the Republic of South Africa. It regards its primary goal in the South African economic system as the achievement and maintenance of price stability.
The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”
The SARB may state officially that it has an inflation targeting range of 3 to 6 per cent per annum. In practice that target is 6 per cent per annum because inflation normally rises to the upper level of the inflation targeting range. The SARB´s official task is thus to limit the destruction of the real value of the Rand currently to 6 per cent per annum.
What does that mean in practice?
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
The maintenance of price stability (still) means that the primary task of a central bank in a first world economy is to limit the destruction of real value in money and other monetary items by inflation to a maximum of 2 percent per annum within an economy or common monetary area. Continuous two per cent annual inflation destroys 2% of the real value of money and other monetary items per annum and 51% over 35 years.
Under the current Historical Cost paradigm it also means that accountants unknowingly destroy 2% per annum of the real value of constant real value non-monetary items never maintained, e.g. companies´ capital and profits never maintained constant with sufficient revaluable fixed properties, and 51% over 35 years time with their very destructive stable measuring unit assumption as implemented under HCA. This unknowing destruction by accountants would be eliminated completely when accountants freely choose to measure financial capital maintenance in units of constant purchasing power during low inflation as they have been authorized in IFRS in the Framework, Par 104 (a) in 1989.
SARB
“The South African Reserve Bank is the central bank of the Republic of South Africa. It regards its primary goal in the South African economic system as the achievement and maintenance of price stability.
The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”
The SARB may state officially that it has an inflation targeting range of 3 to 6 per cent per annum. In practice that target is 6 per cent per annum because inflation normally rises to the upper level of the inflation targeting range. The SARB´s official task is thus to limit the destruction of the real value of the Rand currently to 6 per cent per annum.
What does that mean in practice?
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Thursday, 6 May 2010
Price stability is not what it seems to be
When we discuss, write about, talk about or analyze the term money, we use the term money with the implicit assumption that this money we are dealing with is stable - as in fixed - in real economic value in our low inflationary economies. We thus assume at the same time that prices are more or less stable in low inflationary economies.
The term stable is normally accepted by the public at large to indicate a permanently fixed situation or position or state or price or value. A stable – as in fixed – price over time would be drawn as a horizontal line on a chart. A slowly increasing price over time would be drawn as a slightly rising line on a chart. A slowly decreasing value over time would be drawn as a slightly declining line on a chart. When we say production of a commodity is stable we accept that the absolute number of items being produced is not fluctuating but is at the same level all the time.
The term stable as used by economists, however, does not mean a fixed price or level, even though that is what the public in general thinks it means. The term stable in economics today means slowly increasing or slowly decreasing – depending on what it is being applied to. The term price stability as used by economists today does not mean that prices in general stay the same, but that prices in general are rising slowly – which is, as we are all taught, the popular definition of inflation.
The term stable money as used by economists equally does not mean that the real value of national monetary units they are talking about stays the same in the economy – even though that is what the public in general thinks it means. What they mean with stable money is that the real value of a national monetary unit is slowly being destroyed by inflation over time.
When a central bank governor says that the central bank’s primary task or objective is price stability what she or he means is that the central bank would be fulfilling its primary task, in an economy with low levels of inflation, when prices in general are slowly rising over time (that well known definition of inflation again). The flip side of that statement is that the real value of national monetary units is slowly being destroyed by inflation over time.
A central bank’s primary task being price stability is the same as saying a central bank’s main responsibility is ensuring that inflation is maintained at a very low level. This low level was generally accepted in first world economies to be 2 percent per annum. The latest sub-prime crisis raised doubts about the 2% level being sufficient in the event of large shocks to the economy.
“In a world of small shocks, 2 percent inflation seemed to provide a sufficient cushion to make the zero lower bound unimportant.”
“Should policymakers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range?”
Rethinking Monetary Policy, IMF Staff Position Note, Olivier Blanchard, Giovanni Dell´Ariccia and Paulo Mauro, p 4 and 11, Feb 2010.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
The term stable is normally accepted by the public at large to indicate a permanently fixed situation or position or state or price or value. A stable – as in fixed – price over time would be drawn as a horizontal line on a chart. A slowly increasing price over time would be drawn as a slightly rising line on a chart. A slowly decreasing value over time would be drawn as a slightly declining line on a chart. When we say production of a commodity is stable we accept that the absolute number of items being produced is not fluctuating but is at the same level all the time.
The term stable as used by economists, however, does not mean a fixed price or level, even though that is what the public in general thinks it means. The term stable in economics today means slowly increasing or slowly decreasing – depending on what it is being applied to. The term price stability as used by economists today does not mean that prices in general stay the same, but that prices in general are rising slowly – which is, as we are all taught, the popular definition of inflation.
The term stable money as used by economists equally does not mean that the real value of national monetary units they are talking about stays the same in the economy – even though that is what the public in general thinks it means. What they mean with stable money is that the real value of a national monetary unit is slowly being destroyed by inflation over time.
When a central bank governor says that the central bank’s primary task or objective is price stability what she or he means is that the central bank would be fulfilling its primary task, in an economy with low levels of inflation, when prices in general are slowly rising over time (that well known definition of inflation again). The flip side of that statement is that the real value of national monetary units is slowly being destroyed by inflation over time.
A central bank’s primary task being price stability is the same as saying a central bank’s main responsibility is ensuring that inflation is maintained at a very low level. This low level was generally accepted in first world economies to be 2 percent per annum. The latest sub-prime crisis raised doubts about the 2% level being sufficient in the event of large shocks to the economy.
“In a world of small shocks, 2 percent inflation seemed to provide a sufficient cushion to make the zero lower bound unimportant.”
“Should policymakers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range?”
Rethinking Monetary Policy, IMF Staff Position Note, Olivier Blanchard, Giovanni Dell´Ariccia and Paulo Mauro, p 4 and 11, Feb 2010.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Wednesday, 5 May 2010
SA accoutants freely choose HCA
When SA accountants freely choose financial capital maintenance in units of constant purchasing power instead of their current very destructive stable measuring unit assumption - as they have been authorized by the IASB in the Framework, Par 104 (a) 21 years ago - they will guarantee the reduction of that about R200 billion per annum orchestrated by Mboweni´s reduction in the average annual inflation rate at whatever future rate of inflation. They will permanently secure the reduction of about R200 billion per annum in real value destruction in constant items never maintained as compared to the 18 years before Mboweni´s arrival at the SARB and they will eliminate completely too the current about R167 billion they are still unknowingly, unnecessarily and unintentionally destroying in the real value of constant items never maintained with their very destructive stable measuring unit assumption at 5% average annual inflation.
All SA accountants have to do is freely change over to IFRS authorized IASB-approved financial capital maintenance in units of constant purchasing power during low inflation and they will boost the SA real economy by about R167 billion per annum as long as inflation stays at 5% per annum
Gill Marcus, the current governor of the SARB, will have to bring inflation down to zero per cent per annum on a permanent basis to have the same effect in the real economy: that is not currently advisable in the monetary economy. It is very easy for SA accountants to do that in the constant real value non-monetary item economy: just choose the other - real value maintaining - option presented to them 21 years ago. It is compliant with IFRS and it has been authorized by the IASB in 1989.
Copyright © 2010 Nicolaas J Smith
All SA accountants have to do is freely change over to IFRS authorized IASB-approved financial capital maintenance in units of constant purchasing power during low inflation and they will boost the SA real economy by about R167 billion per annum as long as inflation stays at 5% per annum
Gill Marcus, the current governor of the SARB, will have to bring inflation down to zero per cent per annum on a permanent basis to have the same effect in the real economy: that is not currently advisable in the monetary economy. It is very easy for SA accountants to do that in the constant real value non-monetary item economy: just choose the other - real value maintaining - option presented to them 21 years ago. It is compliant with IFRS and it has been authorized by the IASB in 1989.
Copyright © 2010 Nicolaas J Smith
Tuesday, 4 May 2010
JSE listed Boards of Directors freely choose to make that mistake
A SA company listed on the Johannesburg Stock Exchange prepares its financial reports in terms of International Financial Reporting Standards. IFRS require an entity to choose how it wants to maintain its financial capital: either in nominal monetary units (traditional Historical Cost Accounting) or in units of constant purchasing power during low inflation. This IFRS option only applies during low inflation and deflation. There is no option during hyperinflation. During hyperinflation an entity whose functional currency is a hyperinflationary currency has to implement Constant Purchasing Power Accounting (CPPA), i.e., financial capital maintenance in units of constant purchasing power, inflation-adjusting all non-monetary items - both variable as well as constant real value non-monetary items - during hyperinflation – as required in IAS 29.
The Board of Directors of a JSE listed company is responsible for approving changes in accounting policies. Adopting IFRS was a change in accounting policies. When IFRS are adopted, entities have to make a choice between two basic accounting models during low inflation and deflation. IFRS accept that “a financial concept of capital is adopted by most entities in preparing their financial statements”. The Board of Directors thus only had to decide how it wanted to maintain the company´s financial capital in terms of IFRS as it was given a specific choice between two options on the adoption of IFRS. There is a directly stated choice in IFRS and the Board of Directors actually had to make and made that choice on the adoption of IFRS during low inflation. There is no choice during hyperinflation.
There are no specific IFRS relating to the concept of capital and capital maintenance.
IAS 8 Par 10 and 11 state:
Par 10 In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is:
(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements:
(i) represent faithfully the financial position, financial performance and cash flows of the entity;
(ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
(iii) are neutral, ie free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
Par 11 In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order:
(a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.
There are no specific IFRS relating to the concept of capital and capital maintenance. The measurement concepts in the Framework are thus applicable
The IFRS Framework for the Preparation and Presentation of Financial Statements (1989) states:
“Concepts of Capital and Capital Maintenance
Concepts of Capital
102. A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.
Concepts of Capital Maintenance and the Determination of Profit
104. The concepts of capital in paragraph 102 give rise to the following concepts of capital maintenance:
(a) Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.
(b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.
108. Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. They may not be recognised as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit.”
There are consequently three concepts of capital maintenance at all levels of inflation and deflation (including normal low inflation) in terms of IFRS:
a) Physical capital maintenance
b) Financial capital maintenance in nominal monetary units
This is the generally accepted traditional Historical Cost Accounting model.
c) Financial capital maintenance in units of constant purchasing power
which the IASB also authorized in the Framework, Par 104 (a) in 1989 for implementation during low inflation and deflation as an alternative to the globally implemented generally accepted traditional Historical Cost Accounting model. Financial capital maintenance in units of constant purchasing power is, however, specifically required in IFRS to be implemented in terms of IAS 29 - the IFRS inflation accounting model - during hyperinflation.
The Board of Directors had a choice between two basic accounting models in terms of the Framework, Par 104 (a) during low inflation:
I) Financial capital maintenance in nominal monetary units, i.e. traditional Historical Cost Accounting, and
II) Financial capital maintenance in units of constant purchasing power, i.e. Constant Item Purchasing Power Accounting (CIPPA) during low inflation.
The Framework, Par 104 (a) states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.” It is a directly stated choice and the Board had to make and made the choice during low inflation.
The Board of Directors has no choice during hyperinflation: It has to implement IAS 29 or Constant Purchasing Power Accounting (CPPA) during hyperinflation.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
The Board of Directors of a JSE listed company is responsible for approving changes in accounting policies. Adopting IFRS was a change in accounting policies. When IFRS are adopted, entities have to make a choice between two basic accounting models during low inflation and deflation. IFRS accept that “a financial concept of capital is adopted by most entities in preparing their financial statements”. The Board of Directors thus only had to decide how it wanted to maintain the company´s financial capital in terms of IFRS as it was given a specific choice between two options on the adoption of IFRS. There is a directly stated choice in IFRS and the Board of Directors actually had to make and made that choice on the adoption of IFRS during low inflation. There is no choice during hyperinflation.
There are no specific IFRS relating to the concept of capital and capital maintenance.
IAS 8 Par 10 and 11 state:
Par 10 In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is:
(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements:
(i) represent faithfully the financial position, financial performance and cash flows of the entity;
(ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
(iii) are neutral, ie free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
Par 11 In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order:
(a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.
There are no specific IFRS relating to the concept of capital and capital maintenance. The measurement concepts in the Framework are thus applicable
The IFRS Framework for the Preparation and Presentation of Financial Statements (1989) states:
“Concepts of Capital and Capital Maintenance
Concepts of Capital
102. A financial concept of capital is adopted by most entities in preparing their financial statements. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day.
Concepts of Capital Maintenance and the Determination of Profit
104. The concepts of capital in paragraph 102 give rise to the following concepts of capital maintenance:
(a) Financial capital maintenance. Under this concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.
(b) Physical capital maintenance. Under this concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period.
108. Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. They may not be recognised as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit.”
There are consequently three concepts of capital maintenance at all levels of inflation and deflation (including normal low inflation) in terms of IFRS:
a) Physical capital maintenance
b) Financial capital maintenance in nominal monetary units
This is the generally accepted traditional Historical Cost Accounting model.
c) Financial capital maintenance in units of constant purchasing power
which the IASB also authorized in the Framework, Par 104 (a) in 1989 for implementation during low inflation and deflation as an alternative to the globally implemented generally accepted traditional Historical Cost Accounting model. Financial capital maintenance in units of constant purchasing power is, however, specifically required in IFRS to be implemented in terms of IAS 29 - the IFRS inflation accounting model - during hyperinflation.
The Board of Directors had a choice between two basic accounting models in terms of the Framework, Par 104 (a) during low inflation:
I) Financial capital maintenance in nominal monetary units, i.e. traditional Historical Cost Accounting, and
II) Financial capital maintenance in units of constant purchasing power, i.e. Constant Item Purchasing Power Accounting (CIPPA) during low inflation.
The Framework, Par 104 (a) states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.” It is a directly stated choice and the Board had to make and made the choice during low inflation.
The Board of Directors has no choice during hyperinflation: It has to implement IAS 29 or Constant Purchasing Power Accounting (CPPA) during hyperinflation.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Friday, 30 April 2010
Japan and South Africa have the same enemy
Perfect policies are easy to implement in perfect markets
It is now clear that the US Dollar gains a lot from the fact that the US market is much closer to “perfect” than the EU market.
Fin24.com Opinion states it well:
“StratFor raised an important aspect when they pointed out that the US was able to respond quickly to its banking crisis because it had to go through relatively few layers of regulators and law makers before the funds were made available.
Greece (and potentially Italy, Portugal and Spain) are being sunk because they cannot respond quickly enough and bring all the parties on board.”
Another example of an imperfect market is deflation in Japan:
Japan is at war with deflation for the last 15 years or more. Japan´s accountants implement the 700 year old generally accepted traditional Historical Cost Accounting model: like the rest of the world - supposedly excluding Venezuela which is in hyperinflation. However nothing can be further from the truth in Venezuela.
Back to Japan´s deflation: CNN is running a story today of a social website that allows Japanese housewives to almost always buy the lowest price groceries in their area thus driving down prices even more and increasing the deflationary pressure.
Where is the imperfection in the market and what would the perfect market solution in Japan be?
The imperfection in the market is the Historical Cost Accounting model: the Japanese Yen is in deflation. Thus, accounting non-monetary items at their historical costs, i.e. implementing the stable measuring unit assumption meaning Japanese accountants assume there is no deflation in Japan – instead of lowering all non-monetary item values to reflect the increase in the real value of the Yen, creates the deflation the Bank of Japan is unable to stop.
Deflation creates more real value in money, the Yen, in Japan – because of the monetary nature of money. (Don´t laugh at the expression: it is correct.) :-)
When Japanese accountants stop measuring financial capital maintenance in nominal monetary units, i.e. when they abandon the traditional Historical Cost Accounting model and with it the dreaded stable measuring unit assumption, they will adjust all constant items´ values with deflation: they will automatically lower the nominal values of salaries, but, the real value of the salaries will remain the same because of deflation in the Yen: it is increasing in real value all the time.
That means that Japanese consumers would stop to gain from delaying their consumption while they wait for deflation to automatically increase the real value of their salaries. The Japanese real or non-monetary economy would stabilise as all non-monetary items would see their values adjusted downwards evenly in the non-monetary or real economy. That would stop deflation.
I´m sending this off to the Bank of Japan if I can find a user friendly email address on their website.
In South Africa we have exactly the opposite situation: SA accountants implement the stable measuring unit assumption as part of Historical Cost Accounting and unknowingly destroy the real value of SA banks´ and SA companies´ shareholder equity never maintained constant as a result of insufficient revaluable fixed assets.
The enemy in Japan and South Africa is exactly the same: the stable measuring unit assumption, that is traditional Historical Cost Accounting.
Luckily the International Accounting Standards Board has authorized killing off the Historical Cost Accounting model 21 years ago in their Framework, Par 104 (a) in 1989 which states:
"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
Aren´t we lucky we have such clever people at the IASB!
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
It is now clear that the US Dollar gains a lot from the fact that the US market is much closer to “perfect” than the EU market.
Fin24.com Opinion states it well:
“StratFor raised an important aspect when they pointed out that the US was able to respond quickly to its banking crisis because it had to go through relatively few layers of regulators and law makers before the funds were made available.
Greece (and potentially Italy, Portugal and Spain) are being sunk because they cannot respond quickly enough and bring all the parties on board.”
Another example of an imperfect market is deflation in Japan:
Japan is at war with deflation for the last 15 years or more. Japan´s accountants implement the 700 year old generally accepted traditional Historical Cost Accounting model: like the rest of the world - supposedly excluding Venezuela which is in hyperinflation. However nothing can be further from the truth in Venezuela.
Back to Japan´s deflation: CNN is running a story today of a social website that allows Japanese housewives to almost always buy the lowest price groceries in their area thus driving down prices even more and increasing the deflationary pressure.
Where is the imperfection in the market and what would the perfect market solution in Japan be?
The imperfection in the market is the Historical Cost Accounting model: the Japanese Yen is in deflation. Thus, accounting non-monetary items at their historical costs, i.e. implementing the stable measuring unit assumption meaning Japanese accountants assume there is no deflation in Japan – instead of lowering all non-monetary item values to reflect the increase in the real value of the Yen, creates the deflation the Bank of Japan is unable to stop.
Deflation creates more real value in money, the Yen, in Japan – because of the monetary nature of money. (Don´t laugh at the expression: it is correct.) :-)
When Japanese accountants stop measuring financial capital maintenance in nominal monetary units, i.e. when they abandon the traditional Historical Cost Accounting model and with it the dreaded stable measuring unit assumption, they will adjust all constant items´ values with deflation: they will automatically lower the nominal values of salaries, but, the real value of the salaries will remain the same because of deflation in the Yen: it is increasing in real value all the time.
That means that Japanese consumers would stop to gain from delaying their consumption while they wait for deflation to automatically increase the real value of their salaries. The Japanese real or non-monetary economy would stabilise as all non-monetary items would see their values adjusted downwards evenly in the non-monetary or real economy. That would stop deflation.
I´m sending this off to the Bank of Japan if I can find a user friendly email address on their website.
In South Africa we have exactly the opposite situation: SA accountants implement the stable measuring unit assumption as part of Historical Cost Accounting and unknowingly destroy the real value of SA banks´ and SA companies´ shareholder equity never maintained constant as a result of insufficient revaluable fixed assets.
The enemy in Japan and South Africa is exactly the same: the stable measuring unit assumption, that is traditional Historical Cost Accounting.
Luckily the International Accounting Standards Board has authorized killing off the Historical Cost Accounting model 21 years ago in their Framework, Par 104 (a) in 1989 which states:
"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
Aren´t we lucky we have such clever people at the IASB!
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Thursday, 29 April 2010
SA can possibly experience hyperinflation if Julius Malema ever becomes President
In Zimbabwe hyperinflation reached such high levels that the real value of the country’s entire monetary supply was wiped out. Towards the end of the hyperinflationary spiral the total real value of the ZimDollar money supply halved every 24.7 hours. Eventually the ZimDollar had no value at all. South Africa has never experienced hyperinflation. I used to believe that SA will never experience hyperinflation. With the success of Julius Malema in South Africa I have changed my opinion. SA can possibly experience hyperinflation if Julius Malema one day becomes president of South Africa.
There is no money illusion in hyperinflationary economies. People know that hyperinflation destroys the real value of their money very quickly.
Central bank governors aid and abet money illusion by regularly stating in their monetary policy statements that they are “achieving and maintaining price stability.”
“The MPC remains fully committed to its mandate of achieving and maintaining price stability.”
TT Mboweni, Governor. 2009-06-25: Statement of the Monetary Policy Committee, SARB.
It is not always pointed out by governors of central banks that the “price stability” they mention, refers to their definition of “price stability”. Jean-Claude Trichet, the President of the European Central Bank, is a central bank governor who regularly mentions that 2% inflation is their definition of price stability. Absolute price stability is a year-on-year increase in the Consumer Price Index of zero per cent. The SARB´s definition of “price stability” “is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”
The SARB would aid in reducing money illusion by stating:
The MPC remains fully committed to its mandate of achieving and maintaining the SARB´s chosen level of price stability which is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. Absolute price stability is a year-on-year increase in the CPI of zero per cent. Current 5.1 % annual inflation destroyed about R100 billion of the real value of the Rand over the past 12 months to the end of March, 2010. A one per cent decrease in inflation would maintain about R20 billion per annum of real value only in the SA monetary economy.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
There is no money illusion in hyperinflationary economies. People know that hyperinflation destroys the real value of their money very quickly.
Central bank governors aid and abet money illusion by regularly stating in their monetary policy statements that they are “achieving and maintaining price stability.”
“The MPC remains fully committed to its mandate of achieving and maintaining price stability.”
TT Mboweni, Governor. 2009-06-25: Statement of the Monetary Policy Committee, SARB.
It is not always pointed out by governors of central banks that the “price stability” they mention, refers to their definition of “price stability”. Jean-Claude Trichet, the President of the European Central Bank, is a central bank governor who regularly mentions that 2% inflation is their definition of price stability. Absolute price stability is a year-on-year increase in the Consumer Price Index of zero per cent. The SARB´s definition of “price stability” “is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”
The SARB would aid in reducing money illusion by stating:
The MPC remains fully committed to its mandate of achieving and maintaining the SARB´s chosen level of price stability which is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. Absolute price stability is a year-on-year increase in the CPI of zero per cent. Current 5.1 % annual inflation destroyed about R100 billion of the real value of the Rand over the past 12 months to the end of March, 2010. A one per cent decrease in inflation would maintain about R20 billion per annum of real value only in the SA monetary economy.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Wednesday, 28 April 2010
Do all SA accountants work for Goldman Sachs?
A 1% cut in average annual inflation from 6% to 5% will pump R53 billion almost evenly into the SA economy during twelve months:
R20 billion being maintained (instead of being destroyed by inflation) evenly in the real value of Rand money and other Rand monetary items in the SA monetary economy and a reduction by about R33 billion (thus R33 billion being maintained) of the real value SA accountants unknowingly and unnecessarily destroy in SA banks´ and companies´ Retained Earnings never maintained constant with sufficient revaluable fixed assets under the real value destroying Historical Cost Accounting model.
That still leaves about R167 billion unknowingly being destroyed by SA accountants in the SA real economy in banks´ and companies´ capital and profits never maintained this year and every year while average annual inflation stays at 5%.
SA accountants can easily stop this destruction of that R167 billion by freely changing over to financial capital maintenance in units of constant purchasing power as they have been authorized in IFRS in the Framework, Par 104 (a) twenty one years ago.
They refuse point blank to do this.
They will rather carry on year after year unknowingly, unnecessarily and unintentionally destroying that R167 billion in the SA real economy.
Seems like they are all working for Goldman Sachs.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
R20 billion being maintained (instead of being destroyed by inflation) evenly in the real value of Rand money and other Rand monetary items in the SA monetary economy and a reduction by about R33 billion (thus R33 billion being maintained) of the real value SA accountants unknowingly and unnecessarily destroy in SA banks´ and companies´ Retained Earnings never maintained constant with sufficient revaluable fixed assets under the real value destroying Historical Cost Accounting model.
That still leaves about R167 billion unknowingly being destroyed by SA accountants in the SA real economy in banks´ and companies´ capital and profits never maintained this year and every year while average annual inflation stays at 5%.
SA accountants can easily stop this destruction of that R167 billion by freely changing over to financial capital maintenance in units of constant purchasing power as they have been authorized in IFRS in the Framework, Par 104 (a) twenty one years ago.
They refuse point blank to do this.
They will rather carry on year after year unknowingly, unnecessarily and unintentionally destroying that R167 billion in the SA real economy.
Seems like they are all working for Goldman Sachs.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
What? Price stability? What´s that?
Items with an underlying monetary nature have exactly the same attributes as money held with the single exception that they are not 100% liquid.
We do not have stable – as in fixed real value - money. The real value of money is generally accepted by the public at large to be stable – as in fixed - in low inflation economies, but this is not true. The belief that we have stable – as in fixed real value - money is an illusion, namely the notorious money illusion.
Central banks and monetary authorities have monetary policies that often create the impression that money is stable in real economic value. They implement monetary policies that include the tolerance of low inflation limits of up to two per cent per annum. Then they assure everybody that “price stability” is guaranteed and assured. The public at large mistakenly assume that this means stable – as in fixed – prices. We regularly read in inflation reports that low inflation targets have been met and that “price stability” is assured.
In a low inflationary economy this appears to be true. But in reality it is not true. Yes, money illusion makes us believe that our depreciating money maintains its real value, while it actually halves in real value over 35 years with constant two per cent per annum inflation – the generally accepted level of “price stability.” All currently existing bank notes and coins will eventually arrive at a point of being completely worthless in real monetary value during indefinite inflation. How quickly depends on the level of inflation.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
We do not have stable – as in fixed real value - money. The real value of money is generally accepted by the public at large to be stable – as in fixed - in low inflation economies, but this is not true. The belief that we have stable – as in fixed real value - money is an illusion, namely the notorious money illusion.
Central banks and monetary authorities have monetary policies that often create the impression that money is stable in real economic value. They implement monetary policies that include the tolerance of low inflation limits of up to two per cent per annum. Then they assure everybody that “price stability” is guaranteed and assured. The public at large mistakenly assume that this means stable – as in fixed – prices. We regularly read in inflation reports that low inflation targets have been met and that “price stability” is assured.
In a low inflationary economy this appears to be true. But in reality it is not true. Yes, money illusion makes us believe that our depreciating money maintains its real value, while it actually halves in real value over 35 years with constant two per cent per annum inflation – the generally accepted level of “price stability.” All currently existing bank notes and coins will eventually arrive at a point of being completely worthless in real monetary value during indefinite inflation. How quickly depends on the level of inflation.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Tuesday, 27 April 2010
Monetary items are money held and items with an underlying monetary nature
All economic items have monetary values in an economy using money. Both monetary items and non-monetary items are expressed in monetary terms; i.e. in terms of the functional currency. The functional currency is used as the medium of exchange, unit of account and store of value. Variable real value non-monetary items, constant real value non-monetary items and monetary items are all expressed in terms of money and have monetary values.
There is, however, a difference between having a monetary value and being a monetary item. All economic items have monetary values, but, only money and items with an underlying monetary nature are monetary items . Non-monetary items have monetary values, but, they are not monetary items.
Houses, cars, mobile phones, raw materials, etc. have monetary values, but they are not monetary items. They are variable real value non-monetary items whose real values are expressed in terms of depreciating or appreciating money depending on whether the economy is in a state of inflation or deflation.
Likewise salaries, wages, rentals, pensions, interest, taxes, pensions, Retained Earnings, Issued Share capital, capital reserves, all other shareholder equity items, trade debtors, trade creditors, deferred tax assets and liabilities, taxes payable and receivable, etc. have depreciating or appreciating monetary values, but they are not monetary items. They are constant real value non-monetary items whose constant real non-monetary values are expressed in terms of depreciating or appreciating money. Constant items´ real values need to be maintained with financial capital maintenance in units of purchasing power during inflation and deflation.
Examples of items with an underlying monetary nature
Money loans
Mortgage bonds
Government Bonds
Commercial Bonds
Treasury Bills
Consumer loans
Bank loans
Car loans
Student loans
Credit card loans
Notes Payable
Notes Receivable
They are accounted monetary items of money lent or borrowed, payable or receivable in money. Only monetary items to be paid or received in money are monetary items. Variable and constant items to be paid or received in money remain variable and constant real value non-monetary items. Money is simply the monetary medium of exchange used to transfer the ownership of a variable or constant item from one entity to another.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
There is, however, a difference between having a monetary value and being a monetary item. All economic items have monetary values, but, only money and items with an underlying monetary nature are monetary items . Non-monetary items have monetary values, but, they are not monetary items.
Houses, cars, mobile phones, raw materials, etc. have monetary values, but they are not monetary items. They are variable real value non-monetary items whose real values are expressed in terms of depreciating or appreciating money depending on whether the economy is in a state of inflation or deflation.
Likewise salaries, wages, rentals, pensions, interest, taxes, pensions, Retained Earnings, Issued Share capital, capital reserves, all other shareholder equity items, trade debtors, trade creditors, deferred tax assets and liabilities, taxes payable and receivable, etc. have depreciating or appreciating monetary values, but they are not monetary items. They are constant real value non-monetary items whose constant real non-monetary values are expressed in terms of depreciating or appreciating money. Constant items´ real values need to be maintained with financial capital maintenance in units of purchasing power during inflation and deflation.
Examples of items with an underlying monetary nature
Money loans
Mortgage bonds
Government Bonds
Commercial Bonds
Treasury Bills
Consumer loans
Bank loans
Car loans
Student loans
Credit card loans
Notes Payable
Notes Receivable
They are accounted monetary items of money lent or borrowed, payable or receivable in money. Only monetary items to be paid or received in money are monetary items. Variable and constant items to be paid or received in money remain variable and constant real value non-monetary items. Money is simply the monetary medium of exchange used to transfer the ownership of a variable or constant item from one entity to another.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Monday, 26 April 2010
SA would need no foreign currency to operate internationally
The world economy would function much better if we only had one currency: a universal unit of real value. The USD is used world wide as a proxy of that universal unit of real value - especially in countries with weak local currencies. The USD is the natural hard currency used by all countries in very high inflation and hyperinflation, like Venezuela at the moment.
It is interesting that countries like Zimbabwe regard it as impossible to function without access to foreign currencies, especially the USD.
The US does not need foreign currencies to function: they create the USD that is accepted universally as money.
Many people rant about the fact that fiat money has no intrinsic value. However, the value of any currency is backed by all the other underlying value systems in an economy; e.g. good governance, sound monetary policies, sound economic policies, sound industrial policies, sound mining policies, sound education, a sound legal system, sound justice, a sound defence force, a sound police force, sound health policies to name just a few.
If South Africa had very, very sound systems in all the above and all the other underlying value systems in the country, everybody would accept the Rand as means of payment all over the world. SA would not need any foreign currency to function internationally, just like the US. Very few people understand this.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
It is interesting that countries like Zimbabwe regard it as impossible to function without access to foreign currencies, especially the USD.
The US does not need foreign currencies to function: they create the USD that is accepted universally as money.
Many people rant about the fact that fiat money has no intrinsic value. However, the value of any currency is backed by all the other underlying value systems in an economy; e.g. good governance, sound monetary policies, sound economic policies, sound industrial policies, sound mining policies, sound education, a sound legal system, sound justice, a sound defence force, a sound police force, sound health policies to name just a few.
If South Africa had very, very sound systems in all the above and all the other underlying value systems in the country, everybody would accept the Rand as means of payment all over the world. SA would not need any foreign currency to function internationally, just like the US. Very few people understand this.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Friday, 23 April 2010
To be or not to be a monetary item, that is the question
Monetary items are incorrectly defined in IAS 21 The Effects of Changes in Foreign Exchange Rates, Par 8 too:
Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
Not all assets and liabilities to be received or paid in a fixed or determinable number of units of currency are monetary items – per se. Non-monetary items are often paid in a fixed or determinable number of units of currency. Fixed salary, wage and rentals payments do not transform these constant real value non-monetary items into monetary items. Salaries, wages, rentals, etc are constant real value non-monetary items. They are not monetary items. They are simply paid in money as the medium of exchange. They are sometimes paid in a fixed or determinable number of units of currency because they are measured in nominal monetary units under the current Historical Cost paradigm during low inflation and not in units of constant purchasing power. This does not make them into monetary items simply because they are paid in fixed historical cost values. They remain constant real value non-monetary items.
Definition of monetary items
Monetary items are money held and items with an underlying monetary nature.
Money is the functional currency; i.e., “the currency of the primary economic environment in which the entity operates.” IAS 21 Par 8
Fiat money cannot be declared by statute or by institutional definition to be a non-monetary item. To be money it has to fulfil the three functions of money in an economy: medium of exchange, store of value and unit of account. Trade debtors and trade creditors are defined incorrectly by the IASB, the FASB and PricewaterhousCoopers to be monetary items. They are constant real value non-monetary items. All street vendors in hyperinflationary economies know by experience that paying for a non-monetary item on credit means the value at the date of the sale has to be inflation-adjusted over time, even when they have never been to school. The IASB, the FASB and PricewaterhousCoopers still get this wrong.
Money is a monetary item that is generally accepted as a medium of exchange, store of value and unit of account within an economy. Only an economic item that fulfils all three functions of money at the same time can be the functional currency in a specific economy or monetary union. Fulfilling only two of the three functions does not qualify an item as the functional currency. See Foreign Exchange.
A foreign currency is not the functional currency in a non-dollarized economy since it is not the monetary unit of account.
Money held are bank notes and coins on hand and demand deposits in banks.
People often google "what is the real value of money" and then land up on my other blog. It seems to be not so well understood that inflation always destroys the real value of money over time.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
Not all assets and liabilities to be received or paid in a fixed or determinable number of units of currency are monetary items – per se. Non-monetary items are often paid in a fixed or determinable number of units of currency. Fixed salary, wage and rentals payments do not transform these constant real value non-monetary items into monetary items. Salaries, wages, rentals, etc are constant real value non-monetary items. They are not monetary items. They are simply paid in money as the medium of exchange. They are sometimes paid in a fixed or determinable number of units of currency because they are measured in nominal monetary units under the current Historical Cost paradigm during low inflation and not in units of constant purchasing power. This does not make them into monetary items simply because they are paid in fixed historical cost values. They remain constant real value non-monetary items.
Definition of monetary items
Monetary items are money held and items with an underlying monetary nature.
Money is the functional currency; i.e., “the currency of the primary economic environment in which the entity operates.” IAS 21 Par 8
Fiat money cannot be declared by statute or by institutional definition to be a non-monetary item. To be money it has to fulfil the three functions of money in an economy: medium of exchange, store of value and unit of account. Trade debtors and trade creditors are defined incorrectly by the IASB, the FASB and PricewaterhousCoopers to be monetary items. They are constant real value non-monetary items. All street vendors in hyperinflationary economies know by experience that paying for a non-monetary item on credit means the value at the date of the sale has to be inflation-adjusted over time, even when they have never been to school. The IASB, the FASB and PricewaterhousCoopers still get this wrong.
Money is a monetary item that is generally accepted as a medium of exchange, store of value and unit of account within an economy. Only an economic item that fulfils all three functions of money at the same time can be the functional currency in a specific economy or monetary union. Fulfilling only two of the three functions does not qualify an item as the functional currency. See Foreign Exchange.
A foreign currency is not the functional currency in a non-dollarized economy since it is not the monetary unit of account.
Money held are bank notes and coins on hand and demand deposits in banks.
People often google "what is the real value of money" and then land up on my other blog. It seems to be not so well understood that inflation always destroys the real value of money over time.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Legal tender
Money derives its nominal value from being declared by government to be legal tender. It does not mean economic entities will accept it as money. Zimbabwe declared 100 trillion Zimbabwe Dollar notes as legal tender, but the population in Zimbabwe refused to accept it as legal tender after a very short time because hyperinflation in the millions of per cent per annum made the notes worthless. The Zimbabwe Government withdrew the ZimDollar from circulation when they dollarized their economy with multi-currencies after the Reserve Bank of Zimbabwe wiped out all the real value represented by the Zimbabwe Dollar in their economy by printing excessive amounts of extremely high nominal value bank notes.
Fiat money’s real value is determined by all the underlying value systems in the economy. Changes in money’s real value over time are determined by the rate of inflation or deflation. Money has the legal backing of being legal tender. Legal tender is an offered payment that, by law, cannot be refused in settlement of a debt. Credit cards, debit cards, personal cheques and similar non-cash methods of payment are not usually legal tender. The law does not relieve the debt until payment is accepted which explains the practice in some economies of making out receipts for most payments. Bank notes and coins are usually defined as legal tender.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Fiat money’s real value is determined by all the underlying value systems in the economy. Changes in money’s real value over time are determined by the rate of inflation or deflation. Money has the legal backing of being legal tender. Legal tender is an offered payment that, by law, cannot be refused in settlement of a debt. Credit cards, debit cards, personal cheques and similar non-cash methods of payment are not usually legal tender. The law does not relieve the debt until payment is accepted which explains the practice in some economies of making out receipts for most payments. Bank notes and coins are usually defined as legal tender.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Wednesday, 21 April 2010
Especially the IASB, FASB and PricewaterhouseCoopers get it wrong
The incorrect treatment of the constant items trade debtors and trade creditors and other non-monetary payables and receivables as monetary items is mainly due to the incorrect definition of monetary items in International Financial Reporting Standards.
South African accountants are taught that there are only two distinct economic items in the economy, namely, monetary and non-monetary items and that the economy is divided in the monetary and non-monetary or real economy.
Monetary items are defined by the International Accounting Standards Board in IAS 21 The Effects of Changes in Foreign Exchange Rates, Par 8 as follows:
“Monetary items are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency.”
and in IAS 29 Financial Reporting in Hyperinflationary Economies, Par 12 as follows:
“Monetary items are money held and items to be received or paid in money.”
The US Financial Accounting Standards Board and PricewaterhouseCoopers also define trade debtors and trade creditors incorrectly as monetary items. PwC is simply following the IASB lead. Then these global audit firms charge their clients in hyperinflationary economies huge fees for giving them wrong advice when any street vendor in that hyperinflationary economy will be able to teach PwC, the IASB and the FASB that trade debtors are not monetary items. But, it is not wrong because it is in IFRS. Accountants are not generally encouraged to think independently of mainstream generally accepted accounting practices. Accountants are taught that if it is in IFRS it is acceptable and if it is not is not acceptable. The real effects of accounting entries are not always taken into account.
The second part of the IAS 29 definition is not correct. When a non-monetary item, e.g. raw material, is bought on credit, the trade debtor amount in the supplier’s accounts is not a monetary item just because it will be paid in money or because it will be paid in a fixed or determinable number of units of currency. It can be paid in strawberries or diamonds too, if the supplier will accept strawberries or diamonds as a medium of payment. That will not make the non-monetary raw material a strawberry item or diamond item, just like payment in money does not make non-monetary raw material a monetary item. Money or strawberries or diamonds are simply used as the mutually agreed medium of exchange. The constant real value non-monetary trade debtor amount relates to the sale of a non-monetary item, namely the non-monetary raw material. The buyer did not borrow money from the supplier. The supplier did not give the buyer a monetary loan. The trade debt relates to a non-monetary item: raw material.
The trade debt is thus a constant real value non-monetary item the moment it comes about. The underlying non-monetary nature of the debt (raw material, furniture, vehicle, etc.) results in it being a constant real value non-monetary item the moment the debt comes about which has to be inflation-adjusted during low, hyperinflation and deflation. Street vendors in hyperinflationary economies – some of whom have never been to school - know this instinctively. Some finance professors who learn what monetary and non-monetary items are from books and who have never lived and worked in a hyperinflationary economy, find it hard to grasp.
When inflation destroys the real value of the monetary medium of exchange at 15% per annum, 15% more money has to be paid over a year to pay off the constant real value non-monetary item, the trade debtor amount.
Inflation is always and everywhere a monetary phenomenon - as per Milton Friedman. Money is only the monetary medium of exchange used for payment. Inflation can only destroy the real value of money and other monetary items – nothing else. Inflation has no effect on the real value of non-monetary items. The debt is for the constant real non-monetary value of a non-monetary item mutually agreed and generally accepted to be paid in money - not for a monetary item. Money is simply the medium of exchange. No-one lent any money to anyone else. There is generally no money loans involved with trade creditors and trade debtors.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
South African accountants are taught that there are only two distinct economic items in the economy, namely, monetary and non-monetary items and that the economy is divided in the monetary and non-monetary or real economy.
Monetary items are defined by the International Accounting Standards Board in IAS 21 The Effects of Changes in Foreign Exchange Rates, Par 8 as follows:
“Monetary items are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency.”
and in IAS 29 Financial Reporting in Hyperinflationary Economies, Par 12 as follows:
“Monetary items are money held and items to be received or paid in money.”
The US Financial Accounting Standards Board and PricewaterhouseCoopers also define trade debtors and trade creditors incorrectly as monetary items. PwC is simply following the IASB lead. Then these global audit firms charge their clients in hyperinflationary economies huge fees for giving them wrong advice when any street vendor in that hyperinflationary economy will be able to teach PwC, the IASB and the FASB that trade debtors are not monetary items. But, it is not wrong because it is in IFRS. Accountants are not generally encouraged to think independently of mainstream generally accepted accounting practices. Accountants are taught that if it is in IFRS it is acceptable and if it is not is not acceptable. The real effects of accounting entries are not always taken into account.
The second part of the IAS 29 definition is not correct. When a non-monetary item, e.g. raw material, is bought on credit, the trade debtor amount in the supplier’s accounts is not a monetary item just because it will be paid in money or because it will be paid in a fixed or determinable number of units of currency. It can be paid in strawberries or diamonds too, if the supplier will accept strawberries or diamonds as a medium of payment. That will not make the non-monetary raw material a strawberry item or diamond item, just like payment in money does not make non-monetary raw material a monetary item. Money or strawberries or diamonds are simply used as the mutually agreed medium of exchange. The constant real value non-monetary trade debtor amount relates to the sale of a non-monetary item, namely the non-monetary raw material. The buyer did not borrow money from the supplier. The supplier did not give the buyer a monetary loan. The trade debt relates to a non-monetary item: raw material.
The trade debt is thus a constant real value non-monetary item the moment it comes about. The underlying non-monetary nature of the debt (raw material, furniture, vehicle, etc.) results in it being a constant real value non-monetary item the moment the debt comes about which has to be inflation-adjusted during low, hyperinflation and deflation. Street vendors in hyperinflationary economies – some of whom have never been to school - know this instinctively. Some finance professors who learn what monetary and non-monetary items are from books and who have never lived and worked in a hyperinflationary economy, find it hard to grasp.
When inflation destroys the real value of the monetary medium of exchange at 15% per annum, 15% more money has to be paid over a year to pay off the constant real value non-monetary item, the trade debtor amount.
Inflation is always and everywhere a monetary phenomenon - as per Milton Friedman. Money is only the monetary medium of exchange used for payment. Inflation can only destroy the real value of money and other monetary items – nothing else. Inflation has no effect on the real value of non-monetary items. The debt is for the constant real non-monetary value of a non-monetary item mutually agreed and generally accepted to be paid in money - not for a monetary item. Money is simply the medium of exchange. No-one lent any money to anyone else. There is generally no money loans involved with trade creditors and trade debtors.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Tuesday, 20 April 2010
An amazing contradiction of basic economic logic
Money illusion is so pervasive in our low inflation societies that we do not even notice it any more. It is a complete state of mind - a way of thinking.
We have to stop thinking in nominal terms and start thinking in real value terms. As long as there is inflation in an economy, the national currency created and used in that inflationary economy is not a store of stable real value. It is a store of decreasing real value. Money is losing real value all the time when an economy is in a state of inflation. All current bank notes and coins will actually be completely worthless some time in the future when an economy remains in an inflationary mode for a long enough period of time.
Money developed upon the mistaken belief that it is stable – as in fixed – in real value in the short to medium term in economies with low inflation. The term stable money is seen as meaning that money’s real value stays intact over the short to medium term in low inflationary economies. Money illusion is still very evident today in most economies in money, other monetary items and constant real value non-monetary items that are mistakenly considered to be monetary items, for example, trade debtors, trade creditors, dividends payable, dividends receivable, taxes payable, taxes receivable, etc.
The correct definition of monetary items is critical for the correct classification of non-monetary items since the latter are all items that are not monetary items. If the definition of monetary items is wrong then some constant real value non-monetary items can be incorrectly classified as monetary items. This happens mainly with the incorrect classification of trade debtors and trade creditors as monetary items. This will affect the valuing of these items, the calculation of the net monetary gain or loss and consequently the profit or loss for the reporting period which will influence the correctness of the financial reports when the Constant Item Purchasing Power Accounting model is implemented by accountants in terms of the Framework, Par 104 (a) during non-hyperinflationary conditions as well a in terms of IAS 29 during hyperinflation.
In an amazing contradiction of basic economic logic, there is no net monetary gain or loss calculation when accountants choose the traditional HCA model. The calculation of the net monetary gain or loss is an essential part of the CIPPA model while it is non-existent under the HCA model. This is one of the main failures of the HCA model which is corrected under the CIPPA model - both authorized in the exact same statement, namely, the Framework, Par 104 (a) in 1989.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
We have to stop thinking in nominal terms and start thinking in real value terms. As long as there is inflation in an economy, the national currency created and used in that inflationary economy is not a store of stable real value. It is a store of decreasing real value. Money is losing real value all the time when an economy is in a state of inflation. All current bank notes and coins will actually be completely worthless some time in the future when an economy remains in an inflationary mode for a long enough period of time.
Money developed upon the mistaken belief that it is stable – as in fixed – in real value in the short to medium term in economies with low inflation. The term stable money is seen as meaning that money’s real value stays intact over the short to medium term in low inflationary economies. Money illusion is still very evident today in most economies in money, other monetary items and constant real value non-monetary items that are mistakenly considered to be monetary items, for example, trade debtors, trade creditors, dividends payable, dividends receivable, taxes payable, taxes receivable, etc.
The correct definition of monetary items is critical for the correct classification of non-monetary items since the latter are all items that are not monetary items. If the definition of monetary items is wrong then some constant real value non-monetary items can be incorrectly classified as monetary items. This happens mainly with the incorrect classification of trade debtors and trade creditors as monetary items. This will affect the valuing of these items, the calculation of the net monetary gain or loss and consequently the profit or loss for the reporting period which will influence the correctness of the financial reports when the Constant Item Purchasing Power Accounting model is implemented by accountants in terms of the Framework, Par 104 (a) during non-hyperinflationary conditions as well a in terms of IAS 29 during hyperinflation.
In an amazing contradiction of basic economic logic, there is no net monetary gain or loss calculation when accountants choose the traditional HCA model. The calculation of the net monetary gain or loss is an essential part of the CIPPA model while it is non-existent under the HCA model. This is one of the main failures of the HCA model which is corrected under the CIPPA model - both authorized in the exact same statement, namely, the Framework, Par 104 (a) in 1989.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
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