Where Julius Malema will take South Africa if no-one stops him: hyperinflation.
Real Value Table
Per cent of Today’s Real Value Destroyed
...........................................................Hyperinflation*
Annual Inflation 2% 6% 10% 26%
Years % % % %
5 10 27 41 78
10 18 46 65 95
16 28 63 84 99
20 33 71 88
30 45 84 96
35 51 89 98
44 59 93 99
75 78 99
114 90
228 99
*Cumulative inflation over three years equals or is more than 100%: for example, inflation at 26% per annum for three years in a row.
The 2% column illustrates what HC accountants are unknowingly, unnecessarily and unintentionally doing in the low inflationary world to companies´ capital and profits with their very destructive stable measuring unit assumption; that is, with normal, generally accepted, traditional 700 year old Historical Cost Accounting in the USA, EU, etc.
The 6% column illustrates what they are doing in SA.
The 26% column illustrates what they are doing in Venezuela with the generous help of Hugo Chavez; Julius Malema´s model country: where he will take South Africa if no-one stops him.
Copyright © 2010 Nicolaas J Smith
Monday, 31 May 2010
Friday, 28 May 2010
Audited HC reports do not fairly present the financial position of SA companies
Audited Historical Cost financial reports do not fairly present the financial position of SA companies unless
- the directors inform the shareholders that they are destroying real value in the company with normal Historical Cost Accounting;
- how much they are destroying with HCA;
- how much they will gain when they stop HCA;
- how much they will gain when they freely change over to financial capital maintenance in units of constant purchasing power as authorized in International Financial Reporting Standards in the Framework, Par 104 (a) twenty one years ago;
- they state why they choose HCA when they know they destroy real value in the company.
Both the auditors and the directors have a duty not to implement inappropriate accounting policies.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
- the directors inform the shareholders that they are destroying real value in the company with normal Historical Cost Accounting;
- how much they are destroying with HCA;
- how much they will gain when they stop HCA;
- how much they will gain when they freely change over to financial capital maintenance in units of constant purchasing power as authorized in International Financial Reporting Standards in the Framework, Par 104 (a) twenty one years ago;
- they state why they choose HCA when they know they destroy real value in the company.
Both the auditors and the directors have a duty not to implement inappropriate accounting policies.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Thursday, 27 May 2010
This is not inflation accounting
IFRS authorized financial capital maintenance in units of constant purchasing power, i.e. price-level accounting, in the Framework, Par 104 (a) in 1989 during low inflation and deflation is the only way to maintain the real value of Shareholders´ Equity constant during inflation and deflation in all entities that at least break even – even when they do not own any revaluable fixed assets and without the need for extra money or extra retained profits simply to maintain the constant real value of existing constant items constant. That is what I promote. It has been authorized in International Financial Reporting Standards in the Framework, Par 104 (a) twenty one years ago.
This project is not about inflation accounting at all.
Copyright © 2010 Nicolaas J Smith
This project is not about inflation accounting at all.
Copyright © 2010 Nicolaas J Smith
Wednesday, 26 May 2010
Accountants are not simply record-keepers
The concept of the accountant as simply a record-keeper is very ingrained. A big problem. Many accounting professors still believe in that. I was quite surprised when I saw it first stated by an accounting professor in SA.
It is, however, quite easy to see that accountants value everything they account by just looking at the three basic economic items:
1. Monetary items are valued automatically by inflation or deflation: so, no problem. However, it appears "as if" accountants "only" record them. Why? Because they can only be stated at their original nominal historical cost values - DURING the current financial year or reporting period. Once they are in historical financial statements they have to be updated: to show their real values in the past in terms of the current value of money (the current ever changing CPI).
2. Variable items (property, plant, equipment, inventory, etc) are valued in terms of IFRS. It is a valuation at the current reporting date - not a recording 0f what happened in the past.
3. Constant items (capital, retained profits, debtors, creditors, etc): here is the big mistake - they have to be inflation adjusted, but, no-one does that under HCA: they state them at HC and thus value them like monetary items - and destroy their real values.
It is of course true that all financial statements issued one month after the reporting date are wrong in principle: the CPI (the value of the Rand) has changed.
Copyright © 2010 Nicolaas J Smith
It is, however, quite easy to see that accountants value everything they account by just looking at the three basic economic items:
1. Monetary items are valued automatically by inflation or deflation: so, no problem. However, it appears "as if" accountants "only" record them. Why? Because they can only be stated at their original nominal historical cost values - DURING the current financial year or reporting period. Once they are in historical financial statements they have to be updated: to show their real values in the past in terms of the current value of money (the current ever changing CPI).
2. Variable items (property, plant, equipment, inventory, etc) are valued in terms of IFRS. It is a valuation at the current reporting date - not a recording 0f what happened in the past.
3. Constant items (capital, retained profits, debtors, creditors, etc): here is the big mistake - they have to be inflation adjusted, but, no-one does that under HCA: they state them at HC and thus value them like monetary items - and destroy their real values.
It is of course true that all financial statements issued one month after the reporting date are wrong in principle: the CPI (the value of the Rand) has changed.
Copyright © 2010 Nicolaas J Smith
Tuesday, 25 May 2010
SA accountants value everything they account
The general belief by some accountants that accounting is simply a matter of recording what happened in the past – as stated by some accounting professors – is completely untrue.
SA accountants value everything they account when they deal with the three basic economic items – monetary, variable and constant items - under low inflation in the SA economy.
The theory that 2% inflation is completely unharmful is also not true.
SA accountants would maintain existing constant item real values by not destroying them - as they are doing now to some portion of those constant items – with their very destructive stable measuring unit assumption as part of traditional Historical Cost Accounting.
On the other hand: they cannot create real value out of thin air by simply passing update entries when no real value exists. They do not do that.
Copyright © 2010 Nicolaas J Smith
SA accountants value everything they account when they deal with the three basic economic items – monetary, variable and constant items - under low inflation in the SA economy.
The theory that 2% inflation is completely unharmful is also not true.
SA accountants would maintain existing constant item real values by not destroying them - as they are doing now to some portion of those constant items – with their very destructive stable measuring unit assumption as part of traditional Historical Cost Accounting.
On the other hand: they cannot create real value out of thin air by simply passing update entries when no real value exists. They do not do that.
Copyright © 2010 Nicolaas J Smith
Venezuela should abandon their home-grown currency board and re-instate fractional reserve banking.
In my opinion Venezuelans should work towards a normal mixed economy with fractional reserve banking.
At the moment Venezuela´s monetary system is closest to a currency board. By expeting to “back” Bs by $s you made your own currency board.
In 95% + of the world economy countries use fractional reserve banking to create money out of thin air in their economy. This money out of nothing or fiat money is backed by all the underlying value systems in the economy as exemplified but not limited to sound governance, sound economic policies, sound monetary policies, sound economic policies, sound education, sound legal system, sound education, etc, etc.
Venezuelans should strive to get back to that.
In a perfect mixed economy with fractional reserve banking, the correct level of money supply (created out of thin air, but, back by a perfect government, etc, etc, etc, ) would be indicated by very low inflation – below 2% per annum.
A certain level of foreign exchange reserves would only be required as one element of a sound economy: not specifically to “back” each VEF.
The net profits of a company like PdVSA would then be almost 100% available for enhanced economic development – not to “back” each and every VEF.
Venezuelans should strive to get back to that. Surely there must be bankers, business people, academics, etc in Venezuela who know this and who would strive to lead the country back to that?
At the moment Venezuela´s monetary system is closest to a currency board. By expeting to “back” Bs by $s you made your own currency board.
In 95% + of the world economy countries use fractional reserve banking to create money out of thin air in their economy. This money out of nothing or fiat money is backed by all the underlying value systems in the economy as exemplified but not limited to sound governance, sound economic policies, sound monetary policies, sound economic policies, sound education, sound legal system, sound education, etc, etc.
Venezuelans should strive to get back to that.
In a perfect mixed economy with fractional reserve banking, the correct level of money supply (created out of thin air, but, back by a perfect government, etc, etc, etc, ) would be indicated by very low inflation – below 2% per annum.
A certain level of foreign exchange reserves would only be required as one element of a sound economy: not specifically to “back” each VEF.
The net profits of a company like PdVSA would then be almost 100% available for enhanced economic development – not to “back” each and every VEF.
Venezuelans should strive to get back to that. Surely there must be bankers, business people, academics, etc in Venezuela who know this and who would strive to lead the country back to that?
Monday, 24 May 2010
The real financial position of SA companies is not as SA accountants present it
New terms are defined in Constant ITEM Purchasing Power Accounting. The three basic economic items are
(a) monetary items,
(b) variable items and
(c) constant items.
The last one is one of the new concepts: constant real value non-monetary items.
The three accounting fallacies not yet extinct (on which IFRS are based) are:
(1) The stable measuring unit assumption – based on a fallacy;
(2) Financial capital maintenance in nominal monetary units since it is impossible to maintain the real value of capital constant with this concept per se under inflation and deflation; and
(3) The fallacy that the erosion of companies´ capital and profits is caused by inflation. Inflation can only destroy the real value of money and other monetary items – nothing else.
There is not just one systemic process of real value destruction in the economy, namely, inflation which destroys the real value of money and other monetary items.
SA accountants unknowingly destroy the real value of all constant items never maintained constant in the SA real economy amounting to about R167 billion per annum with their very destructive stable measuring unit assumption – the second enemy in the economy camouflaged by IFRS authorization and Generally Accepted Accounting Practice.
The maintenance of the constant purchasing power of capital with financial capital maintenance in units of constant purchasing power is consequently a basic objective of accounting/financial reporting.
Copyright © 2010 Nicolaas J Smith
(a) monetary items,
(b) variable items and
(c) constant items.
The last one is one of the new concepts: constant real value non-monetary items.
The three accounting fallacies not yet extinct (on which IFRS are based) are:
(1) The stable measuring unit assumption – based on a fallacy;
(2) Financial capital maintenance in nominal monetary units since it is impossible to maintain the real value of capital constant with this concept per se under inflation and deflation; and
(3) The fallacy that the erosion of companies´ capital and profits is caused by inflation. Inflation can only destroy the real value of money and other monetary items – nothing else.
There is not just one systemic process of real value destruction in the economy, namely, inflation which destroys the real value of money and other monetary items.
SA accountants unknowingly destroy the real value of all constant items never maintained constant in the SA real economy amounting to about R167 billion per annum with their very destructive stable measuring unit assumption – the second enemy in the economy camouflaged by IFRS authorization and Generally Accepted Accounting Practice.
The maintenance of the constant purchasing power of capital with financial capital maintenance in units of constant purchasing power is consequently a basic objective of accounting/financial reporting.
Copyright © 2010 Nicolaas J Smith
Friday, 21 May 2010
Something no-one can disprove
Continuous financial capital maintenance in units of constant purchasing power as authorized in International Financial Reporting Standards in the Framework, Par 104 (a) in 1989, is really about finally stopping Historical Cost Accounting although that was not the intention when this project was started in 1995 in Angola: it is simply the natural conclusion of this process.
It is clearly proven – and no-one can disprove – that SA accountants continuously unknowingly destroy a significant amount of real value in the real economy with traditional Historical Cost Accounting each and every year in the real value of that portion of their company´s shareholders´ equity not backed by revaluable fixed assets in terms of HCA during low inflation.
Everybody still blames the destruction of companies´ capital and profits on inflation – something accountants have no control over.
It is undeniably proven that it is not inflation but SA accountants who unknowingly do the destroying with their stable measuring unit assumption (HCA) – something they have complete control over: they can freely reject the stable measuring unit assumption any time they want and they can freely implement financial capital maintenance in units of constant purchasing power during low inflation and deflation as authorized by the IASB in the Framework, Par 104 (a) twenty one years ago.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
It is clearly proven – and no-one can disprove – that SA accountants continuously unknowingly destroy a significant amount of real value in the real economy with traditional Historical Cost Accounting each and every year in the real value of that portion of their company´s shareholders´ equity not backed by revaluable fixed assets in terms of HCA during low inflation.
Everybody still blames the destruction of companies´ capital and profits on inflation – something accountants have no control over.
It is undeniably proven that it is not inflation but SA accountants who unknowingly do the destroying with their stable measuring unit assumption (HCA) – something they have complete control over: they can freely reject the stable measuring unit assumption any time they want and they can freely implement financial capital maintenance in units of constant purchasing power during low inflation and deflation as authorized by the IASB in the Framework, Par 104 (a) twenty one years ago.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Thursday, 20 May 2010
The only and perfect remedy
The Framework, Par 104 (a) states: “Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.” Unfortunately the IASB also authorised the 700 year old status quo - financial capital maintenance in nominal monetary units (the basis of Historical Cost Accounting) which is a fallacy – it is impossible to maintain the real value of financial capital constant with measurement in nominal monetary units per se during inflation and deflation - in the same statement and left its only and perfect remedy as an option which no-one chooses because of everybody’s mistaken belief in the fallacy of “the erosion of business profits and invested capital caused by inflation.”
Fortunately for me, I did not invent the remedy. The IASB authorized the only and perfect remedy in the Framework, Par 104 (a) twenty one years ago, namely, continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Fortunately for me, I did not invent the remedy. The IASB authorized the only and perfect remedy in the Framework, Par 104 (a) twenty one years ago, namely, continuous financial capital maintenance in units of constant purchasing power during low inflation and deflation.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Tuesday, 18 May 2010
The critical difference
The critical difference with continuous financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago compared to other works about the understood need to replace the Historical Cost Accounting model is that it is clearly and undeniably shown that SA accountants unknowingly destroy real value with traditional HCA during low inflation – and lots of it every year: about R167 billion in SA per annum as long as inflation stays at 5% per annum.
Everyone knows and admits that real value is being destroyed in companies´ capital and profits. Everyone blames inflation.
“The erosion of business profits and invested capital caused by inflation”
as stated in the US Financial Accounting Standard FAS 33 is the third of the not yet extinct very popular accounting fallacies to be put to rest in this process.
It is not inflation doing the destroying.
It is impossible for inflation to destroy any non-monetary item.
Capital and profits are constant real value non-monetary items. Inflation can only destroy the real value of money (the Rand) and other Rand monetary items – nothing else.
It is SA accountants´ free choice of implementing the stable measuring unit assumption during low inflation that is doing the destroying.
The critical difference is that it is clearly proven that SA accountants destroy real value - about R167 billion per annum - in the real economy just by the way in which they do normal accounting.
The critical difference is that it is clearly proven that SA accountants would boost the SA real economy with about R167 billion per annum forever - or as long as inflation stays at 5% - when they freely change over to financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago.
Copyright © 2010 Nicolaas J Smith
Everyone knows and admits that real value is being destroyed in companies´ capital and profits. Everyone blames inflation.
“The erosion of business profits and invested capital caused by inflation”
as stated in the US Financial Accounting Standard FAS 33 is the third of the not yet extinct very popular accounting fallacies to be put to rest in this process.
It is not inflation doing the destroying.
It is impossible for inflation to destroy any non-monetary item.
Capital and profits are constant real value non-monetary items. Inflation can only destroy the real value of money (the Rand) and other Rand monetary items – nothing else.
It is SA accountants´ free choice of implementing the stable measuring unit assumption during low inflation that is doing the destroying.
The critical difference is that it is clearly proven that SA accountants destroy real value - about R167 billion per annum - in the real economy just by the way in which they do normal accounting.
The critical difference is that it is clearly proven that SA accountants would boost the SA real economy with about R167 billion per annum forever - or as long as inflation stays at 5% - when they freely change over to financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago.
Copyright © 2010 Nicolaas J Smith
Monday, 17 May 2010
It is not inflation, but, SA accountants doing the destroying
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
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
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
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