The change in the Consumer Price Index - which indicates the rate of inflation or deflation - is the only way we know what is happening with the real value of fiat money. This affects everyone in an economy. Messing around with the CPI should be a criminal offence punishable with a severe prison sentence.
See the following report on Bloomberg:
Economists and politicians, including former central bank President Alfonso Prat-Gay, have challenged official data since former President Nestor Kirchner started to replace personnel at the Buenos Aires-based statistics institute in January 2007.
Kirchner´s wife is the current Argentine President who will most probably be in South Africa if Maradonna´s team get to the final.
The lack of understanding the fact that accountants implementing Historical Cost Accounting is the cause of the destruction of the real value of constant real value non-monetary items (salaries, wages, issued share capital, retained earnings, all other items in shareholders´ equity, trade debtors, trade creditors, all other non-monetary receivables and all other non-monetary payables, etc) makes everone so concerned about inflation when, in fact, they can stop that unknowing, unnecessary and unintentional destruction by accountants when accountants 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.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Thursday, 17 June 2010
Wednesday, 16 June 2010
Two economic enemies
There are two economic enemies destroying real value systematically in the SA economy. The first enemy - inflation - is an economic process. The second enemy is a Generally Accepted Accounting Practice.
The second economic enemy is SA accountants´ free choice of traditional Historical Cost Accounting which includes their very destructive stable measuring unit assumption. This second process of systemic real value destruction manifests itself in accountants´ stable measuring unit assumption only in the constant item part of the SA non-monetary or real economy when they freely choose to measure financial capital maintenance in nominal monetary units (one of the three popular accounting fallacies on which current IFRS are based) when they implement the traditional HCA model in SA companies during low inflation as approved in the IASB´s Framework, Par 104 (a) which is compliant with IFRS.
Copyright © 2010 Nicolaas J Smith
The second economic enemy is SA accountants´ free choice of traditional Historical Cost Accounting which includes their very destructive stable measuring unit assumption. This second process of systemic real value destruction manifests itself in accountants´ stable measuring unit assumption only in the constant item part of the SA non-monetary or real economy when they freely choose to measure financial capital maintenance in nominal monetary units (one of the three popular accounting fallacies on which current IFRS are based) when they implement the traditional HCA model in SA companies during low inflation as approved in the IASB´s Framework, Par 104 (a) which is compliant with IFRS.
Copyright © 2010 Nicolaas J Smith
Tuesday, 15 June 2010
Two enemies in the economy
Constant real value non-monetary items never maintained constant 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.
Inflation is the primary enemy in the monetary economy and the central bank is the enemy of inflation.
The second enemy is the stable measuring unit assumption. Financial capital maintenance in units of constant purchasing power as originally authorized in IFRS in the Framework (1989), Par 104 (a) in 1989 is the enemy of the stable measuring unit assumption during low inflation and deflation. In principle, it is assumed that money, the monetary unit of measure, is perfectly stable during low inflation and deflation; that is, it is assumed that changes in its general purchasing power are not sufficiently important to require financial capital maintenance in units of constant purchasing power during low inflation and deflation where under the nominal constant real non-monetary values of all existing constant items in the real economy is updated by applying the monthly change in the annual CPI in order to maintain their constant real values constant forever in all entities that at least break even. The stable measuring unit assumption unknowingly, unintentionally and completely unnecessarily erodes the real values of existing constant items never maintained constant during low inflation to the amount of about R167 billion in the SA constant item economy each and every year while the HCA model is implemented and inflation remains at about 4.8% per annum.
The stable measuring unit assumption is a stealth enemy camouflaged by US GAAP and IFRS authorization which makes it IFRS compliant and the generally accepted accounting fallacy that the erosion of companies´ capital and profits is caused by inflation: hardly anyone knows or understands that when the very destructive stable measuring unit assumption is implemented, it unknowingly, unintentionally and unnecessarily erodes the existing constant real value of constant items never maintained constant at a rate equal to the annual rate of inflation under HCA during low inflation. Some people who already know about it claim that it makes no difference to the economy. The fact that the stable measuring unit assumption is unnecessarily eroding about R167 billion per annum in the SA real economy, and hundreds of billions of US Dollars in the world´s real economy, does make a difference.
Nicolaas Smith
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.
Inflation is the primary enemy in the monetary economy and the central bank is the enemy of inflation.
The second enemy is the stable measuring unit assumption. Financial capital maintenance in units of constant purchasing power as originally authorized in IFRS in the Framework (1989), Par 104 (a) in 1989 is the enemy of the stable measuring unit assumption during low inflation and deflation. In principle, it is assumed that money, the monetary unit of measure, is perfectly stable during low inflation and deflation; that is, it is assumed that changes in its general purchasing power are not sufficiently important to require financial capital maintenance in units of constant purchasing power during low inflation and deflation where under the nominal constant real non-monetary values of all existing constant items in the real economy is updated by applying the monthly change in the annual CPI in order to maintain their constant real values constant forever in all entities that at least break even. The stable measuring unit assumption unknowingly, unintentionally and completely unnecessarily erodes the real values of existing constant items never maintained constant during low inflation to the amount of about R167 billion in the SA constant item economy each and every year while the HCA model is implemented and inflation remains at about 4.8% per annum.
The stable measuring unit assumption is a stealth enemy camouflaged by US GAAP and IFRS authorization which makes it IFRS compliant and the generally accepted accounting fallacy that the erosion of companies´ capital and profits is caused by inflation: hardly anyone knows or understands that when the very destructive stable measuring unit assumption is implemented, it unknowingly, unintentionally and unnecessarily erodes the existing constant real value of constant items never maintained constant at a rate equal to the annual rate of inflation under HCA during low inflation. Some people who already know about it claim that it makes no difference to the economy. The fact that the stable measuring unit assumption is unnecessarily eroding about R167 billion per annum in the SA real economy, and hundreds of billions of US Dollars in the world´s real economy, does make a difference.
Nicolaas Smith
Copyright © 2010 Nicolaas J Smith
Thursday, 10 June 2010
It is not inflation doing the destroying
It is not inflation doing the destroying as the IASB, the FASB and SA accountants mistakenly believe.
It is SA accountants´ free choice of the very destructive stable measuring unit assumption during low inflation as it forms part of financial capital maintenance in nominal monetary units – the Historical Cost Accounting model – as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago.
SA accountants would knowingly maintain the real values of all constant real value non-monetary items constant (amounting to about R167 billion per year while inflation stays at about 4.8% per annum) 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.
This would be done without requiring extra money or extra retained profits simply to maintain the existing constant real value of existing constant real value non-monetary items constant.
Copyright © 2010 Nicolaas J Smith
It is SA accountants´ free choice of the very destructive stable measuring unit assumption during low inflation as it forms part of financial capital maintenance in nominal monetary units – the Historical Cost Accounting model – as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago.
SA accountants would knowingly maintain the real values of all constant real value non-monetary items constant (amounting to about R167 billion per year while inflation stays at about 4.8% per annum) 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.
This would be done without requiring extra money or extra retained profits simply to maintain the existing constant real value of existing constant real value non-monetary items constant.
Copyright © 2010 Nicolaas J Smith
Wednesday, 9 June 2010
SA accountants are clueless about the destructive nature of the stable measuring unit assumption.
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) equally in the monetary economy. 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 assets 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.
Copyright © 2010 Nicolaas J Smith
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 assets 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.
Copyright © 2010 Nicolaas J Smith
Tuesday, 8 June 2010
Two processes of systemic real value destruction in the SA economy.
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 4.8 % per annum, at the moment (value date: April, 2010 CPI 111.3). 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 April, 2010 amounted to about R100 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.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
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 4.8 % per annum, at the moment (value date: April, 2010 CPI 111.3). 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 April, 2010 amounted to about R100 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.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Monday, 7 June 2010
Inflation normally rises to the upper level of the inflation targeting range
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 the coin is that the real value of the national monetary unit is slowly being destroyed by inflation over time.
A central bank’s primary task being a high degree of 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.” P4
“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?” P11
Rethinking Monetary Policy, IMF Staff Position Note, Olivier Blanchard, Giovanni Dell´Ariccia and Paulo Mauro, Feb, 2010.
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 a high degree 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% of the real value of constant items never maintained, e.g. companies´ capital and profits never maintained with sufficient revaluable fixed assets, per annum and 51% over 35 years time with their very destructive stable measuring unit assumption. This unknowing and unnecessary 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.” SARB.
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
A central bank’s primary task being a high degree of 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.” P4
“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?” P11
Rethinking Monetary Policy, IMF Staff Position Note, Olivier Blanchard, Giovanni Dell´Ariccia and Paulo Mauro, Feb, 2010.
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 a high degree 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% of the real value of constant items never maintained, e.g. companies´ capital and profits never maintained with sufficient revaluable fixed assets, per annum and 51% over 35 years time with their very destructive stable measuring unit assumption. This unknowing and unnecessary 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.” SARB.
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, 3 June 2010
It is not what it appears to be.
When we discuss, write about, talk about or analyze our functional currency, we call it money and describe it using 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 too.
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.
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.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Wednesday, 2 June 2010
3 to 6% inflation is not absolute "price stability"
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 and non-monetary real value destruction in the SA economy 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 4.8 % annual inflation destroyed about R100 billion of the real value of the Rand over the past 12 months to the end of April, 2010. A one per cent decrease in inflation would maintain about R20 billion per annum of real value only in the SA monetary economy and about R33 billion in the non-monetary economy as a result of the reduction in the level of unknowing destruction by SA accountants in the real value of constant real value non-monetary items never maintained in consequence of the implementation of their very destructive stable measuring unit assumption as it forms part of traditional Historical Cost Accounting; i.e. financial capital maintenance in nominal monetary units during low inflation as authorized in International Financial Reporting Standards in the Framework, Par 104 (a) in 1989.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
“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 and non-monetary real value destruction in the SA economy 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 4.8 % annual inflation destroyed about R100 billion of the real value of the Rand over the past 12 months to the end of April, 2010. A one per cent decrease in inflation would maintain about R20 billion per annum of real value only in the SA monetary economy and about R33 billion in the non-monetary economy as a result of the reduction in the level of unknowing destruction by SA accountants in the real value of constant real value non-monetary items never maintained in consequence of the implementation of their very destructive stable measuring unit assumption as it forms part of traditional Historical Cost Accounting; i.e. financial capital maintenance in nominal monetary units during low inflation as authorized in International Financial Reporting Standards in the Framework, Par 104 (a) in 1989.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Tuesday, 1 June 2010
Hyperinflation in SA? Only with Malema.
In Zimbabwe hyperinflation reached such high levels that the real value of the country’s entire money supply was wiped out.
Towards the end of the hyperinflationary spiral the real value of the ZimDollar halved every 24.7 hours according to Steve Hanke from Cato Institute.
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.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Towards the end of the hyperinflationary spiral the real value of the ZimDollar halved every 24.7 hours according to Steve Hanke from Cato Institute.
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.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Monday, 31 May 2010
Real Value Table
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
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
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
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