Money performs the following three functions:
1.Medium of exchange
2.Store of value
3.Unit of account
1. Medium of Exchange
Money has the basic function that it is a medium of exchange of equivalent real values at the moment of exchange. It overcomes the inconveniences of a barter economy where there must be a double coincidence of wants before a trade can take place. For a trade to take place in a barter economy one person must want exactly what the other person has to offer, at the exact time and place where it is offered.
In a monetary economy the real value of goods and services are measured in terms of money, the monetary medium of exchange, which is generally accepted to buy any other good or service. Without this function or attribute the invention cannot be money.
We use payment with money instead of barter to exchange real values in our economies in the transactions we enter into when we buy and sell goods, services, ideas, rights and any kind of property whether physical, virtual or intellectual. Money is the lifeblood of an economy even though it is continuously changing in real value. Without money the creation and exchange of real value in an economy would be severely restricted, as it would become a barter economy.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Tuesday 20 July 2010
Monday 19 July 2010
CPI + CIPPA = Zero destruction
The significant destruction of the real value of SA companies´ and banks´ retained profits never maintained constant, unknowingly done by SA accountants implementing their very destructive stable measuring unit assumption during low inflation would have been impossible to stop without the Consumer Price Index. The CPI and financial capital maintenance in units of constant purchasing power [Constant Item Purchasing Power Accounting or CIPPA] make it easy to fix the problem and to stop our accountants destroying about R167 billion each and every year in the SA real economy.
When our accountants freely start measuring financial capital maintenance in units of constant purchasing power as the IASB-authorized them to do 21 years ago in the Framework, Par 104 (a), then they will maintain all constant items generally never maintained in the SA economy for an unlimited period of time by updating them in terms of the change in the CPI instead of destroying their real values at a rate equal to the inflation rate as they are unknowingly doing right now. They would do that even in companies with no fixed assets at all. The "equivalent revaluable fixed assets requirement" is only applicable with the stable measuring unit assumption.
Copyright © 2010 Nicolaas J Smith
When our accountants freely start measuring financial capital maintenance in units of constant purchasing power as the IASB-authorized them to do 21 years ago in the Framework, Par 104 (a), then they will maintain all constant items generally never maintained in the SA economy for an unlimited period of time by updating them in terms of the change in the CPI instead of destroying their real values at a rate equal to the inflation rate as they are unknowingly doing right now. They would do that even in companies with no fixed assets at all. The "equivalent revaluable fixed assets requirement" is only applicable with the stable measuring unit assumption.
Copyright © 2010 Nicolaas J Smith
Friday 16 July 2010
Sine qua non
There is no CPI in a barter economy as there is no money in such an economy. The CPI is essential to update or index or inflation-adjust the real value of constant items in the economy with continuous measurement of financial capital maintenance in units of constant purchasing power being used as the fundamental model of accounting. The CPI is used to calculate the destruction of real value in constant items never maintained in low inflationary economies using HCA as the fundamental model of accounting.
The real value of money is automatically updated by inflation and deflation. Whereas the price of a constant item should change inversely with the change in the real value of money, the real value of money changes inversely with the change in the level of the CPI.
The CPI is the sine qua non in an inflationary and deflationary economy for correcting the problem created by the fact that money is the only universal unit of account that is not a stable unit of measure: it is applied without a fundamental constant. It would be impossible to measure inflation and deflation without the CPI. Consequently it would also have been impossible to stop the destruction of the real value in constant real value non-monetary items never maintained (generally equity of companies using HCA with no fixed assets or not sufficient revaluable fixed assets to maintain equity’s real value) during low inflation.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
The real value of money is automatically updated by inflation and deflation. Whereas the price of a constant item should change inversely with the change in the real value of money, the real value of money changes inversely with the change in the level of the CPI.
The CPI is the sine qua non in an inflationary and deflationary economy for correcting the problem created by the fact that money is the only universal unit of account that is not a stable unit of measure: it is applied without a fundamental constant. It would be impossible to measure inflation and deflation without the CPI. Consequently it would also have been impossible to stop the destruction of the real value in constant real value non-monetary items never maintained (generally equity of companies using HCA with no fixed assets or not sufficient revaluable fixed assets to maintain equity’s real value) during low inflation.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Thursday 15 July 2010
Units of constant purchasing power
We use the change in the CPI as a measure to calculate the destruction of real value in monetary items (which cannot be indexed) and constant items never maintained (thus being treated as monetary items) over time in an inflationary economy implementing the Historical Cost Accounting model as all companies in SA do. We also use the change in the CPI as a measure to calculate the creation of real value in monetary items (never indexed) and constant items never maintained (never decreased) over time in a deflationary economy that uses the HCA model – as all companies in Japan do.
The CPI can be used to measure financial capital maintenance in units of constant purchasing power and thus index (adjust nominal values for inflation’s destruction of or deflation´s increase in the real value of money which is the monetary unit of account) wages, salaries, pensions, all income statement items, issued share capital, retained profits, capital reserves, other shareholders´ equity items, trade debtors, trade creditors, taxes payable, taxes receivable and all other balance sheet constant items.
Copyright © 2010 Nicolaas J Smith
The CPI can be used to measure financial capital maintenance in units of constant purchasing power and thus index (adjust nominal values for inflation’s destruction of or deflation´s increase in the real value of money which is the monetary unit of account) wages, salaries, pensions, all income statement items, issued share capital, retained profits, capital reserves, other shareholders´ equity items, trade debtors, trade creditors, taxes payable, taxes receivable and all other balance sheet constant items.
Copyright © 2010 Nicolaas J Smith
Tuesday 13 July 2010
Consumer Price Index
“The consumer price index was first used in 1707. In 1925 it became institutionalized when the Second International Conference of Labour Statisticians, convened by the International Labour Organization, promulgated the first international standards of measurement.”
Agrekon, Vol 43, No 2 (June 2004), Vink, Kirsten and Woermann.
The CPI is a non-monetary index number measuring changes in the weighted average of prices quoted in the functional currency of a typical basket of consumer goods and services. The per cent change in the CPI is used to measure inflation. It is a price index determined by measuring the price of a standard group of goods and services representing a typical market basket of a typical urban consumer. It measures the change in average price for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). It can be used to measure changes in the cost of living. It is a measure estimating the average price of consumer goods and services purchased by a typical urban household.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Agrekon, Vol 43, No 2 (June 2004), Vink, Kirsten and Woermann.
The CPI is a non-monetary index number measuring changes in the weighted average of prices quoted in the functional currency of a typical basket of consumer goods and services. The per cent change in the CPI is used to measure inflation. It is a price index determined by measuring the price of a standard group of goods and services representing a typical market basket of a typical urban consumer. It measures the change in average price for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). It can be used to measure changes in the cost of living. It is a measure estimating the average price of consumer goods and services purchased by a typical urban household.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Friday 9 July 2010
Gold is something without intrinsic value
Hi,
Who said that?
Not me.
"Willem Buiter, a former professor at the London School of Economics who is now the chief economist of Citigroup, has called gold the subject of “the longest-lasting bubble in human history”. He says that he would not invest more than a sliver of his wealth “into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.”"
People often google for the "real value of money" and then visit this blog.
There are so many people who lament the fact that fiat money has no intrinsic value. They all call for going back to the gold standard.
Meanwhile, gold is also something without intrinsic value according to the chief economist of Citigroup and former professor at the London School of Economics.
Oh, what a wonderful place the market is. Without so many different view points, there would be no market at all. For every buyer there is a ..... yes, you guessed it right, a seller!!
So then, what is real value if neither gold nor fiat money has any intrinsic value?
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Who said that?
Not me.
"Willem Buiter, a former professor at the London School of Economics who is now the chief economist of Citigroup, has called gold the subject of “the longest-lasting bubble in human history”. He says that he would not invest more than a sliver of his wealth “into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.”"
People often google for the "real value of money" and then visit this blog.
There are so many people who lament the fact that fiat money has no intrinsic value. They all call for going back to the gold standard.
Meanwhile, gold is also something without intrinsic value according to the chief economist of Citigroup and former professor at the London School of Economics.
Oh, what a wonderful place the market is. Without so many different view points, there would be no market at all. For every buyer there is a ..... yes, you guessed it right, a seller!!
So then, what is real value if neither gold nor fiat money has any intrinsic value?
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Wednesday 7 July 2010
What backs money?
Our money today has no intrinsic value in itself. It is fiat money that is created by government fiat or decree. The government declares fiat money to be legal tender. In the past monetary coins were made of, for example, silver or gold which were valuable in themselves. The actual metal of which the coin was made had a real or intrinsic value supposedly equivalent to the nominal value inscribed on the coin. Today fiat money is a government decreed and legally recognized medium of exchange, unit of account and store of value in the economy.
Our money today has no intrinsic value as it is the natural product of the development of the concept of money through time. In the beginning a monetary unit was a full value metal coin. Later it was not a full value metal coin but it was the next best thing as far as economic agents were concerned: it was 100 per cent backed by gold. Today it has no intrinsic value and it is not backed by gold but is backed by the combined macroeconomic real value of all the underlying value systems in a particular economy or monetary union.
These underlying value systems include, but, are not limited to sound governance, a sound economic system, a sound manufacturing system, a sound industrial system, a sound monetary system, a sound political system, a sound social system, a sound educational system, a sound defence system, a sound health system, a sound security system, a sound legal system, a sound accounting system and so on, to name but a few.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Our money today has no intrinsic value as it is the natural product of the development of the concept of money through time. In the beginning a monetary unit was a full value metal coin. Later it was not a full value metal coin but it was the next best thing as far as economic agents were concerned: it was 100 per cent backed by gold. Today it has no intrinsic value and it is not backed by gold but is backed by the combined macroeconomic real value of all the underlying value systems in a particular economy or monetary union.
These underlying value systems include, but, are not limited to sound governance, a sound economic system, a sound manufacturing system, a sound industrial system, a sound monetary system, a sound political system, a sound social system, a sound educational system, a sound defence system, a sound health system, a sound security system, a sound legal system, a sound accounting system and so on, to name but a few.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
The FASB and IASB do not agree on capital maintenance
The FASB defines capital maintenance in its Concepts Statement No 5, Paragraphs 45 to 48.
According to the FASB there are only two concepts of capital
1.Financial capital
2.Physical capital
and consequently two concepts of capital maintenance
i Financial capital maintenance
ii Physical capital maintenance
The IASB states the same, but, defines THREE concepts of capital and THREE concepts of capital maintenance.
The IASB´s Concepts of Capital and Capital Maintenance are defined in the Framework, paragraphs 102 to 110.
The IASB states virtually the same as the FASB above. However, in Paragraph 104 (a) the IASB went one step further and stated twenty one years ago:
“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”
There is no mention of units of constant purchasing power in the FASB´s definition of financial capital maintenance.
The three concepts of capital defined in IFRS during low inflation and deflation are:
(A) Physical capital. See par. 102.
(B) Nominal financial capital. See par. 104 (a).
(C) Constant purchasing power financial capital. See par. 104 (a).
The three concepts of capital maintenance authorized in IFRS during low inflation and deflation are:
(1) Physical capital maintenance: optional during low inflation and deflation. Current Cost Accounting model prescribed by IFRS. See Par 106.
(2) Financial capital maintenance in nominal monetary units (Historical cost accounting): authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104 (a). Unfortunately, financial capital maintenance in nominal monetary units per se during inflation and deflation 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. This fallacy did not and does not stop all companies and entities to use Historical Cost Accounting as the generally accepted tradition basic accounting model for the last 700 years. Historical cost accountants overcame this fallacy by simply assuming that the unit of account (money) is perfectly stable as far as the measurement of most constant real value non-monetary items (shareholders equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc) is concerned. They do however admit that the unit of account is not stable only in the case of certain income statement items: e.g. salaries, wages, rentals, etc. They inflation-adjust these items annually.
(3) Financial capital maintenance in units of constant purchasing power: i.e. Constant Item Purchasing Power Accounting (CIPPA) authorized in IFRS but not prescribed—optional during low inflation and deflation. See the Framework, Par 104 (a). Only constant items are measured in units of constant purchasing power during low inflation and deflation. Net monetary gains and losses have to be accounted.
Prescribed in IAS 29 during hyperinflation; i.e. Constant Purchasing Power Accounting (CPPA): all non-monetary items – constant real value non-monetary items as well as variable real value non-monetary items – have to be measured in units of constant purchasing power during hyperinflation. Net monetary gains and losses have to be accounted.
Only financial capital maintenance in units of constant purchasing power [Constant Item Purchasing Power Accounting (CIPPA) during low inflation and deflation and Constant Purchasing Power Accounting (CPPA) during hyperinflation] per se can maintain the real value of financial capital constant during inflation and deflation in all entities that at least break even—ceteris paribus—for an indefinite period of time. This would happen whether these entities own revaluable fixed assets or not and without the requirement of more capital or additional retained profits to simply maintain the existing constant real value of existing shareholders´ equity constant.
There is thus a major difference between the FASB´s and the IASB´s definitions of the concepts of capital and the concepts of capital maintenance. It is their stated objective to converge their two Frameworks.
However, after working six years on their joint Conceptual Framework project, Kevin McBeth, the FASB Project Manager for the Measurement Phase stated:
“To date the Boards have not taken a decision on where, or even whether, those topics” (the concepts of capital and capital maintenance) “will be included in the converged framework."
The FASB afterwards clarified the matter as follows:
“We are of course familiar with paragraphs 102 – 110 of the IASB Framework as well as paragraphs 45-48 of FASB Concepts Statement 5. Although not labeled as such, capital maintenance ideas have been raised at various points in the discussions of measurement concepts and will continue to be discussed until the board makes decisions about measurement concepts. We do not know yet whether there will be a section in the yet-to-be-completed measurement concepts chapter labeled capital maintenance, but the concepts will almost certainly be discussed.”
This is after 6 years on the Project.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
According to the FASB there are only two concepts of capital
1.Financial capital
2.Physical capital
and consequently two concepts of capital maintenance
i Financial capital maintenance
ii Physical capital maintenance
The IASB states the same, but, defines THREE concepts of capital and THREE concepts of capital maintenance.
The IASB´s Concepts of Capital and Capital Maintenance are defined in the Framework, paragraphs 102 to 110.
The IASB states virtually the same as the FASB above. However, in Paragraph 104 (a) the IASB went one step further and stated twenty one years ago:
“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”
There is no mention of units of constant purchasing power in the FASB´s definition of financial capital maintenance.
The three concepts of capital defined in IFRS during low inflation and deflation are:
(A) Physical capital. See par. 102.
(B) Nominal financial capital. See par. 104 (a).
(C) Constant purchasing power financial capital. See par. 104 (a).
The three concepts of capital maintenance authorized in IFRS during low inflation and deflation are:
(1) Physical capital maintenance: optional during low inflation and deflation. Current Cost Accounting model prescribed by IFRS. See Par 106.
(2) Financial capital maintenance in nominal monetary units (Historical cost accounting): authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104 (a). Unfortunately, financial capital maintenance in nominal monetary units per se during inflation and deflation 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. This fallacy did not and does not stop all companies and entities to use Historical Cost Accounting as the generally accepted tradition basic accounting model for the last 700 years. Historical cost accountants overcame this fallacy by simply assuming that the unit of account (money) is perfectly stable as far as the measurement of most constant real value non-monetary items (shareholders equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc) is concerned. They do however admit that the unit of account is not stable only in the case of certain income statement items: e.g. salaries, wages, rentals, etc. They inflation-adjust these items annually.
(3) Financial capital maintenance in units of constant purchasing power: i.e. Constant Item Purchasing Power Accounting (CIPPA) authorized in IFRS but not prescribed—optional during low inflation and deflation. See the Framework, Par 104 (a). Only constant items are measured in units of constant purchasing power during low inflation and deflation. Net monetary gains and losses have to be accounted.
Prescribed in IAS 29 during hyperinflation; i.e. Constant Purchasing Power Accounting (CPPA): all non-monetary items – constant real value non-monetary items as well as variable real value non-monetary items – have to be measured in units of constant purchasing power during hyperinflation. Net monetary gains and losses have to be accounted.
Only financial capital maintenance in units of constant purchasing power [Constant Item Purchasing Power Accounting (CIPPA) during low inflation and deflation and Constant Purchasing Power Accounting (CPPA) during hyperinflation] per se can maintain the real value of financial capital constant during inflation and deflation in all entities that at least break even—ceteris paribus—for an indefinite period of time. This would happen whether these entities own revaluable fixed assets or not and without the requirement of more capital or additional retained profits to simply maintain the existing constant real value of existing shareholders´ equity constant.
There is thus a major difference between the FASB´s and the IASB´s definitions of the concepts of capital and the concepts of capital maintenance. It is their stated objective to converge their two Frameworks.
However, after working six years on their joint Conceptual Framework project, Kevin McBeth, the FASB Project Manager for the Measurement Phase stated:
“To date the Boards have not taken a decision on where, or even whether, those topics” (the concepts of capital and capital maintenance) “will be included in the converged framework."
The FASB afterwards clarified the matter as follows:
“We are of course familiar with paragraphs 102 – 110 of the IASB Framework as well as paragraphs 45-48 of FASB Concepts Statement 5. Although not labeled as such, capital maintenance ideas have been raised at various points in the discussions of measurement concepts and will continue to be discussed until the board makes decisions about measurement concepts. We do not know yet whether there will be a section in the yet-to-be-completed measurement concepts chapter labeled capital maintenance, but the concepts will almost certainly be discussed.”
This is after 6 years on the Project.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Tuesday 6 July 2010
It´s the real value, stupid!
Real value is the most important fundamental economic concept although it is the lesser studied and understood compared to the study of money. Money and real value are, unfortunately, not one and the same thing during inflation and deflation. Money and monetary items always have lower real values during inflation and higher real values during deflation under any accounting model.
Money is an invention. We can terminate its existence while real value is a fundamental economic concept, which exists, while we exist. Economies have already functioned without money. Barter economies operated without a medium of exchange. Cuba in the past bought oil from Venezuela and paid part in money and part by the provision of the services of sports coaches and medical doctors. Corn farmers in Argentina stored their corn in silos and paid for new pick-up trucks and other expensive mechanized farm implements with quantities of corn - the unit of real value Adam Smith described more than 230 years ago as a very stable unit of real value.
There will always be real value while the human race exists. The need for a medium of exchange, which is money’s first and basic function, is equally true. Money is one of the greatest human inventions of all time. It ranks on par with the invention of the wheel and the Gutenberg press in terms of importance to human development. Without money modern human development would have been very slow indeed.
Monetary items have the exact same attributes as money with the single exception that they are not actual bank notes and bank coins.
Non-monetary items are all items that are not monetary items.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Money is an invention. We can terminate its existence while real value is a fundamental economic concept, which exists, while we exist. Economies have already functioned without money. Barter economies operated without a medium of exchange. Cuba in the past bought oil from Venezuela and paid part in money and part by the provision of the services of sports coaches and medical doctors. Corn farmers in Argentina stored their corn in silos and paid for new pick-up trucks and other expensive mechanized farm implements with quantities of corn - the unit of real value Adam Smith described more than 230 years ago as a very stable unit of real value.
There will always be real value while the human race exists. The need for a medium of exchange, which is money’s first and basic function, is equally true. Money is one of the greatest human inventions of all time. It ranks on par with the invention of the wheel and the Gutenberg press in terms of importance to human development. Without money modern human development would have been very slow indeed.
Monetary items have the exact same attributes as money with the single exception that they are not actual bank notes and bank coins.
Non-monetary items are all items that are not monetary items.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Monday 5 July 2010
Time line for a Unit of Constant Purchasing Power
1707
The Consumer Price Index (CPI) was first used in 1707.
1896
The Market Gage Plan for stabilizing the purchasing power of the dollar was originated in 1896.
1918
The article “The Market Gage Dollar: A Unit of Constant Purchasing Power” was published in The American Economic Review.
The Market Gage Dollar: A Unit of Constant Purchasing Power
D.J. Tinnes
The American Economic Review, Vol. 8, No. 3 (Sep., 1918), pp. 579-584
1925
In 1925 the CPI became institutionalized when the Second International Conference of Labour Statisticians, convened by the International Labour Organization, promulgated the first international standards of measurement.
1989
The International Accounting Standards Board Committee authorized financial capital maintenance in units of constant purchasing in The Framework for the Preparation and Presentation of Financial Statements, Paragraph 104 (a) which states:
“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”
2004
“In October 2004, the FASB and IASB added to their agendas a joint project to develop an improved, common conceptual framework that builds on their existing frameworks (that is, the IASB’s Framework for the Preparation and Presentation of Financial Statements and the FASB’s Statements of Financial Accounting Concepts).” *
2007
The Boards held roundtable discussions on measurement during January and February 2007. *
Capital maintenance mentioned once in the summary.
“Measurement Basis Candidates (April 2007)
The Boards discussed issues related to the following primary measurement basis candidates:
1.Past entry price
2.Past exit price
3.Modified past amount
4.Current entry price
5.Current exit price
6.Current equilibrium price
7.Value in use
8.Future entry price
9.Future exit price.” *
Please note: A unit of constant purchasing power was not stated as a primary measurement basis candidate.
2008
“New Approach (November 2008)
The Boards discussed the beginnings of an approach to making standards-level decisions about measurement of assets and liabilities.
Five factors that might be considered in selecting from among alternative measurement bases are:
1.Value/flow weighting and separation.
2.Confidence level.
3.The measurement of items that generate cash flows together.
4.Cost-benefit” *
Please note: Nothing about a unit of constant purchasing power as a measurement basis.
2009
“Possible Measurement Approaches (January 2009)
On January 14, 2009, the Board discussed which possible measurement methods should be included in the conceptual framework and tentatively decided to include the following categories:
1.Actual or estimated current prices (which will become past prices in future periods if an item is not remeasured)
2.Actual past entry prices adjusted for interest accruals, depreciation, amortization, impairments, and similar things
3.Other prescribed computations based on discounted or undiscounted estimates of future cash flows (which would include value in use and fair-value-based measurements, among other things).” *
Please note: Nothing about a unit of constant purchasing power as a measurement basis.
“Draft Measurement Chapter of the Conceptual Framework (June 2009)
At the June 10, 2009, meeting, the Board discussed a draft measurement chapter for the conceptual framework that is based on measurement factors the Board has discussed in earlier meetings. Those factors are:
1.Method of value realization
2.Cost of preparing and using measures
3.Relative level of confidence in different measures
4.Use of consistent measures for similar items and items used together
5.Separability of changes in measures.” *
Please note: Nothing about a unit of constant purchasing power as a measurement basis.
*As per The Joint Conceptual Framework Project Update.
2010
On 1st July 2010 the US Financial Accounting Standards Board finally stated in email correspondence that the Concepts of Capital and Capital Maintenance will be discussed under the Measurement Phase of The Joint Conceptual Framework Project:
“We do not know yet whether there will be a section in the yet-to-be-completed measurement concepts chapter labeled capital maintenance, but the concepts will almost certainly be discussed.”
Units of constant purchasing power have not been stated once as a measurement basis during the first six years of The Joint Conceptual Framework Project, but, there is reason to expect that they will be discussed in the Measurement Phase in the future.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
The Consumer Price Index (CPI) was first used in 1707.
1896
The Market Gage Plan for stabilizing the purchasing power of the dollar was originated in 1896.
1918
The article “The Market Gage Dollar: A Unit of Constant Purchasing Power” was published in The American Economic Review.
The Market Gage Dollar: A Unit of Constant Purchasing Power
D.J. Tinnes
The American Economic Review, Vol. 8, No. 3 (Sep., 1918), pp. 579-584
1925
In 1925 the CPI became institutionalized when the Second International Conference of Labour Statisticians, convened by the International Labour Organization, promulgated the first international standards of measurement.
1989
The International Accounting Standards Board Committee authorized financial capital maintenance in units of constant purchasing in The Framework for the Preparation and Presentation of Financial Statements, Paragraph 104 (a) which states:
“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”
2004
“In October 2004, the FASB and IASB added to their agendas a joint project to develop an improved, common conceptual framework that builds on their existing frameworks (that is, the IASB’s Framework for the Preparation and Presentation of Financial Statements and the FASB’s Statements of Financial Accounting Concepts).” *
2007
The Boards held roundtable discussions on measurement during January and February 2007. *
Capital maintenance mentioned once in the summary.
“Measurement Basis Candidates (April 2007)
The Boards discussed issues related to the following primary measurement basis candidates:
1.Past entry price
2.Past exit price
3.Modified past amount
4.Current entry price
5.Current exit price
6.Current equilibrium price
7.Value in use
8.Future entry price
9.Future exit price.” *
Please note: A unit of constant purchasing power was not stated as a primary measurement basis candidate.
2008
“New Approach (November 2008)
The Boards discussed the beginnings of an approach to making standards-level decisions about measurement of assets and liabilities.
Five factors that might be considered in selecting from among alternative measurement bases are:
1.Value/flow weighting and separation.
2.Confidence level.
3.The measurement of items that generate cash flows together.
4.Cost-benefit” *
Please note: Nothing about a unit of constant purchasing power as a measurement basis.
2009
“Possible Measurement Approaches (January 2009)
On January 14, 2009, the Board discussed which possible measurement methods should be included in the conceptual framework and tentatively decided to include the following categories:
1.Actual or estimated current prices (which will become past prices in future periods if an item is not remeasured)
2.Actual past entry prices adjusted for interest accruals, depreciation, amortization, impairments, and similar things
3.Other prescribed computations based on discounted or undiscounted estimates of future cash flows (which would include value in use and fair-value-based measurements, among other things).” *
Please note: Nothing about a unit of constant purchasing power as a measurement basis.
“Draft Measurement Chapter of the Conceptual Framework (June 2009)
At the June 10, 2009, meeting, the Board discussed a draft measurement chapter for the conceptual framework that is based on measurement factors the Board has discussed in earlier meetings. Those factors are:
1.Method of value realization
2.Cost of preparing and using measures
3.Relative level of confidence in different measures
4.Use of consistent measures for similar items and items used together
5.Separability of changes in measures.” *
Please note: Nothing about a unit of constant purchasing power as a measurement basis.
*As per The Joint Conceptual Framework Project Update.
2010
On 1st July 2010 the US Financial Accounting Standards Board finally stated in email correspondence that the Concepts of Capital and Capital Maintenance will be discussed under the Measurement Phase of The Joint Conceptual Framework Project:
“We do not know yet whether there will be a section in the yet-to-be-completed measurement concepts chapter labeled capital maintenance, but the concepts will almost certainly be discussed.”
Units of constant purchasing power have not been stated once as a measurement basis during the first six years of The Joint Conceptual Framework Project, but, there is reason to expect that they will be discussed in the Measurement Phase in the future.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Friday 2 July 2010
Capital maintenance to be discussed in Measurement phase
The IASB and FASB are jointly updating and converging their Frameworks. The joint Conceptual Framework project has eight phases, one of which is the Measurement phase.
Buy the ebook for $2.99 or £1.53 or €2.68
The Boards held roundtable discussions on measurement during January and February 2007. No public Discussion Paper has yet been presented for comment.
Reading the reports about the items discussed thus far in the Measurement Phase I noticed that the discussions are almost entirely about variable real value non-monetary items (property, plant, equipment, stock, shares, financial instruments, etc.) and almost nothing about monetary items and constant real value non-monetary items (all items in the income statement, all items in shareholders equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc).
I emailed Kevin McBeth, the FASB Project Manager responsible for the Measurement Phase in the joint project and asked him in which phase the Concepts of Capital and Capital Maintenance are going to be discussed.
He responded by email:
“I cannot speak for the Boards with respect to your query. I can only say that early on in the measurement phase the staff suggested that capital and capital maintenance be discussed in the measurement phase, as it was in the original FASB Conceptual Framework. However, to date the Boards have not taken a decision on where, or even whether, those topics will be included in the converged framework.” (my bold lettering).
I then put the same question to the US Financial Accounting Standards Board.
Ron Lott, the FASB director who is responsible for the joint FASB-IASB Conceptual Framework project responded by email:
“We are of course familiar with paragraphs 102 – 110 of the IASB Framework as well as paragraphs 45-48 of FASB Concepts Statement 5. Although not labeled as such, capital maintenance ideas have been raised at various points in the discussions of measurement concepts and will continue to be discussed until the board makes decisions about measurement concepts.
We do not know yet whether there will be a section in the yet-to-be-completed measurement concepts chapter labeled capital maintenance, but the concepts will almost certainly be discussed.”
Kevin McBeth stated the following by email:
“I believe that you may have misunderstood the discussions the FASB and IASB have had about measurement. Those discussions have used examples of various items, some of which you refer to as variable real value non-monetary items. That may have led you to believe that some of your concerns are being ignored. However, the scope of the measurement phase of the Conceptual Framework project does not exclude the items you refer to as constant real value non-monetary items. The Boards are concerned about the effects of selecting measurements on all elements of the financial statements.
Much remains to be done on this project. Although future discussions probably will not use the terminology and classification scheme that you are espousing, there is reason to expect that they will address the items of concern to you.” (my bold lettering).
The Concepts of Capital and Capital Maintenance will thus be discussed in the Measurement Phase.
Kindest regards
Buy the ebook for $2.99 or £1.53 or €2.68
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Buy the ebook for $2.99 or £1.53 or €2.68
The Boards held roundtable discussions on measurement during January and February 2007. No public Discussion Paper has yet been presented for comment.
Reading the reports about the items discussed thus far in the Measurement Phase I noticed that the discussions are almost entirely about variable real value non-monetary items (property, plant, equipment, stock, shares, financial instruments, etc.) and almost nothing about monetary items and constant real value non-monetary items (all items in the income statement, all items in shareholders equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc).
I emailed Kevin McBeth, the FASB Project Manager responsible for the Measurement Phase in the joint project and asked him in which phase the Concepts of Capital and Capital Maintenance are going to be discussed.
He responded by email:
“I cannot speak for the Boards with respect to your query. I can only say that early on in the measurement phase the staff suggested that capital and capital maintenance be discussed in the measurement phase, as it was in the original FASB Conceptual Framework. However, to date the Boards have not taken a decision on where, or even whether, those topics will be included in the converged framework.” (my bold lettering).
I then put the same question to the US Financial Accounting Standards Board.
Ron Lott, the FASB director who is responsible for the joint FASB-IASB Conceptual Framework project responded by email:
“We are of course familiar with paragraphs 102 – 110 of the IASB Framework as well as paragraphs 45-48 of FASB Concepts Statement 5. Although not labeled as such, capital maintenance ideas have been raised at various points in the discussions of measurement concepts and will continue to be discussed until the board makes decisions about measurement concepts.
We do not know yet whether there will be a section in the yet-to-be-completed measurement concepts chapter labeled capital maintenance, but the concepts will almost certainly be discussed.”
Kevin McBeth stated the following by email:
“I believe that you may have misunderstood the discussions the FASB and IASB have had about measurement. Those discussions have used examples of various items, some of which you refer to as variable real value non-monetary items. That may have led you to believe that some of your concerns are being ignored. However, the scope of the measurement phase of the Conceptual Framework project does not exclude the items you refer to as constant real value non-monetary items. The Boards are concerned about the effects of selecting measurements on all elements of the financial statements.
Much remains to be done on this project. Although future discussions probably will not use the terminology and classification scheme that you are espousing, there is reason to expect that they will address the items of concern to you.” (my bold lettering).
The Concepts of Capital and Capital Maintenance will thus be discussed in the Measurement Phase.
Kindest regards
Buy the ebook for $2.99 or £1.53 or €2.68
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Thursday 1 July 2010
Bye bye CPI, Hello Dollarization
A non-barter economy needs an internal medium of exchange, i.e. money. The rate of change in the Consumer Price Index indicates the rate of inflation, i.e. the annual rate at which the real value of the your money is being destroyed inside your economy.
There are three fundamentally different basic economic items in the economy:
1. Monetary items: money held and items with an underlying monetary nature; basically money and money loans.
2. Variable real value non-monetary items; e.g. property, plant, equipment, raw materials, finished goods, etc.
3. Constant real value non-monetary items; e.g. salaries, wages, rentals, issued share capital, retained profits in companies, debtors, creditors, taxes payable, taxes receivable, etc.
1. Inflation automatically determines the real value of your money inside your economy; i.e. the value of money and other monetary items in the economy. You cannot inflation-adjust or update money or monetary items during the current financial period.
2. Variable item prices are ideally determined in a free market where demand and supply determine the prices of these items. Inflation is automatically taken into account in the process.
3. Constant item values (prices) e.g. salaries, wages, rentals, issued share capital, retained profits in companies, capital reserves, debtors, creditors, taxes payable, taxes receivable, etc., have to be inflation-adjusted on a monthly basis in an inflationary economy by applying the change in the CPI in order to keep the economy stable.
If a country does not calculate its CPI correctly, then it is playing with fire – like Argentina and Venezuela are doing.
The final solution in these cases are always Dollarization.
Why? Because you need a relatively stable unit of measure in an economy.
When you inflation-adjust all constant real value non-monetary items e.g. salaries, wages, rentals, issued share capital, retained profits in companies, capital reserves, debtors, creditors, taxes payable, taxes receivable, etc., on a monthly basis by means of the monthly change in the CPI, then you keep your economy stable because you measure you constant real value non-monetary economy in units of constant purchasing power – as Brazil did with a daily index supplied by the government during 30 years of high and hyperinflation.
For that you need a correctly calculated CPI.
When you mess around with your CPI which is a basic essential in your economy, then you are on your way to Dollarization.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
There are three fundamentally different basic economic items in the economy:
1. Monetary items: money held and items with an underlying monetary nature; basically money and money loans.
2. Variable real value non-monetary items; e.g. property, plant, equipment, raw materials, finished goods, etc.
3. Constant real value non-monetary items; e.g. salaries, wages, rentals, issued share capital, retained profits in companies, debtors, creditors, taxes payable, taxes receivable, etc.
1. Inflation automatically determines the real value of your money inside your economy; i.e. the value of money and other monetary items in the economy. You cannot inflation-adjust or update money or monetary items during the current financial period.
2. Variable item prices are ideally determined in a free market where demand and supply determine the prices of these items. Inflation is automatically taken into account in the process.
3. Constant item values (prices) e.g. salaries, wages, rentals, issued share capital, retained profits in companies, capital reserves, debtors, creditors, taxes payable, taxes receivable, etc., have to be inflation-adjusted on a monthly basis in an inflationary economy by applying the change in the CPI in order to keep the economy stable.
If a country does not calculate its CPI correctly, then it is playing with fire – like Argentina and Venezuela are doing.
The final solution in these cases are always Dollarization.
Why? Because you need a relatively stable unit of measure in an economy.
When you inflation-adjust all constant real value non-monetary items e.g. salaries, wages, rentals, issued share capital, retained profits in companies, capital reserves, debtors, creditors, taxes payable, taxes receivable, etc., on a monthly basis by means of the monthly change in the CPI, then you keep your economy stable because you measure you constant real value non-monetary economy in units of constant purchasing power – as Brazil did with a daily index supplied by the government during 30 years of high and hyperinflation.
For that you need a correctly calculated CPI.
When you mess around with your CPI which is a basic essential in your economy, then you are on your way to Dollarization.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Wednesday 30 June 2010
IASC Foundation to become IFRS Foundation on 1 July 2010
"IASC Foundation to become IFRS Foundation on 1 July 2010
On 1 July 2010 the IASC Foundation will formally change its name to the IFRS Foundation.
The change represents the next step in a process to simplify the names in use across the organisation announced following the conclusion of the Constitutional Review in 2010. The International Financial Reporting Interpretations Committee (IFRIC) and the Standards Advisory Council (SAC) have already been renamed as the IFRS Interpretations Committee and the IFRS Advisory Council, respectively.
The name of the International Accounting Standards Board (IASB) will remain unchanged."
© 2010 International Accounting Standards Committee Foundation
On 1 July 2010 the IASC Foundation will formally change its name to the IFRS Foundation.
The change represents the next step in a process to simplify the names in use across the organisation announced following the conclusion of the Constitutional Review in 2010. The International Financial Reporting Interpretations Committee (IFRIC) and the Standards Advisory Council (SAC) have already been renamed as the IFRS Interpretations Committee and the IFRS Advisory Council, respectively.
The name of the International Accounting Standards Board (IASB) will remain unchanged."
© 2010 International Accounting Standards Committee Foundation
Monetary items
International Financial Reporting Standards definitions:
1. IAS 21 Par 8 Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
So, if you buy a mobile phone on credit and pay it´s fixed price in two month´s time, then your mobile phone is a monetary item according to IFRS.
Obviously wrong.
2. IAS 29 Par 12 Monetary items are money held and items to be received or paid in money.
If you buy a mobile phone on credit and its fixed price is to be paid in two month´s time in money, then your mobile phone is a monetary item according to IFRS.
Obviously wrong.
The correct definition of monetary items:
Monetary items constitute the Money supply.
Updated on 11-05-2013
Trade debtors and trade creditors are constant real value non-monetary items.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
1. IAS 21 Par 8 Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
So, if you buy a mobile phone on credit and pay it´s fixed price in two month´s time, then your mobile phone is a monetary item according to IFRS.
Obviously wrong.
2. IAS 29 Par 12 Monetary items are money held and items to be received or paid in money.
If you buy a mobile phone on credit and its fixed price is to be paid in two month´s time in money, then your mobile phone is a monetary item according to IFRS.
Obviously wrong.
The correct definition of monetary items:
Monetary items constitute the Money supply.
Updated on 11-05-2013
Trade debtors and trade creditors are constant real value non-monetary items.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Tuesday 29 June 2010
Money versus real value
In practice, money has a specific real value for a month at a time in an internal economy or monetary union during low inflation and deflation. It changes every time the CPI changes. A monetary note or monetary coin has its nominal value permanently printed on it. Its nominal value does not and now cannot change.
Today monetary units are mostly created in economies subject to inflation. The Japanese economy is regularly in a state of deflation. The Japanese Yen increases in real value inside the Japanese economy during deflation.
Money refers to a monetary unit used within the economy or monetary union in which it is created. This does not refer to the foreign exchange value of a monetary unit which is not the subject of this book. The foreign exchange value of a monetary unit refers to its exchange value in relation to another monetary unit normally the monetary unit of another country or monetary region.
The real value of money would remain the same over time only at sustainable zero per cent annual inflation. Money would thus have an absolutely stable real value only at sustainable zero per cent annual inflation. This has never happened on a permanent basis in any economy. Now and then countries achieve zero annual inflation for a month or two at a time. But never for a sustainable period of a year or more.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Today monetary units are mostly created in economies subject to inflation. The Japanese economy is regularly in a state of deflation. The Japanese Yen increases in real value inside the Japanese economy during deflation.
Money refers to a monetary unit used within the economy or monetary union in which it is created. This does not refer to the foreign exchange value of a monetary unit which is not the subject of this book. The foreign exchange value of a monetary unit refers to its exchange value in relation to another monetary unit normally the monetary unit of another country or monetary region.
The real value of money would remain the same over time only at sustainable zero per cent annual inflation. Money would thus have an absolutely stable real value only at sustainable zero per cent annual inflation. This has never happened on a permanent basis in any economy. Now and then countries achieve zero annual inflation for a month or two at a time. But never for a sustainable period of a year or more.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Monday 28 June 2010
Measurement in units of constant purchasing power is not generally understood
This is what is stated in the book Principles of Generally Accepted Accounting Practice which reflects what is stated in the IASB´s Framework for the Preparation and Presentation of Financial Statements:
“2.7 Concepts of Capital and Capital Maintenance
The framework identifies two concepts of capital and capital maintenance, the selection of which should be based on users´ needs. It does not say how these needs should be established, nor does it consider the possibility that different user groups may prefer different concepts of capital maintenance.
Financial capital maintenance makes profit dependent upon end-of-period net assets exceeding beginning-of-period net assets (whether measured in nominal units of units of constant purchasing power).
Physical capital maintenance makes profit dependent upon end-of-period physical productive capacity (or operating capability) exceeding that of the beginning of the period.
In both cases, distributions to and contributions from owners must be excluded.
Physical capital maintenance requires the adoption of the current cost basis of measurement, whereas financial capital maintenance does not require the use of a particular basis of measurement, according to paragraph 106 of the framework.
The framework indicates that the principle difference between the two concepts is the treatment of the effect of the changes of prices of assets and liabilities of the enterprise. This is described in paragraphs 108-9 as follows:
* 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. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity.
* Under the concept of physical capital maintenance when capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. All price changes affecting the assets and liabilities of the entity are viewed as changes in the measurement of the physical productive capacity of the entity; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit.”
This is wrong in at least two aspects:
1. There are – in principle (remember that IFRS are principles based standards) – not only two, but three concepts of capital and capital maintenance authorized in IFRS.
2. Measurement in units of constant purchasing power does affect the economy.
The three concepts of capital defined in IFRS during low inflation and deflation are:
•(A) Physical capital. See paragraph 102 of the Framework.
•(B) Nominal financial capital. See paragraph 104 of the Framework.
•(C) Constant purchasing power financial capital. See paragraph 104 of the Framework.
The three concepts of capital maintenance authorized in IFRS during low inflation and deflation are:
•(1) Physical capital maintenance: optional during low inflation and deflation. Current Cost Accounting model prescribed by IFRS. See Par 106 of the Framework.
•(2) Financial capital maintenance in nominal monetary units (Historical cost accounting): authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104 (a) of the Framework. Financial capital maintenance in nominal monetary units per se during inflation and deflation 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.
•(3) Financial capital maintenance in units of constant purchasing power: authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104(a) of the Framework. Prescribed in IAS 29 during hyperinflation. Constant Purchasing Power Accounting. Only financial capital maintenance in units of constant purchasing power per se can maintain the real value of financial capital constant during inflation and deflation in all entities that at least break even—ceteris paribus—for an indefinite period of time. This would happen whether these entities own revaluable fixed assets or not and without the requirement of more capital or additional retained profits to simply maintain the existing constant real value of existing shareholders´ equity constant.
It is a Generally Accepted Accounting Practice that measurement in units of constant purchasing power does affect the economy (see the inflation-adjustment of salaries and wages, etc in the world economy).
Copyright © 2010 Nicolaas J Smith
“2.7 Concepts of Capital and Capital Maintenance
The framework identifies two concepts of capital and capital maintenance, the selection of which should be based on users´ needs. It does not say how these needs should be established, nor does it consider the possibility that different user groups may prefer different concepts of capital maintenance.
Financial capital maintenance makes profit dependent upon end-of-period net assets exceeding beginning-of-period net assets (whether measured in nominal units of units of constant purchasing power).
Physical capital maintenance makes profit dependent upon end-of-period physical productive capacity (or operating capability) exceeding that of the beginning of the period.
In both cases, distributions to and contributions from owners must be excluded.
Physical capital maintenance requires the adoption of the current cost basis of measurement, whereas financial capital maintenance does not require the use of a particular basis of measurement, according to paragraph 106 of the framework.
The framework indicates that the principle difference between the two concepts is the treatment of the effect of the changes of prices of assets and liabilities of the enterprise. This is described in paragraphs 108-9 as follows:
* 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. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity.
* Under the concept of physical capital maintenance when capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. All price changes affecting the assets and liabilities of the entity are viewed as changes in the measurement of the physical productive capacity of the entity; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit.”
This is wrong in at least two aspects:
1. There are – in principle (remember that IFRS are principles based standards) – not only two, but three concepts of capital and capital maintenance authorized in IFRS.
2. Measurement in units of constant purchasing power does affect the economy.
The three concepts of capital defined in IFRS during low inflation and deflation are:
•(A) Physical capital. See paragraph 102 of the Framework.
•(B) Nominal financial capital. See paragraph 104 of the Framework.
•(C) Constant purchasing power financial capital. See paragraph 104 of the Framework.
The three concepts of capital maintenance authorized in IFRS during low inflation and deflation are:
•(1) Physical capital maintenance: optional during low inflation and deflation. Current Cost Accounting model prescribed by IFRS. See Par 106 of the Framework.
•(2) Financial capital maintenance in nominal monetary units (Historical cost accounting): authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104 (a) of the Framework. Financial capital maintenance in nominal monetary units per se during inflation and deflation 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.
•(3) Financial capital maintenance in units of constant purchasing power: authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104(a) of the Framework. Prescribed in IAS 29 during hyperinflation. Constant Purchasing Power Accounting. Only financial capital maintenance in units of constant purchasing power per se can maintain the real value of financial capital constant during inflation and deflation in all entities that at least break even—ceteris paribus—for an indefinite period of time. This would happen whether these entities own revaluable fixed assets or not and without the requirement of more capital or additional retained profits to simply maintain the existing constant real value of existing shareholders´ equity constant.
It is a Generally Accepted Accounting Practice that measurement in units of constant purchasing power does affect the economy (see the inflation-adjustment of salaries and wages, etc in the world economy).
Copyright © 2010 Nicolaas J Smith
Friday 25 June 2010
Capital maintenance to be excluded from IFRS
Capital maintenance to be excluded from IFRS
Last updated on 4 May, 2012
The current International Accounting Standards Board´s Framework for the Preparation and Presentation of Financial Statements includes eight paragraphs dedicated to the Concepts of Capital and Capital Maintenance.
The Framework - with the exception of the Concepts of Capital and Capital Maintenance - is in the process of being updated. The Joint “Conceptual Framework project aims to update and refine the existing concepts to reflect the changes in markets, business practices and the economic environment that have occurred in the two or more decades since the concepts were first developed.
Its overall objective is to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged. Therefore the IASB and the US FASB (the boards) are undertaking the project jointly” according to the IASB.
The Concepts of Capital and Capital Maintenance are not included in the phases to be updated in the Joint Conceptual Framework Project.
Kevin McBeth, FASB Conceptual Framework Project Manager (Phase C Measurement) stated in email correspondence with me: "In the measurement phase the staff suggested that capital and capital maintenance be discussed in the measurement phase, as it was in the original FASB Conceptual Framework. However, to date the Boards have not taken a decision on where, or even whether, those topics will be included in the converged framework."
It is thus not clear where, or even whether the Concepts of Capital and Capital Maintenance as stated in the current Framework, Paragraphs 102 to 110 will be included in the new Conceptual Framework. According to Kevin McBeth, the Concepts of Capital and Capital Maintenance may even be excluded from the future converged Conceptual Framework.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Update:
The Capital Maintenance section of the original Framework (1989) was retained in the latest Conceptual Framework (2010).
Copyright © 2010-2012 Nicolaas J Smith
Last updated on 4 May, 2012
The current International Accounting Standards Board´s Framework for the Preparation and Presentation of Financial Statements includes eight paragraphs dedicated to the Concepts of Capital and Capital Maintenance.
The Framework - with the exception of the Concepts of Capital and Capital Maintenance - is in the process of being updated. The Joint “Conceptual Framework project aims to update and refine the existing concepts to reflect the changes in markets, business practices and the economic environment that have occurred in the two or more decades since the concepts were first developed.
Its overall objective is to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged. Therefore the IASB and the US FASB (the boards) are undertaking the project jointly” according to the IASB.
The Concepts of Capital and Capital Maintenance are not included in the phases to be updated in the Joint Conceptual Framework Project.
Kevin McBeth, FASB Conceptual Framework Project Manager (Phase C Measurement) stated in email correspondence with me: "In the measurement phase the staff suggested that capital and capital maintenance be discussed in the measurement phase, as it was in the original FASB Conceptual Framework. However, to date the Boards have not taken a decision on where, or even whether, those topics will be included in the converged framework."
It is thus not clear where, or even whether the Concepts of Capital and Capital Maintenance as stated in the current Framework, Paragraphs 102 to 110 will be included in the new Conceptual Framework. According to Kevin McBeth, the Concepts of Capital and Capital Maintenance may even be excluded from the future converged Conceptual Framework.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Update:
The Capital Maintenance section of the original Framework (1989) was retained in the latest Conceptual Framework (2010).
Copyright © 2010-2012 Nicolaas J Smith
Thursday 24 June 2010
Real value to be destroyed by SA accountants over the next 30 years - Part II
We can see from Table 3 what the difference would be when SA accountants freely decide to measure financial capital maintenance in units of constant purchasing power as the IASB-authorized them to do 21 years ago in the Framework, Par 104 (a).
The destruction of real value in constant items never maintained which SA accountants treat as monetary items would stop completely. There would only be real value destruction in the value of the Rand because of inflation. At 6.4% annual inflation only R124 billion in real value would be destroyed in the economy as a whole instead of the current about R324 billion over a period of 12 months. Over five years the cumulative total of real value destruction would drop from R1 620 billion to R 624 billion, over 10 years from R3 240 billion to R1 249 billion, over 20 years from R6 480 billion to R2 498 billion and over 30 years from R9 720 billion to R3 747 billion.
SA accountants unknowingly destroy existing real values in existing constant items never maintained with their very destructive stable measuring unit assumption. When they stop their stable measuring unit assumption they would knowingly maintain about R200 billion in existing constant item real values during every period of 12 months in the SA real economy amounting to R1 000 billion over 5 years, R 2 000 billion over 10 years, R4 000 over 20 years and R6 000 billion over 30 years. Boosting the SA real economy with these real values would make a significant difference to growth and employment in the economy over those periods.
Obviously a further reduction of inflation to an annual average of 4% would improve the SA monetary economy even more. Over 30 years it would maintain a further R1 140 billion in the monetary economy on top of the R6 000 to be gained when SA accountants freely switch over to financial capital maintenance in units of constant purchasing power.
There would never more be any destruction of real value in constant items never maintained because of a fundamentally flawed basic model of accounting under which SA accountants simply assume there is no such thing as inflation and never has been, only for the valuation of constant items, when they measure financial capital maintenance in units of constant purchasing power during low inflation. This is exactly the same as stating that there would never more be destruction of the real value of the Rand in the monetary economy at the level of R228 billion per annum (12 x 19 billion) as long as average annual inflation never again reaches 12%. There would be zero per cent real value destruction in constant items – all else being equal – with financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.
Stating that the SARB is responsible for limiting the destruction of the real value of the Rand and other monetary items by inflation to a maximum of 6 per cent or R117 billion per annum is the same as stating that the SARB is responsible for maintaining 94 percent or R1 808 billion of the R1 925 billion total per annum of the real value of the Rand and other monetary items in the SA monetary economy.
It is also the same as stating that SA accountants only unknowingly maintain 94 % or R3 133 billion per annum of the about R3 333 billion of the real value of constant items never maintained they unknowingly treat as monetary items in the SA constant item economy under the Historical Cost paradigm since they unknowingly destroy the remaining 6% or R200 billion annually of the real value of constant items never maintained. They would maintain the real value of the R3 333 billion in constant items constant forever in all SA companies at least breaking even – all else being equal – at all levels of inflation and deflation whether these companies have fixed assets or not.
It is evident from the above why Alan Greenspan stated that low inflation is what sustainable economic growth is built on.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
The destruction of real value in constant items never maintained which SA accountants treat as monetary items would stop completely. There would only be real value destruction in the value of the Rand because of inflation. At 6.4% annual inflation only R124 billion in real value would be destroyed in the economy as a whole instead of the current about R324 billion over a period of 12 months. Over five years the cumulative total of real value destruction would drop from R1 620 billion to R 624 billion, over 10 years from R3 240 billion to R1 249 billion, over 20 years from R6 480 billion to R2 498 billion and over 30 years from R9 720 billion to R3 747 billion.
SA accountants unknowingly destroy existing real values in existing constant items never maintained with their very destructive stable measuring unit assumption. When they stop their stable measuring unit assumption they would knowingly maintain about R200 billion in existing constant item real values during every period of 12 months in the SA real economy amounting to R1 000 billion over 5 years, R 2 000 billion over 10 years, R4 000 over 20 years and R6 000 billion over 30 years. Boosting the SA real economy with these real values would make a significant difference to growth and employment in the economy over those periods.
Obviously a further reduction of inflation to an annual average of 4% would improve the SA monetary economy even more. Over 30 years it would maintain a further R1 140 billion in the monetary economy on top of the R6 000 to be gained when SA accountants freely switch over to financial capital maintenance in units of constant purchasing power.
There would never more be any destruction of real value in constant items never maintained because of a fundamentally flawed basic model of accounting under which SA accountants simply assume there is no such thing as inflation and never has been, only for the valuation of constant items, when they measure financial capital maintenance in units of constant purchasing power during low inflation. This is exactly the same as stating that there would never more be destruction of the real value of the Rand in the monetary economy at the level of R228 billion per annum (12 x 19 billion) as long as average annual inflation never again reaches 12%. There would be zero per cent real value destruction in constant items – all else being equal – with financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.
Stating that the SARB is responsible for limiting the destruction of the real value of the Rand and other monetary items by inflation to a maximum of 6 per cent or R117 billion per annum is the same as stating that the SARB is responsible for maintaining 94 percent or R1 808 billion of the R1 925 billion total per annum of the real value of the Rand and other monetary items in the SA monetary economy.
It is also the same as stating that SA accountants only unknowingly maintain 94 % or R3 133 billion per annum of the about R3 333 billion of the real value of constant items never maintained they unknowingly treat as monetary items in the SA constant item economy under the Historical Cost paradigm since they unknowingly destroy the remaining 6% or R200 billion annually of the real value of constant items never maintained. They would maintain the real value of the R3 333 billion in constant items constant forever in all SA companies at least breaking even – all else being equal – at all levels of inflation and deflation whether these companies have fixed assets or not.
It is evident from the above why Alan Greenspan stated that low inflation is what sustainable economic growth is built on.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Wednesday 23 June 2010
Real value to be destroyed by SA accountants over the next 30 years - Part I
Link to tables
Table 2 above is a good estimate of the state of real value destruction in the SA economy at the moment: In the 12 month period ending in August, 2009, inflation actually destroyed R1 952.799 billion x 0.064 = R124.9 billion in the real value of the Rand in the SA monetary economy. At the same time SA accountants unknowingly destroyed about R200 billion in the real value of constant items never maintained which they treat as monetary items in the SA constant item economy. About R324 billion in real value was thus destroyed in the SA economy in the 12 months to August, 2009 by inflation and unknowingly by SA accountants implementing their very destructive stable measuring unit assumption.
If inflation stays at 6.4% for the next five years and SA accountants keep on unknowingly destroying the real values of constant items never maintained which they treat as monetary items with their very destructive stable measuring unit assumption then a cumulative total of R1 620 billion in real value would be destroyed in the SA economy – all else being equal. The cumulative totals of real value destruction under these circumstances for 10, 20 and 30 years would be R3 240 billion, R6 480 billion and R9 720 billion respectively. These are huge values of real value destruction in the SA economy. The part which SA accountants unknowingly, unnecessarily and unintentionally destroy can easily be eliminated completely.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Table 2 above is a good estimate of the state of real value destruction in the SA economy at the moment: In the 12 month period ending in August, 2009, inflation actually destroyed R1 952.799 billion x 0.064 = R124.9 billion in the real value of the Rand in the SA monetary economy. At the same time SA accountants unknowingly destroyed about R200 billion in the real value of constant items never maintained which they treat as monetary items in the SA constant item economy. About R324 billion in real value was thus destroyed in the SA economy in the 12 months to August, 2009 by inflation and unknowingly by SA accountants implementing their very destructive stable measuring unit assumption.
If inflation stays at 6.4% for the next five years and SA accountants keep on unknowingly destroying the real values of constant items never maintained which they treat as monetary items with their very destructive stable measuring unit assumption then a cumulative total of R1 620 billion in real value would be destroyed in the SA economy – all else being equal. The cumulative totals of real value destruction under these circumstances for 10, 20 and 30 years would be R3 240 billion, R6 480 billion and R9 720 billion respectively. These are huge values of real value destruction in the SA economy. The part which SA accountants unknowingly, unnecessarily and unintentionally destroy can easily be eliminated completely.
Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com
Copyright © 2010 Nicolaas J Smith
Friday 18 June 2010
They simply don´t understand it.
SA 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.
SA 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 already 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.
Copyright © 2010 Nicolaas J Smith
SA 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 already 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.
Copyright © 2010 Nicolaas J Smith
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