It is generally the case that SA companies and banks do not invest 100% of the updated original real values of all contributions to their shareholders´ equity in fixed assets, e.g. land and buildings or other fixed property which are or can be revalued via the Revaluation Reserve to compensate for the real value shortfall in shareholders´ equity under Historical Cost Accounting rules during low inflation.
SA accountants thus generally unnecessarily, unknowingly and unintentionally destroy the real value of SA banks´ and companies´ reported retained earnings and other constant items never maintained at a rate equal to the annual rate of inflation (conservatively estimated at about R200 billion per annum) – all else being equal – when they choose to measure financial capital maintenance in nominal monetary units and implement their very destructive stable measuring unit assumption as part of the real value destroying traditional HCA model for an unlimited period of time during indefinite inflation.
SA accountants unnecessarily, unknowingly and unintentionally in this manner generally destroyed 93.3% of the real value of reported retained earnings that remained in SA banks and companies from January 1981 to Nov 2009 when they maintain their very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Valuing the three economic items
Economic items are economic values. They are made up of monetary items, variable items and constant items. SA accountants value, record, classify, summarize and report transactions and events involving economic items in terms of the depreciating Rand.
(1) The real value of the Rand and all other monetary items in the SA monetary economy generally changes every month during low inflation. Months of zero annual inflation are rare and generally not sustained over a significant period of time.
(2) The real value of variable items may change all the time, e.g. the price of foreign exchange, precious metals, quoted shares, commodities, properties, goods, services, etc.
(3) The real values of constant items stay the same (or are suppose to stay the same) all the time – all else being equal; e.g. salaries, wages, rentals, issued share capital, reported retained profits, shareholders equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc.
SA accountants have to take all three scenarios occurring simultaneously into account over time when they account economic activity and prepare and present financial reports.
Kindest regards,
Nicolaas Smith
Tuesday, 19 January 2010
Monday, 18 January 2010
Accountants value everything they account
Accountants value everything they account
"The debate concerning whether value accounting or price-level accounting should prevail is not on point, because in the long run both should prevail."
Harvey Kapnick, Chairman, Arthur Andersen & Company, “Value Based Accounting – Evolution or Revolution”, Sax Lecture, 1976.
"Accounting is a measurement instrument."
David Mosso, Ex Member of the US Financial Accounting Standards Board
Economic items have economic value. Accountants deal with economic items all the time. They deal with economic values when they account economic items and prepare financial reports. Accountants value economic items when they account economic transactions and events. Financial reporting does not simply report on what took place. Accountants are not just scorekeepers of what happened in the past. Accountants value everything they account in the economy.
Many accountants still think that accounting is just a recording exercise during which they merely record past economic activity. That is not correct. Accountants value economic items when they account them. Accounting is the continuous maintenance of the constant purchasing power of capital and the provision of continuously updated decision-useful financial information about the reporting entity to capital providers and other users. It involves the valuing, recording, classifying, summarizing and reporting of an entity’s economic activity.
Accounting for inflation
In response to a letter to the editor of the Financial Mail, Accounting for Inflation published on 9th May, 2008 in which I stated:
“SA accountants freely destroy real value in the real economy with their assumption that the rand is perfectly stable only for the purpose of accounting constant value items, and have absolutely no concern about the negative impact this has on sustainable economic growth.”
The IASB is dead right that financial capital maintenance can be measured in units of constant purchasing power during low inflation, hyperinflation and deflation. The IASB has my vote.
The statements that HC financial reporting does not destroy wealth and that there is no substance in my suggestion that value destruction would end if SA accountants abandon the stable measuring unit assumption have no substance as can be unequivocally proven in the case of SA banks´ and companies´ shareholders equity values never maintained in SA´s low inflationary economy.
The real values of SA banks´ and companies´ shareholders´ equity are unnecessarily, unknowingly and unintentionally being destroyed by their accountants at a rate equal to the annual rate of inflation when their boards of directors choose to apply the stable measuring unit assumption (one of the two very popular accounting fallacies authorized by the IASB) for an unlimited period of time during indefinite inflation when these entities do not own sufficient fixed assets that are or can be revalued via the Revaluation Reserve to compensate for the real value shortfall in these items under the HCA model.
Copyright © 2005 - 2010 Nicolaas J Smith
"The debate concerning whether value accounting or price-level accounting should prevail is not on point, because in the long run both should prevail."
Harvey Kapnick, Chairman, Arthur Andersen & Company, “Value Based Accounting – Evolution or Revolution”, Sax Lecture, 1976.
"Accounting is a measurement instrument."
David Mosso, Ex Member of the US Financial Accounting Standards Board
Economic items have economic value. Accountants deal with economic items all the time. They deal with economic values when they account economic items and prepare financial reports. Accountants value economic items when they account economic transactions and events. Financial reporting does not simply report on what took place. Accountants are not just scorekeepers of what happened in the past. Accountants value everything they account in the economy.
Many accountants still think that accounting is just a recording exercise during which they merely record past economic activity. That is not correct. Accountants value economic items when they account them. Accounting is the continuous maintenance of the constant purchasing power of capital and the provision of continuously updated decision-useful financial information about the reporting entity to capital providers and other users. It involves the valuing, recording, classifying, summarizing and reporting of an entity’s economic activity.
Accounting for inflation
In response to a letter to the editor of the Financial Mail, Accounting for Inflation published on 9th May, 2008 in which I stated:
“SA accountants freely destroy real value in the real economy with their assumption that the rand is perfectly stable only for the purpose of accounting constant value items, and have absolutely no concern about the negative impact this has on sustainable economic growth.”
The IASB is dead right that financial capital maintenance can be measured in units of constant purchasing power during low inflation, hyperinflation and deflation. The IASB has my vote.
The statements that HC financial reporting does not destroy wealth and that there is no substance in my suggestion that value destruction would end if SA accountants abandon the stable measuring unit assumption have no substance as can be unequivocally proven in the case of SA banks´ and companies´ shareholders equity values never maintained in SA´s low inflationary economy.
The real values of SA banks´ and companies´ shareholders´ equity are unnecessarily, unknowingly and unintentionally being destroyed by their accountants at a rate equal to the annual rate of inflation when their boards of directors choose to apply the stable measuring unit assumption (one of the two very popular accounting fallacies authorized by the IASB) for an unlimited period of time during indefinite inflation when these entities do not own sufficient fixed assets that are or can be revalued via the Revaluation Reserve to compensate for the real value shortfall in these items under the HCA model.
Copyright © 2005 - 2010 Nicolaas J Smith
To be or not to be a constant item, that is the question
The specific choice of measuring financial capital maintenance in units of constant purchasing power (the Constant ITEM Purchasing Power Accounting model) at all levels of inflation and deflation as contained in the Framework for the Preparation and Presentation of Financial Statements Par 104 (a), was approved by the International Accounting Standards Board’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.
“In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8."
IAS Plus, Deloitte. Date: 15 th January, 2010 http://www.iasplus.com/standard/framewk.htm
IAS 8 Par 11 states that managers, in exercising their judgement, have to first apply the rules and regulations in IFRS and interpretations by the International Financial Reporting Interpretations Committee which deal with similar and related items and, only secondly the measurement concepts, criteria for recognition and definitions for expenses, income, liabilities and assets as stated in the Framework.
There are no applicable IFRS or Interpretations regarding the valuation of the constant real value non-monetary items issued share capital, reported retained earnings, capital reserves, share premium account, share discount account, the concepts of capital, the capital maintenance concepts, the determination of profit/loss concept, etc. The measurement concepts and direct and indirect definitions in the Framework are thus applicable. There are Standards related to the constant items trade debtors, trade creditors, other non-monetary payables, other non-monetary receivables, deferred tax assets, deferred tax liabilities, taxes payable and taxes receivable. In terms of IAS 8.11 the Standards take precedence over the Framework in the case of these items.
Conflict
There is a conflict with the capital maintenance concept in the Framework where IFRS treat constant real value non-monetary items like monetary items or variable items. The only way the financial capital concept of continuously measuring financial capital maintenance in units of constant purchasing power in terms of the provisions in the Framework, Par 104 (a) can be correctly implemented, is with the correct treatment of all constant real value non-monetary items as constant items and not as monetary or variable items. The incorrect treatment of constant items as monetary or variable items may lead to the incorrect calculation of the Net Monetary Loss or Gain from holding monetary items as required when measuring financial capital maintenance in units of constant purchasing power in terms of the Framework, Par 104 (a) and as required in IAS 29.
Examples
Examples of constant real value non-monetary items in today’s economy are income statement constant items, e.g. salaries, wages, rentals, all other items in the income statement as well as balance sheet constant items, e.g. reported retained earnings, issued share capital, capital reserves, share issue premiums, share issue discounts, provisions, capital reserves, all other shareholder’s equity items, trade debtors, trade creditors, other non-monetary debtors and creditors, taxes payable and receivable, deferred tax assets and liabilities, dividends payable and receivable, royalties payable and receivable, all other non-monetary payables and receivables, etc.
Kindest regards,
Nicolaas Smith
“In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8."
IAS Plus, Deloitte. Date: 15 th January, 2010 http://www.iasplus.com/standard/framewk.htm
IAS 8 Par 11 states that managers, in exercising their judgement, have to first apply the rules and regulations in IFRS and interpretations by the International Financial Reporting Interpretations Committee which deal with similar and related items and, only secondly the measurement concepts, criteria for recognition and definitions for expenses, income, liabilities and assets as stated in the Framework.
There are no applicable IFRS or Interpretations regarding the valuation of the constant real value non-monetary items issued share capital, reported retained earnings, capital reserves, share premium account, share discount account, the concepts of capital, the capital maintenance concepts, the determination of profit/loss concept, etc. The measurement concepts and direct and indirect definitions in the Framework are thus applicable. There are Standards related to the constant items trade debtors, trade creditors, other non-monetary payables, other non-monetary receivables, deferred tax assets, deferred tax liabilities, taxes payable and taxes receivable. In terms of IAS 8.11 the Standards take precedence over the Framework in the case of these items.
Conflict
There is a conflict with the capital maintenance concept in the Framework where IFRS treat constant real value non-monetary items like monetary items or variable items. The only way the financial capital concept of continuously measuring financial capital maintenance in units of constant purchasing power in terms of the provisions in the Framework, Par 104 (a) can be correctly implemented, is with the correct treatment of all constant real value non-monetary items as constant items and not as monetary or variable items. The incorrect treatment of constant items as monetary or variable items may lead to the incorrect calculation of the Net Monetary Loss or Gain from holding monetary items as required when measuring financial capital maintenance in units of constant purchasing power in terms of the Framework, Par 104 (a) and as required in IAS 29.
Examples
Examples of constant real value non-monetary items in today’s economy are income statement constant items, e.g. salaries, wages, rentals, all other items in the income statement as well as balance sheet constant items, e.g. reported retained earnings, issued share capital, capital reserves, share issue premiums, share issue discounts, provisions, capital reserves, all other shareholder’s equity items, trade debtors, trade creditors, other non-monetary debtors and creditors, taxes payable and receivable, deferred tax assets and liabilities, dividends payable and receivable, royalties payable and receivable, all other non-monetary payables and receivables, etc.
Kindest regards,
Nicolaas Smith
IFRS authorize both destruction and maintenance of real value in SA
Maintaining the real values of all constant items in the SA economy where our accountants use the double entry accounting model to account economic activity is only possible with the real value maintaining Constant ITEM Purchasing Power Accounting (CIPPA) model as authorized by the IASB twenty years ago in the Framework, Par 104 (a) (which is applicable in the absence of specific IFRS) during non-hyperinflationary periods.
Maintaining the real values of all constant items stable in the SA economy is not possible, at present, while SA accountants implement the real value destroying traditional HCA model under which they apply the very destructive stable measuring unit assumption as authorized by the IASB in the Framework, Par 104 (a) in 1989. SA accountants unnecessarily, unknowingly and unintentionally destroy real value on a massive scale in the SA real economy when they measure financial capital maintenance in nominal monetary units as part of traditional HCA.
This unnecessary, unknowing and unintentional destruction by SA accountants in the real value of constant items not fully or never maintained amounts to about R200 billion per annum for as long as they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation. When they freely choose to measure financial capital maintenance in units of constant purchasing power, amazingly also authorized by the IASB in the Framework, Par 104 (a) in 1989 they will knowingly maintain that plus/minus R200 billion in real value per annum by not destroying existing reported constant item real value of, for example, reported retained profits, with their very destructive stable measuring unit assumption during low inflation.
The real value of reported retained profits can be maintained constant during low inflation and deflation under IFRS but not under HCA although the HC model is also authorized under IFRS. Both the destruction and the maintenance of the real value of reported retained profits and all other reported constant items never maintained during low inflation are, paradoxically, authorized under IFRS. Accountants are free to choose the one or the other. Both are compliant with IFRS.
Kindest regards,
Nicolaas Smith
Maintaining the real values of all constant items stable in the SA economy is not possible, at present, while SA accountants implement the real value destroying traditional HCA model under which they apply the very destructive stable measuring unit assumption as authorized by the IASB in the Framework, Par 104 (a) in 1989. SA accountants unnecessarily, unknowingly and unintentionally destroy real value on a massive scale in the SA real economy when they measure financial capital maintenance in nominal monetary units as part of traditional HCA.
This unnecessary, unknowing and unintentional destruction by SA accountants in the real value of constant items not fully or never maintained amounts to about R200 billion per annum for as long as they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation. When they freely choose to measure financial capital maintenance in units of constant purchasing power, amazingly also authorized by the IASB in the Framework, Par 104 (a) in 1989 they will knowingly maintain that plus/minus R200 billion in real value per annum by not destroying existing reported constant item real value of, for example, reported retained profits, with their very destructive stable measuring unit assumption during low inflation.
The real value of reported retained profits can be maintained constant during low inflation and deflation under IFRS but not under HCA although the HC model is also authorized under IFRS. Both the destruction and the maintenance of the real value of reported retained profits and all other reported constant items never maintained during low inflation are, paradoxically, authorized under IFRS. Accountants are free to choose the one or the other. Both are compliant with IFRS.
Kindest regards,
Nicolaas Smith
Friday, 15 January 2010
SA accounting based on two popular accounting fallacies.
Today South African accountants unknowingly destroy the real value of existing reported constant items never maintained when they implement their very destructive stable measuring unit assumption during low inflation because they generally measure financial capital maintenance in SA banks and companies in nominal monetary units implementing the HCA model based on those two very popular IASB approved and authorized accounting fallacies.
Accountants at Johannesburg Stock Exchange listed companies as well as accountants at unlisted SA companies who prepare their financial statements in terms of International Financial Reporting Standards generally choose to measure financial capital maintenance in nominal monetary units, the accounting fallacy as approved by the International Accounting Standards Board in the Framework for the Preparation and Presentation of Financial Statements, Par 104 (a) which they apply in the absence of specific IFRS relating to the concept of capital, the concept of capital maintenance, the concept of profit /loss determination and in the absence of specific IFRS for the valuation of specific constants items, e.g. Shareholders´ Equity items, etc.
The Framework, Par 104 (a) states:
“Financial capital maintenance can be measured either in nominal monetary units or units of constant purchasing power.”
Astonishingly, the IASB approved and authorized both real value destroying HCA stated in terms of the very popular accounting fallacies as well as its only perfect antidote (the antidote is perfect, not the resulting values) during inflation, hyperinflation and deflation, in one and the same statement in 1989. It is impossible to maintain the real value of capital stable by measuring it in nominal monetary units per se during inflation, hyperinflation or deflation. The IFRS statement that financial capital maintenance can be measured in nominal monetary units is only true at sustainable zero inflation – a monetary mode never achieved in the past and maybe never to be achieved in the future. The IASB statement is a fallacy under the three general monetary modes: inflation, hyperinflation and deflation.
Accountants at JSE listed companies have to prepare financial reports in terms of IFRS and thus have to make the choice presented to them in the Framework, Par 104 (a) while accountants at unlisted SA companies can prepare financial statements either in terms of IFRS or South African Generally Accepted Accounting Practice. The boards of directors of SA companies listed on the JSE - which are all implementing IFRS - actually have to make the choice; their accountants being the accounting experts, obviously, advise them about the appropriate choice to make. Financial capital maintenance in nominal monetary units is a popular accounting fallacy authorized by the IASB in the Framework, Par 104 (a) in 1989. It is, however, not an appropriate accounting policy for SA companies during inflation, hyperinflation and deflation.
Unfortunately most, if not all, SA boards of directors choose financial capital maintenance in nominal monetary units as part of the real value destroying HCA model which includes the very destructive stable measuring unit assumption – another popular accounting fallacy authorized by the IASB in 1989 – in SA´s low inflationary economy. This results in their accountants unnecessarily, unknowingly and unintentionally destroying about R200 billion in the real value of existing reported constant items never or not fully maintained in the SA constant item economy each and every year.
Accountants preparing financial reports of unlisted SA companies in terms of SA GAAP generally also choose to measure financial capital maintenance in nominal monetary units and implement the very destructive HCA model since it is the generally accepted traditional accounting model.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Accountants at Johannesburg Stock Exchange listed companies as well as accountants at unlisted SA companies who prepare their financial statements in terms of International Financial Reporting Standards generally choose to measure financial capital maintenance in nominal monetary units, the accounting fallacy as approved by the International Accounting Standards Board in the Framework for the Preparation and Presentation of Financial Statements, Par 104 (a) which they apply in the absence of specific IFRS relating to the concept of capital, the concept of capital maintenance, the concept of profit /loss determination and in the absence of specific IFRS for the valuation of specific constants items, e.g. Shareholders´ Equity items, etc.
The Framework, Par 104 (a) states:
“Financial capital maintenance can be measured either in nominal monetary units or units of constant purchasing power.”
Astonishingly, the IASB approved and authorized both real value destroying HCA stated in terms of the very popular accounting fallacies as well as its only perfect antidote (the antidote is perfect, not the resulting values) during inflation, hyperinflation and deflation, in one and the same statement in 1989. It is impossible to maintain the real value of capital stable by measuring it in nominal monetary units per se during inflation, hyperinflation or deflation. The IFRS statement that financial capital maintenance can be measured in nominal monetary units is only true at sustainable zero inflation – a monetary mode never achieved in the past and maybe never to be achieved in the future. The IASB statement is a fallacy under the three general monetary modes: inflation, hyperinflation and deflation.
Accountants at JSE listed companies have to prepare financial reports in terms of IFRS and thus have to make the choice presented to them in the Framework, Par 104 (a) while accountants at unlisted SA companies can prepare financial statements either in terms of IFRS or South African Generally Accepted Accounting Practice. The boards of directors of SA companies listed on the JSE - which are all implementing IFRS - actually have to make the choice; their accountants being the accounting experts, obviously, advise them about the appropriate choice to make. Financial capital maintenance in nominal monetary units is a popular accounting fallacy authorized by the IASB in the Framework, Par 104 (a) in 1989. It is, however, not an appropriate accounting policy for SA companies during inflation, hyperinflation and deflation.
Unfortunately most, if not all, SA boards of directors choose financial capital maintenance in nominal monetary units as part of the real value destroying HCA model which includes the very destructive stable measuring unit assumption – another popular accounting fallacy authorized by the IASB in 1989 – in SA´s low inflationary economy. This results in their accountants unnecessarily, unknowingly and unintentionally destroying about R200 billion in the real value of existing reported constant items never or not fully maintained in the SA constant item economy each and every year.
Accountants preparing financial reports of unlisted SA companies in terms of SA GAAP generally also choose to measure financial capital maintenance in nominal monetary units and implement the very destructive HCA model since it is the generally accepted traditional accounting model.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
IASB should not authorize IFRS based on massively destructive fallacies
There was only one systemic process of real value destruction operating only in the monetary economy before the invention of the Historical Cost Accounting model. The economic process of inflation only destroyed the real value of depreciating money and other depreciating monetary items equally throughout the monetary economy at that time as it does today in economies subject to inflation and hyperinflation.
There was no simultaneous second systemic process, as we experience it today, whereby Historical Cost accountants unknowingly, unnecessarily and unintentionally destroy massive amounts of real value of existing reported constant items never or not fully maintained, e.g. reported retained profits, only in the constant item economy because they implement their very destructive stable measuring unit assumption (one of the two IASB approved very popular accounting fallacies) during low inflation and hyperinflation.
This includes the unknowing destruction by HC accountants of the real values of issued share capital, share premium account and non-distributable reserves in companies without sufficient fixed assets that are or can be revalued via the Revaluation Reserve to maintain these items´ real values under HCA during low inflation. The reason was that the real value destroying traditional Historical Cost Accounting model which includes the very destructive stable measuring unit assumption and financial capital maintenance in nominal monetary units (the very popular accounting fallacies authorized by the IASB in the Framework, Par 104 a in 1989) was not yet invented at that time.
The International Accounting Standards Board is a private, independent accounting standards board. The mission of the IASB is to develop a single set of global accounting standards. The IASB cooperates with national accounting standard boards for international convergence of accounting standards. IASB should not authorize IFRS based on massively destructive accounting fallacies, e.g. financial capital maintenance in nominal monetary units per se and the stable measuring unit assumption during low inflation which cost the SA economy about R200 billion in real value unknowingly destroyed in constant items never maintained by SA accountants implementing HCA in the SA economy each and every year. Currently the IASB is doing that in the Framework, Par 104 (a) which states that financial capital maintenance can be measured in nominal monetary units.
Kindest regards,
Nicolaas Smith
There was no simultaneous second systemic process, as we experience it today, whereby Historical Cost accountants unknowingly, unnecessarily and unintentionally destroy massive amounts of real value of existing reported constant items never or not fully maintained, e.g. reported retained profits, only in the constant item economy because they implement their very destructive stable measuring unit assumption (one of the two IASB approved very popular accounting fallacies) during low inflation and hyperinflation.
This includes the unknowing destruction by HC accountants of the real values of issued share capital, share premium account and non-distributable reserves in companies without sufficient fixed assets that are or can be revalued via the Revaluation Reserve to maintain these items´ real values under HCA during low inflation. The reason was that the real value destroying traditional Historical Cost Accounting model which includes the very destructive stable measuring unit assumption and financial capital maintenance in nominal monetary units (the very popular accounting fallacies authorized by the IASB in the Framework, Par 104 a in 1989) was not yet invented at that time.
The International Accounting Standards Board is a private, independent accounting standards board. The mission of the IASB is to develop a single set of global accounting standards. The IASB cooperates with national accounting standard boards for international convergence of accounting standards. IASB should not authorize IFRS based on massively destructive accounting fallacies, e.g. financial capital maintenance in nominal monetary units per se and the stable measuring unit assumption during low inflation which cost the SA economy about R200 billion in real value unknowingly destroyed in constant items never maintained by SA accountants implementing HCA in the SA economy each and every year. Currently the IASB is doing that in the Framework, Par 104 (a) which states that financial capital maintenance can be measured in nominal monetary units.
Kindest regards,
Nicolaas Smith
Thursday, 14 January 2010
Two accounting fallacies authorized by the IASB
Constant real value non-monetary items
"Inflation destroys the assumption that money is stable which is the basis of classic accountancy. In such circumstances, historical values registered in accountancy books become heterogeneous amounts measured in different units. The use of such data under traditional accounting methods without previous correction makes no sense and leads to results that are void of meaning. (Massone, 1981a. p.6)"
The Taxation of Income from Business and Capital in Colombia: Fiscal Reform in the Developing World, By Charles E. McLure, John Mutti, Victor Thuronyi, George R. Zodrow, Contributor Charles E. McLure, Published by Duke University Press, 1990, ISBN 0822309254, 9780822309253, Page 259
Constant items are non-monetary items with constant real values over time.
The double entry accounting model was first comprehensively codified by the Italian Franciscan monk, Luca Pacioli in his book Summa de arithmetica, geometria, proportioni et proportionalita, published in Venice in 1494.
SA accountants use the Consumer Price Index to maintain the real values of certain – not all - income statement constant items, e.g. salaries, wages, rentals, etc constant during low inflationary periods. They value them in units of constant purchasing power while they generally implement the real value destroying Historical Cost Accounting model which is based on two IASB authorized accounting fallacies, namely, financial capital maintenance in nominal monetary units and the very destructive stable measuring unit assumption during inflation.
Accountants are required by the International Accounting Standards Board to implement IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation. They have to restate their HC or current cost financial statements by applying the CPI during hyperinflation. They have to value all non-monetary items (both variable and constant items) in units of constant purchasing power by applying the CPI at the period end date. Companies in a hyperinflationary economy can only use IAS 29 to maintain the real value of non-monetary times stable when their tax authorities accept the restated values for the calculation of taxes due.
“Regarding to tax regulation, I want to emphasize that tax regulation required restatement of assets and liabilities according to inflation (in terms of IAS 29) for the date of 31.12.2003 but taxes were not taken according to restated values in 2003. In 2004, financial statements were restated and taxes were taken based on restated values.”
Cemal KÜÇÜKSÖZEN, Ph.D, Head of Accounting Standards Department, Capital Markets Board of Turkey
Constant Purchasing Power inflation accounting as defined in IAS 29 is a complete price-level inflation accounting model where under ALL variable and constant real value non-monetary items are inflation-adjusted by means of the CPI during hyperinflation.
Only the Constant ITEM Purchasing Power Accounting model, as approved by the IASB in the Framework for the Preparation and Presentation of Financial Statements, Par 104 (a) in 1989, enables accountants to maintain the real values of all income statement and balance sheet constant items constant during inflation and deflation.
The IASB´s Framework, Par 104 (a) states:
“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
The IASB thus, amazingly, authorized and approved the two very popular accounting fallacies and their only and perfect antidote in the exact same statement in 1989. The antidote – financial capital maintenance in units of constant purchasing power – is perfect during inflation, hyperinflation and deflation; the values may not be.
Kindest regards,
Nicolaas Smith
"Inflation destroys the assumption that money is stable which is the basis of classic accountancy. In such circumstances, historical values registered in accountancy books become heterogeneous amounts measured in different units. The use of such data under traditional accounting methods without previous correction makes no sense and leads to results that are void of meaning. (Massone, 1981a. p.6)"
The Taxation of Income from Business and Capital in Colombia: Fiscal Reform in the Developing World, By Charles E. McLure, John Mutti, Victor Thuronyi, George R. Zodrow, Contributor Charles E. McLure, Published by Duke University Press, 1990, ISBN 0822309254, 9780822309253, Page 259
Constant items are non-monetary items with constant real values over time.
The double entry accounting model was first comprehensively codified by the Italian Franciscan monk, Luca Pacioli in his book Summa de arithmetica, geometria, proportioni et proportionalita, published in Venice in 1494.
SA accountants use the Consumer Price Index to maintain the real values of certain – not all - income statement constant items, e.g. salaries, wages, rentals, etc constant during low inflationary periods. They value them in units of constant purchasing power while they generally implement the real value destroying Historical Cost Accounting model which is based on two IASB authorized accounting fallacies, namely, financial capital maintenance in nominal monetary units and the very destructive stable measuring unit assumption during inflation.
Accountants are required by the International Accounting Standards Board to implement IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation. They have to restate their HC or current cost financial statements by applying the CPI during hyperinflation. They have to value all non-monetary items (both variable and constant items) in units of constant purchasing power by applying the CPI at the period end date. Companies in a hyperinflationary economy can only use IAS 29 to maintain the real value of non-monetary times stable when their tax authorities accept the restated values for the calculation of taxes due.
“Regarding to tax regulation, I want to emphasize that tax regulation required restatement of assets and liabilities according to inflation (in terms of IAS 29) for the date of 31.12.2003 but taxes were not taken according to restated values in 2003. In 2004, financial statements were restated and taxes were taken based on restated values.”
Cemal KÜÇÜKSÖZEN, Ph.D, Head of Accounting Standards Department, Capital Markets Board of Turkey
Constant Purchasing Power inflation accounting as defined in IAS 29 is a complete price-level inflation accounting model where under ALL variable and constant real value non-monetary items are inflation-adjusted by means of the CPI during hyperinflation.
Only the Constant ITEM Purchasing Power Accounting model, as approved by the IASB in the Framework for the Preparation and Presentation of Financial Statements, Par 104 (a) in 1989, enables accountants to maintain the real values of all income statement and balance sheet constant items constant during inflation and deflation.
The IASB´s Framework, Par 104 (a) states:
“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
The IASB thus, amazingly, authorized and approved the two very popular accounting fallacies and their only and perfect antidote in the exact same statement in 1989. The antidote – financial capital maintenance in units of constant purchasing power – is perfect during inflation, hyperinflation and deflation; the values may not be.
Kindest regards,
Nicolaas Smith
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