Accountants are taught that there are only two fundamentally different items in the economy, namely, monetary and non-monetary items.
That is wrong.
There are three fundamentally different items in the economy:
1. Monetary items
2. Variable real value non-monetary items
3. Constant real value non-monetary items
Monetary items are money held and items with an underlying monetary nature.
Examples of monetary items in today’s economy are bank notes and coins, bank loans, bank account balances, treasury bills, commercial bonds, government bonds, mortgage bonds, student loans, car loans, consumer loans, credit card loans, notes payable, notes receivable, etc.
To be continued ......
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Tuesday 7 July 2009
Monday 6 July 2009
The impact of inflation on the man in the street.
Milton Friedman correctly stated that "inflation is always and everwhere a monetary phenomenon." Inflation can only destroy the real value of the Rand and other monetary items like the real value of home loans originally made to home buyers. As inflation destroys the real value of the original loan amount at a higher rate than provided for by the bank at the time the loan was agreed, the bank has to increase interest on the loan to recover the updated real value of the loan plus a real profit margin.
Since inflation is only a monetary phenomenon, it is impossible - by definition - for inflation to have any effect on non-monetary items. Inflation has no effect on the real value of non-monetary items.
Inflation can only destroy the real value of money (the Rand) and other monetary items. Monetary items are money (Rands) held and items with an underlying monetary nature.
Non-monetary items are all items that are not monetary items.
Non-monetary items are sub-divided in variable real value non-monetary items and constant real value non-monetary items. Variable items are non-monetary items with variable real values over time. Variable items are items like property, plant, equipment, shares, inventory, finished goods, etc.
Variable items are correctly valued by our accountants in terms of SA Gaap or IFRS at for example fair value, market value, net realizable value, present value, recoverable value, etc. There are no unresovled problems (except the current developments in fair value) with the valuation of variable items.
Constant items are non-monetary items with constant real values over time. Constant items are items like issued share capital, retained earnings, share premium, share discount, capital reserves, all other items in shareholders´ equity, trade debtors, trade creditors, deferred tax assets and deferred tax liabilities, taxes payable, taxes receivable, all items in the profit and loss account, etc.
Our accountants value constant items at Historical Cost: i.e. they do not update their real values. The reason for this is that they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured either in nominal monetary units or in units of constant purchasing power."
Our accountants all choose nominal monetary units; i.e they all do their accounts based on the historical cost basis: i.e. they apply the stable measuring unit assumption. They assume that changes in the Rand´s purchasing power are not significant enough to require changes to the real values of constant items. They basically assume the Rand is perfectly stable ONLY for the valuation of the above constant items.
So what happens?
They correctly value certain income statement items in units of constant purchasing power. They thus inflation-adjust salaries, wages, rentals, etc annually like all other countries during low inflation.
BUT, when a SA company does not have revaluable property with an updated real value or hidden holding gains exactly equal to the original real value of all contributions to shareholders´ equity where they can continuously revalue the property or have sufficient holding gains to maintain shareholders´ equity´s real value, they destroy the real value of shareholders´ equity at a rate equal to the annual rate of inflation - because the Rand is the unstable unit of account in our economy - when these values are never updated or there is a lack of revaluable variable items during indefinite inflation.
It is not inflation destroying, for example R3 billion in the real value of ABSA´s retained earnings last year and the same this year. It is ABSA´s accountants valuing their retained earnings balance at historical cost because ABSA´s board of directors selected the historical cost basis for doing their accounts. ABSA´s board of directors can change their mind and select to measure financial capital maintenance in units of constant purchasing power as they can freely do in terms of the IASB´s Framework, Par. 104 (a) which is compliant with IFRS.
What will happen when ABSA do that? They will maintain about R3 billion in the real value of their retained earnings each and every year for an unlimited period of time - ceteris paribus - instead of destroying about that amount annually for an unlimited period of time - ceteris paribus - as they unknowingly and unintentionally did last year and as they unknowingly and unintentionally do this year..
What does this mean for the man in the street?
Our accountants unknowingly destroy about R200 billion annually in the SA real economy in this manner. This is a conservative estimate. When SA rejects the stable measuring unit assumption and implements finacial capital maintenance in units of constant purchasing power as provided for 20 years ago by the IASB in the Framework, Par. 104 (a) about R200 billion will be maintained in our real economy for an unlimited period of time. This is compliant with IFRS - see Par. 104 (a).
A boost of about R200 billion per annum for an unlimited period of time in the SA economy will lead to a stronger economy, more jobs, maintenance of investment capital in banks and companies, etc.
This will obviously benefit the man in the street.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Since inflation is only a monetary phenomenon, it is impossible - by definition - for inflation to have any effect on non-monetary items. Inflation has no effect on the real value of non-monetary items.
Inflation can only destroy the real value of money (the Rand) and other monetary items. Monetary items are money (Rands) held and items with an underlying monetary nature.
Non-monetary items are all items that are not monetary items.
Non-monetary items are sub-divided in variable real value non-monetary items and constant real value non-monetary items. Variable items are non-monetary items with variable real values over time. Variable items are items like property, plant, equipment, shares, inventory, finished goods, etc.
Variable items are correctly valued by our accountants in terms of SA Gaap or IFRS at for example fair value, market value, net realizable value, present value, recoverable value, etc. There are no unresovled problems (except the current developments in fair value) with the valuation of variable items.
Constant items are non-monetary items with constant real values over time. Constant items are items like issued share capital, retained earnings, share premium, share discount, capital reserves, all other items in shareholders´ equity, trade debtors, trade creditors, deferred tax assets and deferred tax liabilities, taxes payable, taxes receivable, all items in the profit and loss account, etc.
Our accountants value constant items at Historical Cost: i.e. they do not update their real values. The reason for this is that they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured either in nominal monetary units or in units of constant purchasing power."
Our accountants all choose nominal monetary units; i.e they all do their accounts based on the historical cost basis: i.e. they apply the stable measuring unit assumption. They assume that changes in the Rand´s purchasing power are not significant enough to require changes to the real values of constant items. They basically assume the Rand is perfectly stable ONLY for the valuation of the above constant items.
So what happens?
They correctly value certain income statement items in units of constant purchasing power. They thus inflation-adjust salaries, wages, rentals, etc annually like all other countries during low inflation.
BUT, when a SA company does not have revaluable property with an updated real value or hidden holding gains exactly equal to the original real value of all contributions to shareholders´ equity where they can continuously revalue the property or have sufficient holding gains to maintain shareholders´ equity´s real value, they destroy the real value of shareholders´ equity at a rate equal to the annual rate of inflation - because the Rand is the unstable unit of account in our economy - when these values are never updated or there is a lack of revaluable variable items during indefinite inflation.
It is not inflation destroying, for example R3 billion in the real value of ABSA´s retained earnings last year and the same this year. It is ABSA´s accountants valuing their retained earnings balance at historical cost because ABSA´s board of directors selected the historical cost basis for doing their accounts. ABSA´s board of directors can change their mind and select to measure financial capital maintenance in units of constant purchasing power as they can freely do in terms of the IASB´s Framework, Par. 104 (a) which is compliant with IFRS.
What will happen when ABSA do that? They will maintain about R3 billion in the real value of their retained earnings each and every year for an unlimited period of time - ceteris paribus - instead of destroying about that amount annually for an unlimited period of time - ceteris paribus - as they unknowingly and unintentionally did last year and as they unknowingly and unintentionally do this year..
What does this mean for the man in the street?
Our accountants unknowingly destroy about R200 billion annually in the SA real economy in this manner. This is a conservative estimate. When SA rejects the stable measuring unit assumption and implements finacial capital maintenance in units of constant purchasing power as provided for 20 years ago by the IASB in the Framework, Par. 104 (a) about R200 billion will be maintained in our real economy for an unlimited period of time. This is compliant with IFRS - see Par. 104 (a).
A boost of about R200 billion per annum for an unlimited period of time in the SA economy will lead to a stronger economy, more jobs, maintenance of investment capital in banks and companies, etc.
This will obviously benefit the man in the street.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Accountants´ unstable unit of account is the only unit of measure that is not an absolute value
Accountants regard all non-monetary items stated at Historical Cost, whether they are variable real value non-monetary HC items or constant real value non-monetary HC items to be fundamentally the same, namely, non-monetary items – or, items that are not monetary items - when they implement the very destructive stable measuring unit assumption as part of the traditional HCA model during non-hyperinflationary periods.
This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always destroys the real value of money over time. It is thus impossible for money to be stable in real value during inflation.
On the other hand, inflation has no effect on the real value of non-monetary items.
The unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation. This means that the unit of measure in accounting is not a stable unit of measure during inflation and deflation.
Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measure that is not an absolute value. All other generally accepted units of measure are absolute values, e.g. metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.
This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always destroys the real value of money over time. It is thus impossible for money to be stable in real value during inflation.
On the other hand, inflation has no effect on the real value of non-monetary items.
The unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation. This means that the unit of measure in accounting is not a stable unit of measure during inflation and deflation.
Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measure that is not an absolute value. All other generally accepted units of measure are absolute values, e.g. metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.
Saturday 4 July 2009
Accountants generally choose the very destructive stable measuring unit assumption
It is generally accepted that the economy is divided in two parts: the monetary economy and the non-monetary or real economy. It is also generally accepted that there are two basic economic items in the economy: monetary items and non-monetary items. Monetary items are money held and items with an underlying monetary nature. Non-monetary items are all items that are not monetary items.
No distinction is generally made between the valuation of variable real value non-monetary items, e.g. property, plant, equipment, inventory, etc valued at Historical Cost and constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, Shareholders´ Equity and most items in the income statement also valued at Historical Cost.
This is the result of the fact that the economy is based on the Historical Cost paradigm. Historical Cost is the traditional measurement basis in accounting. It is thus generally accepted for accountants to choose to implement the very destructive stable measuring unit assumption during non-hyperinflationary periods.
One of the basic principles in accounting is “The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”
Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.
Non-monetary items are not all fundamentally the same. Non-monetary items are subdivided into variable real value non-monetary items and constant real value non-monetary items. The three fundamentally different basic economic items are, in fact, monetary items, variable items and constant items although it is generally accepted that there are only two basic economic items, namely, monetary and non-monetary items.
No distinction is generally made between the valuation of variable real value non-monetary items, e.g. property, plant, equipment, inventory, etc valued at Historical Cost and constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, Shareholders´ Equity and most items in the income statement also valued at Historical Cost.
This is the result of the fact that the economy is based on the Historical Cost paradigm. Historical Cost is the traditional measurement basis in accounting. It is thus generally accepted for accountants to choose to implement the very destructive stable measuring unit assumption during non-hyperinflationary periods.
One of the basic principles in accounting is “The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”
Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.
Non-monetary items are not all fundamentally the same. Non-monetary items are subdivided into variable real value non-monetary items and constant real value non-monetary items. The three fundamentally different basic economic items are, in fact, monetary items, variable items and constant items although it is generally accepted that there are only two basic economic items, namely, monetary and non-monetary items.
Thursday 2 July 2009
ABSA accountants are busy unknowingly destroying about R3 billion right now
SA banks are safe according to the SARB
SA banks may be adequately capitalized as per the SARB.
What the SARB can not deny is that the banks´ accountants are unknowingly destroying the real value of their Retained Earnings at 8% per annum because their Boards of Directors choose to implement the very destructive stable measuring unit assumption during low inflation.
ABSA´s accountants are currently unknowingly destroying about R3 billion in the real value of ABSA´s Retained Earnings during 2009. I dare the SARB or anyone to prove me wrong.
I will still calculate the unintentional real value destruction in the other banks by their accountants because their Boards chose the Historical Cost basis.
They destroyed R3.338 billion during 2008. They will carry on at that rate - ceteris paribus - while they carry on acting dumb and making as if there is no such thing as inflation as far as the valuation of constant items are concerned.
Inflation has no effect on the real value of non-monetary items. Inflation can only and does only destroy the real value of the Rand. Nothing else. However, the Rand is the unstable unit of account in the SA economy. ONLY accountants ASSUME it is stable ONLY for the valuing of constant items - nothing else.
The real values of constant items never maintained are unknowingly being destroyed by SA accountants choosing to implement the real value destroying Historical Cost Accounting model which includes the very destructive stable measuring unit assumption.
When they choose to measure financial capital maintenance in units of constant purchasing power as authorized in the IASB´s Framework, Par. 104 (a) twenty years ago and which is compliant with IFRS, they will stop this unintentional destruction. Instead they will maintain those values for an unlimited period of time and the SA economy will be boosted by about R200 billion per annum for an indefinite period of time.
So, it is not inflation doing the destroying in constant items - it is our accountants implementing the stable measuring unit assumption.
I dare anyone - including SARB - to prove me wrong.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
SA banks may be adequately capitalized as per the SARB.
What the SARB can not deny is that the banks´ accountants are unknowingly destroying the real value of their Retained Earnings at 8% per annum because their Boards of Directors choose to implement the very destructive stable measuring unit assumption during low inflation.
ABSA´s accountants are currently unknowingly destroying about R3 billion in the real value of ABSA´s Retained Earnings during 2009. I dare the SARB or anyone to prove me wrong.
I will still calculate the unintentional real value destruction in the other banks by their accountants because their Boards chose the Historical Cost basis.
They destroyed R3.338 billion during 2008. They will carry on at that rate - ceteris paribus - while they carry on acting dumb and making as if there is no such thing as inflation as far as the valuation of constant items are concerned.
Inflation has no effect on the real value of non-monetary items. Inflation can only and does only destroy the real value of the Rand. Nothing else. However, the Rand is the unstable unit of account in the SA economy. ONLY accountants ASSUME it is stable ONLY for the valuing of constant items - nothing else.
The real values of constant items never maintained are unknowingly being destroyed by SA accountants choosing to implement the real value destroying Historical Cost Accounting model which includes the very destructive stable measuring unit assumption.
When they choose to measure financial capital maintenance in units of constant purchasing power as authorized in the IASB´s Framework, Par. 104 (a) twenty years ago and which is compliant with IFRS, they will stop this unintentional destruction. Instead they will maintain those values for an unlimited period of time and the SA economy will be boosted by about R200 billion per annum for an indefinite period of time.
So, it is not inflation doing the destroying in constant items - it is our accountants implementing the stable measuring unit assumption.
I dare anyone - including SARB - to prove me wrong.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Wednesday 1 July 2009
Normal Rands and Rands of constant purchasing power are not the same.
When SA accountants choose to measure financial capital maintenance in real value maintaining units of constant purchasing power (the CIPPA model) – as they can freely do in terms of the IASB´s Framework, Par. 104 (a) - they will maintain all constant item real values over time including Shareholders´ Equity in companies that at least break even – all else being equal - whether companies have fixed property or other variable items to revalue or not.
Variable Items
SA accountants value variable real value non-monetary items in terms of IFRS or SA GAAP. “Listed companies use IFRS and the unlisted companies could use either IFRS or Statements of GAAP.”
IAS 16 deals with Property Plant & Equipment. It allows two methods of valuation or measurement; either historical cost or revaluation based on fair value. The charge for depreciation relates to the carrying value, whether historical cost or fair value. It is not acceptable under HCA to index up the original cost of an asset by reference to subsequent inflation or to base the depreciation charge on that indexed amount.
There are similar requirements in respect of intangible assets (IAS 38) and inventories (IAS 2).
IAS 39 requires fair values to be applied in valuing investments and derivative financial instruments. A historical cost basis of accounting is not acceptable for these items.
The real values of variable real value non-monetary items, e.g. property, are not destroyed when accountants value them at Historical Cost in terms of IFRS or SA GAAP. These items will be fair valued when they are eventually sold.
Monetary items
Low inflation is what long term sustainable economic growth is built on. Alan Greenspan.
SA accountants value monetary items at their original nominal monetary values; that is, at their original HC values since monetary items can not be updated or indexed during the current financial period for the purpose of
1.accounting their values during the reporting period,
2.determining the profit or loss for the reporting period, and
3.measuring financial capital maintenance in either nominal monetary units or constant purchasing power units
during inflation or deflation.
Inflation (some people will hold Tito Mboweni responsible) – not SA accountants - destroys the real value of the Rand and other SA monetary items over time at the annual rate of inflation as determined by the change in the CPI.
Cumulative SA inflation from January 1981 to April 2009: 1 354%
Cumulative SA inflation from April 1994 to April 2009: 161%
Source of base data used for calculations: Statistics South Africa
The internal real value of the Rand is automatically adjusted downwards as it is being destroyed by the economic process of inflation in SA´s low inflationary economy as indicated by the rate of change in the CPI. Inflation destroys the real value of monetary items under any accounting model and also when no accounting model is implemented; that is, when a business does not account its economic activities; for example, street vendors. The accounting model has no affect on the real value of monetary items during the reporting period.
Double entry accounting cannot maintain the real value of monetary items during the reporting period. It is not an attribute of double entry accounting to maintain the real value of monetary items during the reporting period. Inflation destroys the real value of money and other monetary items no matter which accounting model is used. That is why low inflation is so critical for long term sustainable economic growth.
Constant items
SA accountants can choose to measure financial capital maintenance in either nominal monetary units (the real value destroying traditional HCA model) when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation or in real value maintaining units of constant purchasing power (the CIPPA model). Both models are approved by the IASB in the Framework, Par. 104 (a).
It is very obvious that how SA accountants as a group choose to measure financial capital maintenance does make a big difference to the underlying real value of constant items like Retained Earnings in the SA economy and has important effects on the economy as a whole.
I wrote a letter “Accounting for Inflation” to the Financial Mail which was published in the 9th May 2008 edition 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 destruction of real value in the real economy by SA accountants will stop when they stop their assumption that the rand is perfectly stable only for the purpose of accounting constant items never or not fully updated.
We will still have 10,6% cash inflation in the monetary economy - all else being equal - but we will have 0% inflation in the real economy with an (as for now unknown) increase in GDP and sustainable economic growth in SA.
No-one stops us from revoking the stable measuring unit assumption.
The historical cost accounting model is not required by SA law, or by Generally Accepted Accounting Practice or the International Accounting Standards Board.”
Rejecting the stable measuring unit assumption is simply a logical, but, long overdue improvement in basic accounting approved by the IASB 20 years ago which, I am confident, will be speedily implemented after proper due process in South Africa.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Variable Items
SA accountants value variable real value non-monetary items in terms of IFRS or SA GAAP. “Listed companies use IFRS and the unlisted companies could use either IFRS or Statements of GAAP.”
IAS 16 deals with Property Plant & Equipment. It allows two methods of valuation or measurement; either historical cost or revaluation based on fair value. The charge for depreciation relates to the carrying value, whether historical cost or fair value. It is not acceptable under HCA to index up the original cost of an asset by reference to subsequent inflation or to base the depreciation charge on that indexed amount.
There are similar requirements in respect of intangible assets (IAS 38) and inventories (IAS 2).
IAS 39 requires fair values to be applied in valuing investments and derivative financial instruments. A historical cost basis of accounting is not acceptable for these items.
The real values of variable real value non-monetary items, e.g. property, are not destroyed when accountants value them at Historical Cost in terms of IFRS or SA GAAP. These items will be fair valued when they are eventually sold.
Monetary items
Low inflation is what long term sustainable economic growth is built on. Alan Greenspan.
SA accountants value monetary items at their original nominal monetary values; that is, at their original HC values since monetary items can not be updated or indexed during the current financial period for the purpose of
1.accounting their values during the reporting period,
2.determining the profit or loss for the reporting period, and
3.measuring financial capital maintenance in either nominal monetary units or constant purchasing power units
during inflation or deflation.
Inflation (some people will hold Tito Mboweni responsible) – not SA accountants - destroys the real value of the Rand and other SA monetary items over time at the annual rate of inflation as determined by the change in the CPI.
Cumulative SA inflation from January 1981 to April 2009: 1 354%
Cumulative SA inflation from April 1994 to April 2009: 161%
Source of base data used for calculations: Statistics South Africa
The internal real value of the Rand is automatically adjusted downwards as it is being destroyed by the economic process of inflation in SA´s low inflationary economy as indicated by the rate of change in the CPI. Inflation destroys the real value of monetary items under any accounting model and also when no accounting model is implemented; that is, when a business does not account its economic activities; for example, street vendors. The accounting model has no affect on the real value of monetary items during the reporting period.
Double entry accounting cannot maintain the real value of monetary items during the reporting period. It is not an attribute of double entry accounting to maintain the real value of monetary items during the reporting period. Inflation destroys the real value of money and other monetary items no matter which accounting model is used. That is why low inflation is so critical for long term sustainable economic growth.
Constant items
SA accountants can choose to measure financial capital maintenance in either nominal monetary units (the real value destroying traditional HCA model) when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation or in real value maintaining units of constant purchasing power (the CIPPA model). Both models are approved by the IASB in the Framework, Par. 104 (a).
It is very obvious that how SA accountants as a group choose to measure financial capital maintenance does make a big difference to the underlying real value of constant items like Retained Earnings in the SA economy and has important effects on the economy as a whole.
I wrote a letter “Accounting for Inflation” to the Financial Mail which was published in the 9th May 2008 edition 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 destruction of real value in the real economy by SA accountants will stop when they stop their assumption that the rand is perfectly stable only for the purpose of accounting constant items never or not fully updated.
We will still have 10,6% cash inflation in the monetary economy - all else being equal - but we will have 0% inflation in the real economy with an (as for now unknown) increase in GDP and sustainable economic growth in SA.
No-one stops us from revoking the stable measuring unit assumption.
The historical cost accounting model is not required by SA law, or by Generally Accepted Accounting Practice or the International Accounting Standards Board.”
Rejecting the stable measuring unit assumption is simply a logical, but, long overdue improvement in basic accounting approved by the IASB 20 years ago which, I am confident, will be speedily implemented after proper due process in South Africa.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Monday 29 June 2009
Inflation has no effect on the real value of non-monetary items
Inflation, being a uniquely monetary phenomenon, can not, by definition, destroy the real value of non-monetary items. Inflation has no effect on the real value of non-monetary items.
It is SA accountants’ choice of accounting model that determines whether they carry on currently unintentionally destroying real value in constant real value non-monetary items never or not fully updated (the real value destroying traditional HCA model) when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation or maintain those values in future for an unlimited period of time (the IASB approved real value maintaining CIPPA model) – all else being equal.
It is not inflation that is doing the destroying in the real value of constant items. It is our accountants unknowingly doing the destroying when they implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
This is the case with all constant items never or not fully inflation-adjusted including the unintentional destruction by SA accountants of the real value of Shareholders´ Equity in SA banks and companies which do not have sufficient variable items that can be or are revalued via the Revaluation Reserve or with insufficient holding gains to compensate for the real value shortfall in Shareholders´ Equity under HCA.
It is SA accountants’ choice of accounting model that determines whether they carry on currently unintentionally destroying real value in constant real value non-monetary items never or not fully updated (the real value destroying traditional HCA model) when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation or maintain those values in future for an unlimited period of time (the IASB approved real value maintaining CIPPA model) – all else being equal.
It is not inflation that is doing the destroying in the real value of constant items. It is our accountants unknowingly doing the destroying when they implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
This is the case with all constant items never or not fully inflation-adjusted including the unintentional destruction by SA accountants of the real value of Shareholders´ Equity in SA banks and companies which do not have sufficient variable items that can be or are revalued via the Revaluation Reserve or with insufficient holding gains to compensate for the real value shortfall in Shareholders´ Equity under HCA.
Sunday 28 June 2009
Rejecting the stable measuring unit assumption is compliant with IFRS
Today´s Fin24 has an article starting: " South Africa's inflation-targeting framework is likely to be fine-tuned by the new government, said chief economist from Brait, Colen Garrow, on Friday."
"Target may be fine tuned" Fin24 28 June 2009
Mboweni averaged 5.93% annual inflation so far.
Upping the upper band to 7% will result in SA accountants unknowingly destroying a further cumulative 10% in constant items they refuse to maintain over the next 10 years.
They will thus unknowingly destroy 56% instead of 46% of the real value of all Retained Earnings never maintained in SA companies and banks today over the next 10 years.
That may amount to unknowingly destroying R202 billion instead of R200 billion p.a
When SA accountants freely choose to measure financial capital maintenance in units of constant purchasing power as approved by the IASB 20 years ago in the Framework, Par. 104 (a) which is compliant with IFRS, they will maintain instead of unknowingly destroy - as they are now doing - about R200 billion p.a. in the SA real economy for an unlimited period of time - ceteris paribus.
ABSA´s accountants are unknowingly destroying R3.3 bil. like that now.
Rejecting the stable measuring unit assumption is compliant with IFRS.
It will result in our accountants boosting the SA real economy by at least R200 billion (a conservative estimate) p.a. for an unlimited period of time - ceteris paribus.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
"Target may be fine tuned" Fin24 28 June 2009
Mboweni averaged 5.93% annual inflation so far.
Upping the upper band to 7% will result in SA accountants unknowingly destroying a further cumulative 10% in constant items they refuse to maintain over the next 10 years.
They will thus unknowingly destroy 56% instead of 46% of the real value of all Retained Earnings never maintained in SA companies and banks today over the next 10 years.
That may amount to unknowingly destroying R202 billion instead of R200 billion p.a
When SA accountants freely choose to measure financial capital maintenance in units of constant purchasing power as approved by the IASB 20 years ago in the Framework, Par. 104 (a) which is compliant with IFRS, they will maintain instead of unknowingly destroy - as they are now doing - about R200 billion p.a. in the SA real economy for an unlimited period of time - ceteris paribus.
ABSA´s accountants are unknowingly destroying R3.3 bil. like that now.
Rejecting the stable measuring unit assumption is compliant with IFRS.
It will result in our accountants boosting the SA real economy by at least R200 billion (a conservative estimate) p.a. for an unlimited period of time - ceteris paribus.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Saturday 27 June 2009
The confusion about inflation accounting
Most accountants and accounting authorities completely ignore the real value maintaining Constant Item Purchasing Power basic accounting model as approved by the IASB in the Framework, Par. 104 (a) as an alternative for the real value destroying traditional HC basic accounting model.
They do not appreciate, firstly, that SA accountants unknowingly destroy real value on a massive scale in the SA real economy when they implement the real value destroying stable measuring unit assumption for an unlimited period of time during indefinite inflation in the case of balance sheet constant items when they do not have sufficient revaluable fixed assets or holding gains to compensate for a real value shortfall in Shareholders´ Equity.
Secondly, they mistakenly assume that any price-level accounting always only relates to inflation accounting during high and hyperinflation despite the fact that the IASB approved a constant item price-level basic accounting model twenty years ago.
Thirdly, they do not appreciate the real value maintaining effect on balance sheet constant items of choosing to measure financial capital maintenance in constant purchasing power units as approved by the IASB in the Framework, Par. 104 (a).
Financial capital maintenance in units of constant purchasing power is generally not implemented in non-hyperinflationary economies.
Measurement in units of constant purchasing power is, however, comprehensively and extensively used for the valuation of income statement constant items, e.g., salaries, wages, rentals, etc in most economies at all levels of inflation, including in South Africa.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
They do not appreciate, firstly, that SA accountants unknowingly destroy real value on a massive scale in the SA real economy when they implement the real value destroying stable measuring unit assumption for an unlimited period of time during indefinite inflation in the case of balance sheet constant items when they do not have sufficient revaluable fixed assets or holding gains to compensate for a real value shortfall in Shareholders´ Equity.
Secondly, they mistakenly assume that any price-level accounting always only relates to inflation accounting during high and hyperinflation despite the fact that the IASB approved a constant item price-level basic accounting model twenty years ago.
Thirdly, they do not appreciate the real value maintaining effect on balance sheet constant items of choosing to measure financial capital maintenance in constant purchasing power units as approved by the IASB in the Framework, Par. 104 (a).
Financial capital maintenance in units of constant purchasing power is generally not implemented in non-hyperinflationary economies.
Measurement in units of constant purchasing power is, however, comprehensively and extensively used for the valuation of income statement constant items, e.g., salaries, wages, rentals, etc in most economies at all levels of inflation, including in South Africa.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Friday 26 June 2009
Difference between basic and inflation accounting
The Constant Purchasing Power inflation accounting model required by the IASB in IAS 29 is in contrast to the Constant Item Purchasing Power basic accounting model approved by the IASB in the Framework, Par. 104 (a) as an alternative to the real value destroying traditional basic Historical Cost Accounting model also approved in Par. 104 (a).
Constant Item Purchasing Power Accounting requires that ONLY constant items (instead of constant AND variable non-monetary items in the case of CPP inflation accounting) are inflation-adjusted by means of the CPI during non-hyperinflationary periods for the purpose of implementing a constant purchasing power capital concept of invested purchasing power, a constant purchasing power financial capital maintenance concept and a constant purchasing power profit or loss determination concept.
Variable items are valued in terms of IFRS or SA GAAP for primary valuation purposes during non-hyperinflationary periods. Monetary items are always stated at their original nominal values during the current accounting period.
Constant Item Purchasing Power Accounting requires that ONLY constant items (instead of constant AND variable non-monetary items in the case of CPP inflation accounting) are inflation-adjusted by means of the CPI during non-hyperinflationary periods for the purpose of implementing a constant purchasing power capital concept of invested purchasing power, a constant purchasing power financial capital maintenance concept and a constant purchasing power profit or loss determination concept.
Variable items are valued in terms of IFRS or SA GAAP for primary valuation purposes during non-hyperinflationary periods. Monetary items are always stated at their original nominal values during the current accounting period.
Thursday 25 June 2009
Current SA inflation - May 2009
Percentage unknowing real value destruction by SA accountants in constant items never maintained since
Jan 1981
93.2%
April 1994
61.9%
May 2008
8.0%
Example: R3.338 billion of the real value of Retained Earnings have unknowingly been destroyed by ABSA´s accountants implementing the stable measuring units assumption as chosen by their board of directors during their 2008 financial year if they maintain that assumption for an unlimited period of time during indefinite inflation.
Cumulative inflation since Jan 1981
1 360.3%
Cumulative inflation since Apr 1994
162.6%
Annual inflation
8.0%
Source of base data: Statistics South Africa
Jan 1981
93.2%
April 1994
61.9%
May 2008
8.0%
Example: R3.338 billion of the real value of Retained Earnings have unknowingly been destroyed by ABSA´s accountants implementing the stable measuring units assumption as chosen by their board of directors during their 2008 financial year if they maintain that assumption for an unlimited period of time during indefinite inflation.
Cumulative inflation since Jan 1981
1 360.3%
Cumulative inflation since Apr 1994
162.6%
Annual inflation
8.0%
Source of base data: Statistics South Africa
Price-level accounting clearly does not prevail
Price-level accounting clearly does not prevail for balance sheet constant items, as Harvey Kapnick hoped for in 1976, except during rare instances of hyperinflation (e.g., Turkey’s latest period of hyperinflation) when companies are required to implement IAS 29 which is the IASB´s CPP inflation accounting model.
The implementation of IAS 29 inflation accounting by Zimbabwean listed companies as required by the Zimbabwean Stock Exchange made no difference to the Zimbabwean economy during the final stages of the hyperinflationary destruction of the Zimbabwe Dollar. Updating all non-monetary items as required by IAS 29 inflation accounting in terms of the Consumer Price Index when it is not calculated and supplied by the government and when the value of the Zimbabwe Dollar halved every 15 hours, was obviously of no use.
The IASB specifically requires financial capital maintenance in terms of units of constant purchasing power during hyperinflation, but, leaves it as an option to the disastrously destructive traditional HCA model during non-hyperinflationary periods. An option that is ignored by almost all accountants during non-hyperinflationary periods because of, firstly, the lack of appreciating the very destructive effect of the stable measuring unit assumption on the real values of balance sheet constant items during non-hyperinflationary periods; secondly, the lack of appreciating the real value maintaining effect on balance sheet constant items of choosing to measure financial capital maintenance in units of constant purchasing power during non-hyperinflationary periods; as well as, thirdly, the general assumption by most accountants that price-level accounting always refers ONLY to CPP inflation accounting when all non-monetary items (variable and constant items) are inflation adjusted by means of the CPI during high and hyperinflationary periods in terms of IAS 29 inflation accounting.
Price-level accounting does prevail in certain income statement items, e.g. salaries, wages, rentals, etc. which are inflation-adjusted by means of the CPI in most economies, including South Africa.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
The implementation of IAS 29 inflation accounting by Zimbabwean listed companies as required by the Zimbabwean Stock Exchange made no difference to the Zimbabwean economy during the final stages of the hyperinflationary destruction of the Zimbabwe Dollar. Updating all non-monetary items as required by IAS 29 inflation accounting in terms of the Consumer Price Index when it is not calculated and supplied by the government and when the value of the Zimbabwe Dollar halved every 15 hours, was obviously of no use.
The IASB specifically requires financial capital maintenance in terms of units of constant purchasing power during hyperinflation, but, leaves it as an option to the disastrously destructive traditional HCA model during non-hyperinflationary periods. An option that is ignored by almost all accountants during non-hyperinflationary periods because of, firstly, the lack of appreciating the very destructive effect of the stable measuring unit assumption on the real values of balance sheet constant items during non-hyperinflationary periods; secondly, the lack of appreciating the real value maintaining effect on balance sheet constant items of choosing to measure financial capital maintenance in units of constant purchasing power during non-hyperinflationary periods; as well as, thirdly, the general assumption by most accountants that price-level accounting always refers ONLY to CPP inflation accounting when all non-monetary items (variable and constant items) are inflation adjusted by means of the CPI during high and hyperinflationary periods in terms of IAS 29 inflation accounting.
Price-level accounting does prevail in certain income statement items, e.g. salaries, wages, rentals, etc. which are inflation-adjusted by means of the CPI in most economies, including South Africa.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Wednesday 24 June 2009
Changing the way a company does its accounts does change the value of the company for the better
"ABSA joins chorus of doom" on today´s Fin24.com states that ABSA´s operating performance had been knocked by a REDUCTION IN THE VALUE of investment portfolios"
R3.326 Billion of the real value of ABSA´s Retained Earnings was not just reduced during their 2008 financial year but actually unknowingly DESTROYED by ABSA´s accountants implementing the stable measuring unit assumption as an accounting policy chosen by their Board of Directors. They are doing the same this year. Measurement in units of constant purchasing power is compliant with IFRS.
R3.326 Billion is also, more or less, the amount that ABSA´s accountants will unknowingly destroy in the real value of the bank´s Retained Earnings during their current financial year as a result of their implementation of the stable measuring unit assumption because the ABSA Board of Directors selected financial capital maintenance in nominal monetary units instead of in units of constant purchasing power in terms of the IASB´s Framework, Par. 104 (a) which states that "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
Both bases are compliant with IFRS since the Framework applies (see IAS 8.11). There is not one specific IFRS relating to the valuing of Retained Earnings.
R3.326 Billion is the estimated amount that ABSA´s accountants will maintain in the real value of the banks Retained Earnings during this finacial year and every year there after - ceteris paribus - if ABSA´s Board of Directors decide today to reject the stable measuring unit assumption and to maintain the banks financial capital in real value maintaining units of constant purchasing power - which is compliant with IFRS - instead of in real value destroying nominal monetary units - which is also compliant with IFRS, but, results in their accountants unknowingly destroying the real value of their Retained Earnings as described above.
I think Maria Ramos should perhaps have a look at this.
R3.326 Billion is 4.5% of ABSA´s current market value.
Changing the way a company does its accounts does change the value of the company for the better.
R3.326 Billion of the real value of ABSA´s Retained Earnings was not just reduced during their 2008 financial year but actually unknowingly DESTROYED by ABSA´s accountants implementing the stable measuring unit assumption as an accounting policy chosen by their Board of Directors. They are doing the same this year. Measurement in units of constant purchasing power is compliant with IFRS.
R3.326 Billion is also, more or less, the amount that ABSA´s accountants will unknowingly destroy in the real value of the bank´s Retained Earnings during their current financial year as a result of their implementation of the stable measuring unit assumption because the ABSA Board of Directors selected financial capital maintenance in nominal monetary units instead of in units of constant purchasing power in terms of the IASB´s Framework, Par. 104 (a) which states that "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
Both bases are compliant with IFRS since the Framework applies (see IAS 8.11). There is not one specific IFRS relating to the valuing of Retained Earnings.
R3.326 Billion is the estimated amount that ABSA´s accountants will maintain in the real value of the banks Retained Earnings during this finacial year and every year there after - ceteris paribus - if ABSA´s Board of Directors decide today to reject the stable measuring unit assumption and to maintain the banks financial capital in real value maintaining units of constant purchasing power - which is compliant with IFRS - instead of in real value destroying nominal monetary units - which is also compliant with IFRS, but, results in their accountants unknowingly destroying the real value of their Retained Earnings as described above.
I think Maria Ramos should perhaps have a look at this.
R3.326 Billion is 4.5% of ABSA´s current market value.
Changing the way a company does its accounts does change the value of the company for the better.
Friday 19 June 2009
Audited Historical Cost annual financial statements do not fairly present the financial position of a company
1st Update: 24 June 2009
Audited annual financial statements provided by SA companies which prepare them using the traditional Historical Cost basis, i.e., when the directors choose to measure financial capital maintenance in nominal monetary units instead of in units of constant purchasing power in terms of the IASB´s Framework, Par. 104 (a), are compliant with IFRS, but, do not fairly present the financial position of the companies as required by Art. 29.1(b) of the Companies Act.
Article 29.1 (b) of the SA Companies Act, No 71 of 2008 states:
“If a company provides any financial statements, including any annual financial statements, to any person for any reason, those statements must-
(b) present fairly the state of affairs and business of the company, and explain the transactions and financial position of the business of the company;”
SA company directors´ choice to measure financial capital maintenance in nominal monetary units, i.e., the traditional HC basis which includes implementing the very destructive stable measuring unit assumption, is compliant with IFRS. However, audited financial statements prepared under this basis do not fairly present the financial position of SA companies, as required by the Companies Act, when the directors do not:
(1) state in those annual financial statements that their choice of the traditional Historical Cost basis which includes the very destructive stable measuring unit assumption, destroys the real value of ONLY constant real value non-monetary items never maintained, at a rate equal to the annual rate of inflation and at a lower rate when they are not fully maintained.
(2) state that this includes the destruction of the real value of Shareholders´ Equity when the company does not have sufficient variable real value non-monetary items that are or can be revalued via the Revaluation Reserve or do not present sufficient hidden and unrecognised holding gains to compensate for the shortfall in real value in Shareholders’ Equity under the HC basis;
(3) state the percentage and amount of Shareholders´ Equity that is not being maintained; i.e., the percentage and amount of Shareholders´ Equity that is subject to real value destruction at a rate equal to the annual inflation rate because of the directors´ choice, in terms of the Framework, Par. 104 (a), to maintain financial capital maintenance in nominal monetary units instead of in units of constant purchasing power – both methods being compliant with IFRS;
(4) state the amount of real value destroyed during the last financial year in Shareholders´ Equity and all other constant items because of the directors´ choice to implement the HC basis;
(5) state the updated total amount of real value destroyed from the company’s start to date in this manner in at least Shareholders´ Equity never or not fully maintained;
(6) state the change in the updated real value of Shareholders´ Equity if the directors decide to measure financial capital maintenance in units of constant purchasing power instead of in nominal monetary units as provided in the Framework, Par. 104 (a) which is complaint with IFRS;
(7) state the directors´ estimate of the amount of real value to be destroyed by their implementation of the stable measuring unit assumption during the following accounting year under the HC basis;
(8) state that the real value calculated in (7) represents the amount of real value the company would gain during the following accounting year and every year there after for an unlimited period of time – ceteris paribus - if the directors´ choose to measure financial capital maintenance in units of constant purchasing power – which is compliant with IFRS – as provided in the Framework, Par. 104 (a);
(9) state the directors´ reason(s) for choosing financial capital maintenance in real value destroying nominal monetary units instead of in real value maintaining units of constant purchasing power in terms of the IASB´s Framework, Par. 104 (a).
It is obviously a million times better for company directors to choose to measure financial capital maintenance in constant purchasing power units as provided for in the IASB´s Framework, Par. 104 (a) which states: "Finacial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
Both bases are compliant with IFRS. Measuring financial capital maintenance in constant purchasing power units instead of in nominal monetary units stops the unknowing destruction by accountants of massive amounts in real value in constant real value non-monetary items never or not fully updated, for example, Retained Earnings, in the real economy.
Audited annual financial statements provided by SA companies which prepare them using the traditional Historical Cost basis, i.e., when the directors choose to measure financial capital maintenance in nominal monetary units instead of in units of constant purchasing power in terms of the IASB´s Framework, Par. 104 (a), are compliant with IFRS, but, do not fairly present the financial position of the companies as required by Art. 29.1(b) of the Companies Act.
Article 29.1 (b) of the SA Companies Act, No 71 of 2008 states:
“If a company provides any financial statements, including any annual financial statements, to any person for any reason, those statements must-
(b) present fairly the state of affairs and business of the company, and explain the transactions and financial position of the business of the company;”
SA company directors´ choice to measure financial capital maintenance in nominal monetary units, i.e., the traditional HC basis which includes implementing the very destructive stable measuring unit assumption, is compliant with IFRS. However, audited financial statements prepared under this basis do not fairly present the financial position of SA companies, as required by the Companies Act, when the directors do not:
(1) state in those annual financial statements that their choice of the traditional Historical Cost basis which includes the very destructive stable measuring unit assumption, destroys the real value of ONLY constant real value non-monetary items never maintained, at a rate equal to the annual rate of inflation and at a lower rate when they are not fully maintained.
(2) state that this includes the destruction of the real value of Shareholders´ Equity when the company does not have sufficient variable real value non-monetary items that are or can be revalued via the Revaluation Reserve or do not present sufficient hidden and unrecognised holding gains to compensate for the shortfall in real value in Shareholders’ Equity under the HC basis;
(3) state the percentage and amount of Shareholders´ Equity that is not being maintained; i.e., the percentage and amount of Shareholders´ Equity that is subject to real value destruction at a rate equal to the annual inflation rate because of the directors´ choice, in terms of the Framework, Par. 104 (a), to maintain financial capital maintenance in nominal monetary units instead of in units of constant purchasing power – both methods being compliant with IFRS;
(4) state the amount of real value destroyed during the last financial year in Shareholders´ Equity and all other constant items because of the directors´ choice to implement the HC basis;
(5) state the updated total amount of real value destroyed from the company’s start to date in this manner in at least Shareholders´ Equity never or not fully maintained;
(6) state the change in the updated real value of Shareholders´ Equity if the directors decide to measure financial capital maintenance in units of constant purchasing power instead of in nominal monetary units as provided in the Framework, Par. 104 (a) which is complaint with IFRS;
(7) state the directors´ estimate of the amount of real value to be destroyed by their implementation of the stable measuring unit assumption during the following accounting year under the HC basis;
(8) state that the real value calculated in (7) represents the amount of real value the company would gain during the following accounting year and every year there after for an unlimited period of time – ceteris paribus - if the directors´ choose to measure financial capital maintenance in units of constant purchasing power – which is compliant with IFRS – as provided in the Framework, Par. 104 (a);
(9) state the directors´ reason(s) for choosing financial capital maintenance in real value destroying nominal monetary units instead of in real value maintaining units of constant purchasing power in terms of the IASB´s Framework, Par. 104 (a).
It is obviously a million times better for company directors to choose to measure financial capital maintenance in constant purchasing power units as provided for in the IASB´s Framework, Par. 104 (a) which states: "Finacial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
Both bases are compliant with IFRS. Measuring financial capital maintenance in constant purchasing power units instead of in nominal monetary units stops the unknowing destruction by accountants of massive amounts in real value in constant real value non-monetary items never or not fully updated, for example, Retained Earnings, in the real economy.
Thursday 11 June 2009
There is magic in lower inflation
Thought Leader
Alan Greenspan correctly stated that low inflation is what sustained economic growth is built upon.
It is very irresponsible to suggest an inflation target of 10% to 15%.
Under the current Historical Cost paradigm there are always TWO simultaneous systemic economy-wide real value destruction processes operating in the economy during inflation: (a) inflation in the monetary economy and (b) SA accountants implementing the Historical Cost Accounting model in the non-monetary or real economy:
(1) 161.6% cumulative inflation since April 1994 have destroyed 61.8% of the real value of the Rand in our monetary economy.
(2) During the same period SA accountants have unknowingly destroyed 61.8% of the real value in the non-monetary or real economy of all Retained Earnings balances that remained in SA companies during that period and in the Shareholders´ Equity of all companies with no fixed assets or a lower percentage in companies with insufficient fixed assets to revalue because our accountants implement the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model.
When SA accountants freely choose to measure financial capital maintenance in units of constant purchasing power as per the International Accounting Standards Board´s Framework, Par. 104 (a) which is compliant with International Financial Reporting Standards, they will maintain instead of unknowingly destroy about R200 billion per annum in real value in constant items not updated in the SA real economy for an unlimited period of time and reduce economy-wide value destruction to simply a single destruction process by inflation in the real value of the Rand.
Alan Greenspan correctly stated that low inflation is what sustained economic growth is built upon.
It is very irresponsible to suggest an inflation target of 10% to 15%.
Under the current Historical Cost paradigm there are always TWO simultaneous systemic economy-wide real value destruction processes operating in the economy during inflation: (a) inflation in the monetary economy and (b) SA accountants implementing the Historical Cost Accounting model in the non-monetary or real economy:
(1) 161.6% cumulative inflation since April 1994 have destroyed 61.8% of the real value of the Rand in our monetary economy.
(2) During the same period SA accountants have unknowingly destroyed 61.8% of the real value in the non-monetary or real economy of all Retained Earnings balances that remained in SA companies during that period and in the Shareholders´ Equity of all companies with no fixed assets or a lower percentage in companies with insufficient fixed assets to revalue because our accountants implement the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model.
When SA accountants freely choose to measure financial capital maintenance in units of constant purchasing power as per the International Accounting Standards Board´s Framework, Par. 104 (a) which is compliant with International Financial Reporting Standards, they will maintain instead of unknowingly destroy about R200 billion per annum in real value in constant items not updated in the SA real economy for an unlimited period of time and reduce economy-wide value destruction to simply a single destruction process by inflation in the real value of the Rand.
Wednesday 10 June 2009
SA accounting facts as at end of April 2009
Real value unknowingly destroyed by SA accountants in Retained Earnings remaining in SA companies from Jan 1981 to Apr 2009
93.1%
Real value unknowingly destroyed by SA accountants in Shareholders´ Equity of SA companies with no variable real value non-monetary items to revalue with equivalent entries in Revaluation Reserve from Jan 1981 to Apr 2009
93.1%
Real value unknowingly destroyed by SA accountants in Retained Earnings remaining in SA companies from Apr 1994 to Apr 2009
61.8%
Real value unknowingly destroyed by SA accountants in Shareholders´ Equity of SA companies with no variable real value non-monetary items to revalue with equivalent entries in Revaluation Reserve from Apr 1994 to Apr 2009
61.8%
Cumulative inflation since Jan 1981: 1 354.8%
Cumulative inflation since Apr 1994: 161.6%
Annual inflation: 8.4%
Source of base data: Statistics South Africa
93.1%
Real value unknowingly destroyed by SA accountants in Shareholders´ Equity of SA companies with no variable real value non-monetary items to revalue with equivalent entries in Revaluation Reserve from Jan 1981 to Apr 2009
93.1%
Real value unknowingly destroyed by SA accountants in Retained Earnings remaining in SA companies from Apr 1994 to Apr 2009
61.8%
Real value unknowingly destroyed by SA accountants in Shareholders´ Equity of SA companies with no variable real value non-monetary items to revalue with equivalent entries in Revaluation Reserve from Apr 1994 to Apr 2009
61.8%
Cumulative inflation since Jan 1981: 1 354.8%
Cumulative inflation since Apr 1994: 161.6%
Annual inflation: 8.4%
Source of base data: Statistics South Africa
Sunday 31 May 2009
SA inflation facts as at the end of April, 2009
Annual inflation: 8.4% as at April 2009
Cumulative inflation since Jan 1981: 1 354.8%
Cumulative inflation since Apr 1994: 161.6%
Cumulative real value destruction since Jan 1981: 93.1%
Cumulative real value destructionm since April 1994: 61.8%
Real value unknowingly destroyed by SA accountants in all Retained Earnings remaining in SA companies from Jan 1981 to Apr 2009
93.1%
Real value unknowingly destroyed by SA accountants in Issued Share Capital of all SA companies with no variable real value non-monetary items to revalue from Jan 1981 to Apr 2009
93.1%
Real value unknowingly destroyed by SA accountants in all Retained Earnings remaining in companies from Apr 1994 to Apr 2009
61.8%
Real value unknowingly destroyed by SA accountants in Issued Share Capital of all SA companies with no variable real value non-monetary items to revalue from Apr 1994 to Apr 2009
61.8%
Cumulative inflation since Jan 1981: 1 354.8%
Cumulative inflation since Apr 1994: 161.6%
Cumulative real value destruction since Jan 1981: 93.1%
Cumulative real value destructionm since April 1994: 61.8%
Real value unknowingly destroyed by SA accountants in all Retained Earnings remaining in SA companies from Jan 1981 to Apr 2009
93.1%
Real value unknowingly destroyed by SA accountants in Issued Share Capital of all SA companies with no variable real value non-monetary items to revalue from Jan 1981 to Apr 2009
93.1%
Real value unknowingly destroyed by SA accountants in all Retained Earnings remaining in companies from Apr 1994 to Apr 2009
61.8%
Real value unknowingly destroyed by SA accountants in Issued Share Capital of all SA companies with no variable real value non-monetary items to revalue from Apr 1994 to Apr 2009
61.8%
Saturday 30 May 2009
SA Inflation Facts as at March 2009
1347.9% The cumulative inflation rate in SA since January 1981.
160.3% The cumulative inflation rate in SA since April 1994.
50% of real value in all constant items never updated since April 1994 unknowingly destroyed by SA accountants by December 2005: i.e. in 11 years time by their implementation of the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model.
50% of the real value of all Retained Earings in SA companies as at the end of April, 1994 unknowingly destroyed by SA accountants in 11 years.
61.6% of the real value of all retained earings in SA companies as at the end of April, 1994 unknowingly destroyed by SA accountants by March 2009.
61.6% of the real value of all issued share capital of all SA companies with no variable real value non-monetary items to revalue as at the end of April, 1994 unknowingly destroyed by SA accountants by March 2009.
This is the case when SA accountants choose - as they all do - to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation when they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par. 104 (a). SA accountants have unknowingly destroyed 61.6% of all Retained Earingins in all SA companies in this way since April 1994 - as long as they choose to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation - all else being equal.
93.1% of the real value of all retained earings in SA companies as at the end of January, 1981 unknowingly destroyed by SA accountants by March 2009.
93.1% of the real value of all issued share capital of all SA companies with no variable real value non-monetary items to revalue as at the end of January, 1981 unknowingly destroyed by SA accountants by March 2009.
This is the case when SA accountants choose- as they all do - to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation when they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par. 104 (a). SA accountants have unknowingly destroyed 93.1% of all Retained Earingins in all SA companies in this way since January, 1981 - as long as they choose to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation - all else being equal.
160.3% The cumulative inflation rate in SA since April 1994.
50% of real value in all constant items never updated since April 1994 unknowingly destroyed by SA accountants by December 2005: i.e. in 11 years time by their implementation of the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model.
50% of the real value of all Retained Earings in SA companies as at the end of April, 1994 unknowingly destroyed by SA accountants in 11 years.
61.6% of the real value of all retained earings in SA companies as at the end of April, 1994 unknowingly destroyed by SA accountants by March 2009.
61.6% of the real value of all issued share capital of all SA companies with no variable real value non-monetary items to revalue as at the end of April, 1994 unknowingly destroyed by SA accountants by March 2009.
This is the case when SA accountants choose - as they all do - to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation when they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par. 104 (a). SA accountants have unknowingly destroyed 61.6% of all Retained Earingins in all SA companies in this way since April 1994 - as long as they choose to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation - all else being equal.
93.1% of the real value of all retained earings in SA companies as at the end of January, 1981 unknowingly destroyed by SA accountants by March 2009.
93.1% of the real value of all issued share capital of all SA companies with no variable real value non-monetary items to revalue as at the end of January, 1981 unknowingly destroyed by SA accountants by March 2009.
This is the case when SA accountants choose- as they all do - to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation when they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par. 104 (a). SA accountants have unknowingly destroyed 93.1% of all Retained Earingins in all SA companies in this way since January, 1981 - as long as they choose to maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation - all else being equal.
Monday 25 May 2009
The difference between deflation and disinflation
Deflation is a sustained decrease in the general price level resulting in a sustained increase in the real value of the functional currency and other monetary items.
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The functional currency is the currency of the primary economic environment in which an entity operates. It is normally the national or regional measurement currency or monetary unit of account in an economy or monetary union like the Euro in the European Monetary Union.
Deflation only happens below zero percent annual inflation. The functional currency and other monetary items are worth more all the time during deflation as opposed to being worth less all the time during inflation. Deflation is the opposite of inflation. Inflation destroys the real value of the functional currency and other monetary items. Deflation creates more real value in the functional currency and other monetary items.
Disinflation is lower inflation. Prices in an economy are still rising during disinflation, but at a slower rate. The general price level still rises, but, at a slower rate resulting in a continued, but, lower rate of real value destruction in the functional currency and other monetary items.
A lowering of inflation is, by definition, always disinflation. That is the same as a lowering of the rate of increase in the general price level. A lowering of the absolute value of the general price level is deflation.
Deflation means the general price level is not increasing at all, but, actually decreasing continuously and the functional currency and other monetary items are worth more all the time. Deflation causes an increase in the real value of the functional currency and other monetary items.
Inflation destroys the real value of the functional currency. Disinflation destroys the real value of the functional currency at a slower rate. Deflation creates more real value in the functional currency.
Inflation is a sustained increase in the general price level. Disinflation is a slower sustained increase in the general price level. Deflation is a sustained decrease in the general price level.
Disinflation happens, for example, after a period of higher inflation in what are normally considered low inflationary economies and is initially popularly confused with deflation. During disinflation many prominent prices, for example, oil, fuel, property and food prices are falling, but, the general price level is still actually rising, albeit at a much slower rate than during normal low inflation. When the slowing annual inflation rate (slowing increase in general price level) moves lower and lower it eventually gets to a zero percent annual rate for maybe a month or two. There is no increase in the general price level. When the absolute value of the general price level then starts to decrease the economy switches over from inflation to deflation: not just a slower increase in the generally increasing price level as during disinflation but actually a sustained decrease in the absolute value of the general price level below zero percent which causes an increase in the real value of the functional currency and other monetary items: the opposite of inflation.
Countries have little experience of deflation. Deflation is generally regarded as a very serious economic problem that everyone is trying to avoid at all costs especially after what happened during the Great Depression.
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Buy the ebook for $2.99 or £1.53 or €2.68
The functional currency is the currency of the primary economic environment in which an entity operates. It is normally the national or regional measurement currency or monetary unit of account in an economy or monetary union like the Euro in the European Monetary Union.
Deflation only happens below zero percent annual inflation. The functional currency and other monetary items are worth more all the time during deflation as opposed to being worth less all the time during inflation. Deflation is the opposite of inflation. Inflation destroys the real value of the functional currency and other monetary items. Deflation creates more real value in the functional currency and other monetary items.
Disinflation is lower inflation. Prices in an economy are still rising during disinflation, but at a slower rate. The general price level still rises, but, at a slower rate resulting in a continued, but, lower rate of real value destruction in the functional currency and other monetary items.
A lowering of inflation is, by definition, always disinflation. That is the same as a lowering of the rate of increase in the general price level. A lowering of the absolute value of the general price level is deflation.
Deflation means the general price level is not increasing at all, but, actually decreasing continuously and the functional currency and other monetary items are worth more all the time. Deflation causes an increase in the real value of the functional currency and other monetary items.
Inflation destroys the real value of the functional currency. Disinflation destroys the real value of the functional currency at a slower rate. Deflation creates more real value in the functional currency.
Inflation is a sustained increase in the general price level. Disinflation is a slower sustained increase in the general price level. Deflation is a sustained decrease in the general price level.
Disinflation happens, for example, after a period of higher inflation in what are normally considered low inflationary economies and is initially popularly confused with deflation. During disinflation many prominent prices, for example, oil, fuel, property and food prices are falling, but, the general price level is still actually rising, albeit at a much slower rate than during normal low inflation. When the slowing annual inflation rate (slowing increase in general price level) moves lower and lower it eventually gets to a zero percent annual rate for maybe a month or two. There is no increase in the general price level. When the absolute value of the general price level then starts to decrease the economy switches over from inflation to deflation: not just a slower increase in the generally increasing price level as during disinflation but actually a sustained decrease in the absolute value of the general price level below zero percent which causes an increase in the real value of the functional currency and other monetary items: the opposite of inflation.
Countries have little experience of deflation. Deflation is generally regarded as a very serious economic problem that everyone is trying to avoid at all costs especially after what happened during the Great Depression.
Buy the ebook for $2.99 or £1.53 or €2.68
Saturday 23 May 2009
Targeting 6% inflation is not international best practice.
"Inflation targeting is still seen by the markets as international best practice, which is why SA should stick with it." Greta Steyn, Fin24.com
Targeting 6% inflation is not international best practice.
The EMU, US and UK will never target 6% inflation.
Continuous 6% inflation destroys 6% of the real value of the Rand in one year and 71% in 20 yrs.
SA accountants unknowingly destroy 6% of the real value of Retained Earnings of all SA companies in one year and 71% in 20 yrs when they apply the stable measuring unit assumption for an indefinite period of time.
Mboweni, Greta Steyn and company do not even understand that.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Targeting 6% inflation is not international best practice.
The EMU, US and UK will never target 6% inflation.
Continuous 6% inflation destroys 6% of the real value of the Rand in one year and 71% in 20 yrs.
SA accountants unknowingly destroy 6% of the real value of Retained Earnings of all SA companies in one year and 71% in 20 yrs when they apply the stable measuring unit assumption for an indefinite period of time.
Mboweni, Greta Steyn and company do not even understand that.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
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