EXISTING real value unknowingly and unintentionally DESTROYED in three SA banks´ Retained Profits during their last financial year because their Boards of Directors refused to maintain - AT NO EXTRA COST - the real values of these banks´ EXISTING equity in units of constant purchasing power as it was freely in their power to do since the IASB authorized them to do that 20 years ago when it approved the Framework, Par. 104 (a) which states:
"Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
African Bank Group R 299 million
Chartered Accountants on the Board of Directors during last financial year:
David Woollam CA(SA)
David Gibbon CA(SA)
Brian Steele BCom, CA(SA), MBA
Independent Auditors during last financial year:
Deloitte & Touche
Partner: G M Pinnock CA(SA)
ABSA R 3 388 million
Chartered Accountants on the Board of Directors during last financial year::
Group Chief Executive: S F Booysen DCom (Acc), CA(SA)
D C Arnold CA(SA), FCMA, AMP
S A Fakie BCom CA(SA)
B P Connellan CA(SA)
J H Shindehutte Bcom (Hons), CA(SA), HDip Tax
Y Z Cuba BCom (Stats), BCom (Hons) (Acc), CA(SA)
Independent Auditors during last financial year:
PricewaterhouseCoopers Inc.
Director: T Winterboer CA(SA)
Ernst & Young Inc.
Director: E van Rooyen CA(SA)
FirstRand Group R 4 158 million
Chartered Accountants on the Board of Directors during last financial year:
L L Dippenaar MCom, CA(SA)
D M Falck CA(SA)
P M Goss BEcon (Hons), BAccSc (Hons), CA(SA)
S E Nxasana BCom, Bcompt (Hons), CA(SA)
A T Nzimande BCom, CA(SA)
R K Store CA(SA)
Independent auditors during last financial year:
PricewaterhouseCoopers Inc.
Director: F Tonelli CA(SA)
The above Board of Directors are unknowingly and unintentionally DESTROYING at least the same EXISTING amounts during the current financial year. They will carry on unknowingly (?) and unintentionally (?) DESTROYING these banks´ EXISTING real values in their EXISTING Retained Profits as long as they refuse to maintain these banks´ EXISTING Shareholders´ equity in units of constant purchasing power as they have been authorized to do by the IASB in 1989 and which is compliant with International Financial Reporting Standards.
The above applies to all SA banks and companies.
The above is valid when the above Boards of Directors refuse to measure financial capital maintenance in units of constant purchasin power during an indefinite period of time during indefinite low inflation.
The above amounts are the real values these Boards of Directors will maintain in these banks forever each and every year - ceteris paribus - as long as these banks break even as soon as they simply select to value all constant items in the banks in unit of constant purchasing power. It was authorized by the IASB 20 years ago and is compliant with IFRS. These Boards of Directors still refuse point blank to do it. They will rather stubbornly carry on destroying the banks´ capital.
Strange but true.
Kindest regards,
Nicolaas Smith
Wednesday 9 September 2009
Tuesday 8 September 2009
Capital destruction in nominal monetary units
Capital is a constant real value non-monetary item. Its real value can be maintained constant forever in all companies at least breaking even - all else being equal - only when financial capital maintenance is measured in units of constant purchasing power during low inflation as the IASB authorized 20 years ago in the Framework, Par. 104 (a).
At continuous 6% annual inflation a nominal monetary item´s real value is destroyed as follows:
46% after 10 years
93% after 44 years
99% after 75 years
Capital´s real value can be maintained constant forever - ceteris paribus.
A SA accountant accounts capital once and it instantaneously loses its constant item status and is magically turned into a depreciating monetary item with the SA accountant unknowingly destroying its real value as set out above. This is the case in all SA companies which do not have 100% of all contributions to equity (excluding the revaluation reserve) invested in variable item fixed assets that can be or are revalued via the revaluation reserve.
In principle SA has never ever had and currently does not have any constant item Retained Profits. All SA´s supposedly "constant item" Retained Profits are simply CASH. Not cash in the bank earning interest but CASH as in notes and coins kept under the mattress with their real values being destroyed by inflation.
The IASB went to great lengths in IAS 29 to clearly define capital as a non-monetary item. That was a total waste of time in 1989 when it then went ahead to "approve" at the same time the impossible process of financial capital "maintenance" in nominal monetary units during low inflation.
Kindest regards,
Nicolaas Smith
At continuous 6% annual inflation a nominal monetary item´s real value is destroyed as follows:
46% after 10 years
93% after 44 years
99% after 75 years
Capital´s real value can be maintained constant forever - ceteris paribus.
A SA accountant accounts capital once and it instantaneously loses its constant item status and is magically turned into a depreciating monetary item with the SA accountant unknowingly destroying its real value as set out above. This is the case in all SA companies which do not have 100% of all contributions to equity (excluding the revaluation reserve) invested in variable item fixed assets that can be or are revalued via the revaluation reserve.
In principle SA has never ever had and currently does not have any constant item Retained Profits. All SA´s supposedly "constant item" Retained Profits are simply CASH. Not cash in the bank earning interest but CASH as in notes and coins kept under the mattress with their real values being destroyed by inflation.
The IASB went to great lengths in IAS 29 to clearly define capital as a non-monetary item. That was a total waste of time in 1989 when it then went ahead to "approve" at the same time the impossible process of financial capital "maintenance" in nominal monetary units during low inflation.
Kindest regards,
Nicolaas Smith
The art of turning capital into CASH in a flash
SA accountants are great performing artists. They get their biggest inspiration from the American Institute of Certified Public Accountants´ definition of accounting that starts with the words: The art of …
SA accountants have perfected the art of turning capital into CASH in a flash. They wait patiently for SA entrepreneurs to start companies to increase the wealth of the nation. Companies need accountants to do their books. SA accountants confidently step forward and state: Trust me, I’m an accountant.
SA entrepreneurs have to use some of the existing wealth of the nation to serve as the investment capital of their companies.
The entrepreneurs entrust the accounting of this investment capital to their trusted accountants. SA accountants confidently value this capital in nominal monetary units on the basis that the International Accounting Standards Board states that it is humanly possible to measure financial capital maintenance in nominal monetary units during low inflation. (It isn´t.)
No-one has told SA accountants up till now that this is only possible at zero inflation. They thus happily value SA entrepreneurs´ capital in nominal monetary units and instantaneously turn that hard earned capital into CASH.
We all know what happens to CASH: its real value is destroyed by inflation.
SA accountants unknowingly destroy the real value of shareholders´ equity never updated at a rate equal to the inflation rate. This is the case in all SA companies which do not have 100% of all contributions to equity (excluding the revaluation reserve) invested in variable item fixed assets that can be or are revalued via the revaluation reserve.
SA accountants do their famous stable measuring unit assumption trick and instantaneously turn SA entrepreneurs´ capital into plain old CASH the very first instant they account that capital in nominal monetary units during low inflation. Real value destroyed forever at a rate equal to the rate of inflation or for as long as they carry on with their infamous stable measuring unit assumption.
Snap: nominal monetary units, and it’s done: Capital to CASH in a flash.
Kindest regards,
Nicolaas Smith
PS The real value of R 1 000 000 in Retained Profits contributed on 1st Jan 1981 which are still in Retained Profits today but updated at the rate of inflation: R 14 882 000. Real value destroyed since 1981 R13 882 000.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
SA accountants have perfected the art of turning capital into CASH in a flash. They wait patiently for SA entrepreneurs to start companies to increase the wealth of the nation. Companies need accountants to do their books. SA accountants confidently step forward and state: Trust me, I’m an accountant.
SA entrepreneurs have to use some of the existing wealth of the nation to serve as the investment capital of their companies.
The entrepreneurs entrust the accounting of this investment capital to their trusted accountants. SA accountants confidently value this capital in nominal monetary units on the basis that the International Accounting Standards Board states that it is humanly possible to measure financial capital maintenance in nominal monetary units during low inflation. (It isn´t.)
No-one has told SA accountants up till now that this is only possible at zero inflation. They thus happily value SA entrepreneurs´ capital in nominal monetary units and instantaneously turn that hard earned capital into CASH.
We all know what happens to CASH: its real value is destroyed by inflation.
SA accountants unknowingly destroy the real value of shareholders´ equity never updated at a rate equal to the inflation rate. This is the case in all SA companies which do not have 100% of all contributions to equity (excluding the revaluation reserve) invested in variable item fixed assets that can be or are revalued via the revaluation reserve.
SA accountants do their famous stable measuring unit assumption trick and instantaneously turn SA entrepreneurs´ capital into plain old CASH the very first instant they account that capital in nominal monetary units during low inflation. Real value destroyed forever at a rate equal to the rate of inflation or for as long as they carry on with their infamous stable measuring unit assumption.
Snap: nominal monetary units, and it’s done: Capital to CASH in a flash.
Kindest regards,
Nicolaas Smith
PS The real value of R 1 000 000 in Retained Profits contributed on 1st Jan 1981 which are still in Retained Profits today but updated at the rate of inflation: R 14 882 000. Real value destroyed since 1981 R13 882 000.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
PricewaterhouseCoopers clueless about monetary and constant item real value
Dr Roelof Botha, an economic adviser to PricewaterhouseCoopers, does not agree with these levels of increase. "In the private sector increases exceeding consumer price inflation (CPI) may be justified if the company's productivity increases.
If institutions like the Reserve Bank and the South African Revenue Service (Sars) - which have no effect on the country's productivity and add no value to the economy - award salary increases higher than the CPI, they violate their own principles. Fin24
Dr Roelof Botha from PricewaterhouseCoopers was commenting on the salary increases above the inflation rate at the SARB.
It is unbelievable that an economic adviser to PricewaterhouseCoopers would state that the SARB has no effect on the country´s productivity and add no value to the economy.
A 1% drop in the inflation rate maintains instead of destroy R20 billion per annum in the SA monetary economy. Tito Mboweni and his team at the SARB have succeeded in maintaining average annual inflation at 6% per annum for the last 10 years compared to 12% average annual inflation during the last 12 years of apartheid rule. They have thus maintained instead of destroyed R120 billion per annum in the SA monetary economy during the last 10 years.
Basically the SARB has added R120 billion PER ANNUM to the economy during the last 10 years. This will carry on in the future as long as inflation can be maintained at or below 6%.
PWC´s Dr Botha regards R120 billion per annum as "no value".
The 50% reduction in average annual inflation also reduced by 50% the amount of real value SA accountants at PricewaterhouseCoopers´ clients and all other SA companies unknowingly destroy in constant items never updated in the SA real economy. PWC signed most of their clients´ accounts off as "fairly presenting their businesses."
PricewaterhouseCoopers is not even remotely aware of the unknowing and unintentional destruction in the real value of constant items never updated by all the accountants at all their clients. PWC is blisfully lost in Historical Cost accounting - blindfolded by their complete support of the implementation of the very destructive stable measuring unit assumption in the SA economy.
PricewaterhouseCoopers´ Dr Botha will obviously state that Gideon Gono, the governor of the Reserve Bank of Zimbabwe had not the slightes effect on the Zimbabwean economy when he single handedly wiped out 100% of the real value of the Zimbabwe Dollar in the Zim monetary economy with hyperinflation at billions of percent and eliminated the ZimDollar completely from the Zim economy in that fashion.
The blatant lack of basic understanding of measurement of monetary as well as constant item real value in the SA economy by PricewaterhouseCoopers is shocking.
Kindest regards,
Nicolaas Smith
If institutions like the Reserve Bank and the South African Revenue Service (Sars) - which have no effect on the country's productivity and add no value to the economy - award salary increases higher than the CPI, they violate their own principles. Fin24
Dr Roelof Botha from PricewaterhouseCoopers was commenting on the salary increases above the inflation rate at the SARB.
It is unbelievable that an economic adviser to PricewaterhouseCoopers would state that the SARB has no effect on the country´s productivity and add no value to the economy.
A 1% drop in the inflation rate maintains instead of destroy R20 billion per annum in the SA monetary economy. Tito Mboweni and his team at the SARB have succeeded in maintaining average annual inflation at 6% per annum for the last 10 years compared to 12% average annual inflation during the last 12 years of apartheid rule. They have thus maintained instead of destroyed R120 billion per annum in the SA monetary economy during the last 10 years.
Basically the SARB has added R120 billion PER ANNUM to the economy during the last 10 years. This will carry on in the future as long as inflation can be maintained at or below 6%.
PWC´s Dr Botha regards R120 billion per annum as "no value".
The 50% reduction in average annual inflation also reduced by 50% the amount of real value SA accountants at PricewaterhouseCoopers´ clients and all other SA companies unknowingly destroy in constant items never updated in the SA real economy. PWC signed most of their clients´ accounts off as "fairly presenting their businesses."
PricewaterhouseCoopers is not even remotely aware of the unknowing and unintentional destruction in the real value of constant items never updated by all the accountants at all their clients. PWC is blisfully lost in Historical Cost accounting - blindfolded by their complete support of the implementation of the very destructive stable measuring unit assumption in the SA economy.
PricewaterhouseCoopers´ Dr Botha will obviously state that Gideon Gono, the governor of the Reserve Bank of Zimbabwe had not the slightes effect on the Zimbabwean economy when he single handedly wiped out 100% of the real value of the Zimbabwe Dollar in the Zim monetary economy with hyperinflation at billions of percent and eliminated the ZimDollar completely from the Zim economy in that fashion.
The blatant lack of basic understanding of measurement of monetary as well as constant item real value in the SA economy by PricewaterhouseCoopers is shocking.
Kindest regards,
Nicolaas Smith
Third blank spot for SA accountants
We have already asked SA accountants
1. Is there inflation in SA or not?
2. Are there net monetary losses and gains during low inflation?
Now we can ask them: SA accountants how many basic economic items are there in the economy?
3. Two or three basic economic items?
SA accountants do accounting from the viewpoint that there are two basic items in the economy
Monetary items
Non-monetary items
They account variable items they value at Historical Cost, eg. stock when the Historical Cost of inventories is lower than net realizable value and Retained Profits - which is a constant item - both at Historical Cost. They make no difference between HC variable items and HC constant items.
Fact Check: There are three basic items in the economy:
Monetary items
Variable items
Constant items
SA accountants have never heard of constant items although they have been around for 500 years and they have been accounting them and unknowingly and unintentionally destroying their real values at the rate of inflation for the last 357 years.
Currently SA accountants unknowingly destroy about R200 billion PER ANNUM in the SA real economy because of their implementation of the stable measuring unit assumption during low inflation. The IASB authorized them to measure financial capital maintenance in units of constant purchasing power 20 years ago in the Framework, Par. 104 (a) which states:
“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
SA accountants refuse point blank to measure financial capital maintenance in units of constant purchasing power.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
1. Is there inflation in SA or not?
2. Are there net monetary losses and gains during low inflation?
Now we can ask them: SA accountants how many basic economic items are there in the economy?
3. Two or three basic economic items?
SA accountants do accounting from the viewpoint that there are two basic items in the economy
Monetary items
Non-monetary items
They account variable items they value at Historical Cost, eg. stock when the Historical Cost of inventories is lower than net realizable value and Retained Profits - which is a constant item - both at Historical Cost. They make no difference between HC variable items and HC constant items.
Fact Check: There are three basic items in the economy:
Monetary items
Variable items
Constant items
SA accountants have never heard of constant items although they have been around for 500 years and they have been accounting them and unknowingly and unintentionally destroying their real values at the rate of inflation for the last 357 years.
Currently SA accountants unknowingly destroy about R200 billion PER ANNUM in the SA real economy because of their implementation of the stable measuring unit assumption during low inflation. The IASB authorized them to measure financial capital maintenance in units of constant purchasing power 20 years ago in the Framework, Par. 104 (a) which states:
“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
SA accountants refuse point blank to measure financial capital maintenance in units of constant purchasing power.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Thursday 3 September 2009
Two when there are actually three
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, other items in Shareholders´ Equity and most items in the income statement (excluding items like salaries, wages, rents, etc. valued in units of constant purchasing power or inflation-adjusted) 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.
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 over time.
Kindest regards,
Nicolaas Smith
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, other items in Shareholders´ Equity and most items in the income statement (excluding items like salaries, wages, rents, etc. valued in units of constant purchasing power or inflation-adjusted) 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.
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 over time.
Kindest regards,
Nicolaas Smith
Tuesday 1 September 2009
Fraternizing with the enemy
Whereas inflation is SA´s public enemy No 1, SA accountant’s stable measuring unit assumption is public enemy No 2.
SA accountants proudly live up to their deserved reputation as trusted custodians of real value in the case of the constant items salaries and wages. They very responsibly admit that the real value of salaries and wages would be destroyed if the destruction of the real value of the unstable medium of exchange in SA, the always depreciating Rand, is not compensated for by valuing remuneration items in units of constant purchasing power; i.e., inflation-adjusting them in a low inflation environment. They vigorously reject the stable measuring unit assumption in the case of salaries and wages.
Retained Profits are constant items exactly the same as salaries and wages. When it comes to valuing Retained Profits and other balance sheet constant items, SA accountants slavishly follow their mentor’s advice and implement their very destructive stable measuring unit assumption whereby they now suddenly ASSUME that the Rand is perfectly stable and always had been perfectly stable. They refuse point blank to measure financial capital maintenance in units of constant purchasing power as the IASB has authorized them to do 20 years ago. They thus unknowingly and unintentionally destroy the real value of Retained Profits in all SA companies at a rate equal to the rate of inflation. Thus unnecessary destruction of real value in constant items never updated amounts to about R200 billion per annum in the SA real economy.
Financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) in 1989 means inflation-adjusting all constant item accounts – income statement and balance sheet constant items – in a low inflation environment.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
SA accountants proudly live up to their deserved reputation as trusted custodians of real value in the case of the constant items salaries and wages. They very responsibly admit that the real value of salaries and wages would be destroyed if the destruction of the real value of the unstable medium of exchange in SA, the always depreciating Rand, is not compensated for by valuing remuneration items in units of constant purchasing power; i.e., inflation-adjusting them in a low inflation environment. They vigorously reject the stable measuring unit assumption in the case of salaries and wages.
Retained Profits are constant items exactly the same as salaries and wages. When it comes to valuing Retained Profits and other balance sheet constant items, SA accountants slavishly follow their mentor’s advice and implement their very destructive stable measuring unit assumption whereby they now suddenly ASSUME that the Rand is perfectly stable and always had been perfectly stable. They refuse point blank to measure financial capital maintenance in units of constant purchasing power as the IASB has authorized them to do 20 years ago. They thus unknowingly and unintentionally destroy the real value of Retained Profits in all SA companies at a rate equal to the rate of inflation. Thus unnecessary destruction of real value in constant items never updated amounts to about R200 billion per annum in the SA real economy.
Financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) in 1989 means inflation-adjusting all constant item accounts – income statement and balance sheet constant items – in a low inflation environment.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Monday 31 August 2009
White elephant at fancy dress party
Inflation is undoubtedly SA´s public enemy No 1.
Luckily we have had Tito Mboweni (Julius, Mboweni is BLACK, please don’t forget that!!) over the last 10 years reducing the destruction of the real value of the Rand and all other monetary items to an annual average of 6% in the SA monetary economy.
That is half the 12% annual average during the last 12 years of WHITE apartheid rule.
With a 1% drop in inflation being equal to maintaining R20 billion in the real value of the Rand PER ANNUM it means that Tito maintained on average AN ADDITIONAL R120 billion PER ANNUM in the SA monetary economy. This will carry on into the future as long as average annual inflation stays at 6% or below.
This will have a permanent effect on the SA economy as a whole.
Let’s hope Gill Marcus can get it down another 3% to the bottom level of the SARB´s inflation targeting range. (Julius, not because she is WHITE, but because that would be very good for everyone in South Africa. Tito got it down to 6% now we should go lower. We should expect that from whoever is the next Governor of the SARB, whether this person is blue, orange or purple.)
That would maintain another R60 billion PER ANNUM in the SA monetary economy for as long as inflation can be maintained below 3% per annum.
Good luck to Gill Marcus.
Every year she achieves that, we can have a fancy dress party and go dressed/coloured in gold, platinum and sterling silver. Julius Malema has a standing invitation. He can come as a white elephant.
Kindest regards,
Nicolaas Smith
Luckily we have had Tito Mboweni (Julius, Mboweni is BLACK, please don’t forget that!!) over the last 10 years reducing the destruction of the real value of the Rand and all other monetary items to an annual average of 6% in the SA monetary economy.
That is half the 12% annual average during the last 12 years of WHITE apartheid rule.
With a 1% drop in inflation being equal to maintaining R20 billion in the real value of the Rand PER ANNUM it means that Tito maintained on average AN ADDITIONAL R120 billion PER ANNUM in the SA monetary economy. This will carry on into the future as long as average annual inflation stays at 6% or below.
This will have a permanent effect on the SA economy as a whole.
Let’s hope Gill Marcus can get it down another 3% to the bottom level of the SARB´s inflation targeting range. (Julius, not because she is WHITE, but because that would be very good for everyone in South Africa. Tito got it down to 6% now we should go lower. We should expect that from whoever is the next Governor of the SARB, whether this person is blue, orange or purple.)
That would maintain another R60 billion PER ANNUM in the SA monetary economy for as long as inflation can be maintained below 3% per annum.
Good luck to Gill Marcus.
Every year she achieves that, we can have a fancy dress party and go dressed/coloured in gold, platinum and sterling silver. Julius Malema has a standing invitation. He can come as a white elephant.
Kindest regards,
Nicolaas Smith
Friday 28 August 2009
Constant purchasing power
Variable Items during low inflation and deflation
Variable items, eg. property, plant, equipment, inventories, quoted and unquoted shares, foreign exchange, etc are valued in terms of IFRS or SA GAAP during low inflation and deflation at, for example, market value, fair value, present value, recoverable value, net realizable value, etc.
They are not valued by anyone in units of constant purchasing power during low inflation and deflation.
Variable items during hyperinflation
Variable items are required by the IASB to be valued in units of constant purchasing power during hyperinflation in terms of IAS 29 Financial Reporting in Hyperinflationary Economies by inflation-adjusting their nominal values in terms of the change in the CPI.
Does this affect the nature of the underlying resources? Yes it does.
Turkey was in hyperinflation in 2004.
“In 2004, financial statements were restated and taxes were taken based on restated values.” Dr Cemal KÜÇÜKSÖZEN, Head of Accounting Standards Department, Capital Markets Board of Turkey.
Brazilian accountants valued non-monetary items in the entire Brazilian economyin units of constant purchasing power by inflation-adjusting them by means of variosindeces during various different governments during the 30 years from 1964 to 1994 thus maintaining their real values constant according to the Central Bank of Brazil.
Yes, to represent value in terms of constant purchasing power does affect the nature of the underlying resources.
The choices accountants make do change those values and do affect the economy: see Brazil and Trukey above.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Variable items, eg. property, plant, equipment, inventories, quoted and unquoted shares, foreign exchange, etc are valued in terms of IFRS or SA GAAP during low inflation and deflation at, for example, market value, fair value, present value, recoverable value, net realizable value, etc.
They are not valued by anyone in units of constant purchasing power during low inflation and deflation.
Variable items during hyperinflation
Variable items are required by the IASB to be valued in units of constant purchasing power during hyperinflation in terms of IAS 29 Financial Reporting in Hyperinflationary Economies by inflation-adjusting their nominal values in terms of the change in the CPI.
Does this affect the nature of the underlying resources? Yes it does.
Turkey was in hyperinflation in 2004.
“In 2004, financial statements were restated and taxes were taken based on restated values.” Dr Cemal KÜÇÜKSÖZEN, Head of Accounting Standards Department, Capital Markets Board of Turkey.
Brazilian accountants valued non-monetary items in the entire Brazilian economyin units of constant purchasing power by inflation-adjusting them by means of variosindeces during various different governments during the 30 years from 1964 to 1994 thus maintaining their real values constant according to the Central Bank of Brazil.
Yes, to represent value in terms of constant purchasing power does affect the nature of the underlying resources.
The choices accountants make do change those values and do affect the economy: see Brazil and Trukey above.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Thursday 27 August 2009
Breaking news R5.879 billion additional loss at Eskom
Besides the R9.708 billion after tax loss reported in the 2009 Annual Report, Eskom lost another R5.879 billion in the real value of its Accumulated Profits from March 2008 till July 2009. This amount was unknowingly and unintentionally destroyed in the real value of Eskom´s Accumulated Profits by the accountants at Eskom implementing the stable measuring unit assumption.
Kindest regards,
Nicolaas Smith
Kindest regards,
Nicolaas Smith
Wednesday 26 August 2009
Disinflation (inflation at a slower rate) continues in the SA monetary economy.
Disinflation (inflation at a slower rate) continues in the SA monetary economy.
The general increase in consumer prices in SA over the 12 months to the end of July, 2009 only led to the destruction on average of 6.7% of the real value of the Rand and all other monetary items in the SA monetary economy compared to 6.9% in the 12 month period to the end of June, 2009.
SA accountants unknowingly also only destroyed 6.7% of the real value of all Retained Profits in SA companies and SA banks over the 12 months to July, 2009 compared to the 6.9% in real value they were unknowingly destroying in all constant items never updated in the SA real economy in the 12 months to June, 2009.
The time it takes to destroy 50% of the real value of current Retained Profits stays at 11 years.
This unknowing destruction by SA accountants amounts to about R200 billion PER ANNUM.
This was because of their implementation of their very destructive stable measuring unit assumption and their refusal to change over to measuring financial capital maintenance in units of constant purchasing power as they were authorized to do 20 years ago by the IASB in the Framework, Par. 104 (a) which states:
“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
Two of the “hidden forces of economic law on the side of destruction” as described by John Maynard Keynes thus had a slightly lesser destructive effect on the SA economy in the year to end July, 2009.
Cumulative inflation since April 1994 came to 166.5% in July, 2009.
62.5% of all the real value of Retained Profits in SA companies and banks in April, 1994 whichremained in Retained Profits till July, 2009 have thus been unknowingly and unintentionally been destroyed by SA accountants implementing their stable measuring unit assumption by which they assume cumulative inflation over that period was zero percent.
So too the real value of issued share capital of all SA companies with no fixed assets over that period.
Cumulative inflation since Jan 1981 came to 1382.2% in July, 2009.
93.3% of all the real value of Retained Profits in SA companies and banks in Jan, 1981 which remained in Retained Profits till July, 2009 have thus been unknowingly and unintentionally been destroyed by SA accountants implementing their stable measuring unit assumption by which they assume cumulative inflation over that period was zero percent.
So too the real value of issued share capital of all SA companies with no fixed assets over that period.
We all know that our accountants can freely stop their silly and very destructive stable measuring unit assumption any time they want.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
The general increase in consumer prices in SA over the 12 months to the end of July, 2009 only led to the destruction on average of 6.7% of the real value of the Rand and all other monetary items in the SA monetary economy compared to 6.9% in the 12 month period to the end of June, 2009.
SA accountants unknowingly also only destroyed 6.7% of the real value of all Retained Profits in SA companies and SA banks over the 12 months to July, 2009 compared to the 6.9% in real value they were unknowingly destroying in all constant items never updated in the SA real economy in the 12 months to June, 2009.
The time it takes to destroy 50% of the real value of current Retained Profits stays at 11 years.
This unknowing destruction by SA accountants amounts to about R200 billion PER ANNUM.
This was because of their implementation of their very destructive stable measuring unit assumption and their refusal to change over to measuring financial capital maintenance in units of constant purchasing power as they were authorized to do 20 years ago by the IASB in the Framework, Par. 104 (a) which states:
“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
Two of the “hidden forces of economic law on the side of destruction” as described by John Maynard Keynes thus had a slightly lesser destructive effect on the SA economy in the year to end July, 2009.
Cumulative inflation since April 1994 came to 166.5% in July, 2009.
62.5% of all the real value of Retained Profits in SA companies and banks in April, 1994 whichremained in Retained Profits till July, 2009 have thus been unknowingly and unintentionally been destroyed by SA accountants implementing their stable measuring unit assumption by which they assume cumulative inflation over that period was zero percent.
So too the real value of issued share capital of all SA companies with no fixed assets over that period.
Cumulative inflation since Jan 1981 came to 1382.2% in July, 2009.
93.3% of all the real value of Retained Profits in SA companies and banks in Jan, 1981 which remained in Retained Profits till July, 2009 have thus been unknowingly and unintentionally been destroyed by SA accountants implementing their stable measuring unit assumption by which they assume cumulative inflation over that period was zero percent.
So too the real value of issued share capital of all SA companies with no fixed assets over that period.
We all know that our accountants can freely stop their silly and very destructive stable measuring unit assumption any time they want.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Money cannot be valued in units of constant purchasing power
Units of constant purchasing power
There are three basic economic items in the economy:
1. Monetary items
2. Variable items
3. Constant items
We will analyse the possibility and the effect of valuing items in units of constant purchasing power in each case.
Monetary items
Inflation only destroys the real value of money and other monetary items over time.
Inflation has no effect on the real value of non-monetary items.
Money and other monetary items´ real values are destroyed at the rate of inflation over time in a low inflationary and in a hyperinflationary environment.
SA accountants VALUE money and other monetary items in nominal monetary units during the current financial period since that is the only way in which they can be valued under any accounting model.
It is impossible to update, inflation-adjust or restate money and other monetary items during the current financial period during low inflation, hyperinflation or deflation.
It is impossible to inflation-adjust money and other monetary items during the current financial period by means of units of constant purchasing power during low inflation, hyperinflation or deflation.
SA accountants can only VALUE monetary items in nominal monetary units, eg. bank account balances, capital amounts of bank loans, capital amounts of bank savings, car loans, housing loans, consumer loans, student loans, all other monetary loans, etc.
Monetary items cannot be valued in units of constant purchasing power during the current financial period under any accounting model.
Kindest regards,
Nicolaas Smith
There are three basic economic items in the economy:
1. Monetary items
2. Variable items
3. Constant items
We will analyse the possibility and the effect of valuing items in units of constant purchasing power in each case.
Monetary items
Inflation only destroys the real value of money and other monetary items over time.
Inflation has no effect on the real value of non-monetary items.
Money and other monetary items´ real values are destroyed at the rate of inflation over time in a low inflationary and in a hyperinflationary environment.
SA accountants VALUE money and other monetary items in nominal monetary units during the current financial period since that is the only way in which they can be valued under any accounting model.
It is impossible to update, inflation-adjust or restate money and other monetary items during the current financial period during low inflation, hyperinflation or deflation.
It is impossible to inflation-adjust money and other monetary items during the current financial period by means of units of constant purchasing power during low inflation, hyperinflation or deflation.
SA accountants can only VALUE monetary items in nominal monetary units, eg. bank account balances, capital amounts of bank loans, capital amounts of bank savings, car loans, housing loans, consumer loans, student loans, all other monetary loans, etc.
Monetary items cannot be valued in units of constant purchasing power during the current financial period under any accounting model.
Kindest regards,
Nicolaas Smith
Tuesday 25 August 2009
Units of constant purchasing power for dummies
The two confirmed disbelievers in this area are the accounting professor and Market Monkey.
The accounting professor states:
“So its fine to represent value in terms of constant purchasing power and to argue that that would be a better method than using historic cost and maintaining a fiction as to the stability of the measuring unit - but that doesn't affect the nature of the underlying resources.”
Market Monkey says he is dead right.
The accounting professor and Market Monkey are both dead wrong.
Units of constant purchasing power
Inflation can only destroy the real value of money and other monetary items over time. Inflation has no effect on the real value of non-monetary items.
Stating or valuing economic items in nominal monetary units over time thus means that the real values of these items will be destroyed over time in an inflationary environment if they are monetary items or if they are treated as monetary items.
Valuing constant real value non-monetary items, eg. salaries, wages, etc., in units of constant purchasing power over time means that the real value of these items will be maintained constant over time since the nominal values are inflation-adjusted by means of the Consumer Price Index over time. This is the case with salaries and wages in South Africa. Everybody including the accounting professor and Market Monkey understand that.
There are three basic economic items in the economy:
1. Monetary items
2. Variable items
3. Constant items
We will analyse the possibility and the effect of valuing items in units of constant purchasing power in each case.
Monetary items
It is impossible to update or inflation-adjust money and other monetary items during the current financial period during low inflation or hyperinflation.
It is thus impossible to inflation-adjust money and other monetary items by means of units of constant purchasing power during low inflation or hyperinflation.
SA accountants can only VALUE monetary items in nominal monetary units, eg. bank account balances, capital amounts of bank loans, capital amounts of bank savings, car loans, housing loans, consumer loans, student loans, all other monetary loans, etc.
Since monetary items can ONLY be VALUED by SA accountants in nominal monetary units it also appears as if they in this case simply report on what happened in the past as the accounting professor and Market Monkey believe.
Monetary items thus cannot be valued in units of constant purchasing power during the current financial period.
The accounting professor, Market Monkey and I all agree on this item.
Sorry, no bun fight in the monetary item area.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
The accounting professor states:
“So its fine to represent value in terms of constant purchasing power and to argue that that would be a better method than using historic cost and maintaining a fiction as to the stability of the measuring unit - but that doesn't affect the nature of the underlying resources.”
Market Monkey says he is dead right.
The accounting professor and Market Monkey are both dead wrong.
Units of constant purchasing power
Inflation can only destroy the real value of money and other monetary items over time. Inflation has no effect on the real value of non-monetary items.
Stating or valuing economic items in nominal monetary units over time thus means that the real values of these items will be destroyed over time in an inflationary environment if they are monetary items or if they are treated as monetary items.
Valuing constant real value non-monetary items, eg. salaries, wages, etc., in units of constant purchasing power over time means that the real value of these items will be maintained constant over time since the nominal values are inflation-adjusted by means of the Consumer Price Index over time. This is the case with salaries and wages in South Africa. Everybody including the accounting professor and Market Monkey understand that.
There are three basic economic items in the economy:
1. Monetary items
2. Variable items
3. Constant items
We will analyse the possibility and the effect of valuing items in units of constant purchasing power in each case.
Monetary items
It is impossible to update or inflation-adjust money and other monetary items during the current financial period during low inflation or hyperinflation.
It is thus impossible to inflation-adjust money and other monetary items by means of units of constant purchasing power during low inflation or hyperinflation.
SA accountants can only VALUE monetary items in nominal monetary units, eg. bank account balances, capital amounts of bank loans, capital amounts of bank savings, car loans, housing loans, consumer loans, student loans, all other monetary loans, etc.
Since monetary items can ONLY be VALUED by SA accountants in nominal monetary units it also appears as if they in this case simply report on what happened in the past as the accounting professor and Market Monkey believe.
Monetary items thus cannot be valued in units of constant purchasing power during the current financial period.
The accounting professor, Market Monkey and I all agree on this item.
Sorry, no bun fight in the monetary item area.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Accounting professor is dead wrong - Part 2
Continuing from yesterday’s blog:
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.
SA accountants who prepare their companies´ accounts based on International Financial Reporting Standards during low inflation have to choose between Historical Cost Accounting and Constant ITEM Purchasing Power Accounting in terms of Par. 104 (a) which states:
“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
SA accountants have to choose between implementing the constant purchasing power financial capital concept of invested purchasing power measured in units of constant purchasing power, the constant purchasing power financial capital maintenance concept and determining profit or loss in terms of units of constant purchasing power during non-hyperinflationary periods, on the one hand, or the traditional Historical Cost financial capital concept of invested money in nominal monetary units, the HC financial capital maintenance concept in nominal monetary units and the HC profit or loss determination concept in nominal monetary units during non-hyperinflationary periods.
SA accountants generally choose the real value destroying Historical Cost Accounting model when they implement the very destructive stable measuring unit assumption.
We all know that measuring an economic item in units of constant purchasing power maintains its real value constant as compared to measuring it in nominal monetary unit which results in its real value being destroyed at a rate equal to the rate of inflation.
The accounting professor states: “the choice of the measuring unit does not affect their fundamental value”
He is dead wrong in the case of constant items never updated.
He states: “ So its fine to represent value in terms of constant purchasing power and to argue that that would be a better method than using historic cost and maintaining a fiction as to the stability of the measuring unit - but that doesn't affect the nature of the underlying resources.”
He is dead wrong in the case of constant items never updated.
He states: “The choices accountants won't change that value & won't affect the economy (except indirectly insofar as investment decisions are based on the figures we present).”
He is dead wrong in the case of constant items never updated.
SA accountants unknowingly destroy about R200 billion PER ANNUM in the real value of constant items, for example, Retained Profits of all SA companies never updated during low inflation because they implement the very destructive stable measuring unit assumption as part of the real value destroying Historical Cost Accounting model.
They will boost the SA real economy by about R200 billion PER ANNUM for an unlimited period of time – ceteris paribus – when they reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the IASB 20 years ago.
They simply have to ignore that the accounting professor states that “to represent value in terms of constant purchasing power doesn't affect the nature of the underlying resources.”
He is dead wrong in the case of constant items never updated.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
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.
SA accountants who prepare their companies´ accounts based on International Financial Reporting Standards during low inflation have to choose between Historical Cost Accounting and Constant ITEM Purchasing Power Accounting in terms of Par. 104 (a) which states:
“Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power.”
SA accountants have to choose between implementing the constant purchasing power financial capital concept of invested purchasing power measured in units of constant purchasing power, the constant purchasing power financial capital maintenance concept and determining profit or loss in terms of units of constant purchasing power during non-hyperinflationary periods, on the one hand, or the traditional Historical Cost financial capital concept of invested money in nominal monetary units, the HC financial capital maintenance concept in nominal monetary units and the HC profit or loss determination concept in nominal monetary units during non-hyperinflationary periods.
SA accountants generally choose the real value destroying Historical Cost Accounting model when they implement the very destructive stable measuring unit assumption.
We all know that measuring an economic item in units of constant purchasing power maintains its real value constant as compared to measuring it in nominal monetary unit which results in its real value being destroyed at a rate equal to the rate of inflation.
The accounting professor states: “the choice of the measuring unit does not affect their fundamental value”
He is dead wrong in the case of constant items never updated.
He states: “ So its fine to represent value in terms of constant purchasing power and to argue that that would be a better method than using historic cost and maintaining a fiction as to the stability of the measuring unit - but that doesn't affect the nature of the underlying resources.”
He is dead wrong in the case of constant items never updated.
He states: “The choices accountants won't change that value & won't affect the economy (except indirectly insofar as investment decisions are based on the figures we present).”
He is dead wrong in the case of constant items never updated.
SA accountants unknowingly destroy about R200 billion PER ANNUM in the real value of constant items, for example, Retained Profits of all SA companies never updated during low inflation because they implement the very destructive stable measuring unit assumption as part of the real value destroying Historical Cost Accounting model.
They will boost the SA real economy by about R200 billion PER ANNUM for an unlimited period of time – ceteris paribus – when they reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the IASB 20 years ago.
They simply have to ignore that the accounting professor states that “to represent value in terms of constant purchasing power doesn't affect the nature of the underlying resources.”
He is dead wrong in the case of constant items never updated.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Monday 24 August 2009
Financial reporting does NOT simply report on what took place
There is a debate whether accountants simply record what happened in the past or whether they value economic items.
There are three different categories of basic economic items in a financial report:
I. Monetary items
We all report monetary items at their original nominal monetary amounts during the current financial period.
Let us assume the following: Telkom placed R100 million in a savings account in the bank on 2nd Jan 2008.
Their accountants left this item as posted on 02-01-2008. Telkom´s auditors checked this entry and stated that Telkom´s accounts fairly presented their business at their year end.
Monetary items are also VALUED by accountants at their original nominal monetary values because it is impossible to update or inflation-adjust money and other monetary items. Their real values are continuously being destroyed by inflation which means they are always VALUED at their current inflation-destroyed real values.
Simply reporting them as they took place originally and VALUING them are thus one and the same thing.
II. Constant items
Let us assume: In Jan 1981 one of the late honourable Anton Rupert´s original companies had R100 million in Retained Profits. That amount stayed in retained profits till today. It was part of the Remgro Retained Earnings value at 31st March 2009.
Remgro´s auditors verified the amount and stated that Remgro´s accounts fairly present their business.
The fact that that R100 million is only worth R6.8 million in real value today is absolutely no concern to anyone.
Well, to me it is.
The fact that SA accountants valued in the past and now value Retained Profits at Historical Cost with their silly stable measuring unit assumption thus transforming hundreds (thousands?) of billions of Rands of constant real value non-monetary items currently into simple old CASH (you know, like Rand notes and coins) means that Retained Profits, just like Monetary Items above, are simply being reported as they took place originally and that VALUING them and stating them at their original nominal monetary values are one and the same thing.
The simple undeniable fact that by valuing (simply reporting what took place in some people´s view) Retained Profits at Historical Cost by implementing that silly stable measuring unit assumption, SA accountants are destroying hundreds of billions of Rand (about R200 billion) PER ANNUM in the SA real economy apparently has not been realized yet. Luckily the IASB realized something 20 years ago when they approved the Framework, Par. 104 (a) as follows:
"Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
III. Variable Items
Let us assume: A company bought stock on Jan 1 2008 at R100 million. At its year end on 31.12.2008 the net realizable value of that stock was R10 million.
Their auditors said: No. The stock has to be shown at the lower of cost or net realizable value.
So:
Financial reporting does NOT simply report on what took place.
Let us assume: Big bucks bankers on Wall Street securitized USD 10 trillion in sub-prime mortages and sold it off all over the world.
.
Their auditors forced them to value those items at fair value.
So:
Financial reporting does NOT simply report on what took place.
We can state a million examples of variable items not reported as they took place originally but VALUED in terms of IFRS or SA GAAP.
Copyright 2005-2010 by Nicolaas Smith
There are three different categories of basic economic items in a financial report:
I. Monetary items
We all report monetary items at their original nominal monetary amounts during the current financial period.
Let us assume the following: Telkom placed R100 million in a savings account in the bank on 2nd Jan 2008.
Their accountants left this item as posted on 02-01-2008. Telkom´s auditors checked this entry and stated that Telkom´s accounts fairly presented their business at their year end.
Monetary items are also VALUED by accountants at their original nominal monetary values because it is impossible to update or inflation-adjust money and other monetary items. Their real values are continuously being destroyed by inflation which means they are always VALUED at their current inflation-destroyed real values.
Simply reporting them as they took place originally and VALUING them are thus one and the same thing.
II. Constant items
Let us assume: In Jan 1981 one of the late honourable Anton Rupert´s original companies had R100 million in Retained Profits. That amount stayed in retained profits till today. It was part of the Remgro Retained Earnings value at 31st March 2009.
Remgro´s auditors verified the amount and stated that Remgro´s accounts fairly present their business.
The fact that that R100 million is only worth R6.8 million in real value today is absolutely no concern to anyone.
Well, to me it is.
The fact that SA accountants valued in the past and now value Retained Profits at Historical Cost with their silly stable measuring unit assumption thus transforming hundreds (thousands?) of billions of Rands of constant real value non-monetary items currently into simple old CASH (you know, like Rand notes and coins) means that Retained Profits, just like Monetary Items above, are simply being reported as they took place originally and that VALUING them and stating them at their original nominal monetary values are one and the same thing.
The simple undeniable fact that by valuing (simply reporting what took place in some people´s view) Retained Profits at Historical Cost by implementing that silly stable measuring unit assumption, SA accountants are destroying hundreds of billions of Rand (about R200 billion) PER ANNUM in the SA real economy apparently has not been realized yet. Luckily the IASB realized something 20 years ago when they approved the Framework, Par. 104 (a) as follows:
"Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
III. Variable Items
Let us assume: A company bought stock on Jan 1 2008 at R100 million. At its year end on 31.12.2008 the net realizable value of that stock was R10 million.
Their auditors said: No. The stock has to be shown at the lower of cost or net realizable value.
So:
Financial reporting does NOT simply report on what took place.
Let us assume: Big bucks bankers on Wall Street securitized USD 10 trillion in sub-prime mortages and sold it off all over the world.
.
Their auditors forced them to value those items at fair value.
So:
Financial reporting does NOT simply report on what took place.
We can state a million examples of variable items not reported as they took place originally but VALUED in terms of IFRS or SA GAAP.
Copyright 2005-2010 by Nicolaas Smith
Friday 21 August 2009
SA accountants only fail in one instance - but it costs us a fortune
There are three economic items in the economy:
1. Monetary items
2. Variable items
3. Constant items
1. Monetary Items
Monetary items are the easiest to value. Accountants do not have to do any calculations or follow any complicated rules in IFRS. They simply state the original nominal values during low inflation and during hyperinflation. That´s it.
Inflation destroys the real value of money and all other monetary items. Inflation keeps all monetary real values current at today´s rate. Very simple.
No-one can update any nominal monetary value during the current financial year.
So, it is the easiest thing in the world for accounants to value monetary items. They are automatically valued by inflation. They just state them at their original nominal values.
So, it is a fact: Accountants VALUE monetary items.
2. Variable Items
Accountants value variable items in terms of International Financial Reporting Standards at, for example, market value, fair value, recoverable value, present value and net realizable value during low inflation.
During hyperinflation, accountants have to value all variable items in units of constant purchasing power by inflation-adjusting them by means of the CPI. This is a requirement of the IASB in IAS 29 Financial Reporting in Hyperinflationary Economies.
No problems here either. Well, fair value mark-to-market procedures still have some way to go. But, the accounting authorities are working very hard to get this sorted out as soon as possible.
So, it is a fact: Accountants VALUE all variable items.
3. Constant items
Constant items are divided in two sub-groups:
a) Income statement items
b) Balance sheet constant items
Income statement items
Accountants value some (not all) income statement constant items, eg. salaries, wages, rents, etc in units of constant purchasing power during low inflation and thus maintain their real values constant - ceteris paribus.
The income statement items that are not inflation-adjusted during low inflation, accounants value at historical cost implementing the stable measuring unit assumption during low inflation.
During hyperinflation IAS 29 requires accountants to inflation-adjust not just some, but, all income statement items in units of constant purchasing power by means of the CPI. They thus maintain their real values constant - ceteris paribus.
So, it is a fact: Accountants VALUE income statement items either in units of constant purchasing power or at historical cost during low inflation. During hyperinflation all income statement items are VALUED in units of constant purchasing power.
Balance sheet constant items
Accountants have to value all balance sheet constant items in units of constant purchasing power during hyperinflation. Accountant thus maintain their real values constant during hyperinflation - ceteris paribus.
Accountants value all balance sheet constant items, eg. issued share capital, retained profits, all other items in shareholders´ equity, etc at historical cost during low inflation thus unknowingly and unintentionally destroying their real values at a rate equal to the inflation rate because these items are constant real value non-monetary items. Accountants thus value these items the same as simple old cash - in nominal monetary values at historical cost implementing their very destructive stable measuring unit assumption and unknowingly destroy their real values at a rate equal to the rate of inflation to the tune of about R200 billion per year in the SA real economy for an unlimited period of time as long as they carry on implementing the very destructive stable measuring unit assumption during indefinite inflation.
So, it is a fact: accountants VALUE all income statement and all balance sheet constant items.
Summary: SA accountants VALUE all items they account in a business.
Kindest regards,
Nicolaas Smith
PS When SA accountants choose to value all constant items during low inflation in units of constant purchasing power as they have been authorized by the IASB 20 years ago in the Framework, Par. 104 (a), they will boost the SA real economy by about R200 billion per annum forever - ceteris paribus
1. Monetary items
2. Variable items
3. Constant items
1. Monetary Items
Monetary items are the easiest to value. Accountants do not have to do any calculations or follow any complicated rules in IFRS. They simply state the original nominal values during low inflation and during hyperinflation. That´s it.
Inflation destroys the real value of money and all other monetary items. Inflation keeps all monetary real values current at today´s rate. Very simple.
No-one can update any nominal monetary value during the current financial year.
So, it is the easiest thing in the world for accounants to value monetary items. They are automatically valued by inflation. They just state them at their original nominal values.
So, it is a fact: Accountants VALUE monetary items.
2. Variable Items
Accountants value variable items in terms of International Financial Reporting Standards at, for example, market value, fair value, recoverable value, present value and net realizable value during low inflation.
During hyperinflation, accountants have to value all variable items in units of constant purchasing power by inflation-adjusting them by means of the CPI. This is a requirement of the IASB in IAS 29 Financial Reporting in Hyperinflationary Economies.
No problems here either. Well, fair value mark-to-market procedures still have some way to go. But, the accounting authorities are working very hard to get this sorted out as soon as possible.
So, it is a fact: Accountants VALUE all variable items.
3. Constant items
Constant items are divided in two sub-groups:
a) Income statement items
b) Balance sheet constant items
Income statement items
Accountants value some (not all) income statement constant items, eg. salaries, wages, rents, etc in units of constant purchasing power during low inflation and thus maintain their real values constant - ceteris paribus.
The income statement items that are not inflation-adjusted during low inflation, accounants value at historical cost implementing the stable measuring unit assumption during low inflation.
During hyperinflation IAS 29 requires accountants to inflation-adjust not just some, but, all income statement items in units of constant purchasing power by means of the CPI. They thus maintain their real values constant - ceteris paribus.
So, it is a fact: Accountants VALUE income statement items either in units of constant purchasing power or at historical cost during low inflation. During hyperinflation all income statement items are VALUED in units of constant purchasing power.
Balance sheet constant items
Accountants have to value all balance sheet constant items in units of constant purchasing power during hyperinflation. Accountant thus maintain their real values constant during hyperinflation - ceteris paribus.
Accountants value all balance sheet constant items, eg. issued share capital, retained profits, all other items in shareholders´ equity, etc at historical cost during low inflation thus unknowingly and unintentionally destroying their real values at a rate equal to the inflation rate because these items are constant real value non-monetary items. Accountants thus value these items the same as simple old cash - in nominal monetary values at historical cost implementing their very destructive stable measuring unit assumption and unknowingly destroy their real values at a rate equal to the rate of inflation to the tune of about R200 billion per year in the SA real economy for an unlimited period of time as long as they carry on implementing the very destructive stable measuring unit assumption during indefinite inflation.
So, it is a fact: accountants VALUE all income statement and all balance sheet constant items.
Summary: SA accountants VALUE all items they account in a business.
Kindest regards,
Nicolaas Smith
PS When SA accountants choose to value all constant items during low inflation in units of constant purchasing power as they have been authorized by the IASB 20 years ago in the Framework, Par. 104 (a), they will boost the SA real economy by about R200 billion per annum forever - ceteris paribus
Thursday 20 August 2009
SA accountants value economic items - they do not simply report on what took place
There are three basic items in the economy:
1. Monetary items
2. Variable items
3. Constant items.
SA accountants value economic items when they account them and prepare financial reports.
Inflation destroys the real value of the Rand and all other Rand monetary items. Inflation has no effect on the real value of non-monetary items. Monetary items cannot be updated or inflation adjusted. SA accountants value monetary items at their original nominal monetary values during the accounting period.
Inflation is the enemy in the SA monetary economy. Tito Mboweni and soon Gill Marcus are inflation´s enemies.
SA accountants value variable items, e.g. property, plant, equipment, quoted and unquoted shares, foreign exchange, inventories, finished goods, etc. in terms of International Financial Reporting Standards at for example market value, fair value, recoverable value, present value and net realizable value.
There is no enemy in the SA variable item non-monetary economy.
Constant items are real value non-monetary items with constant real values over time. Examples are salaries, wages, rentals, issued share capital, retained profits, etc. SA accountant unfortunately value them at historical cost implementing the stable measuring unit assumption. SA accountants unknowingly destroy the real value of constant items never or not fully updated at a rate equal to the inflation rate. This amounts to about R200 billion in the SA real economy.
The stable measuring unit assumption is the enemy in the SA constant item economy.
SA accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated when they implement the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model for an unlimited period of time during indefinite inflation.
SA accountant will boost the SA real economy by about R200 billion for an unlimited period of time - ceteris paribus - when they freely reject the stable measuring unit assumption and measure financial capital maintenance in units of constant purchasing power as the IASB authorized them to do 20 years ago in the Framework, Par. 104 (a).
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
1. Monetary items
2. Variable items
3. Constant items.
SA accountants value economic items when they account them and prepare financial reports.
Inflation destroys the real value of the Rand and all other Rand monetary items. Inflation has no effect on the real value of non-monetary items. Monetary items cannot be updated or inflation adjusted. SA accountants value monetary items at their original nominal monetary values during the accounting period.
Inflation is the enemy in the SA monetary economy. Tito Mboweni and soon Gill Marcus are inflation´s enemies.
SA accountants value variable items, e.g. property, plant, equipment, quoted and unquoted shares, foreign exchange, inventories, finished goods, etc. in terms of International Financial Reporting Standards at for example market value, fair value, recoverable value, present value and net realizable value.
There is no enemy in the SA variable item non-monetary economy.
Constant items are real value non-monetary items with constant real values over time. Examples are salaries, wages, rentals, issued share capital, retained profits, etc. SA accountant unfortunately value them at historical cost implementing the stable measuring unit assumption. SA accountants unknowingly destroy the real value of constant items never or not fully updated at a rate equal to the inflation rate. This amounts to about R200 billion in the SA real economy.
The stable measuring unit assumption is the enemy in the SA constant item economy.
SA accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated when they implement the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model for an unlimited period of time during indefinite inflation.
SA accountant will boost the SA real economy by about R200 billion for an unlimited period of time - ceteris paribus - when they freely reject the stable measuring unit assumption and measure financial capital maintenance in units of constant purchasing power as the IASB authorized them to do 20 years ago in the Framework, Par. 104 (a).
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
The second systemic economy-wide process of real value destruction
There was only one systemic economy-wide process of real value destruction operating in the economy before double entry accounting was invented.
The economic process of inflation destroyed the real value of money and other monetary items equally throughout the monetary economy at that time as it does today in economies subject to inflation.
There was no simultaneous second systemic economy-wide process as we experience today whereby accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated during indefinite inflation.
This includes the unknowing destruction by accountants of the real value of Shareholders´ Equity in companies without sufficient variable items that are or can be revalued via the Revaluation Reserve or without sufficient hidden and unrecognised holding gains to compensate for the real value shortfall in Shareholders´ Equity as we experience today because now accountants choose to maintain the very destructive stable measuring unit assumption for an unlimited period of time while they assume indefinite inflation – all else being equal.
The reason was that the real value destroying traditional Historical Cost Accounting model was not yet invented at that time.
We will go back to only one systemic economy-wide process of real value destruction operating in the economy, namely the economic process of inflation destroying the real value of money and other monetary items, when SA accountants reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the International Accounting Standards Board in the Framework for the Preparation and Presentation of Financial Statements, Par. 104 (a) in 1989 which states:
"Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
All constant items´ real values will be maintained for an indefinite period of time - ceteris paribus.
Kindest regards,
Nicolaas Smith
The economic process of inflation destroyed the real value of money and other monetary items equally throughout the monetary economy at that time as it does today in economies subject to inflation.
There was no simultaneous second systemic economy-wide process as we experience today whereby accountants unknowingly and unintentionally destroy the real value of constant items never or not fully updated during indefinite inflation.
This includes the unknowing destruction by accountants of the real value of Shareholders´ Equity in companies without sufficient variable items that are or can be revalued via the Revaluation Reserve or without sufficient hidden and unrecognised holding gains to compensate for the real value shortfall in Shareholders´ Equity as we experience today because now accountants choose to maintain the very destructive stable measuring unit assumption for an unlimited period of time while they assume indefinite inflation – all else being equal.
The reason was that the real value destroying traditional Historical Cost Accounting model was not yet invented at that time.
We will go back to only one systemic economy-wide process of real value destruction operating in the economy, namely the economic process of inflation destroying the real value of money and other monetary items, when SA accountants reject the stable measuring unit assumption and freely choose to measure financial capital maintenance in units of constant purchasing power as authorized by the International Accounting Standards Board in the Framework for the Preparation and Presentation of Financial Statements, Par. 104 (a) in 1989 which states:
"Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
All constant items´ real values will be maintained for an indefinite period of time - ceteris paribus.
Kindest regards,
Nicolaas Smith
Tuesday 18 August 2009
Trust me, I´m a SA accountant
Trust me, I am a SA accountant.
I will - unknowingly and unintentionally - destroy your Retained Profits at a rate equal to the rate of inflation (currently 6.9% - you can make your own calculations) as well as all your other constant real value non-monetary items never updated that I and all my fellow accountants (except Nicolaas Smith) - many of whom are CA(SA)s - value in nominal monetary units, i.e. at Historical Cost, implementing our very destructive stable measuring unit assumption as part of the traditional generally accepted real value destroying Historical Cost Accounting model as authorized by the IASB in the Framework, Par. 104 (a) which states:
"Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
In this way we unknowingly and unintentionally destroy at least R200 billion in the SA real economy each and every year as we did last year and as we will do for ever more as long as we implement our very destructive stable measuring unit assumption during indefinite inflation.
Signed: SA accountant
I will - unknowingly and unintentionally - destroy your Retained Profits at a rate equal to the rate of inflation (currently 6.9% - you can make your own calculations) as well as all your other constant real value non-monetary items never updated that I and all my fellow accountants (except Nicolaas Smith) - many of whom are CA(SA)s - value in nominal monetary units, i.e. at Historical Cost, implementing our very destructive stable measuring unit assumption as part of the traditional generally accepted real value destroying Historical Cost Accounting model as authorized by the IASB in the Framework, Par. 104 (a) which states:
"Financial capital maintenance can be measured in either nominal monetary units OR IN UNITS OF CONSTANT PURCHASING POWER."
In this way we unknowingly and unintentionally destroy at least R200 billion in the SA real economy each and every year as we did last year and as we will do for ever more as long as we implement our very destructive stable measuring unit assumption during indefinite inflation.
Signed: SA accountant
CAs are variable item value custodians and constant item value destroyers
Tito Mboweni is the custodian or guardian of the real value of the Rand.
Accountants value all economic items in a business.
How they value those economic items is very important. Ultimately, there is only one correct value for any economic item.
They are thus all custodians or guardians of the real values in a business.
That is why they are paid such high salaries. They are paid for financial integrity.
It does not mean they are little value-gods.
There are some items still to be sorted out.
They do look after value very well (variable items that they value in terms of IFRS) - with the one exception of the real value of balance sheet constant items, eg. issued share capital of companies with no fixed assets and retained profits of all companies. These they unknowingly destroy at a rate equal to the inflation rate to the tune of about R200 billion per annum in the SA real economy.
CA´s unintentionally do this with their implementation of the stable measuring unit assumption.
In fact International Financial Reporting Standards reject the stable measuring unit assumption on two occasions:
1. In IAS 29 Financial Reporting In Hyperinflationary Economies.
2. In The Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
When CAs start thinkging for themselves about what they are - unknowingly - doing to the SA real economy they will realize that by freely choosing to measure financial capital maitnenance in units of constant purchasing power as authorized by the IASB 20 years ago, they will boost the SA real economy by at least R200 billion per annum for an unlimited period of time instead of unknowingly and unintentionally destroying about R200 billion PER ANNUM for an unlimited period of time - each and every year - in the SA real economy (ceteris paribus) as they are unknowingly and unintentionally doing this year.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Accountants value all economic items in a business.
How they value those economic items is very important. Ultimately, there is only one correct value for any economic item.
They are thus all custodians or guardians of the real values in a business.
That is why they are paid such high salaries. They are paid for financial integrity.
It does not mean they are little value-gods.
There are some items still to be sorted out.
They do look after value very well (variable items that they value in terms of IFRS) - with the one exception of the real value of balance sheet constant items, eg. issued share capital of companies with no fixed assets and retained profits of all companies. These they unknowingly destroy at a rate equal to the inflation rate to the tune of about R200 billion per annum in the SA real economy.
CA´s unintentionally do this with their implementation of the stable measuring unit assumption.
In fact International Financial Reporting Standards reject the stable measuring unit assumption on two occasions:
1. In IAS 29 Financial Reporting In Hyperinflationary Economies.
2. In The Framework, Par. 104 (a) which states: "Financial capital maintenance can be measured in either nominal monetary units or in units of constant purchasing power."
When CAs start thinkging for themselves about what they are - unknowingly - doing to the SA real economy they will realize that by freely choosing to measure financial capital maitnenance in units of constant purchasing power as authorized by the IASB 20 years ago, they will boost the SA real economy by at least R200 billion per annum for an unlimited period of time instead of unknowingly and unintentionally destroying about R200 billion PER ANNUM for an unlimited period of time - each and every year - in the SA real economy (ceteris paribus) as they are unknowingly and unintentionally doing this year.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
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