Money is a store of value. Money is a depreciating store of value during inflation and an appreciating store of value during deflation.
Money has to maintain most of its value over time in order to be accepted as a medium of exchange. It would not solve barter’s double coincidence of wants problem if it could not be stored over time and still remain valuable in exchange.
The fact that inflation is destroying the real value of money means it is a store of depreciating real value during inflation. Money was a store of value right from the start. First types of money consisted of gold or silver coins. The metals from which the coins were made had an actual real value in themselves and these coins could be melted down and the metal could be sold in its bullion form when the bullion price was above the coin price. Next money was not made of precious metal coins but money consisted of bank notes, the real values of which were fully backed by gold reserves. Today depreciating money simply represents depreciating real value since depreciating bank notes and bank coins have no intrinsic value. Although the store of value function and nominal values of depreciating bank notes and bank coins are legally defined, their depreciating real values are determined by the economic process of inflation.
The abuse of money’s store of value function led to inflation.
Money is very liquid; i.e. it is readily available as cash and it is normally easy to obtain on demand. A property, e.g. a well-located plot of land with a well-maintained and well-equipped building is also a store of value. It is however quite an illiquid store of value. The real value is not immediately available in easily transportable and divisible cash. Money’s high liquidity makes it more desirable as a store of value in comparison with other stores of value like gold, property, marketable securities, bonds, etc. Money is obviously not the best store of value in an inflationary economy where its real value is being destroyed by inflation. Money is normally available in convenient smaller denominations which facilitate everyday small purchases. As such, money is very user friendly. It is easily transportable especially with electronic transfer facilities.
Inflation actually manifests itself in money’s store of value function. Inflation does not manifest itself in money’s medium of exchange function or unit of account functions which vindicates the fact that inflation can only destroy the real value of money and monetary items; i.e. inflation has no effect on the real value of non-monetary items. Money is always a medium of exchange of equal real value at the moment of exchange. Free market prices are adjusted in the market in a price setting process that takes the decreasing real value of money into account (amongst many other factors) so that economic items (the product and the amount of money) of equal real value are exchanged at the moment of exchange.
Constant real value non-monetary items, e.g. salaries, wages, rents, etc which are measured in units of constant purchasing power (inflation-adjusted)
Depreciating money has a constantly decreasing real value. Depreciating “bank money” deposits have the same attributes of depreciating money with the single exception that they are not physical depreciating bank notes and bank coins but accounted depreciating monetary values. The depreciating money represented by depreciating accounted bank money also has a depreciating store of value function.
A country’s money supply consists of banknotes and coins (currency) and bank money or demand deposits - the balances in savings and deposit accounts. Intangible bank money is usually a much larger part of the money supply than bank notes and coins.
SA monetary aggregates
According to the SARB the monetary aggregates in SA consist of the following:
M0
Deposits of banks and mutual banks with the SARB and notes and coins outside
the SARB and SA mint
M1A
Coins and banknotes in circulation outside the monetary sector, cheque and
transmission deposits with banking institutions and the post office savings
bank
M1
MIA plus other demand deposits with banking institutions
M2
M1 plus other short term deposits, and all medium term deposits (including
savings deposits) with the monetary banking institutions
M3
M2 plus all long term deposits with monetary banking institutions
In a low cash inflationary economy depreciating money is a store of decreasing real value but it is generally assumed to have a stable – as in fixed - real value. SA accountants officially assume that the Rand is perfectly stable when they value fixed balance sheet constant real value non-monetary items never maintained. They do not consider the destruction of the Rand´s real value (e.g. at 6.4% per annum and even up to more than 20% per annum, but not as high as 26% per annum for three years in a row) as sufficiently important for them to decide to measure constant items in units of constant purchasing power - as approved by the IASB twenty years ago - to stop the destruction of real value in fixed balance sheet constant items (issued share capital, retained profits, all other shareholders equity items, trade debtors, trade creditors, taxes payable, taxes receivable, etc) never maintained. SA accountants´ stable measuring unit assumption is very destructive and totally unacceptable. It always was and now still is fundamentally wrong and very costly to the SA economy. SA accountants unknowingly destroy about R200 billion in the real value of constant items never maintained in this manner – each and every year (all else being equal).
Kindest regards,
Nicolaas Smith
Tuesday 20 October 2009
Monday 19 October 2009
Eskom: 1% Increase in inflation will cost SA an additional R53 billion per annum
Fin24.Com: Power price hikes fuel inflation
2009/10/18 11:45:00 AM Sake24.com reporter
"Johannesburg - Eskom's proposed electricity price hike will increase inflation by between a half and one percentage point.
Econometrix chief economist Dr Azar Jammine said South Africa will be fortunate if inflation falls to within the Reserve Bank's target range for the consumer price index of 3% to 6%.
"Inflation may fall below 6% in the second quarter of next year, but after that it will climb to 7% and stay there," Jammine told the annual congress of the South African Chamber of Commerce and Industry (SACCI) in Johannesburg on Friday."
A one percent increase in inflation will cost SA an additional R53 billion per year:
(1) Inflation will destroy an additional R20 billion in the real value of the Rand each and every year there after.
(2) SA accountants will unknowingly (?) destroy an additional about R33 billion in the real value of constant items never maintained in the SA real economy - e.g. in Retained Earnings - with their very destructive stable measuring unit assumption.
This will carry on for as long as the additional 1% increase stays in place and SA accountants keep on refusing to measure financial capital maintenance in units of constant purchasing power as they have been authorized to do by the International Accounting Standards Board in the Framework, Par. 104 (a) twenty years ago.
Increases in the price level (inflation) destroy the real value of money (the functional currency) and other monetary items with an underlying monetary nature (e.g. loans and bonds). However, inflation has no effect on the real value of variable real value non-monetary items (e.g. goods and commodities, like cars, gold, real estate, inventories, finished goods, foreign exchange, etc) and constant real value non-monetary items (e.g. issued share capital, retained profits, capital reserves, salaries, wages, rentals, pensions, trade debtors, trade creditors, taxes payable, taxes receivable, deferred tax assets, deferred tax liabilities, etc).
SA accountants choose to implement the stable measuring unit assumption during low inflation when they value constant items in fixed nominal monetary units. SA accountants´ choice of implementing the stable measuring unit assumption instead of measuring constant items´ real values in units of constant purchasing power results in the real values of these fixed constant real value non-monetary items being destroyed at a rate equal to the rate of inflation when they are never maintained during low inflation because inflation destroys the real value of money which is the monetary measuring unit of account. Constant items are treated like monetary items when their real values are never maintained as a result of the implementation of the stable measuring unit assumption as part of the traditional Historical cost accounting model.
“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.”
At 7% inflation the total real value destroyed in the SA economy would be:
R140 billion per annum by inflation in the real value of the Rand in the monetary economy.
R233 billion (estimate) unknowingly (?) destroyed by SA accountants in the real value of constant items never maintained in the SA non-monetary or real economy.
Total: R373 billion per annum
When SA accountants freely decide to measure financial capital maintenance in units of constant purchasing power as per the IASB´s Framework, Par. 104 (a), then the total annual destruction will be reduced from R373 billion to only R140 billion real value destruction by inflation in the real value of the Rand.
PS: Do you know an accountant?
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
2009/10/18 11:45:00 AM Sake24.com reporter
"Johannesburg - Eskom's proposed electricity price hike will increase inflation by between a half and one percentage point.
Econometrix chief economist Dr Azar Jammine said South Africa will be fortunate if inflation falls to within the Reserve Bank's target range for the consumer price index of 3% to 6%.
"Inflation may fall below 6% in the second quarter of next year, but after that it will climb to 7% and stay there," Jammine told the annual congress of the South African Chamber of Commerce and Industry (SACCI) in Johannesburg on Friday."
A one percent increase in inflation will cost SA an additional R53 billion per year:
(1) Inflation will destroy an additional R20 billion in the real value of the Rand each and every year there after.
(2) SA accountants will unknowingly (?) destroy an additional about R33 billion in the real value of constant items never maintained in the SA real economy - e.g. in Retained Earnings - with their very destructive stable measuring unit assumption.
This will carry on for as long as the additional 1% increase stays in place and SA accountants keep on refusing to measure financial capital maintenance in units of constant purchasing power as they have been authorized to do by the International Accounting Standards Board in the Framework, Par. 104 (a) twenty years ago.
Increases in the price level (inflation) destroy the real value of money (the functional currency) and other monetary items with an underlying monetary nature (e.g. loans and bonds). However, inflation has no effect on the real value of variable real value non-monetary items (e.g. goods and commodities, like cars, gold, real estate, inventories, finished goods, foreign exchange, etc) and constant real value non-monetary items (e.g. issued share capital, retained profits, capital reserves, salaries, wages, rentals, pensions, trade debtors, trade creditors, taxes payable, taxes receivable, deferred tax assets, deferred tax liabilities, etc).
SA accountants choose to implement the stable measuring unit assumption during low inflation when they value constant items in fixed nominal monetary units. SA accountants´ choice of implementing the stable measuring unit assumption instead of measuring constant items´ real values in units of constant purchasing power results in the real values of these fixed constant real value non-monetary items being destroyed at a rate equal to the rate of inflation when they are never maintained during low inflation because inflation destroys the real value of money which is the monetary measuring unit of account. Constant items are treated like monetary items when their real values are never maintained as a result of the implementation of the stable measuring unit assumption as part of the traditional Historical cost accounting model.
“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.”
At 7% inflation the total real value destroyed in the SA economy would be:
R140 billion per annum by inflation in the real value of the Rand in the monetary economy.
R233 billion (estimate) unknowingly (?) destroyed by SA accountants in the real value of constant items never maintained in the SA non-monetary or real economy.
Total: R373 billion per annum
When SA accountants freely decide to measure financial capital maintenance in units of constant purchasing power as per the IASB´s Framework, Par. 104 (a), then the total annual destruction will be reduced from R373 billion to only R140 billion real value destruction by inflation in the real value of the Rand.
PS: Do you know an accountant?
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Sunday 18 October 2009
Medium of Exchange
Money performs the following three functions:
1. Medium of exchange
2. Store of value
3. Unit of account
1. Medium of Exchange
Money has the basic function that it is a medium of exchange of equivalent real values at the moment of exchange. It overcomes the inconveniences of a barter economy where there must be a coincidence of wants before a trade can take place. For a trade to take place in a barter economy one person must want exactly what the other person has to offer, at the exact time and place where it is offered.
In a monetary economy the real value of goods and services are measured in terms of money, the monetary medium of exchange, which is generally accepted to buy any other good or service. Without this function or attribute the invention cannot be money.
We use payment with money instead of barter to exchange real values in our economies in the transactions we enter into when we buy and sell goods, services, ideas, rights and any kind of property whether physical, virtual or intellectual. Money is the lifeblood of an economy even though it is continuously changing in real value. Without money the creation and exchange of real value in an economy would be severely restricted, as it would become a barter economy.
Kindest regards,
Nicolaas Smith
1. Medium of exchange
2. Store of value
3. Unit of account
1. Medium of Exchange
Money has the basic function that it is a medium of exchange of equivalent real values at the moment of exchange. It overcomes the inconveniences of a barter economy where there must be a coincidence of wants before a trade can take place. For a trade to take place in a barter economy one person must want exactly what the other person has to offer, at the exact time and place where it is offered.
In a monetary economy the real value of goods and services are measured in terms of money, the monetary medium of exchange, which is generally accepted to buy any other good or service. Without this function or attribute the invention cannot be money.
We use payment with money instead of barter to exchange real values in our economies in the transactions we enter into when we buy and sell goods, services, ideas, rights and any kind of property whether physical, virtual or intellectual. Money is the lifeblood of an economy even though it is continuously changing in real value. Without money the creation and exchange of real value in an economy would be severely restricted, as it would become a barter economy.
Kindest regards,
Nicolaas Smith
Friday 16 October 2009
Consumer Price Index
“The consumer price index was first used in 1707. In 1925 it became institutionalized when the Second International Conference of Labour Statisticians, convened by the International Labour Organization, promulgated the first international standards of measurement.”
Agrekon, Vol 43, No 2 (June 2004), Vink, Kirsten and Woermann.
The CPI is a non-monetary index number measuring changes in the weighted average of prices quoted in the functional currency of a typical basket of consumer goods and services. The per cent change in the CPI is used to measure inflation. It is a price index determined by measuring the price of a standard group of goods and services representing a typical market basket of a typical urban consumer. It measures the change in average price for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). It can be used to measure changes in the cost of living. It is a measure estimating the average price of consumer goods and services purchased by a typical urban household.
We use the change in the CPI as a measure to calculate the destruction of real value in monetary items (which cannot be indexed) and constant items never maintained (thus being treated as monetary items) over time in an inflationary economy implementing the HCA model. We also use the change in the CPI as a measure to calculate the creation of real value in monetary items (never indexed) and constant items never maintained (never decreased) over time in a deflationary economy. The CPI can be used to measure financial capital maintenance in units of constant purchasing power and thus index (adjust nominal values for inflation’s destruction of the real value of money which is the monetary unit of account) wages, salaries, pensions, all income statement items, issued share capital, retained profits, capital reserves, other shareholders´ equity items, trade debtors, trade creditors, taxes payable, taxes receivable and all other balance sheet constant items.
There is no CPI in a barter economy as there is no money in such an economy. The CPI is essential to maintain the real value of constant items in the economy with measurement of financial capital maintenance in units of constant purchasing power being used as the fundamental model of accounting. The CPI is used to calculate the destruction of real value in constant items never maintained in low inflationary economies using HCA as the fundamental model of accounting.
The real value of money is automatically updated by inflation and deflation. Whereas the price of a constant item should change inversely with the change in the real value of money, the real value of money changes inversely with the change in the level of the CPI.
The CPI is the sine qua non in an inflationary and deflationary economy for correcting the problem created by the fact that money is the only universal unit of account that is not a stable unit of measure. It would be impossible to measure inflation and deflation without the CPI. Consequently it would also have been impossible to stop the destruction of the real value in constant real value non-monetary items never maintained (generally retained profits and issued share capital of companies using HCA during inflation with no fixed assets or not sufficient fixed assets to maintain equity´s real value).
This massive destruction of the real value of SA companies´ and banks´ retained profits never maintained, unknowingly perpetrated by SA accountants implementing their very destructive stable measuring unit assumption during low inflation would have been impossible to stop without the CPI. The CPI makes it easy to fix the problem and to stop our accountants destroying about R200 billion each and every year in the SA real economy.
When our accountants freely start measuring financial capital maintenance in units of constant purchasing power as the IASB authorized them to do 20 years ago in the Framework, Par. 104 (a), then they will maintain all constant items in the SA economy for an unlimited period of time by updating them in terms of the change in the CPI instead of destroying their real values at a rate equal to the inflation rate as they are unknowingly doing right now. They would do that even in companies with no fixed assets at all. The "equivalent fixed assets requirement" is only applicable with the stable measuring unit assumption.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Agrekon, Vol 43, No 2 (June 2004), Vink, Kirsten and Woermann.
The CPI is a non-monetary index number measuring changes in the weighted average of prices quoted in the functional currency of a typical basket of consumer goods and services. The per cent change in the CPI is used to measure inflation. It is a price index determined by measuring the price of a standard group of goods and services representing a typical market basket of a typical urban consumer. It measures the change in average price for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). It can be used to measure changes in the cost of living. It is a measure estimating the average price of consumer goods and services purchased by a typical urban household.
We use the change in the CPI as a measure to calculate the destruction of real value in monetary items (which cannot be indexed) and constant items never maintained (thus being treated as monetary items) over time in an inflationary economy implementing the HCA model. We also use the change in the CPI as a measure to calculate the creation of real value in monetary items (never indexed) and constant items never maintained (never decreased) over time in a deflationary economy. The CPI can be used to measure financial capital maintenance in units of constant purchasing power and thus index (adjust nominal values for inflation’s destruction of the real value of money which is the monetary unit of account) wages, salaries, pensions, all income statement items, issued share capital, retained profits, capital reserves, other shareholders´ equity items, trade debtors, trade creditors, taxes payable, taxes receivable and all other balance sheet constant items.
There is no CPI in a barter economy as there is no money in such an economy. The CPI is essential to maintain the real value of constant items in the economy with measurement of financial capital maintenance in units of constant purchasing power being used as the fundamental model of accounting. The CPI is used to calculate the destruction of real value in constant items never maintained in low inflationary economies using HCA as the fundamental model of accounting.
The real value of money is automatically updated by inflation and deflation. Whereas the price of a constant item should change inversely with the change in the real value of money, the real value of money changes inversely with the change in the level of the CPI.
The CPI is the sine qua non in an inflationary and deflationary economy for correcting the problem created by the fact that money is the only universal unit of account that is not a stable unit of measure. It would be impossible to measure inflation and deflation without the CPI. Consequently it would also have been impossible to stop the destruction of the real value in constant real value non-monetary items never maintained (generally retained profits and issued share capital of companies using HCA during inflation with no fixed assets or not sufficient fixed assets to maintain equity´s real value).
This massive destruction of the real value of SA companies´ and banks´ retained profits never maintained, unknowingly perpetrated by SA accountants implementing their very destructive stable measuring unit assumption during low inflation would have been impossible to stop without the CPI. The CPI makes it easy to fix the problem and to stop our accountants destroying about R200 billion each and every year in the SA real economy.
When our accountants freely start measuring financial capital maintenance in units of constant purchasing power as the IASB authorized them to do 20 years ago in the Framework, Par. 104 (a), then they will maintain all constant items in the SA economy for an unlimited period of time by updating them in terms of the change in the CPI instead of destroying their real values at a rate equal to the inflation rate as they are unknowingly doing right now. They would do that even in companies with no fixed assets at all. The "equivalent fixed assets requirement" is only applicable with the stable measuring unit assumption.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Thursday 15 October 2009
Money has no intrinsic value
Our money today has no intrinsic value in itself. It is fiat money that is created by government fiat or decree. The government declares fiat money to be legal tender. In the past monetary coins were made of, for example, silver or gold which were valuable in themselves. The actual metal of which the coin was made had a real or intrinsic value supposedly equivalent to the nominal value inscribed on the coin. Today fiat money is a government decreed and legally recognized medium of exchange, a unit of account and a store of value in our economy.
Our money today has no intrinsic value, as it is the natural product of the development of the monetary unit through time. In the beginning stages it was a full value metal coin. Later it was not a full value metal coin but it was the next best thing as far as economic agents were concerned: it was 100 per cent backed by gold. Today it has no intrinsic value and it is not backed by gold but is “backed” by the combined macroeconomic real value of all the underlying value systems in our economies. This includes, but is not limited to, the economic system, the manufacturing system, the industrial system, the monetary system, the political system, the social system, the educational system, the defence system, the health system, the security system, the legal system, the accounting system, and so on, to name but a few.
Money´s lack of intrinsic value is one of the reasons why gold is the best long-term hedge against economic and political meltdown.
Kindest regards,
Nicolaas Smith
Our money today has no intrinsic value, as it is the natural product of the development of the monetary unit through time. In the beginning stages it was a full value metal coin. Later it was not a full value metal coin but it was the next best thing as far as economic agents were concerned: it was 100 per cent backed by gold. Today it has no intrinsic value and it is not backed by gold but is “backed” by the combined macroeconomic real value of all the underlying value systems in our economies. This includes, but is not limited to, the economic system, the manufacturing system, the industrial system, the monetary system, the political system, the social system, the educational system, the defence system, the health system, the security system, the legal system, the accounting system, and so on, to name but a few.
Money´s lack of intrinsic value is one of the reasons why gold is the best long-term hedge against economic and political meltdown.
Kindest regards,
Nicolaas Smith
Tuesday 13 October 2009
SA accountants simply assume there is no inflation
SA accountants simply assume there is no such thing as inflation and never ever was before either.
Inflation is a rise in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation destroys the real value (purchasing power) of money.
The effect of inflation is distributed evenly in money and monetary items and as a consequence there are hidden costs to some and hidden benefits to others from this destruction in purchasing power in items that are assets to some while a the same time liabilities to others. For example, with inflation lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers will benefit. Individuals and institutions with net monetary assets will experience a net monetary loss (less real value owned/more real value – real assets – destroyed) while individuals and institutions with net monetary liabilities will experience a net monetary gain (less real value owed/more real liabilities destroyed) during inflation.
Increases in the price level (inflation) destroy the real value of money (the functional currency) and other monetary items with an underlying monetary nature (e.g. bonds and loans). However, inflation has no effect on the real value of variable real value non-monetary items (e.g. property, plant, equipment like cars, gold, inventories, finished goods, foreign exchange, etc) and constant real value non-monetary items (e.g. issued share capital, retained profits, capital reserves, other shareholder equity items, salaries, wages, rentals, pensions, trade debtors, trade creditors, taxes payable, taxes receivable, deferred tax assets, deferred tax liabilities, etc).
Inflation destroys the real value of money. Inflation has no effect on the real value of non-monetary items. Fixed constant real value non-monetary items never maintained are effectively treated like monetary items under traditional Historical Cost Accounting. Their real values are destroyed at a rate equal to the rate of inflation because they are measured in nominal monetary units and inflation destroys the real value of money which is the monetary unit of account.
SA accountants choose to implement the stable measuring unit assumption during low inflation when they value constant items in fixed nominal monetary units. Accountants´ choice of implementing the stable measuring unit assumption instead of measuring constant items´ real values in units of constant purchasing power, as they are authorized to do in the Framework, Par. 104 (a), results in the real values of these fixed constant items being destroyed at a rate equal to the rate of inflation when they are never maintained during low inflation because inflation destroys the real value of money which is the monetary unit of account. Fixed constant items never maintained are effectively monetary items under HCA. Their real values are destroyed at a rate equal to the rate of inflation because they are measured in nominal monetary units and inflation destroys the real value of money which is the monetary unit of account.
This costs the SA real economy about R200 billion per annum in unknowing real value destruction by SA accountants implementing their very destructive stable measuring unit assumption. They can freely stop this by measuring financial capital maintenance in units of constant purchasing power as they have been authorized to do by the IASB in 1989 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."
They refuse to do that.
The extremely rapid destruction of the real value of the monetary unit of account is compensated for during hyperinflation by the rejection of the stable measuring unit assumption in International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies. IAS 29, which has to be implemented during hyperinflation, requires all non-monetary items (variable items and constant items) to be measured in units of constant purchasing power.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Monday 12 October 2009
Net monetary gains and losses
Hi,
Net monetary gains and losses are calculated and accounted during hyperinflation as required by IAS 29 Financial Reporting in Hyperinflationary Economies and with the measurement of financial capital maintenance in units of constant purchasing power in terms of the IASB´s Framework, Par. 104 (a) during low inflation. Net monetary gains and losses are not required to be computed under the traditional Historical Cost Accounting model although it has been stated that it can be done.
Computing the gains or losses from holding monetary items can be done and the information disclosed when the books are maintained on a historical-cost basis.
Harvey Kapnick, Chairman of Arthur Anderson & Company, Value based accounting: Evolution or revolution, Saxe Lecture, 1976, Page 6.
http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm
This omission to compute the gains and losses from holding monetary items is a consequence of the stable measuring unit assumption.
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.
Kindest regards,
Nicolaas Smith
Net monetary gains and losses are calculated and accounted during hyperinflation as required by IAS 29 Financial Reporting in Hyperinflationary Economies and with the measurement of financial capital maintenance in units of constant purchasing power in terms of the IASB´s Framework, Par. 104 (a) during low inflation. Net monetary gains and losses are not required to be computed under the traditional Historical Cost Accounting model although it has been stated that it can be done.
Computing the gains or losses from holding monetary items can be done and the information disclosed when the books are maintained on a historical-cost basis.
Harvey Kapnick, Chairman of Arthur Anderson & Company, Value based accounting: Evolution or revolution, Saxe Lecture, 1976, Page 6.
http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm
This omission to compute the gains and losses from holding monetary items is a consequence of the stable measuring unit assumption.
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.
Kindest regards,
Nicolaas Smith
Money versus real value
In practice, money has a specific real value for a month at a time in an internal economy during low inflation. It changes every time the CPI changes. A monetary note or monetary coin has its nominal value permanently printed on it. Its nominal value does not and now cannot change.
Today monetary units are mostly created in economies subject to inflation. The Japanese economy is regularly in a state of deflation.
Money refers to a monetary unit used within the economy or monetary union in which it is created. This does not refer to the foreign exchange value of a monetary unit. The foreign exchange value of a monetary unit refers to its exchange value in relation to another monetary unit normally the monetary unit of another country or monetary region.
The real value of money would remain the same over time only at sustainable zero per cent annual inflation. Money would thus be the same as real value only at sustainable zero per cent annual inflation. This has never happened on a permanent basis in any economy. Now and then countries achieve zero inflation for a month or two at a time. But never for a sustainable period of a year or more.
Real value is the most important fundamental economic concept although it is the lesser studied and understood compared to the study of money. Money and real value are, unfortunately, not one and the same thing during inflation and deflation. Money and monetary items always have lower real values during inflation and higher real values during deflation under any accounting model.
Money is an invention. We can terminate its existence while real value is a fundamental economic concept, which exists, while we exist. Economies have already functioned without money. Barter economies operated without a medium of exchange. Cuba in the past bought oil from Venezuela and paid part in money and part by the provision of the services of sports coaches and medical doctors. Corn farmers in Argentina stored their corn in silos and paid for new pick-up trucks and other expensive mechanized farm implements with quantities of corn - the unit of real value Adam Smith described more than 220 years ago as a very stable unit of real value.
There will always be real value while the human race exists. The need for a medium of exchange, which is money’s first and basic function, is equally true. Money is one of the greatest human inventions of all time. It ranks on par with the invention of the wheel and the Gutenberg press in terms of importance to human development. Without money modern human development would have been very slow indeed.
Monetary items have the exact same attributes as money with the single exception that they are not actual bank notes and bank coins.
Non-monetary items are all items that are not monetary items.
Kindest regards,
Nicolaas Smith
Today monetary units are mostly created in economies subject to inflation. The Japanese economy is regularly in a state of deflation.
Money refers to a monetary unit used within the economy or monetary union in which it is created. This does not refer to the foreign exchange value of a monetary unit. The foreign exchange value of a monetary unit refers to its exchange value in relation to another monetary unit normally the monetary unit of another country or monetary region.
The real value of money would remain the same over time only at sustainable zero per cent annual inflation. Money would thus be the same as real value only at sustainable zero per cent annual inflation. This has never happened on a permanent basis in any economy. Now and then countries achieve zero inflation for a month or two at a time. But never for a sustainable period of a year or more.
Real value is the most important fundamental economic concept although it is the lesser studied and understood compared to the study of money. Money and real value are, unfortunately, not one and the same thing during inflation and deflation. Money and monetary items always have lower real values during inflation and higher real values during deflation under any accounting model.
Money is an invention. We can terminate its existence while real value is a fundamental economic concept, which exists, while we exist. Economies have already functioned without money. Barter economies operated without a medium of exchange. Cuba in the past bought oil from Venezuela and paid part in money and part by the provision of the services of sports coaches and medical doctors. Corn farmers in Argentina stored their corn in silos and paid for new pick-up trucks and other expensive mechanized farm implements with quantities of corn - the unit of real value Adam Smith described more than 220 years ago as a very stable unit of real value.
There will always be real value while the human race exists. The need for a medium of exchange, which is money’s first and basic function, is equally true. Money is one of the greatest human inventions of all time. It ranks on par with the invention of the wheel and the Gutenberg press in terms of importance to human development. Without money modern human development would have been very slow indeed.
Monetary items have the exact same attributes as money with the single exception that they are not actual bank notes and bank coins.
Non-monetary items are all items that are not monetary items.
Kindest regards,
Nicolaas Smith
Friday 9 October 2009
Money illusion
Definition: Money illusion is the mistaken belief that money is stable – as in fixed – in real value over time.
Money illusion is primarily evident in low inflation countries. In hyperinflationary countries there is absolutely no money illusion as far as the hyperinflationary national currency is concerned. Everyone knows as a fact that the local hyperinflationary currency loses value day by day. In low inflationary countries people are vaguely aware that money loses value over a long period of time. Over the short term, however, low inflation money is used as if its real value is completely stable – as in fixed.
Money illusion is evident everywhere in low inflationary economies. TV channels reporting on historical events regularly quote historical values as the most natural thing to do. “Marble Arch was built for 10 000 Pounds” the TV reporter states with sincere knowledge that his audience is being well entertained with correct facts and figures. It is a figure very difficult to instantaneously value today. 10 000 British Pounds was the original cost in historical terms but we live today and absolutely no-one can immediately imagine what the construction cost of Marble Arch was in current terms. It is the same as saying that 300 years ago something cost one Pound. It is impossible to immediately value it now. We live now and not 300 years in the past. We don’t know what some-one could have bought for a Pound 300 years ago. People in the United Kingdom know what a person can buy for one Pound now – and that value changes month after month.
Companies report an unending stream of information about their performance and results. Sales increased by 5 per cent over last year’s figures, for example. Are these historical cost comparisons or real value comparisons? It is more never than hardly ever stated.
Money illusion is very, very common in our low inflationary economies. An example: The BBC recently ran a program about the fantastic E-Type Jag. It was stated that one of the many reasons why the E-type Jag - the best car ever, according to the presenter - was such a success was its original nominal price of 2 500 Pounds at the time of its first introduction into the market. Towards the end of the program it is then stated that a number of years later these same original E-Type Jags sold at a nominal price at that time of 25 000 Pounds. It is thus implied to be 10 times more than the original price of 2 500 Pounds. In nominal terms, yes. We all agree. Certainly not in real terms and we are interested in real values. We are real people. We live real lives in a real world. Nominal profits - however fantastic they may look - are misleading the longer the time period and the higher the rate of inflation or hyperinflation in the transaction currency during the time period involved.
In this example we are all led to believe that the E-Type Jag was sold at a real value 10 times its original real value. It is the notorious money illusion at work. The real value in a sale like that certainly would not be 10 times the original real value once the original nominal price is adjusted for inflation in the British Pound over the years in question.
Money illusion in Historical Cost values
(The following is adapted from a live-event on CNN. Any resemblance to a living person is purely coincidental ;-)
Let us assume a highly respected 75-year-old grandfather tries to encourage his grandson to accept a low starting salary in a very good company as a good starting point for the youngster’s career. The grandfather may mention that when he started work he earned 25 Dollars per week - meaning that he also started with a low salary and worked his way up. Stating his starting salary at its original historical cost value of maybe more than 50 odd years ago completely distorted the example he was trying to give. He was trying to say - and he certainly did, incorrectly (unintentional though it may have been) create the impression - that he started work at a low salary and had to work his way up. When the original historical cost value of 25 US Dollars of the grandfather’s first weekly pay packet is inflation-adjusted for inflation - in the medium of exchange - during the fifty or more years of his working life till the date of his comments on CNN, we find that he started work at a monthly salary of about 5 000 US Dollars current at the date of his comments. So, at 60 000 US Dollar per year the grandfather had a very good starting salary - which is exactly the opposite of what he was trying to say to his grandson.
That is money illusion at work. Money illusion is so pervasive in our low inflation societies that we do not even notice it any more. It is a complete state of mind - a way of thinking.
We have to stop thinking in money terms and start thinking in real value terms. As long as there is positive inflation in an economy, the national currency created and used in that inflationary economy is not a store of stable real value. It is a store of decreasing real value. Money is losing real value all the time when an economy is in a state of inflation. All current notes and coins will actually be worthless sometime in the future when an economy remains in an inflationary mode for a long enough period of time.
Money developed upon the mistaken belief that it is stable – as in fixed – in real value in the short to medium term in economies with low inflation. The term stable money is seen as meaning that money’s real value stays intact over the short to medium term in low inflationary economies. Money illusion is still very evident today in most economies in money, monetary items and constant items that are mistakenly considered to be monetary items, for example, trade debtors and trade creditors.
Kindest regards,
Nicolaas Smith
Money illusion is primarily evident in low inflation countries. In hyperinflationary countries there is absolutely no money illusion as far as the hyperinflationary national currency is concerned. Everyone knows as a fact that the local hyperinflationary currency loses value day by day. In low inflationary countries people are vaguely aware that money loses value over a long period of time. Over the short term, however, low inflation money is used as if its real value is completely stable – as in fixed.
Money illusion is evident everywhere in low inflationary economies. TV channels reporting on historical events regularly quote historical values as the most natural thing to do. “Marble Arch was built for 10 000 Pounds” the TV reporter states with sincere knowledge that his audience is being well entertained with correct facts and figures. It is a figure very difficult to instantaneously value today. 10 000 British Pounds was the original cost in historical terms but we live today and absolutely no-one can immediately imagine what the construction cost of Marble Arch was in current terms. It is the same as saying that 300 years ago something cost one Pound. It is impossible to immediately value it now. We live now and not 300 years in the past. We don’t know what some-one could have bought for a Pound 300 years ago. People in the United Kingdom know what a person can buy for one Pound now – and that value changes month after month.
Companies report an unending stream of information about their performance and results. Sales increased by 5 per cent over last year’s figures, for example. Are these historical cost comparisons or real value comparisons? It is more never than hardly ever stated.
Money illusion is very, very common in our low inflationary economies. An example: The BBC recently ran a program about the fantastic E-Type Jag. It was stated that one of the many reasons why the E-type Jag - the best car ever, according to the presenter - was such a success was its original nominal price of 2 500 Pounds at the time of its first introduction into the market. Towards the end of the program it is then stated that a number of years later these same original E-Type Jags sold at a nominal price at that time of 25 000 Pounds. It is thus implied to be 10 times more than the original price of 2 500 Pounds. In nominal terms, yes. We all agree. Certainly not in real terms and we are interested in real values. We are real people. We live real lives in a real world. Nominal profits - however fantastic they may look - are misleading the longer the time period and the higher the rate of inflation or hyperinflation in the transaction currency during the time period involved.
In this example we are all led to believe that the E-Type Jag was sold at a real value 10 times its original real value. It is the notorious money illusion at work. The real value in a sale like that certainly would not be 10 times the original real value once the original nominal price is adjusted for inflation in the British Pound over the years in question.
Money illusion in Historical Cost values
(The following is adapted from a live-event on CNN. Any resemblance to a living person is purely coincidental ;-)
Let us assume a highly respected 75-year-old grandfather tries to encourage his grandson to accept a low starting salary in a very good company as a good starting point for the youngster’s career. The grandfather may mention that when he started work he earned 25 Dollars per week - meaning that he also started with a low salary and worked his way up. Stating his starting salary at its original historical cost value of maybe more than 50 odd years ago completely distorted the example he was trying to give. He was trying to say - and he certainly did, incorrectly (unintentional though it may have been) create the impression - that he started work at a low salary and had to work his way up. When the original historical cost value of 25 US Dollars of the grandfather’s first weekly pay packet is inflation-adjusted for inflation - in the medium of exchange - during the fifty or more years of his working life till the date of his comments on CNN, we find that he started work at a monthly salary of about 5 000 US Dollars current at the date of his comments. So, at 60 000 US Dollar per year the grandfather had a very good starting salary - which is exactly the opposite of what he was trying to say to his grandson.
That is money illusion at work. Money illusion is so pervasive in our low inflation societies that we do not even notice it any more. It is a complete state of mind - a way of thinking.
We have to stop thinking in money terms and start thinking in real value terms. As long as there is positive inflation in an economy, the national currency created and used in that inflationary economy is not a store of stable real value. It is a store of decreasing real value. Money is losing real value all the time when an economy is in a state of inflation. All current notes and coins will actually be worthless sometime in the future when an economy remains in an inflationary mode for a long enough period of time.
Money developed upon the mistaken belief that it is stable – as in fixed – in real value in the short to medium term in economies with low inflation. The term stable money is seen as meaning that money’s real value stays intact over the short to medium term in low inflationary economies. Money illusion is still very evident today in most economies in money, monetary items and constant items that are mistakenly considered to be monetary items, for example, trade debtors and trade creditors.
Kindest regards,
Nicolaas Smith
Thursday 8 October 2009
International Financial Reporting Standards
Constant Item Purchasing Power Accounting is authorized by the IASB during low inflation
The statement that financial capital maintenance can be measured in either constant purchasing power units or in nominal monetary units in the IASB´s Framework, means that CIPPA has been authorized by the IASB since 1989 as an alternative to the traditional HCA model during periods of low inflation.
This means that the international accounting profession has been in agreement regarding the use of CIPPA for financial capital maintenance in units of constant purchasing power during low inflation since 1989. The standards thus reject the stable measuring unit in this option and in IAS29 Financial Reporting in Hyperinflationary Economies.
Income statement constant real value non-monetary items like salaries, wages, rentals, utilities, transport fees, etc are normally valued by accountants in terms of units of constant purchasing power during low inflation in most economies including South Africa.
Payments in money for these items are normally inflation-adjusted by means of the CPI to compensate for the destruction of the real value of the unstable monetary medium of exchange by inflation. Inflation is always and everywhere a monetary phenomenon and can only destroy the real value of money (the functional currency inside an economy) and other monetary items. Inflation can not and does not destroy the real value of non-monetary items.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
The statement that financial capital maintenance can be measured in either constant purchasing power units or in nominal monetary units in the IASB´s Framework, means that CIPPA has been authorized by the IASB since 1989 as an alternative to the traditional HCA model during periods of low inflation.
This means that the international accounting profession has been in agreement regarding the use of CIPPA for financial capital maintenance in units of constant purchasing power during low inflation since 1989. The standards thus reject the stable measuring unit in this option and in IAS29 Financial Reporting in Hyperinflationary Economies.
Income statement constant real value non-monetary items like salaries, wages, rentals, utilities, transport fees, etc are normally valued by accountants in terms of units of constant purchasing power during low inflation in most economies including South Africa.
Payments in money for these items are normally inflation-adjusted by means of the CPI to compensate for the destruction of the real value of the unstable monetary medium of exchange by inflation. Inflation is always and everywhere a monetary phenomenon and can only destroy the real value of money (the functional currency inside an economy) and other monetary items. Inflation can not and does not destroy the real value of non-monetary items.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Wednesday 7 October 2009
Real value destruction in the South African economy
There are two processes of economy wide real value destruction operating in the SA economy. The one overall real value destruction process is well known and generally accepted. It is inflation. Inflation is the enemy in the monetary economy and the Governor of the Reserve Bank is the enemy of inflation. Everybody knows that inflation is destroying the real value of their Rands and all other monetary items at the rate of 6.4% per annum, at the moment. Value date: August 2009 CPI 108.5
The second process of economy wide real value destruction is the unknowing, unintentional and completely unnecessary destruction by SA accountants of the real value of constant items never maintained in the SA constant item economy. This is the result of their implementation of the very destructive stable measuring unit assumption during low inflation as part of the real value destroying traditional Historical Cost Accounting model used by most SA companies. The enemy is SA accountants´ stable measuring unit assumption. In principle, they assume the unit of measure, the Rand, is perfectly stable during inflation; that is, they assume that changes in its general purchasing power are not sufficiently important to require the inflation-adjustment of the nominal values of all constant items in the SA economy in order to maintain their real values constant. In so doing, they unknowingly destroy the real values of constant items never maintained during inflation.
SA accountants´ stable measuring unit assumption is a stealth enemy: hardly anyone understands that when accountants implement it they are unknowingly and unintentionally responsible for the destruction of the real values of constant items not maintained under HCA during inflation.
Table 1: Real value destruction: Historical Cost Paradigm
Monetary aggregate: M3 R1 952.799 billion SARB: Value date: August 2009
Estimated value of constant items not maintained in SA economy: R 3 333 billion
Table 2: Real value destruction: Const. ITEM Purch. Power Accounting
Table 1 above gives us a close estimate of the state of real value destruction in the SA economy at the moment: In the 12 month period ending in August, 2009, inflation actually destroyed R1 952.799 billion x 0.064 = R124.9 billion in the real value of the Rand in the SA monetary economy. At the same time SA accountants unknowingly, unintentionally and completely unnecessarily destroyed about R200 billion in the real value of constant items never maintained in the SA constant item economy. About R324 billion in real value was thus destroyed in the SA economy in the 12 months to August, 2009 by inflation and by SA accountants implementing their very destructive stable measuring unit assumption.
If inflation stays at 6.4% for the next five years and SA accountants keep on unknowingly destroying the real values of constant items not maintained with their very destructive stable measuring unit assumption then a cumulative total of R1 620 billion in real value would be destroyed in the SA economy – all else being equal. The cumulative totals of real value destruction under these circumstances for 10, 20 and 30 years would be R3 240 billion, R6 480 billion and R9 720 billion respectively – ceteris paribus. These are huge values of real value destruction in the SA economy of which the part for which SA accountants are unknowingly responsible, is completely unnecessary and can easily be prevented.
We can see from Table 2 what the difference would be when SA accountants freely decide to measure financial capital maintenance in units of constant purchasing power as the IASB authorized them to do 20 years ago in the Framework, Par. 104 (a).
The destruction of real value in constant items would stop completely. There would only be real value destruction in the real value of the Rand because of inflation. At 6.4% annual inflation only R124 billion in real value would be destroyed in the economy as a whole instead of the current about R324 billion over a period of 12 months. Over five years the cumulative total of real value destruction would drop from R1 620 billion to R 624 billion, over 10 years from R3 240 billion to R1 249 billion, over 20 years from R6 480 billion to R2 498 billion and over 30 years from R9 720 billion to R3 747 billion.
SA accountants unknowingly destroy existing real values in existing constant items with their very destructive stable measuring unit assumption. When they stop their stable measuring unit assumption they would knowingly maintain about R200 billion in existing constant item real values during every period of 12 months in the SA real economy amounting to R1 000 billion over 5 years, R 2 000 billion over 10 years, R4 000 over 20 years and R6 000 billion over 30 years. Boosting the real economy with these real values would make a very big difference to the SA economy as a whole, to growth and to employment in the economy over that period.
Obviously a further reduction of inflation to an annual average of 3% would improve the SA economy even more. Over 30 years it would boost the economy by a further R2 000 billion on top of the R6 000 to be gained when SA accountants freely switch over to financial capital maintenance in units of constant purchasing power.
Kindest regards,
Nicolaas Smith
The second process of economy wide real value destruction is the unknowing, unintentional and completely unnecessary destruction by SA accountants of the real value of constant items never maintained in the SA constant item economy. This is the result of their implementation of the very destructive stable measuring unit assumption during low inflation as part of the real value destroying traditional Historical Cost Accounting model used by most SA companies. The enemy is SA accountants´ stable measuring unit assumption. In principle, they assume the unit of measure, the Rand, is perfectly stable during inflation; that is, they assume that changes in its general purchasing power are not sufficiently important to require the inflation-adjustment of the nominal values of all constant items in the SA economy in order to maintain their real values constant. In so doing, they unknowingly destroy the real values of constant items never maintained during inflation.
SA accountants´ stable measuring unit assumption is a stealth enemy: hardly anyone understands that when accountants implement it they are unknowingly and unintentionally responsible for the destruction of the real values of constant items not maintained under HCA during inflation.
Table 1: Real value destruction: Historical Cost Paradigm
Monetary aggregate: M3 R1 952.799 billion SARB: Value date: August 2009
Estimated value of constant items not maintained in SA economy: R 3 333 billion
Table 2: Real value destruction: Const. ITEM Purch. Power Accounting
Table 1 above gives us a close estimate of the state of real value destruction in the SA economy at the moment: In the 12 month period ending in August, 2009, inflation actually destroyed R1 952.799 billion x 0.064 = R124.9 billion in the real value of the Rand in the SA monetary economy. At the same time SA accountants unknowingly, unintentionally and completely unnecessarily destroyed about R200 billion in the real value of constant items never maintained in the SA constant item economy. About R324 billion in real value was thus destroyed in the SA economy in the 12 months to August, 2009 by inflation and by SA accountants implementing their very destructive stable measuring unit assumption.
If inflation stays at 6.4% for the next five years and SA accountants keep on unknowingly destroying the real values of constant items not maintained with their very destructive stable measuring unit assumption then a cumulative total of R1 620 billion in real value would be destroyed in the SA economy – all else being equal. The cumulative totals of real value destruction under these circumstances for 10, 20 and 30 years would be R3 240 billion, R6 480 billion and R9 720 billion respectively – ceteris paribus. These are huge values of real value destruction in the SA economy of which the part for which SA accountants are unknowingly responsible, is completely unnecessary and can easily be prevented.
We can see from Table 2 what the difference would be when SA accountants freely decide to measure financial capital maintenance in units of constant purchasing power as the IASB authorized them to do 20 years ago in the Framework, Par. 104 (a).
The destruction of real value in constant items would stop completely. There would only be real value destruction in the real value of the Rand because of inflation. At 6.4% annual inflation only R124 billion in real value would be destroyed in the economy as a whole instead of the current about R324 billion over a period of 12 months. Over five years the cumulative total of real value destruction would drop from R1 620 billion to R 624 billion, over 10 years from R3 240 billion to R1 249 billion, over 20 years from R6 480 billion to R2 498 billion and over 30 years from R9 720 billion to R3 747 billion.
SA accountants unknowingly destroy existing real values in existing constant items with their very destructive stable measuring unit assumption. When they stop their stable measuring unit assumption they would knowingly maintain about R200 billion in existing constant item real values during every period of 12 months in the SA real economy amounting to R1 000 billion over 5 years, R 2 000 billion over 10 years, R4 000 over 20 years and R6 000 billion over 30 years. Boosting the real economy with these real values would make a very big difference to the SA economy as a whole, to growth and to employment in the economy over that period.
Obviously a further reduction of inflation to an annual average of 3% would improve the SA economy even more. Over 30 years it would boost the economy by a further R2 000 billion on top of the R6 000 to be gained when SA accountants freely switch over to financial capital maintenance in units of constant purchasing power.
Kindest regards,
Nicolaas Smith
Tuesday 6 October 2009
Capital illusion
Capital illusion is the mistaken belief by accountants, economists, analysts, investors and business people that the real value of companies´ capital and retained profits are always adequately maintained during low inflation under the Historical Cost paradigm.
Capital illusion is aided and abetted by the International Accounting Standards Board’s unqualified statement in the Framework, Par. 104 (a) that financial capital maintenance can be measured in nominal monetary units.
It is impossible to maintain the real value of financial capital in nominal monetary units – per se – during inflation.
100% of the inflation-adjusted original real values of all contributions to Shareholders´ Equity have to be invested during inflation in revaluable variable item fixed assets with an equivalent updated fair value (revalued or with unrecorded hidden holding gains) in order not to destroy Shareholders Equity’s original real value at a rate equal to the rate of inflation under the traditional Historical Cost Accounting model implemented by most companies in South Africa.
Very few companies in SA abide by the 100% of equity invested in fixed assets rule.
There is neither capital illusion nor massive unnecessary capital destruction when financial capital maintenance is measured in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) in 1989: the real value of Shareholders´ Equity is maintained even without fixed assets in companies that break even.
Kindest regards,
Nicolaas Smith
Summary: Capital illusion is the mistake everyone makes in thinking that the real value of companies´ equity (capital and retained profits) is always backed by their fixed assets - either revalued or with unaccounted holding gains. Inflation-adjusting all constant items will maintain the real value of your equity forever as long as you break even - even if you have no fixed assets at all - instead of destroying the unbacked part at the rate of inflation as accountants are unknowingly doing at the moment, unnecessarily decapitalizing SA companies and banks by about R200 billion per year.
Capital illusion is aided and abetted by the International Accounting Standards Board’s unqualified statement in the Framework, Par. 104 (a) that financial capital maintenance can be measured in nominal monetary units.
It is impossible to maintain the real value of financial capital in nominal monetary units – per se – during inflation.
100% of the inflation-adjusted original real values of all contributions to Shareholders´ Equity have to be invested during inflation in revaluable variable item fixed assets with an equivalent updated fair value (revalued or with unrecorded hidden holding gains) in order not to destroy Shareholders Equity’s original real value at a rate equal to the rate of inflation under the traditional Historical Cost Accounting model implemented by most companies in South Africa.
Very few companies in SA abide by the 100% of equity invested in fixed assets rule.
There is neither capital illusion nor massive unnecessary capital destruction when financial capital maintenance is measured in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) in 1989: the real value of Shareholders´ Equity is maintained even without fixed assets in companies that break even.
Kindest regards,
Nicolaas Smith
Summary: Capital illusion is the mistake everyone makes in thinking that the real value of companies´ equity (capital and retained profits) is always backed by their fixed assets - either revalued or with unaccounted holding gains. Inflation-adjusting all constant items will maintain the real value of your equity forever as long as you break even - even if you have no fixed assets at all - instead of destroying the unbacked part at the rate of inflation as accountants are unknowingly doing at the moment, unnecessarily decapitalizing SA companies and banks by about R200 billion per year.
Monday 5 October 2009
Mboweni´s R120 billion annual gift to South Africa
Money illusion is still very evident today in most economies in money, monetary items and constant items that are mistakenly considered to be monetary items, for example, trade debtors and trade creditors.
The incorrect treatment of trade debtors and trade creditors as monetary items is mainly due to the incorrect definition of monetary items in IFRS. IAS 29, Par. 12 defines monetary items incorrectly as follows:
Monetary items are money held and items to be received or paid in money.
Not all items to be received or paid in money are monetary items – per se. Money is simply used as the generally accepted medium of exchange to transfer monetary items as well as most non-monetary items from one economic entity to another. Most non-monetary items are transferred from one entity to another by generally accepted mutual agreement to use money as the medium of exchange.
Money has the legal backing of being legal tender. Legal tender is an offered payment that, by law, cannot be refused in settlement of a debt. Legal tender is anything which, when offered, extinguishes the debt. Credit cards, debit cards, personal cheques and similar non-cash methods of payment are not usually legal tender. The law does not relieve the debt until payment is accepted which explains the practice in some economies of making out receipts for most payments. Bank notes and coins are usually defined as legal tender.
Monetary items are incorrectly defined in IAS 21, Par. 8 too:
Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
Not all assets and liabilities to be received or paid in a fixed or determinable number of units of currency are monetary items – per se.
The correct definition of monetary items:
Monetary items are money held and items with an underlying monetary nature.
Money illusion is the mistaken belief by people in general that money’s real value is maintained in the short to medium term in low inflationary economies. Central bank governors aid and abet money illusion by regularly stating in their monetary policy statements that they are “achieving and maintaining price stability.”
“The MPC remains fully committed to its mandate of achieving and maintaining price stability.”
TT Mboweni, Governor. 2009-06-25: Statement of the Monetary Policy Committee, SARB.
It is not always pointed out by governors of central banks that the “price stability” they mention, refers to their definition of “price stability”. Jean-Claude Trichet, the President of the European Central Bank, is a central bank governor who regularly mentions that 2% inflation is their definition of price stability. Absolute price stability is a year-on-year increase in the Consumer Price Index of zero per cent. The SARB´s definition of “price stability” “is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”
The SARB would aid in reducing money illusion by stating:
The MPC remains fully committed to its mandate of achieving and maintaining the SARB´s chosen level of price stability which is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. Absolute price stability is a year-on-year increase in the CPI of zero per cent. Current 6.4% annual inflation destroyed about R124 billion of the real value of the Rand over the past 12 months to the end of August, 2009. A one per cent decrease in inflation would maintain about R19 billion per annum of real value in the SA monetary economy.
Tito Mboweni, the highly respected outgoing Governor of the SARB, has achieved the remarkable distinction of reducing the average annual destruction of the real value of the Rand by inflation by 50% during his 10 year tenure at the helm of South Africa’s central bank. In the 18 years before his arrival, average annual destruction of the real value of the Rand by inflation was 12 % or R240 billion per annum in August, 2009 CPI value terms – ceteris paribus. This means that Mr Mboweni and his excellent team at the SARB managed to maintain, on average, an extra R120 billion per annum in the SA monetary economy over the last 10 years. This annual R120 billion benefit to the SA economy will remain in place as long as average annual inflation stays at 6% or lower – all else being equal.
A further reduction of average annual inflation to 3% - the bottom level of the SA´s inflation target range – would maintain an additional R60 billion per annum in the SA monetary economy. That would bring the total real value maintained to R180 billion per annum compared to the R240 billion real value destroyed per annum during the last 18 years before Mr Mboweni´s arrival at the SARB.
Kindest regards,
Nicolaas Smith
The incorrect treatment of trade debtors and trade creditors as monetary items is mainly due to the incorrect definition of monetary items in IFRS. IAS 29, Par. 12 defines monetary items incorrectly as follows:
Monetary items are money held and items to be received or paid in money.
Not all items to be received or paid in money are monetary items – per se. Money is simply used as the generally accepted medium of exchange to transfer monetary items as well as most non-monetary items from one economic entity to another. Most non-monetary items are transferred from one entity to another by generally accepted mutual agreement to use money as the medium of exchange.
Money has the legal backing of being legal tender. Legal tender is an offered payment that, by law, cannot be refused in settlement of a debt. Legal tender is anything which, when offered, extinguishes the debt. Credit cards, debit cards, personal cheques and similar non-cash methods of payment are not usually legal tender. The law does not relieve the debt until payment is accepted which explains the practice in some economies of making out receipts for most payments. Bank notes and coins are usually defined as legal tender.
Monetary items are incorrectly defined in IAS 21, Par. 8 too:
Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
Not all assets and liabilities to be received or paid in a fixed or determinable number of units of currency are monetary items – per se.
The correct definition of monetary items:
Monetary items are money held and items with an underlying monetary nature.
Money illusion is the mistaken belief by people in general that money’s real value is maintained in the short to medium term in low inflationary economies. Central bank governors aid and abet money illusion by regularly stating in their monetary policy statements that they are “achieving and maintaining price stability.”
“The MPC remains fully committed to its mandate of achieving and maintaining price stability.”
TT Mboweni, Governor. 2009-06-25: Statement of the Monetary Policy Committee, SARB.
It is not always pointed out by governors of central banks that the “price stability” they mention, refers to their definition of “price stability”. Jean-Claude Trichet, the President of the European Central Bank, is a central bank governor who regularly mentions that 2% inflation is their definition of price stability. Absolute price stability is a year-on-year increase in the Consumer Price Index of zero per cent. The SARB´s definition of “price stability” “is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”
The SARB would aid in reducing money illusion by stating:
The MPC remains fully committed to its mandate of achieving and maintaining the SARB´s chosen level of price stability which is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. Absolute price stability is a year-on-year increase in the CPI of zero per cent. Current 6.4% annual inflation destroyed about R124 billion of the real value of the Rand over the past 12 months to the end of August, 2009. A one per cent decrease in inflation would maintain about R19 billion per annum of real value in the SA monetary economy.
Tito Mboweni, the highly respected outgoing Governor of the SARB, has achieved the remarkable distinction of reducing the average annual destruction of the real value of the Rand by inflation by 50% during his 10 year tenure at the helm of South Africa’s central bank. In the 18 years before his arrival, average annual destruction of the real value of the Rand by inflation was 12 % or R240 billion per annum in August, 2009 CPI value terms – ceteris paribus. This means that Mr Mboweni and his excellent team at the SARB managed to maintain, on average, an extra R120 billion per annum in the SA monetary economy over the last 10 years. This annual R120 billion benefit to the SA economy will remain in place as long as average annual inflation stays at 6% or lower – all else being equal.
A further reduction of average annual inflation to 3% - the bottom level of the SA´s inflation target range – would maintain an additional R60 billion per annum in the SA monetary economy. That would bring the total real value maintained to R180 billion per annum compared to the R240 billion real value destroyed per annum during the last 18 years before Mr Mboweni´s arrival at the SARB.
Kindest regards,
Nicolaas Smith
Saturday 3 October 2009
Money makes the world go round
Hi,
Monetary items are money held and items with an underlying monetary nature.
Money is the greatest economic invention of all time. Money did not exist and was not discovered. It was invented over a long period of time. Money is a monetary item which is used as a medium of exchange and serves at the same time as a store of value and as the monetary unit of account for the accounting of economic activity in a country or a monetary region like the Rand Common Monetary Area which includes South Africa, Namibia, Swaziland and Lesotho.
Money is a medium of exchange which is its main function. Without that function it can never be money. Money is the functional currency in an economy, i.e. the currency of the primary economic environment in which an economic entity operates. The historical development of money led it also to be used as the fundamental unit of measure to account the value of economic items. Money is the only universal unit of measure that is not a stable value. All other universal units of measure are fundamentally stable units of measure, e.g. inch, centimetre, ounce, gram, kilogram, pound, etc.
Historically money developed on the mistaken belief by people in general that it is stable – as in fixed – in real economic value in the short to medium term in economies with low cash inflation. Stable in this instance was seen as meaning that money kept its real value intact over the short to medium term in low inflationary economies. Money illusion is still very evident today in most economies in money, monetary items and constant items that are mistakenly considered to be monetary items, for example, trade debtors and trade creditors. There is no money illusion in hyperinflationary economies. People know that hyperinflation destroys the real value of money very quickly.
It is not what it appears to be
When we discuss, write about, talk about or analyze this monetary item described above, we call it money and describe it using the term money with the implicit assumption that this money we are dealing with is stable - as in fixed - in real economic value in our low inflationary economies. We thus assume at the same time that prices are more or less stable in low inflationary economies.
The term stable is normally accepted by the public at large to indicate a permanently fixed situation or position or state or price or value. A stable – as in fixed - price over time would be drawn as a horizontal line on a chart. A slowly increasing price over time would be drawn as a slightly rising line on a chart. A slowly decreasing value over time would be drawn as a slightly declining line on a chart. When we say production of a commodity is stable we accept that the absolute number of items being produced is not fluctuating but is at the same level all the time.
The term stable as used by economists, however, does not mean a fixed price or level, even though that is what the public in general thinks it means. The term stable in economics these days means slowly increasing or slowly decreasing – depending on what it is being applied to. The term price stability as used by economists today does not mean that prices in general stay the same, but that prices in general are rising slowly – which is, as we are all taught, the popular definition of inflation.
The term stable money as used by economists equally does not mean that the real value of national monetary units they are talking about stays the same in the economy – even though that is what the public in general thinks it means. What they mean with stable money is that the real value of a national monetary unit is slowly decreasing over time – which is, as we shall see, a much better – but not yet the best – definition of inflation.
When a central bank governor says that the central bank’s primary task or objective is price stability what she or he means is that the central bank would be fulfilling its primary task, in an economy with low levels of inflation, when prices in general are slowly rising over time (that well known definition of inflation again). The flip side of that statement is that the real value of national monetary units is slowly being destroyed by inflation over time – the best definition of inflation.
A central bank’s primary task being price stability is the same as saying a central bank’s main responsibility is ensuring that inflation is maintained at a very low level. This low level is now generally accepted in first world economies to be up to 2 percent per annum. We know that inflation is always and everywhere the destruction of real value in money and other monetary items over time. We also know that inflation has no effect on the real value of non-monetary items.
The maintenance of price stability thus means that the primary task of a central bank is to limit the destruction of real value in money and other monetary items by inflation to a maximum of 2 percent per annum within an economy or common monetary area. Two percent continuous inflation destroys the following percentages of real value over the time periods indicated:
Years....%
5.......10
10......18
16......28
20......33
30......45
35......51
We also know that accountants unknowingly destroy the real value of constant items never or not fully updated during inflation when they implement the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model. Historical Cost accountants thus unknowingly destroy the same percentages stated above in the real value of constant items never updated during continuous “price stability” of 2% inflation per annum in low inflation first world economies.
Kindest regards,
Nicolaas Smith
Monetary items are money held and items with an underlying monetary nature.
Money is the greatest economic invention of all time. Money did not exist and was not discovered. It was invented over a long period of time. Money is a monetary item which is used as a medium of exchange and serves at the same time as a store of value and as the monetary unit of account for the accounting of economic activity in a country or a monetary region like the Rand Common Monetary Area which includes South Africa, Namibia, Swaziland and Lesotho.
Money is a medium of exchange which is its main function. Without that function it can never be money. Money is the functional currency in an economy, i.e. the currency of the primary economic environment in which an economic entity operates. The historical development of money led it also to be used as the fundamental unit of measure to account the value of economic items. Money is the only universal unit of measure that is not a stable value. All other universal units of measure are fundamentally stable units of measure, e.g. inch, centimetre, ounce, gram, kilogram, pound, etc.
Historically money developed on the mistaken belief by people in general that it is stable – as in fixed – in real economic value in the short to medium term in economies with low cash inflation. Stable in this instance was seen as meaning that money kept its real value intact over the short to medium term in low inflationary economies. Money illusion is still very evident today in most economies in money, monetary items and constant items that are mistakenly considered to be monetary items, for example, trade debtors and trade creditors. There is no money illusion in hyperinflationary economies. People know that hyperinflation destroys the real value of money very quickly.
It is not what it appears to be
When we discuss, write about, talk about or analyze this monetary item described above, we call it money and describe it using the term money with the implicit assumption that this money we are dealing with is stable - as in fixed - in real economic value in our low inflationary economies. We thus assume at the same time that prices are more or less stable in low inflationary economies.
The term stable is normally accepted by the public at large to indicate a permanently fixed situation or position or state or price or value. A stable – as in fixed - price over time would be drawn as a horizontal line on a chart. A slowly increasing price over time would be drawn as a slightly rising line on a chart. A slowly decreasing value over time would be drawn as a slightly declining line on a chart. When we say production of a commodity is stable we accept that the absolute number of items being produced is not fluctuating but is at the same level all the time.
The term stable as used by economists, however, does not mean a fixed price or level, even though that is what the public in general thinks it means. The term stable in economics these days means slowly increasing or slowly decreasing – depending on what it is being applied to. The term price stability as used by economists today does not mean that prices in general stay the same, but that prices in general are rising slowly – which is, as we are all taught, the popular definition of inflation.
The term stable money as used by economists equally does not mean that the real value of national monetary units they are talking about stays the same in the economy – even though that is what the public in general thinks it means. What they mean with stable money is that the real value of a national monetary unit is slowly decreasing over time – which is, as we shall see, a much better – but not yet the best – definition of inflation.
When a central bank governor says that the central bank’s primary task or objective is price stability what she or he means is that the central bank would be fulfilling its primary task, in an economy with low levels of inflation, when prices in general are slowly rising over time (that well known definition of inflation again). The flip side of that statement is that the real value of national monetary units is slowly being destroyed by inflation over time – the best definition of inflation.
A central bank’s primary task being price stability is the same as saying a central bank’s main responsibility is ensuring that inflation is maintained at a very low level. This low level is now generally accepted in first world economies to be up to 2 percent per annum. We know that inflation is always and everywhere the destruction of real value in money and other monetary items over time. We also know that inflation has no effect on the real value of non-monetary items.
The maintenance of price stability thus means that the primary task of a central bank is to limit the destruction of real value in money and other monetary items by inflation to a maximum of 2 percent per annum within an economy or common monetary area. Two percent continuous inflation destroys the following percentages of real value over the time periods indicated:
Years....%
5.......10
10......18
16......28
20......33
30......45
35......51
We also know that accountants unknowingly destroy the real value of constant items never or not fully updated during inflation when they implement the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model. Historical Cost accountants thus unknowingly destroy the same percentages stated above in the real value of constant items never updated during continuous “price stability” of 2% inflation per annum in low inflation first world economies.
Kindest regards,
Nicolaas Smith
Friday 2 October 2009
Deloitte ignores capital
Deloitte, one of the Big Four accounting and auditing multi-nationals, also ignores the paragraphs in the Framework that deal with the concepts of capital, capital maintenance and the determination of profit or loss in their presentation of the Framework on their site IAS Plus as at 02/10/2009. Deloitte do not even mention one word in their presentation of the Framework about the fact that companies can measure financial capital maintenance in units of constant purchasing power.
This appears to be another example of the lack of understanding by accountants in general that an essential function of accounting is to maintain the real value of constant items at all levels of inflation and deflation which can only be achieved with the IASB approved CIPPA model in the Framework, Par. 104 (a) during low inflation and IAS 29 during hyperinflation.
http://www.iasplus.com/standard/framewk.htm
Similarly the paragraphs in the Framework dealing with the concepts of capital, the concepts of financial capital maintenance and units of constant purchasing power were also omitted from presentation of the Framework in the Wikipedia article on IFRS till they were added very recently. The whole of the Framework was summarized in the Wikipedia article, except those paragraphs.
The concept of financial capital maintenance in units of constant purchasing power during low inflation seems to have been correctly treated by the IASC Board twenty years ago – and then simply just ignored by everyone.
Kindest regards,
Nicolaas Smith
This appears to be another example of the lack of understanding by accountants in general that an essential function of accounting is to maintain the real value of constant items at all levels of inflation and deflation which can only be achieved with the IASB approved CIPPA model in the Framework, Par. 104 (a) during low inflation and IAS 29 during hyperinflation.
http://www.iasplus.com/standard/framewk.htm
Similarly the paragraphs in the Framework dealing with the concepts of capital, the concepts of financial capital maintenance and units of constant purchasing power were also omitted from presentation of the Framework in the Wikipedia article on IFRS till they were added very recently. The whole of the Framework was summarized in the Wikipedia article, except those paragraphs.
The concept of financial capital maintenance in units of constant purchasing power during low inflation seems to have been correctly treated by the IASC Board twenty years ago – and then simply just ignored by everyone.
Kindest regards,
Nicolaas Smith
Thursday 1 October 2009
This is not inflation accounting
Constant ITEM Purchasing Power Accounting, despite being approved by the IASB in the Framework twenty years ago, is completely ignored by accountants in non-hyperinflationary economies even though it would maintain instead of destroy the real values of not only all income statement constant items but also all balance sheet constant real value non-monetary items for an unlimited period of time during low inflation and deflation. CIPPA would stop SA accountants unknowingly destroying about R200 billion in the real value of constant items in the SA real economy each and every year. CIPPA would result in SA accountants knowingly boosting the SA real economy by at least R200 billion per annum for an unlimited period – ceteris paribus.
The reason accountants ignore CIPPA is because any price-level accounting model is generally viewed by almost all accountants and accounting authorities as a 1970-style failed and discredited inflation accounting model that requires all non-monetary items - variable real value non-monetary items and constant real value non-monetary items - to be inflation-adjusted by means of the CPI.
SA accountants forego the opportunity to implement the substantial real value maintaining benefits of measuring financial capital maintenance in units of constant purchasing power in SA companies and the economy in general. This results in the unknowing and unintentional destruction by SA accountants of billions of Rand in real value in the SA real economy – in most companies´ Retained Earnings (to name just one item unknowingly destroyed by SA accountants like this) - year in year out because they choose to measure financial capital maintenance in nominal monetary units and implement the very destructive stable measuring unit assumption as part of the real value destroying HCA model in SA when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
The reason accountants ignore CIPPA is because any price-level accounting model is generally viewed by almost all accountants and accounting authorities as a 1970-style failed and discredited inflation accounting model that requires all non-monetary items - variable real value non-monetary items and constant real value non-monetary items - to be inflation-adjusted by means of the CPI.
SA accountants forego the opportunity to implement the substantial real value maintaining benefits of measuring financial capital maintenance in units of constant purchasing power in SA companies and the economy in general. This results in the unknowing and unintentional destruction by SA accountants of billions of Rand in real value in the SA real economy – in most companies´ Retained Earnings (to name just one item unknowingly destroyed by SA accountants like this) - year in year out because they choose to measure financial capital maintenance in nominal monetary units and implement the very destructive stable measuring unit assumption as part of the real value destroying HCA model in SA when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Wednesday 30 September 2009
Salaries and wages are normally inflation-adjusted
Salaries, wages, rentals, etc are normally inflation-adjusted in South Africa and generally too in most economies in the world.
Inflation-adjusted income statement constant real value non-monetary items, for example, salaries and wages, are – right this very moment - a blessing to users in SA – and all around the world - because they maintain the real value or purchasing power of salaries and wages during inflation as long as the inflation-adjustment is at least equal to inflation over the period in question. Millions of SA workers, their trade unions, the SA government, SA accountants and South Africans in general would agree that the practice of inflation-adjusting accounts in a low inflation environment is a blessing to users and does not insult them.
Inflation-adjusted balance sheet constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, etc in SA´s low inflation environment would be a blessing to everyone in SA when our accountants simply choose to change from their current implementation of the real value destroying traditional HCA model and freely choose to implement the real value maintaining Constant ITEM Purchasing Power Accounting model as approved in the IASB´s Framework, Par. 104 (a) twenty years ago. They would maintain - instead of currently destroy as they also did last year and all the years before - at least R200 billion annually in constant item real value in the SA real economy for an unlimited period – all else being equal – and as they will do next year if they carry on with their very destructive stable measuring unit assumption.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Inflation-adjusted income statement constant real value non-monetary items, for example, salaries and wages, are – right this very moment - a blessing to users in SA – and all around the world - because they maintain the real value or purchasing power of salaries and wages during inflation as long as the inflation-adjustment is at least equal to inflation over the period in question. Millions of SA workers, their trade unions, the SA government, SA accountants and South Africans in general would agree that the practice of inflation-adjusting accounts in a low inflation environment is a blessing to users and does not insult them.
Inflation-adjusted balance sheet constant real value non-monetary items, e.g. Issued Share capital, Retained Earnings, etc in SA´s low inflation environment would be a blessing to everyone in SA when our accountants simply choose to change from their current implementation of the real value destroying traditional HCA model and freely choose to implement the real value maintaining Constant ITEM Purchasing Power Accounting model as approved in the IASB´s Framework, Par. 104 (a) twenty years ago. They would maintain - instead of currently destroy as they also did last year and all the years before - at least R200 billion annually in constant item real value in the SA real economy for an unlimited period – all else being equal – and as they will do next year if they carry on with their very destructive stable measuring unit assumption.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Monday 28 September 2009
1970-style CPP inflation accounting was a failed inflation accounting model.
1970-style CPP inflation accounting was a failed inflation accounting model.
The difference between constant real value non-monetary items and variable real value non-monetary items is not generally known yet.
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.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
The difference between constant real value non-monetary items and variable real value non-monetary items is not generally known yet.
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.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Inflation August, 2009
A slightly diffirent presentation of inflation facts for South Afrca. It would
be quite interesting to calculate the amount of real value destroyed over the
last 5, 10, 15, 20, 25 years, etc.
Annual inflation 6.4%
Annual destruction in real value of Rand by inflation R128 billion aprox
Annual constant item real value destruction by the implementation of the
stable measuring unit assumption by SA accountants R200 billion aprox
Cumulative inflation since Jan 1981 1 386.3%
Cumulative inflation since Apr 1994 167.2%
Real value unknowingly destroyed by SA accountants in Shareholders´ Equity items having remained in SA companies from Jan 1981 to Aug 2009 without an equivalent investment in fixed assets with the same fair value (revalued or with undisclosed holding gains) as a result of Historical Cost Accounting. 93.3%
The equivalent value from Apr 1994 to Aug 2009. 62.6%
Kindest regards,
be quite interesting to calculate the amount of real value destroyed over the
last 5, 10, 15, 20, 25 years, etc.
Annual inflation 6.4%
Annual destruction in real value of Rand by inflation R128 billion aprox
Annual constant item real value destruction by the implementation of the
stable measuring unit assumption by SA accountants R200 billion aprox
Cumulative inflation since Jan 1981 1 386.3%
Cumulative inflation since Apr 1994 167.2%
Real value unknowingly destroyed by SA accountants in Shareholders´ Equity items having remained in SA companies from Jan 1981 to Aug 2009 without an equivalent investment in fixed assets with the same fair value (revalued or with undisclosed holding gains) as a result of Historical Cost Accounting. 93.3%
The equivalent value from Apr 1994 to Aug 2009. 62.6%
Kindest regards,
Thursday 24 September 2009
Who destroy more real value: Inflation or SA Accountants?
100% of the inflation-adjusted original real values of all contributions to Shareholders´ Equity have to be invested in revaluable variable item fixed assets with an equivalent updated fair value (revalued or with unrecorded hidden holding gains) in order not to destroy Equity’s original real value under the traditional Historical Cost Accounting model implemented by all companies in South Africa.
The current real value of the nominal portion not invested as such will be destroyed at a rate equal to the rate of inflation when the constant item Equity is measured in nominal monetary units, i.e. implementing the stable measuring unit assumption as done by all SA accountants.
Most companies do not meet the 100% requirement. In practice this means that the real value of Retained Profits of all SA companies and banks are unknowingly and unintentionally being destroyed at a rate equal to the rate of inflation by SA accountants implementing the real value destroying traditional Historical Cost Accounting model.
Implementing the IASB approved alternative, namely, financial capital maintenance in units of constant purchasing power as authorized in 1989 in the Framework, Par. 104 (a), would stop this destruction forever under all levels of inflation and deflation whether a company has fixed assets or has no fixed assets at all.
SA accountants would maintain instead of currently destroy about R200 billion per annum in constant item real value in the SA real economy when they reject the stable measuring unit assumption as approved in Par. 104 (a).
One percent inflation destroys about R20 billion per annum in the real value of the Rand in SA.
6.4% inflation thus destroys about R128 billion per annum in the real value of the Rand.
SA accountants unknowingly and unintentionally destroy about R200 billion per annum in the real value of constant items not fully or never updated because they implement the stable measuring unit assumption.
Kindest regards
Nicolaas Smith
Summary: The only way you can prevent your accountant from destroying the real value of your capital and retained profits at the rate of inflation with traditional Historical Cost Accounting is to invest 100% of your capital and retained profits in fixed assets. Hardly any company does that. It means that most companies´ and banks´ retained profits are unknowingly being destroyed by their accountants.
Under the alternative units of constant purchasing power accounting during low inflation your accountant would maintain the real value of your capital and retained profits forever no matter what the rate of inflation and even if you have no fixed assets - as long as you break even.
SA accountants are unknowingly terrible destroyers with their stable measuring unit assumption.
The current real value of the nominal portion not invested as such will be destroyed at a rate equal to the rate of inflation when the constant item Equity is measured in nominal monetary units, i.e. implementing the stable measuring unit assumption as done by all SA accountants.
Most companies do not meet the 100% requirement. In practice this means that the real value of Retained Profits of all SA companies and banks are unknowingly and unintentionally being destroyed at a rate equal to the rate of inflation by SA accountants implementing the real value destroying traditional Historical Cost Accounting model.
Implementing the IASB approved alternative, namely, financial capital maintenance in units of constant purchasing power as authorized in 1989 in the Framework, Par. 104 (a), would stop this destruction forever under all levels of inflation and deflation whether a company has fixed assets or has no fixed assets at all.
SA accountants would maintain instead of currently destroy about R200 billion per annum in constant item real value in the SA real economy when they reject the stable measuring unit assumption as approved in Par. 104 (a).
One percent inflation destroys about R20 billion per annum in the real value of the Rand in SA.
6.4% inflation thus destroys about R128 billion per annum in the real value of the Rand.
SA accountants unknowingly and unintentionally destroy about R200 billion per annum in the real value of constant items not fully or never updated because they implement the stable measuring unit assumption.
Kindest regards
Nicolaas Smith
Summary: The only way you can prevent your accountant from destroying the real value of your capital and retained profits at the rate of inflation with traditional Historical Cost Accounting is to invest 100% of your capital and retained profits in fixed assets. Hardly any company does that. It means that most companies´ and banks´ retained profits are unknowingly being destroyed by their accountants.
Under the alternative units of constant purchasing power accounting during low inflation your accountant would maintain the real value of your capital and retained profits forever no matter what the rate of inflation and even if you have no fixed assets - as long as you break even.
SA accountants are unknowingly terrible destroyers with their stable measuring unit assumption.
Sir David Tweedie´s perfect solution
Accountants are players in the business game because of their specialized knowledge in the monetary game and variable item game which they play together with other management team players. Accountants are always scorekeepers by training in all the games too.
Accountants do not have the assistance of other management team players in the constant item game they play against the stable measuring unit assumption enemy. In the selected income statement constant item game accountants are unbeatable world champions against the stable measuring unit assumption enemy. They inflation adjust salaries, wages, rentals, etc during low inflation and score all the time. The stable measuring unit assumption enemy never scores as long as accountants measure these items in units of constant purchasing power during low inflation.
Now comes the End Game.
The purpose of this game is to maintain the real value of the other income statement and all balance sheet constant items.
The game is played at Ellis Park.
Sir David Tweedie, Chairman of the International Accounting Standards Board leads a delegation from the Board at the game. The IASB has a magnificent exhibition inside the Ellis Park grounds where they demonstrate their indestructible Measurement in Units of Constant Purchasing Power Missile Attack System. This missile kills the stable measuring unit assumption enemy instantaneously whenever this missile is used for an indefinite period of time.
It is very strange that all the Boards of Directors of especially JSE listed companies stream past Sir David´s exhibition without anyone even stopping to look at the deadly weapon. When I ask one of the Board of Directors why that is, they say the exhibition has been there since 1989 and no-one has ever stopped to look at it.
SA accounting professors are Historical Cost gurus. They advised them that accountants are actually only scorekeepers and should not even be on the field playing against the stable measuring unit assumption enemy. They state that there is absolutely no substance in the claim that Sir David´s Measurement in Units of Constant Purchasing Power system can be used during low inflation. They all love the stable measuring unit assumption. They feel that they have proved themselves after their long Historical Cost teaching careers and that anyone who opposes them must be nuts.
I pointed out to them that Sir David has a big poster up saying: FOR USE DURING LOW INFLATION!! The Board of Directors say they don´t understand it especially after the professors´ specific instructions that accountants are only scorekeepers and never players. They seem to be very confused.
The End Game begins.
There are only accountants on the field against the massive stable measuring unit assumption enemy who uses the Historical Cost method. The accountants kick off at the start of the financial year. Then something extraordinary happens. All the accountants get a glazy look in their eyes as if they cannot see the stable measuring unit assumption enemy. They all turn around and meekly go and sit behind the try-line.
The stable measuring unit assumption enemy gathers the ball and trots through unopposed to score under the poles and converts the try. The next kick-off is by the ABSA accountants. After the kick-off they do the same. They quietly run back and sit down behind the try-line. The stable measuring unit assumption picks up the ball, scores under the poles and converts thus destroying about R3.4 billion in the real value of ABSA´s Retained Profits during 2009.
At the end of the game the stable measuring unit assumption enemy has destroyed R200 billion in the real value of SA constant items never updated. The game is over for the year. The accountants being well trained scorekeepers keep score during and after the game.
In this game they are only scorekeepers which prove the professors right – but, only for this mainly balance sheet constant item game. Not for any of the other games. This proves that when accountants are only scorekeepers in Historical Cost nominal monetary values for constant items never updated, real value is destroyed on a massive scale in the SA real economy.
Next year´s game will be exactly the same unless Sir David can get SA Boards of Directors to accept his free offer. He is a very patient man. He has been trying for the last 20 years with not a single free give-away in SA – or anywhere else in the low inflation world. Apparently a rogue SA accountant living in Portugal accepted his offer. Well, at least he managed one free give-away in twenty years.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Accountants do not have the assistance of other management team players in the constant item game they play against the stable measuring unit assumption enemy. In the selected income statement constant item game accountants are unbeatable world champions against the stable measuring unit assumption enemy. They inflation adjust salaries, wages, rentals, etc during low inflation and score all the time. The stable measuring unit assumption enemy never scores as long as accountants measure these items in units of constant purchasing power during low inflation.
Now comes the End Game.
The purpose of this game is to maintain the real value of the other income statement and all balance sheet constant items.
The game is played at Ellis Park.
Sir David Tweedie, Chairman of the International Accounting Standards Board leads a delegation from the Board at the game. The IASB has a magnificent exhibition inside the Ellis Park grounds where they demonstrate their indestructible Measurement in Units of Constant Purchasing Power Missile Attack System. This missile kills the stable measuring unit assumption enemy instantaneously whenever this missile is used for an indefinite period of time.
It is very strange that all the Boards of Directors of especially JSE listed companies stream past Sir David´s exhibition without anyone even stopping to look at the deadly weapon. When I ask one of the Board of Directors why that is, they say the exhibition has been there since 1989 and no-one has ever stopped to look at it.
SA accounting professors are Historical Cost gurus. They advised them that accountants are actually only scorekeepers and should not even be on the field playing against the stable measuring unit assumption enemy. They state that there is absolutely no substance in the claim that Sir David´s Measurement in Units of Constant Purchasing Power system can be used during low inflation. They all love the stable measuring unit assumption. They feel that they have proved themselves after their long Historical Cost teaching careers and that anyone who opposes them must be nuts.
I pointed out to them that Sir David has a big poster up saying: FOR USE DURING LOW INFLATION!! The Board of Directors say they don´t understand it especially after the professors´ specific instructions that accountants are only scorekeepers and never players. They seem to be very confused.
The End Game begins.
There are only accountants on the field against the massive stable measuring unit assumption enemy who uses the Historical Cost method. The accountants kick off at the start of the financial year. Then something extraordinary happens. All the accountants get a glazy look in their eyes as if they cannot see the stable measuring unit assumption enemy. They all turn around and meekly go and sit behind the try-line.
The stable measuring unit assumption enemy gathers the ball and trots through unopposed to score under the poles and converts the try. The next kick-off is by the ABSA accountants. After the kick-off they do the same. They quietly run back and sit down behind the try-line. The stable measuring unit assumption picks up the ball, scores under the poles and converts thus destroying about R3.4 billion in the real value of ABSA´s Retained Profits during 2009.
At the end of the game the stable measuring unit assumption enemy has destroyed R200 billion in the real value of SA constant items never updated. The game is over for the year. The accountants being well trained scorekeepers keep score during and after the game.
In this game they are only scorekeepers which prove the professors right – but, only for this mainly balance sheet constant item game. Not for any of the other games. This proves that when accountants are only scorekeepers in Historical Cost nominal monetary values for constant items never updated, real value is destroyed on a massive scale in the SA real economy.
Next year´s game will be exactly the same unless Sir David can get SA Boards of Directors to accept his free offer. He is a very patient man. He has been trying for the last 20 years with not a single free give-away in SA – or anywhere else in the low inflation world. Apparently a rogue SA accountant living in Portugal accepted his offer. Well, at least he managed one free give-away in twenty years.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Wednesday 23 September 2009
All hell breaks lose in final game
All hell breaks lose in final game
We have seen up to now that accountants are always scorekeepers because of their specialized training and knowledge in the two accounting games looked at so far: the monetary item game and the variable item game.
But, they are always also important players in these two games. They are never just scorekeepers as SA accounting professors so eloquently claim. They and all their supporters in this aspect of accounting are dead wrong.
A very interesting point is that in the monetary item and variable item games accountants join all the other members of their management teams to play the business game. As players they all score when they make profits, are part of the profit making process or simply mangage to maintain the real values of economic items.
In the monetary item game they are up against the inflation enemy. There are no apparent enemies in the variable item game as the efficient market mechanism kills all enemies to the equilibrium of supply and demand. We must admit that it was actually a variable item enemy, bad mortgage credit, which caused the current international financial crisis.
The constant item game is a very different type of game. There is only one person who can play this game: the accountant. No-one else in the management team or any worker in the business game can play this game.
We find the second economic enemy in this game: the stable measuring unit assumption. Only accountants can fight against the stable measuring unit assumption.
This economic enemy is a remarkable enemy. It is a stealth enemy. No-one really knows that it is destroying the economy. Those who know, like Market Monkey, say it does not really make any difference. He and they are dead wrong.
The board of directors can acquire a deadly weapon for the accountant to kill the stable measuring unit assumption instantaneously. All boards of directors inexplicably refuse to do anything about it.
Accountants managed to break the constant item game up into two games: a selected income statement constant item game and a mainly balance sheet constant item game.
In the selected income statement constant item game accountants completely crush the stable measuring unit assumption enemy. They inflation adjust salaries, wages, rentals, etc and the stable measuring unit assumption enemy never ever scores as long as accountants value these items in units of constant purchasing power.
Accountants are world champions in this selected income statement constant item game. They never lose and the stable measuring unit assumption enemy never scores one single point against them.
Accountants are obviously also scorekeepers in this game. They are the only players on the field but they get invaluable help from trade unions off the field.
In the next post all hell brakes loose in the final game. You will never ever believe what happens.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
We have seen up to now that accountants are always scorekeepers because of their specialized training and knowledge in the two accounting games looked at so far: the monetary item game and the variable item game.
But, they are always also important players in these two games. They are never just scorekeepers as SA accounting professors so eloquently claim. They and all their supporters in this aspect of accounting are dead wrong.
A very interesting point is that in the monetary item and variable item games accountants join all the other members of their management teams to play the business game. As players they all score when they make profits, are part of the profit making process or simply mangage to maintain the real values of economic items.
In the monetary item game they are up against the inflation enemy. There are no apparent enemies in the variable item game as the efficient market mechanism kills all enemies to the equilibrium of supply and demand. We must admit that it was actually a variable item enemy, bad mortgage credit, which caused the current international financial crisis.
The constant item game is a very different type of game. There is only one person who can play this game: the accountant. No-one else in the management team or any worker in the business game can play this game.
We find the second economic enemy in this game: the stable measuring unit assumption. Only accountants can fight against the stable measuring unit assumption.
This economic enemy is a remarkable enemy. It is a stealth enemy. No-one really knows that it is destroying the economy. Those who know, like Market Monkey, say it does not really make any difference. He and they are dead wrong.
The board of directors can acquire a deadly weapon for the accountant to kill the stable measuring unit assumption instantaneously. All boards of directors inexplicably refuse to do anything about it.
Accountants managed to break the constant item game up into two games: a selected income statement constant item game and a mainly balance sheet constant item game.
In the selected income statement constant item game accountants completely crush the stable measuring unit assumption enemy. They inflation adjust salaries, wages, rentals, etc and the stable measuring unit assumption enemy never ever scores as long as accountants value these items in units of constant purchasing power.
Accountants are world champions in this selected income statement constant item game. They never lose and the stable measuring unit assumption enemy never scores one single point against them.
Accountants are obviously also scorekeepers in this game. They are the only players on the field but they get invaluable help from trade unions off the field.
In the next post all hell brakes loose in the final game. You will never ever believe what happens.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Tuesday 22 September 2009
Inflation accounting
As a result of the lack of appreciating the destructive nature of their implementation of the very destructive stable measuring unit assumption, 1970-style CPP inflation accounting was also not an accounting system implemented by accountants to correct or eliminate the destruction of the real value of constant items by the use of the stable measuring unit assumption, but, a failed attempt to simply make financial reports more understandable and more comparable with previous year statements during periods of high inflation by inflation-adjusting all non-monetary items equally in terms of the CPI.
Accountants simply do not appreciate that they unknowingly destroy real value on a massive scale in all constant real value non-monetary items never or not fully updated when they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation. They also do not appreciate that they make that choice. Neither do they appreciate that they will stop that destruction by freely choosing to measure financial capital maintenance in units of constant purchasing power, as approved in the IASB Framework, Par. 104 (a) in 1989.
Geoffrey Whittington in his definitive work on inflation accounting in the beginning of the 1980´s, Inflation Accounting - An Introduction to the Debate, published in 1983, clearly indicated that with 1970-style CPP inflation accounting all non-monetary accounts (with no distinction being made between variable and constant real value non-monetary item accounts) were updated by means of the CPI.
He stated that Constant Purchasing Power inflation accounting (CPP) was a method of inflation-adjusting all non-monetary accounts consistently by means of the Consumer Price Index which reflected changes in money’s purchasing power. 1970-style CPP inflation accounting tried to deal with the problem of inflation in the popularly understood sense, as a decrease in the real value of money. According to Whittington, CPP inflation accounting tried to solve this problem by inflation-adjusting all non-monetary items at the reporting date by means of the CPI.
Kindest regards,
Nicolaas Smith
Accountants simply do not appreciate that they unknowingly destroy real value on a massive scale in all constant real value non-monetary items never or not fully updated when they choose to implement the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation. They also do not appreciate that they make that choice. Neither do they appreciate that they will stop that destruction by freely choosing to measure financial capital maintenance in units of constant purchasing power, as approved in the IASB Framework, Par. 104 (a) in 1989.
Geoffrey Whittington in his definitive work on inflation accounting in the beginning of the 1980´s, Inflation Accounting - An Introduction to the Debate, published in 1983, clearly indicated that with 1970-style CPP inflation accounting all non-monetary accounts (with no distinction being made between variable and constant real value non-monetary item accounts) were updated by means of the CPI.
He stated that Constant Purchasing Power inflation accounting (CPP) was a method of inflation-adjusting all non-monetary accounts consistently by means of the Consumer Price Index which reflected changes in money’s purchasing power. 1970-style CPP inflation accounting tried to deal with the problem of inflation in the popularly understood sense, as a decrease in the real value of money. According to Whittington, CPP inflation accounting tried to solve this problem by inflation-adjusting all non-monetary items at the reporting date by means of the CPI.
Kindest regards,
Nicolaas Smith
Monday 21 September 2009
Inconvenient Villains
Dictionary.com: villain - "Something/someone said to be the cause of particular trouble"
There are three basic economic items in the economy.
1. Monetary items
2. Variable items
3. Constant items
Accountants value everything they account. Every accounting entry accounts a debit value and a credit value.
1. Monetary items are items like money, bank account balances, car loans, housing loans, student loans, consumer loans, any loan in money, saving accounts, etc.
Accountants cannot value them wrongly: the only way accountants can value and account monetary items is at their original nominal values. Inflation destroys the real value of the Rand and monetary items. So, monetary items are always automatically kept at their always lower real values because inflation destroys their real values equally.
This loss in real value is, inexplicably required by accounting authorities to be calculated and accounted during hyperinflation, but not during low inflation. Why, no-one knows. The IASB authorized accounting in units of constant purchasing power during low inflation 20 years ago. Under this accounting model you have to calculate the real value loss in money during low inflation. But, not when you use the traditional Historical Cost Accounting model that the whole world uses. Why, no-one knows.
So, inflation and not accountants destroys the real value of your Rand balances you keep over time. So, don´t keep Rand balances and you will not lose any real value. Or if you keep Rands over time, you have to receive interest on that money at least equal to the inflation rate over that period. That is just to maintain the real value of your money. You still have not received and real interest. Just nominal interest if it is exactly equal to the inflation rate.
2. Variable items are things like fixed property, land, buildings, plant, machinery, equipment, computers, raw material stock, finished goods stock, etc.
Accountants again value all these items when they account them. They value them in terms of rules set forth in International Financial Reporting Standards or SA Generally Accepted Accounting Practice.
No value is destroyed here by accountants as long as they follow the rules correctly.
So here we have no problem.
3. Constant items are items like salaries, wages, rentals, companies´ capital, retained profits, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary receivables and all other non-monetary payables, etc.
Accountants value salaries, wages, rentals, etc in units of constant purchasing power. So, they inflation-adjust these items every year and thus keep their real values updated. You know that if your salary is not inflation-adjusted then its real value is destroyed – not by inflation (inflation can only destroy the real value of the Rand which is the medium of exchange used to pay the constant item salary) - but by the accountant that values your salary at Historical Cost. When the accountant values your salary in units of constant purchasing power or updates it in terms of inflation then you do not lose any real value in your salary. So, it is your accountant’s way of doing accounts that is maintaining the real value of your salary. It has nothing to do with inflation because it does not matter how high or how low inflation is, when your accountant inflation-adjust your salary you never lose real value.
Your accountant has to do the same with your company´s capital, retained profits if you keep profit behind in the company to grow the company, trade debtors, trade creditors, taxes payable, taxes receivable, etc. Not a single accountant in SA does that. By not updating these items in terms of inflation or not inflation-adjusting them, your accountant is unknowingly destroying their real values at a rate equal to the rate of inflation. It is not inflation doing the destroying because if your accountant values these items in units of constant purchasing power, that is, updates them in terms of inflation or simply inflation-adjust them, then your accounatant will maintain their real values constant forever – as long as your business at least breaks even.
The International Accounting Standards Board authorized your accountant to do that 20 years ago. Not a single accountant in SA does that because they do not understand and they are not taught that valuing these items at Historical Cost means they destroy their real values at a rate equal to the inflation rate. They also do not understand and they are not taught that when they inflation-adjust these items they maintain their real values constant forever as long as your business breaks even.
Kindest regards,
Nicolaas Smith
There are three basic economic items in the economy.
1. Monetary items
2. Variable items
3. Constant items
Accountants value everything they account. Every accounting entry accounts a debit value and a credit value.
1. Monetary items are items like money, bank account balances, car loans, housing loans, student loans, consumer loans, any loan in money, saving accounts, etc.
Accountants cannot value them wrongly: the only way accountants can value and account monetary items is at their original nominal values. Inflation destroys the real value of the Rand and monetary items. So, monetary items are always automatically kept at their always lower real values because inflation destroys their real values equally.
This loss in real value is, inexplicably required by accounting authorities to be calculated and accounted during hyperinflation, but not during low inflation. Why, no-one knows. The IASB authorized accounting in units of constant purchasing power during low inflation 20 years ago. Under this accounting model you have to calculate the real value loss in money during low inflation. But, not when you use the traditional Historical Cost Accounting model that the whole world uses. Why, no-one knows.
So, inflation and not accountants destroys the real value of your Rand balances you keep over time. So, don´t keep Rand balances and you will not lose any real value. Or if you keep Rands over time, you have to receive interest on that money at least equal to the inflation rate over that period. That is just to maintain the real value of your money. You still have not received and real interest. Just nominal interest if it is exactly equal to the inflation rate.
2. Variable items are things like fixed property, land, buildings, plant, machinery, equipment, computers, raw material stock, finished goods stock, etc.
Accountants again value all these items when they account them. They value them in terms of rules set forth in International Financial Reporting Standards or SA Generally Accepted Accounting Practice.
No value is destroyed here by accountants as long as they follow the rules correctly.
So here we have no problem.
3. Constant items are items like salaries, wages, rentals, companies´ capital, retained profits, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary receivables and all other non-monetary payables, etc.
Accountants value salaries, wages, rentals, etc in units of constant purchasing power. So, they inflation-adjust these items every year and thus keep their real values updated. You know that if your salary is not inflation-adjusted then its real value is destroyed – not by inflation (inflation can only destroy the real value of the Rand which is the medium of exchange used to pay the constant item salary) - but by the accountant that values your salary at Historical Cost. When the accountant values your salary in units of constant purchasing power or updates it in terms of inflation then you do not lose any real value in your salary. So, it is your accountant’s way of doing accounts that is maintaining the real value of your salary. It has nothing to do with inflation because it does not matter how high or how low inflation is, when your accountant inflation-adjust your salary you never lose real value.
Your accountant has to do the same with your company´s capital, retained profits if you keep profit behind in the company to grow the company, trade debtors, trade creditors, taxes payable, taxes receivable, etc. Not a single accountant in SA does that. By not updating these items in terms of inflation or not inflation-adjusting them, your accountant is unknowingly destroying their real values at a rate equal to the rate of inflation. It is not inflation doing the destroying because if your accountant values these items in units of constant purchasing power, that is, updates them in terms of inflation or simply inflation-adjust them, then your accounatant will maintain their real values constant forever – as long as your business at least breaks even.
The International Accounting Standards Board authorized your accountant to do that 20 years ago. Not a single accountant in SA does that because they do not understand and they are not taught that valuing these items at Historical Cost means they destroy their real values at a rate equal to the inflation rate. They also do not understand and they are not taught that when they inflation-adjust these items they maintain their real values constant forever as long as your business breaks even.
Kindest regards,
Nicolaas Smith
Variable item game: Accountants - Scorekeepers or players?
As we stated before: The accounting game is played on three fields:
1. Monetary item field
2. Variable item field
3. Constant item field
We already know that accountants are important players on top of being the official scorekeepers in the monetary item game. Accountants are thus naturally good at multi-tasking in the monetary item game: scorekeepers by training as well as value keepers because of their specialized knowledge of the subject matter of monetary items.
Accountants are always multitasking: they always value everything they account - there are different ways of valuing items - and they are always scorekeepers by training.
They are never just scorekeepers no matter what the accounting professors say. They are dead wrong. They can be rewarded as Emeritus Professor of Accounting at all universities in South Africa. They will still be dead wrong stating that accountants are simply scorekeepers of past events.
Now let’s scrutinize the variable item game.
Variable items have variable real non-monetary values over time. Examples are property, plant, equipment, raw materials inventories, finished goods stock, foreign exchange, etc. Accountants value them at market value, fair value, recoverable value, present value and at net realizable value in terms of International Financial Reporting Standards or SA GAAP.
The business game is mainly played on this field. We have to admit that the main players in this field are not accountants. Production, manufacturing, warehousing, transportation, marketing, publicity, sales, after sales service, insurance, customs, taxation, etc are mainly done by other members in the business game team. Accountants are mainly in operation as scorekeepers because of their specialized knowledge and training.
Accountants are, nevertheless, also important players in the variable item game: Valuing variable items incorrectly can even lead to the collapse of the world economic system as evidenced by the latest financial crisis. Accountants are thus important players in being true and valid value custodians: valuing variable items correctly where these values are not determined in the market: see the sub-prime crisis.
Accountants are thus multitaskers in the variable item game too: they are very important players – not in scoring goals by making sales, but, in valuing variable items – the values of which are not determined in the market place - correctly. They keep on faithfully fulfilling their general task as scorekeepers too – during and after the game.
But, they are not just scorekeepers as the accounting professors and their followers claim. As I stated before: they are dead wrong.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
1. Monetary item field
2. Variable item field
3. Constant item field
We already know that accountants are important players on top of being the official scorekeepers in the monetary item game. Accountants are thus naturally good at multi-tasking in the monetary item game: scorekeepers by training as well as value keepers because of their specialized knowledge of the subject matter of monetary items.
Accountants are always multitasking: they always value everything they account - there are different ways of valuing items - and they are always scorekeepers by training.
They are never just scorekeepers no matter what the accounting professors say. They are dead wrong. They can be rewarded as Emeritus Professor of Accounting at all universities in South Africa. They will still be dead wrong stating that accountants are simply scorekeepers of past events.
Now let’s scrutinize the variable item game.
Variable items have variable real non-monetary values over time. Examples are property, plant, equipment, raw materials inventories, finished goods stock, foreign exchange, etc. Accountants value them at market value, fair value, recoverable value, present value and at net realizable value in terms of International Financial Reporting Standards or SA GAAP.
The business game is mainly played on this field. We have to admit that the main players in this field are not accountants. Production, manufacturing, warehousing, transportation, marketing, publicity, sales, after sales service, insurance, customs, taxation, etc are mainly done by other members in the business game team. Accountants are mainly in operation as scorekeepers because of their specialized knowledge and training.
Accountants are, nevertheless, also important players in the variable item game: Valuing variable items incorrectly can even lead to the collapse of the world economic system as evidenced by the latest financial crisis. Accountants are thus important players in being true and valid value custodians: valuing variable items correctly where these values are not determined in the market: see the sub-prime crisis.
Accountants are thus multitaskers in the variable item game too: they are very important players – not in scoring goals by making sales, but, in valuing variable items – the values of which are not determined in the market place - correctly. They keep on faithfully fulfilling their general task as scorekeepers too – during and after the game.
But, they are not just scorekeepers as the accounting professors and their followers claim. As I stated before: they are dead wrong.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Friday 18 September 2009
Monetary game: Accountants - Scorekeepers or players?
The accounting game is played on three fields:
1. Monetary item field
2. Variable item field
3. Constant item field
1. Monetary item game
This game is played in war conditions. The enemy player is inflation. The purpose of the game is to maintain the real value of money and at the same time to make a profit. Accountants value all items in the economy and are thus always players. By nature they are also always scorekeepers.
The enemy inflation is always destroying the real value of money and so is continuously scoring. It is impossible for the accountant to maintain the real value of money constant during the game (the current financial year) no matter which accounting model the accountant uses. The accountant and other members of his team use various tactics to make extra money or profit to make up for the real value that the enemy inflation is continuously destroying in the real value of money. The accountant, because of his or her training, is mostly the player used to place money on call, invest it on other short term or long term investments to at least equal inflation and to make a positive return. Accountants have the permanent task to keep the score during and after the game.
Accountants get invaluable help from the South African Reserve Bank team under the leadership of Tito the Great who wages a non-stop war against inflation throughout the country on all fronts.
Accountants are thus important players and always scorekeepers in the monetary item battle game against the enemy inflation.
People like SA accounting professors who claim that accountants are only scorekeepers and never players are thus dead wrong.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
1. Monetary item field
2. Variable item field
3. Constant item field
1. Monetary item game
This game is played in war conditions. The enemy player is inflation. The purpose of the game is to maintain the real value of money and at the same time to make a profit. Accountants value all items in the economy and are thus always players. By nature they are also always scorekeepers.
The enemy inflation is always destroying the real value of money and so is continuously scoring. It is impossible for the accountant to maintain the real value of money constant during the game (the current financial year) no matter which accounting model the accountant uses. The accountant and other members of his team use various tactics to make extra money or profit to make up for the real value that the enemy inflation is continuously destroying in the real value of money. The accountant, because of his or her training, is mostly the player used to place money on call, invest it on other short term or long term investments to at least equal inflation and to make a positive return. Accountants have the permanent task to keep the score during and after the game.
Accountants get invaluable help from the South African Reserve Bank team under the leadership of Tito the Great who wages a non-stop war against inflation throughout the country on all fronts.
Accountants are thus important players and always scorekeepers in the monetary item battle game against the enemy inflation.
People like SA accounting professors who claim that accountants are only scorekeepers and never players are thus dead wrong.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Thursday 17 September 2009
Not generally accepted but a fact
The IASB approved Framework, Par. 104 (a) which is applicable in this case since there is no specific IFRS relating to the valuation of Issued Share capital, Retained Earnings and other items in Shareholders´ Equity during non-hyperinflationary periods, allows accountants to reject the stable measuring unit assumption during all levels of inflation and deflation when they choose to measure financial capital maintenance in units of constant purchasing power as an alternative to measurement in nominal monetary units as applied in the traditional HCA model.
It is not generally appreciated by accounting authorities and accountants that they are unknowingly and unintentionally responsible for the destruction of the real value of constant real value non-monetary items never or not fully updated or inflation-adjusted or maintained over time when they implement the real value destroying traditional HCA model: more specifically, the very destructive stable measuring unit assumption during periods of inflation when they maintain it for an unlimited period of time during indefinite inflation. This lack of appreciation also applies to economists, business people and the public in general.
It is also not generally appreciated by accounting authorities and accountants that they can stop this destruction by selecting financial capital maintenance in units of constant purchasing power as authorized by the IASB 20 years ago in the Framework, Par. 104 (a) which is applicable in the absence of specific IFRS.
It is generally accepted and a fact that inflation destroys the real value of money (the internal functional currency) and other monetary items over time. It is also generally accepted and a fact that hyperinflation can destroy the real value of a country’s entire monetary base as happened in Zimbabwe recently. That was the result of a massive increase in the volume and nominal value of bank notes in the country by Gideon Gono, the governor of the Reserve Bank of Zimbabwe, with an equivalent extreme rate of destruction of the real value of the Zimbabwe Dollar since the massive nominal increase in ZimDollar money supply was not the result of a concomitant increase in real value in the real or non-monetary economy of Zimbabwe.
“By a continuing process of inflation, governments can confiscate,
secretly and unobserved, an important part of the wealth of their
citizens. By this method they not only confiscate, but they
confiscate arbitrarily; and, while the process impoverishes many,
it actually enriches some.
Lenin was certainly right. There is no subtler, no surer
means of overturning the existing basis of society than to
debauch the currency. The process engages all the hidden forces
of economic law on the side of destruction, and does it in a
manner which not one man in a million is able to diagnose.”
The Economic Consequences of the Peace by John Maynard Keynes
1919
http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/keynes/peace
It is generally accepted and a fact that inflation destroys the real value of the capital amounts of monetary savings and money lent over time.
It is generally accepted, but not a fact, that inflation erodes, which is the same as destroys, the real value of constant real value non-monetary items with fixed nominal payments over time, e.g. fixed salary, wage, rental payments, etc.
The constant real non-monetary values of salaries, wages, rentals, etc are generally maintained, i.e. not destroyed, when accountants choose to measure the real value of these constant real value non-monetary items in units of constant purchasing power in terms of the CPI in most economies with payment in depreciating money during inflation.
It is not generally accepted, but a fact, that SA accountants unknowingly destroy the real value of Retained Earnings of all SA companies and banks over time when they choose to measure financial capital maintenance in nominal monetary units in terms of the real value destroying traditional HCA model during inflation when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation and these companies and banks have no revaluable fixed asset variable items or insufficient revaluable fixed asset variable items to maintain 100% of the updated original real value of all contributions to their Shareholders´ equity.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
It is not generally appreciated by accounting authorities and accountants that they are unknowingly and unintentionally responsible for the destruction of the real value of constant real value non-monetary items never or not fully updated or inflation-adjusted or maintained over time when they implement the real value destroying traditional HCA model: more specifically, the very destructive stable measuring unit assumption during periods of inflation when they maintain it for an unlimited period of time during indefinite inflation. This lack of appreciation also applies to economists, business people and the public in general.
It is also not generally appreciated by accounting authorities and accountants that they can stop this destruction by selecting financial capital maintenance in units of constant purchasing power as authorized by the IASB 20 years ago in the Framework, Par. 104 (a) which is applicable in the absence of specific IFRS.
It is generally accepted and a fact that inflation destroys the real value of money (the internal functional currency) and other monetary items over time. It is also generally accepted and a fact that hyperinflation can destroy the real value of a country’s entire monetary base as happened in Zimbabwe recently. That was the result of a massive increase in the volume and nominal value of bank notes in the country by Gideon Gono, the governor of the Reserve Bank of Zimbabwe, with an equivalent extreme rate of destruction of the real value of the Zimbabwe Dollar since the massive nominal increase in ZimDollar money supply was not the result of a concomitant increase in real value in the real or non-monetary economy of Zimbabwe.
“By a continuing process of inflation, governments can confiscate,
secretly and unobserved, an important part of the wealth of their
citizens. By this method they not only confiscate, but they
confiscate arbitrarily; and, while the process impoverishes many,
it actually enriches some.
Lenin was certainly right. There is no subtler, no surer
means of overturning the existing basis of society than to
debauch the currency. The process engages all the hidden forces
of economic law on the side of destruction, and does it in a
manner which not one man in a million is able to diagnose.”
The Economic Consequences of the Peace by John Maynard Keynes
1919
http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/keynes/peace
It is generally accepted and a fact that inflation destroys the real value of the capital amounts of monetary savings and money lent over time.
It is generally accepted, but not a fact, that inflation erodes, which is the same as destroys, the real value of constant real value non-monetary items with fixed nominal payments over time, e.g. fixed salary, wage, rental payments, etc.
The constant real non-monetary values of salaries, wages, rentals, etc are generally maintained, i.e. not destroyed, when accountants choose to measure the real value of these constant real value non-monetary items in units of constant purchasing power in terms of the CPI in most economies with payment in depreciating money during inflation.
It is not generally accepted, but a fact, that SA accountants unknowingly destroy the real value of Retained Earnings of all SA companies and banks over time when they choose to measure financial capital maintenance in nominal monetary units in terms of the real value destroying traditional HCA model during inflation when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation and these companies and banks have no revaluable fixed asset variable items or insufficient revaluable fixed asset variable items to maintain 100% of the updated original real value of all contributions to their Shareholders´ equity.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Wednesday 16 September 2009
Stable measuring unit assumption rejected
IFRS do, however, already – 20 years ago - allow the rejection of the stable measuring unit assumption as an alternative to HCA at all levels of inflation and deflation. The IASB´s Framework, Par. 104 (a) states that financial capital maintenance can be calculated in either constant purchasing power units or in nominal monetary units. Par. 104 (a) was authorized by the IASB predecessor body, the International Accounting Standards Committee Board in April, 1989 and adopted by the IASB in 2001.
The stable measuring unit assumption is also rejected in IAS 29 Financial Reporting in Hyperinflationary Economies.
The Standards thus already reject the stable measuring unit assumption under two circumstances:
1.) In IAS 29 during hyperinflationary conditions with the IASB´s Constant Purchasing Power inflation accounting model which is a complete price-level inflation accounting model under which all non-monetary items, variable and constant items, are inflation-adjusted by means of the CPI during hyperinflation, and
2.) In the Framework, Par. 104 (a) in the implementation of the Constant ITEM Purchasing Power basic accounting model with the measurement of financial capital maintenance in units of constant purchasing power as an alternative to the real value destroying traditional HCA model when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
The stable measuring unit assumption is also rejected in IAS 29 Financial Reporting in Hyperinflationary Economies.
The Standards thus already reject the stable measuring unit assumption under two circumstances:
1.) In IAS 29 during hyperinflationary conditions with the IASB´s Constant Purchasing Power inflation accounting model which is a complete price-level inflation accounting model under which all non-monetary items, variable and constant items, are inflation-adjusted by means of the CPI during hyperinflation, and
2.) In the Framework, Par. 104 (a) in the implementation of the Constant ITEM Purchasing Power basic accounting model with the measurement of financial capital maintenance in units of constant purchasing power as an alternative to the real value destroying traditional HCA model when the stable measuring unit assumption is maintained for an unlimited period of time during indefinite inflation.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
SA accountants abdicate one of their main functions
The function of financial accounting is not just “to convey value information about the economic resources of a business” as Harvey Kapnick stated in the 1976 Sax Lecture.
http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm
It is an essential function of accounting to maintain the real value of constant items during inflation and deflation.
This can only be achieved by valuing constant items in units of constant purchasing power, i.e., by inflation-adjusting all constant items by means of the CPI during low inflation as approved by the IASB in the Framework, Par. 104 (a) twenty years ago and by implementing IAS 29 during hyperinflation.
Accountants have abdicated the essential financial capital maintenance function of accounting to their fiction that money is stable in real value during inflation and deflation. In so doing, they have in the past unknowingly destroyed and currently unknowingly destroy real value on a massive scale in the real economy when they implement the very destructive stable measuring unit assumption as part of the IASB approved real value destroying traditional Historical Cost Accounting model during non-hyperinflationary periods when they implement the stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Accountants and accounting authorities do not appreciate that they can change that by simply rejecting the stable measuring unit assumption when they choose the IFRS compliant Constant ITEM Purchasing Power Accounting model and measure financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.
Kindest regards,
Nicolaas Smith
Summary: It is obviously one of the main functions of accounting to maintain the real value of constant items during inflation and deflation. Accountants unknowingly destroy constant items´ real values at the rate of inflation when they do not inflation-adjust them.
http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm
It is an essential function of accounting to maintain the real value of constant items during inflation and deflation.
This can only be achieved by valuing constant items in units of constant purchasing power, i.e., by inflation-adjusting all constant items by means of the CPI during low inflation as approved by the IASB in the Framework, Par. 104 (a) twenty years ago and by implementing IAS 29 during hyperinflation.
Accountants have abdicated the essential financial capital maintenance function of accounting to their fiction that money is stable in real value during inflation and deflation. In so doing, they have in the past unknowingly destroyed and currently unknowingly destroy real value on a massive scale in the real economy when they implement the very destructive stable measuring unit assumption as part of the IASB approved real value destroying traditional Historical Cost Accounting model during non-hyperinflationary periods when they implement the stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Accountants and accounting authorities do not appreciate that they can change that by simply rejecting the stable measuring unit assumption when they choose the IFRS compliant Constant ITEM Purchasing Power Accounting model and measure financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.
Kindest regards,
Nicolaas Smith
Summary: It is obviously one of the main functions of accounting to maintain the real value of constant items during inflation and deflation. Accountants unknowingly destroy constant items´ real values at the rate of inflation when they do not inflation-adjust them.
Tuesday 15 September 2009
No-one is suggesting inflation-adjusting variable items during low inflation
It is correct, essential and compliant with IFRS to inflation-adjust or update or maintain constant real value non-monetary items by means of the CPI which is a general price index during all levels of inflation and deflation. The reason for this is that non-monetary items - both variable and constant real value non-monetary items - are expressed in terms of money, i.e. in terms of an unstable monetary unit of account which is the same as the unstable monetary medium of exchange. Inflation destroys the real value of the unstable monetary medium of exchange - which is also the unstable monetary unit of account in accounting and the economy in general. Constant items thus have to be updated or maintained or valued at a rate equal to the rate of inflation or deflation, i.e. valued in units of constant purchasing power, in order to maintain their real values constant during inflation and deflation respectively because the unstable unit of measure in accounting is an unstable monetary unit of account and consequently hardly every absolutely stable during periods of inflation and deflation.
Variable items do not need to be and are not valued in units of constant purchasing power during low inflation because they are valued in terms of SA GAAP or IFRS at, for example, fair value, market value, present value, recoverable value, net realizable value, etc which take inflation - amongst many other things - into account.
Variable items are only valued in units of constant purchasing power during hyperinflation as required by the IASB in IAS 29.
There is a school of thought that 2% inflation is completely unharmful and that it has no disadvantages compared to absolute price stability. This is not correct. 2% inflation will destroy 50% of all Retained Profits over 35 years – all else being equal – when the stable measuring unit assumption is implemented for an indefinite period of time during indefinite inflation. This is what is happening in the European Monetary Union and in the USA.
It is not correct for accountants to inflation-adjust by means of the CPI, which is a general price index, variable real value non-monetary items which are subject to product specific inflation or price increases (e.g. properties, shares, etc.) for the purpose of valuing these variable items during the accounting period on a primary valuation basis during non-hyperinflationary periods. These variable real value non-monetary items are generally subject to market based real value changes determined by supply and demand. They incorporate product or item specific price changes or product specific inflation where the word inflation is used to simply mean a product or product group price increase instead of the general use of the word in economics to mean the destruction of the real value of money over time, i.e. a general destruction of the purchasing power of money which results in an increase in the general price level over time.
1970-style Constant Purchasing Power (CPP) inflation accounting was a popular but failed attempt at inflation accounting at that time. It was a form of inflation accounting which tried unsuccessfully to make corporate accounts more informative when comparing current transactions with previous transactions by updating ALL non-monetary items (without distinguishing between variable and constant real value non-monetary items) equally by means of the Consumer Price Index during high and hyperinflation.
Measurement in units of constant purchasing power was used for variable AND constant items during the high inflation 1970´s. 1970-style CPP inflation accounting was abandoned as a failed and discredited inflation accounting model when general inflation decreased to low levels thereafter.
Summary: Balance sheet constant items have to be inflation-adjusted during low inflation exactly the same as salaries and wages because money is an unstable unit of account. Variable items are valued in terms of IFRS or SA GAAP. Product inflation is incorporated in the market prices and other measurement bases of variable items. Variable items are not inflation-adjusted during low inflation - only during hyperinflation as required by IAS 29.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Variable items do not need to be and are not valued in units of constant purchasing power during low inflation because they are valued in terms of SA GAAP or IFRS at, for example, fair value, market value, present value, recoverable value, net realizable value, etc which take inflation - amongst many other things - into account.
Variable items are only valued in units of constant purchasing power during hyperinflation as required by the IASB in IAS 29.
There is a school of thought that 2% inflation is completely unharmful and that it has no disadvantages compared to absolute price stability. This is not correct. 2% inflation will destroy 50% of all Retained Profits over 35 years – all else being equal – when the stable measuring unit assumption is implemented for an indefinite period of time during indefinite inflation. This is what is happening in the European Monetary Union and in the USA.
It is not correct for accountants to inflation-adjust by means of the CPI, which is a general price index, variable real value non-monetary items which are subject to product specific inflation or price increases (e.g. properties, shares, etc.) for the purpose of valuing these variable items during the accounting period on a primary valuation basis during non-hyperinflationary periods. These variable real value non-monetary items are generally subject to market based real value changes determined by supply and demand. They incorporate product or item specific price changes or product specific inflation where the word inflation is used to simply mean a product or product group price increase instead of the general use of the word in economics to mean the destruction of the real value of money over time, i.e. a general destruction of the purchasing power of money which results in an increase in the general price level over time.
1970-style Constant Purchasing Power (CPP) inflation accounting was a popular but failed attempt at inflation accounting at that time. It was a form of inflation accounting which tried unsuccessfully to make corporate accounts more informative when comparing current transactions with previous transactions by updating ALL non-monetary items (without distinguishing between variable and constant real value non-monetary items) equally by means of the Consumer Price Index during high and hyperinflation.
Measurement in units of constant purchasing power was used for variable AND constant items during the high inflation 1970´s. 1970-style CPP inflation accounting was abandoned as a failed and discredited inflation accounting model when general inflation decreased to low levels thereafter.
Summary: Balance sheet constant items have to be inflation-adjusted during low inflation exactly the same as salaries and wages because money is an unstable unit of account. Variable items are valued in terms of IFRS or SA GAAP. Product inflation is incorporated in the market prices and other measurement bases of variable items. Variable items are not inflation-adjusted during low inflation - only during hyperinflation as required by IAS 29.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission.
Monday 14 September 2009
It is not inflation doing the destroying
It was stated in 2008 that there is no doubt that inflation destroys the real value of monetary as well as non-monetary items that do not maintain their real value in terms of purchasing power. Reference: This blog.
I agreed at the time. Subsequently it became very clear to me that inflation has no effect on the real value of non-monetary items over time. The understanding of the real value destroying effect of the stable measuring unit assumption on constant items never or not fully updated is a work in progress. Not inflation, per se, but SA accountants´ implementation of the very destructive stable measuring unit assumption during low inflation as it forms part of the real value destroying HCA model, destroys the real value of constant real value non-monetary items never or not fully updated over time.
There is no substance in the statement that inflation destroys the real value of non-monetary items which do not hold their real value over time. Inflation has no effect on the real value on non-monetary items over time.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof. Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
SA accountants unknowingly destroy or maintain (please note: not create) the real value of constant real value non-monetary items (please note: not variable real value non-monetary items) depending on whether they choose the IASB approved real value destroying traditional HCA model under which they implement the very destructive stable measuring unit assumption during non-hyperinflationary periods for an unlimited period of time during indefinite inflation or the IASB approved real value maintaining Constant ITEM Purchasing Power Accounting model under which they select to reject the stable measuring unit assumption at all levels of inflation and deflation for an unlimited period of time.
Inflation is a uniquely monetary phenomenon and can only destroy the real value of money and other monetary items over time. It has no effect on the real value of non-monetary items. See GUCENME and ARSOY above. SA accountants unknowingly, unintentionally and unwittingly do the destroying of the real value of constant items, e.g. Retained Earnings, Issued Share capital, other items in shareholder’s equity, salaries, wages, rentals, etc never or not fully updated or inflation-adjusted over time when they choose the real value destroying traditional HCA model during inflationary periods when they maintain the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
This includes the unknowing destruction by SA accountants of the real value of the Issued Share capital of SA companies and banks which do not have any or sufficient property or other variable real value non-monetary items to revalue to an amount at least equal to the updated original real value of all contributions to Shareholder’s Equity. SA accountants unknowingly destroy the real value of the Retained Earnings of all SA companies and banks and the real value of the Issued Share capital of SA companies with no variable real value non-monetary items to revalue continuously at a rate equal to the inflation rate while they continue implementing the very destructive stable measuring unit assumption during non-hyperinflationary conditions when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Summary: Inflation only destroys the real value of money. It has no effect on non-monetary items. Not inflation, but, SA accountants implementing the very destructive stable measuring unit assumption are unknowingly destroying the real value of constant items never updated in the SA real economy on a massive scale. The destruction stops when they value constant items in units of constant purchasing power.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
I agreed at the time. Subsequently it became very clear to me that inflation has no effect on the real value of non-monetary items over time. The understanding of the real value destroying effect of the stable measuring unit assumption on constant items never or not fully updated is a work in progress. Not inflation, per se, but SA accountants´ implementation of the very destructive stable measuring unit assumption during low inflation as it forms part of the real value destroying HCA model, destroys the real value of constant real value non-monetary items never or not fully updated over time.
There is no substance in the statement that inflation destroys the real value of non-monetary items which do not hold their real value over time. Inflation has no effect on the real value on non-monetary items over time.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof. Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
SA accountants unknowingly destroy or maintain (please note: not create) the real value of constant real value non-monetary items (please note: not variable real value non-monetary items) depending on whether they choose the IASB approved real value destroying traditional HCA model under which they implement the very destructive stable measuring unit assumption during non-hyperinflationary periods for an unlimited period of time during indefinite inflation or the IASB approved real value maintaining Constant ITEM Purchasing Power Accounting model under which they select to reject the stable measuring unit assumption at all levels of inflation and deflation for an unlimited period of time.
Inflation is a uniquely monetary phenomenon and can only destroy the real value of money and other monetary items over time. It has no effect on the real value of non-monetary items. See GUCENME and ARSOY above. SA accountants unknowingly, unintentionally and unwittingly do the destroying of the real value of constant items, e.g. Retained Earnings, Issued Share capital, other items in shareholder’s equity, salaries, wages, rentals, etc never or not fully updated or inflation-adjusted over time when they choose the real value destroying traditional HCA model during inflationary periods when they maintain the very destructive stable measuring unit assumption for an unlimited period of time during indefinite inflation.
This includes the unknowing destruction by SA accountants of the real value of the Issued Share capital of SA companies and banks which do not have any or sufficient property or other variable real value non-monetary items to revalue to an amount at least equal to the updated original real value of all contributions to Shareholder’s Equity. SA accountants unknowingly destroy the real value of the Retained Earnings of all SA companies and banks and the real value of the Issued Share capital of SA companies with no variable real value non-monetary items to revalue continuously at a rate equal to the inflation rate while they continue implementing the very destructive stable measuring unit assumption during non-hyperinflationary conditions when they maintain the stable measuring unit assumption for an unlimited period of time during indefinite inflation.
Summary: Inflation only destroys the real value of money. It has no effect on non-monetary items. Not inflation, but, SA accountants implementing the very destructive stable measuring unit assumption are unknowingly destroying the real value of constant items never updated in the SA real economy on a massive scale. The destruction stops when they value constant items in units of constant purchasing power.
© 2005-2010 by Nicolaas J Smith. All rights reserved
No reproduction without permission
Sunday 13 September 2009
Intrinsic value increases simply with accounting policy change
The intrinsic value of a company is its actual value based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value.
Most often intrinsic worth is estimated by analyzing a company's fundamentals.
Intrinsic value is the actual value of company, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often difficult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value.
There is no universally accepted way to obtain this figure.
The fact that intrinsic value is the actual financial value of a company based upon the value found directly within the business and that it refers to the value of a company which is contained in the company itself means that the intrinsic value of all companies with positive shareholders equity will increase simply with a change in accounting policy from the real value destroying traditional Historical Cost Accounting model to measuring financial capital maintenance in units of constant purchasing power as authorized by the International Accounting Standards Board in the Framework, Par. 104 (a).
Par. 104 (a) states: “Financial capital maintenance can be calculated in either nominal monetary units or in units of constant purchasing power.”
This will increase the intrinsic value of most probably all companies on the Johannesburg Stock Exchange and most unlisted companies in SA.
Kindest regards,
Nicolaas Smith
PinkPolkaDot summary: Inflation-adjusting companies´ capital and retained profits (like accountants do with salaries) plus other constant items, will increase companies´ internal funding from equity (their capital will be maintained instead of unknowingly destroyed by their accountants) and increase their intrinsic values.
Most often intrinsic worth is estimated by analyzing a company's fundamentals.
Intrinsic value is the actual value of company, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often difficult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value.
There is no universally accepted way to obtain this figure.
The fact that intrinsic value is the actual financial value of a company based upon the value found directly within the business and that it refers to the value of a company which is contained in the company itself means that the intrinsic value of all companies with positive shareholders equity will increase simply with a change in accounting policy from the real value destroying traditional Historical Cost Accounting model to measuring financial capital maintenance in units of constant purchasing power as authorized by the International Accounting Standards Board in the Framework, Par. 104 (a).
Par. 104 (a) states: “Financial capital maintenance can be calculated in either nominal monetary units or in units of constant purchasing power.”
This will increase the intrinsic value of most probably all companies on the Johannesburg Stock Exchange and most unlisted companies in SA.
Kindest regards,
Nicolaas Smith
PinkPolkaDot summary: Inflation-adjusting companies´ capital and retained profits (like accountants do with salaries) plus other constant items, will increase companies´ internal funding from equity (their capital will be maintained instead of unknowingly destroyed by their accountants) and increase their intrinsic values.
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