Trust me, I´m an accountant

Only daily parallel rate indexing can do the trick in a hypeirnflationary economy.

   Here you will find everything SAICA banned from continued being published on   

   their public Discussion Forum about SA accountants - including CA(SA)s -        

   unknowingly destroying about R134 billion per annum in the SA non-monetary   

   economy with their very destructive stable measuring unit assumption.            

  SAICA: "We do not concur with the suggestion that the standards should   

  reject the stable unit measuring assumption."                                                  

  It´s rejection during LOW inflation was authorized in IFRS in the Framework, Par 

  104 (a) twenty one years ago: something SAICA apparently did not realize.       

  SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                 

  environment insult the user."                                                                                

  Most accountants, including CA(SA)s, inflation-adjust salaries, wages, rentals,  

  etc. during low inflation.                                                                          

Missive Nº 402

Hi,

Hyperinflation is defined as an exceptional circumstance by the IASB. All non-monetary items – variable and constant items - are required to be valued in units of constant purchasing power in terms of IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation by applying the period-end CPI to make restated HC or Current Cost financial reports more useful. This normally does nothing to the real values of the restated constant items unless they are accepted by the tax authorities as the new real values for these companies. The only way a country in hyperinflation can stabilize its real or non-monetary economy is by applying the daily parallel rate in the valuing of all non-monetary items instead of the year-end CPI.

Only daily parallel rate indexing of all non-monetary items (variable and constant items) can stabilize the non-monetary or real economy (not the hyperinflationary monetary economy) in a hyperinflationary economy. 185 million people in Brazil did that for 30 years from 1964 to 1994.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com 

Copyright © 2010 Nicolaas J Smith

Press freedom in South Africa

SAICA: Inflation-adjusted accounts (SA workers´ wages) in a low inflation environment insult the user.

   Here you will find everything SAICA banned from continued being published on   

   their public Discussion Forum about SA accountants - including CA(SA)s -        

   unknowingly destroying about R134 billion per annum in the SA non-monetary   

   economy with their very destructive stable measuring unit assumption.            

  SAICA: "We do not concur with the suggestion that the standards should   

  reject the stable unit measuring assumption."                                                  

  It´s rejection during LOW inflation was authorized in IFRS in the Framework, Par 

  104 (a) twenty one years ago: something SAICA apparently did not realize.       

  SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                 

  environment insult the user."                                                                                

  Most accountants, including CA(SA)s, inflation-adjust salaries, wages, rentals,  

  etc. during low inflation.                                                                          

Missive Nº 402

Hi,

Non-monetary items which, according to Prof Geoff Everingham “hold their values in terms of purchasing power” under Historical Cost Accounting are variable real value non-monetary items, e.g. property, plant, equipment, inventories, foreign exchange, etc., plus some, not all,  income statement constant real value non-monetary items, e.g., salaries, wages, rentals, etc - the latter being valued in units of constant purchasing power during low inflation by most accountants world wide despite the fact that the South African Institute of Chartered Accountants state on their website something as silly as: "Ultimately, inflation-adjusted accounts in a low inflation environment insult the user."

While 1.3 million plus SA workers strike for their pay to be inflation-adjusted, SAICA states that inflation-adjusted accounts (SA workers´ salaries and wages) in a low inflation environment (the SA economy) insult the user.

Only our highly respected Prof Geoff Everingham, Emeritus Professor of Accounting at the University of Cape Town, with his statement that measuring economic items in nominal monetary units and units of constant purchasing power is one and the same thing - made a sillier statement than SAICA´s. And these are the top accounting authorities in SA!! They sound like Zimbabwe during hyperinflation!

Variable items hold their values in terms of purchasing power as a result of the ways in which they are valued in terms of IFRS, SA GAAP or just simply in the market, in which their nominal values are adjusted to allow for the many factors that determine their values - including - amongst many factors - inflation. For example: fair value, market value, net realizable value, present value and recoverable value all adjust for inflation in the real value of the Rand as part of the specific valuation process.

Valuation values 

Values used in the valuation of variable items on a primary valuation basis include the following:

Market value

Fair value

Net realisable value

Present value

Recoverable value

Current cost

Carrying value

Residual value

Value in use

Settlement value

Book value

Replacement cost

Historical cost

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Accounts Payable and Accounts Receivable under CIPPA.

   Here you will find everything SAICA banned from continued being published on   

   their public Discussion Forum about SA accountants - including CA(SA)s -        

   unknowingly destroying about R134 billion per annum in the SA non-monetary   

   economy with their very destructive stable measuring unit assumption.            

  SAICA: "We do not concur with the suggestion that the standards should   

  reject the stable unit measuring assumption."                                                  

  It´s rejection during LOW inflation was authorized in IFRS in the Framework, Par 

  104 (a) twenty one years ago: something SAICA apparently did not realize.       

  SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                 

  environment insult the user."                                                                                

  Most accountants, including CA(SA)s, inflation-adjust salaries, wages, rentals,  

  etc. during low inflation.                                                                          

Missive Nº 401

Hi,

2 - When I settle the Accounts Payable and receive the Accounts Receivable, what am I receiving/paying?  The adjusted amount or the original invoice amount?

You receive the adjusted amount.

You receive the constant real non-monetary value (the sale has been made and the AP/AR amount is fixed in real value at the date of sale) measured in units of constant purchasing power – inflation-adjusted.

All original nominal (HC) invoiced amounts that are not settled on the spot (on the date of sale) have to be updated every month the CPI changes as an AP/AR amount, BUT, the original REAL VALUE stays the same: the nominal values are inflation-adjusted; i.e. they are measured in units of constant purchasing power over time. An invoice is stated in terms of money. When the real value of that money is destroyed by inflation over time and there is no stable measuring unit assumption made by accountants and implemented in accounting, then the nominal value of the invoice has to be adjusted over time in order to keep the real value the same – under CIPPA: because there is no stable measuring unit assumption under CIPPA: you are implementing financial capital maintenance in units of constant purchasing power which requires you to inflation-adjust all constant items; e.g. AR, AP, equity, etc.

You receive/pay the original real value; i.e. the nominal value adjusted for inflation (the destruction in the real value of the medium of exchange) over time. Street vendors who have never been to school know this instinctively in a hyperinflationary economy. They adjust all their prices for all the products they sell in the streets daily as the black market rate changes. Obviously, the same has to be done to invoice values, trade debtors, capital, profit and all other constant real value non-monetary items over time during inflation.

When I told them in Angola that I was going to update debtors they immediately understood. In hyperinflation it is also done for all variable real value non-monetary items; i.e. for all non-monetary items. We were the only firm who inflation-adjusted their salaries monthly: they got the same in USD but fantastic “increases” in Kwanzas. There were no real increases. Ben Bernanke stated that in pure hyperinflation there are no price increases. He is correct.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Why is inventory inflation-adjusted under CIPPA? Is this not against IAS 2? 

   Here you will find everything SAICA banned from continued being published on   

   their public Discussion Forum about SA accountants - including CA(SA)s -        

   unknowingly destroying about R134 billion per annum in the SA non-monetary   

   economy with their very destructive stable measuring unit assumption.            

  SAICA: "We do not concur with the suggestion that the standards should   

  reject the stable unit measuring assumption."                                                  

  It´s rejection during LOW inflation was authorized in IFRS in the Framework, Par 

  104 (a) twenty one years ago: something SAICA apparently did not realize.       

  SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                 

  environment insult the user."                                                                                

  Most accountants, including CA(SA)s, inflation-adjust salaries, wages, rentals,  

  etc. during low inflation.                                                                          

Missive Nº 400

Hi,

IAS 2 (Technical Summary) states:

Inventories shall be measured at the lower of cost and net realisable value.

The Historical Cost of inventories is inflation-adjusted during low inflation because there is no stable measuring unit assumption under Constant ITEM Purchasing Power Accounting. Implementing CIPPA means an entity is applying financial capital maintenance in units of constant purchasing power during low inflation and deflation.

That means

Firstly that all constant real value non-monetary items (all items in the income statement, equity, trade debtors, trade creditors, etc.) are measured in units of constant purchasing power (inflation-adjusted every time the CPI changes);

Secondly that variable real value non-monetary items (property, plant, equipment, inventories, foreign exchange, etc.) are valued in terms of IFRS or GAAP on a primary basis and

Thirdly that monetary items are measured in nominal monetary units during the current financial period which includes the calculation and accounting of the net monetary gain or loss for the financial period.

Variable items, e.g. inventories, that are valued on a primary basis at HC in terms of IFRS are inflation-adjusted every time the CPI changes because there is no stable measuring unit assumption under CIPPA.

Measurement at HC does not mean or imply that the stable measuring unit assumption is applied. The stable measuring unit assumption is rejected under CIPPA. HC valuation is simply the measurement of an item at its original nominal historical cost in terms of IFRS or GAAP which is then inflation-adjusted every time the CPI changes: i.e. monthly.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Two methods to calculate the net monetary loss or gain. 

   Here you will find everything SAICA banned from continued being published on   

   their public Discussion Forum about SA accountants - including CA(SA)s -        

   unknowingly destroying about R134 billion per annum in the SA non-monetary   

   economy with their very destructive stable measuring unit assumption.            

  SAICA: "We do not concur with the suggestion that the standards should   

  reject the stable unit measuring assumption."                                                  

  It´s rejection during LOW inflation was authorized in IFRS in the Framework, Par 

  104 (a) twenty one years ago: something SAICA apparently did not realize.       

  SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                 

  environment insult the user."                                                                                

  Most accountants, including CA(SA)s, inflation-adjust salaries, wages, rentals,  

  etc. during low inflation.                                                                          

Missive Nº 399

Hi,

Accountants have to calculate the net monetary loss or gain from holding monetary items when they choose the Constant Purchasing Power Accounting (CIPPA) model where under they measure financial capital maintenance in units of constant purchasing power in the same way as the IASB requires its calculation and accounting during hyperinflation. There are net monetary losses and net monetary gains during low inflation too, but they are not required to be calculated when accountants choose the traditional HCA model.

Net montary losses and gains are calculated in terms of IFRS during low inflation, deflation and hyperinflation. IAS 29 Financial Reporting in Hyperinflationary Economies requires their calculation during hyperinflation. They are also required to be calculated during low inflation and deflation in terms of CIPPA as authorized in IFRS in the Framework, Par 104 (a). They are not calcuted under HCA which is one of the various fundamental flaws in IFRS and US GAAP as recognized by experts and academics.

The net monetary loss or gain can be calculated in two ways:

• 1. It is the difference in the trial balance when the correct split between monetary and non-monetary items has been made (which requires the correct definition of monetary items because non-monetary items are all items that are not monetary items – therefore, if the definition of monetary items is wrong – which it is in IFRS, in US GAAP and as per PricewaterhouseCoopers – then the split will be wrong) after all constant real value non-monetary items (correctly classified) have been inflation-adjusted correctly and variable items have been correctly valued in terms of IFRS with variable items valued at HC having been inflation-adjusted.

• 2. It is the net monetary loss or gain in the weighted-average of monetary assets and monetary liabilities over the financial period. Obviously both calculations would be made: the one to prove the other.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Example of Value does not exist independently of how we account it. 

   Here you will find everything SAICA banned from continued being published on   

   their public Discussion Forum about SA accountants - including CA(SA)s -            

   unknowingly destroying about R167 billion per annum in the SA non-monetary   

   economy with their very destructive stable measuring unit assumption.               

  SAICA: "We do not concur with the suggestion that the standards should    

  reject the stable unit measuring assumption."                                                  

  It´s rejection during LOW inflation was authorized in IFRS in the Framework, Par 

  104 (a) twenty one years ago: something SAICA apparently did not realize.        

  SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                 

  environment insult the user."                                                                             

  Most accountants, including CA(SA)s, inflation-adjust salaries, wages, rentals,     

  etc. during low inflation.                                                                                         

Missive Nº 398

Hi,

Example of Value does not exist independently of how we account it.

Here is an example of Constant ITEM Purhasing Power Accounting maintaining real value when HCA destroys real value.

Assume:  These transactions happened on first day of the year, 10% inflation rate and all balance sheet amounts are still outstanding at the end of the year.

As can be seen from the above equity increased by 100 (perhaps 900 billion in the economy?) under CIPPA compared to HCA under the exact same circumstances during a year during low inflation by maintaining the real value of inventory, equity and profit, but, reduced by the cost of inflation (destruction of the real value of money) - over time. This is always over time. The above proves that value does not exist independently of how we account it over time.

A person could say that this would be reflected in the stock market. Yes, I agree. That would be true for listed companies and unlisted companies when the shares are traded. It would: in the variable real value non-monetary price of the shares: variable real value non-monetary items not being part of the company: they belongs to third parties.  

It is also true that the accounted real value of the permanent investment base of the company (or economy) actually increased with multiplier effects in loan availability, capital investments, employment, production levels, taxes, etc under CIPPA as compared to HCA. It is also true that it is impossible for the real value of the equity to be paid away in dividends as it happens under HCA. The real value of equity would be maintained constant forever in entities that at least break even under CIPPA, i.e. under financial capital maintenance in units of constant purchasing power during low inflation as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Value does not exist independently of how we measure it.  

Here you will find everything SAICA banned from continued being published on   

   their public Discussion Forum about SA accountants - including CA(SA)s -            

   unknowingly destroying about R167 billion per annum in the SA non-monetary   

   economy with their very destructive stable measuring unit assumption.               

  SAICA: "We do not concur with the suggestion that the standards should    

  reject the stable unit measuring assumption."                                                  

  It´s rejection during LOW inflation was authorized in IFRS in the Framework, Par 

  104 (a) twenty one years ago: something SAICA apparently did not realize.        

  SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                 

  environment insult the user."                                                                             

  Most accountants, including CA(SA)s, inflation-adjust salaries, wages, rentals,     

  etc. during low inflation.                                                                                         

Missive Nº 397

Hi,

CA007 stated in our mother of all debates:

"I state: Value DOES exist independently of how we ACCOUNTING measure it."

My reply was:

I spent a lot of time and I have prepared an excellent concise response to your statement that "value exist independently of how we accounting measure it".

I then realized that we first have to agree what the concept of a unit of constant purchasing power is, what the effect of applying it is, whether it is part of IFRS, whether it is generally accepted, does it work, does it not work, is there something like it, is it just a theoretical concept and no-one ever uses it, or is it used every day by billions of people - or not, is it never ever used, does no-one use it ever, has it ever been used in the past, does it appear in IFRS, how many times is it applied in IFRS - if at all, is it junk, is it real, does it affect the economy, does it have any effect, yes or no, what exactly is it, is there such a thing, or is it just my imagination, who supports it, etc, etc.

I will prepare a stament - with references to reliable third party source - although I am a bit worried that you may not accept them since you wish to regard what happened in Brazil during 30 years as "irrelevant".

We will have to agree that Brazil did exist during those 30 years from 1964 to 1994 and that 185 million people did measure all their non-monetary items DAILY in units of constant purchasing power and we will have to agree that it kept their internal non-monetary real market more or less stable while hyperinflation destroyed ONLY the real value of their money - not the real value of their non-monetary items. We also will have to agree that the reason why hyperinflation did not destroy the real value of all their non-monetary items was because they remeasured them DAILY in units of constant purchasing power. We will have to agree that it is impossible for hyperinflation to destroy any non-monetary item. We will have to agree that hyperinflation like inflation can only destroy the real value of money and other monetary items - nothing esle. We will have to agree that it was because they implemented measurement in units of constant purchasing power. We will have to agree that the Brazilian economy was not a barter economy during those 30 years as you claim. There may have been barter here and there on a miniscule scale, but the economy was not a barter economy. The whole economy remeasured all non-monetary items DAILY in units of constant purchasing power.

We will have to agree that this is not irrelevant as you say.

We did the same in Auto-Sueco (Angola) in 1996 where I worked in Luanda, Angola. I implemented it. It is not theory to me.

I know that various other South-American countries also used indexation during about the same period as Brazil - and even later.

If you are not prepared to agree that Brazil used the measurement of all non-monetary items during 30 years by means of units of constant purchasing power and that it had a real effect on their economy - totally different from the stable measuring unit assumption that you apply in your accounting - then I am prepared to research other cases of indexation - especially in South American countries.

This is all about units of constant purchasing power.

We will have to agree that it was because they rejected the stable measuring unit assumption - the basis of your accounting model, namely, HCA. We will have to agree that they did not apply HCA. We will have to agree that they rejected the stable measuring unit assumption - the fundamental basis of Historical Cost Accounting. We will have to agree that they maintained their NON-MONETARY OR REAL economy more or less stable BECAUSE they applied measurement in units of constant purchasing power. We will have to agree that they applied inflation-accounting and that it worked - that measurement in units of constant purchasing power did and does make a difference to the economy.

This is all about measurement in units of constant purchasing power and whether it makes a difference to the eonomy or not (for those who do not accept historical facts from the recent economic history of Brazil).

CA007, I wish to ask you: do you accept that there is a concept of units of constant purchasing power?

Yes or no?

Or do you regard the whole concept of units of contant purchasing power as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago (how long have you been an accountant?) as irrelevant as you regard 30 years of economic history in Brazil?

Par 104 (a) states: "Financial capital maintenance can be measured either in nominal monetary units OR UNITS OF CONSTANT PURCHASING POWER". (my capitals)

Par 104 (a) does not state "during hyperinflation". That is stated in IAS 29. Par 104 (a) thus applies under all levels of inflation and deflation - LOW inflation too.

CA007, do you accept measurement in units constant purchasing power during LOW inflation as authorized in IFRS?

Or, do you regard it as irrelevant?

During low inflation ONLY constant real value non-monetary items (NOT variable real value non-monetary items) are measured in units of constant purchasing power.

During hyperinflation ALL non-monetary items - both constant and variable items - are measured in units of constant purchasing power.

I do not wish to implement inflation-accounting in SA.

I wish SA accountants to measure ONLY constant items during LOW inflation as authorized in IFRS.

CA007, do you accept measurement in units constant purchasing power during LOW inflation as authorized in IFRS?

Or, do you regard it as irrelevant?

After I have your view about measurement in units of constant purchasing power, then I will be able to respond fully to your statement that value exist independently of how we accounting measure it. I am not running away from your statement. I will answer it in detail. You know already that I disagree with you. I intend to prove my point with historical facts and other facts.

You see, stating that what happened in Brazil during 30 years when an important country like Brazil as a whole maintained its whole non-monetary or real economy more or less stable - they even GREW economically - they had positive GDP growth - DURING hyperinflation of 2000 % per annum - by means of measuring all non-monetary items (variable and constant items - variable items too because they were in hyperinflation - this is not necessary during low inflation) by the accounting practice (authorized in IFRS) of measuring all non-monetary items in units of constant purchasing power which affected their economy in a massive way - they kept their non-monetary economy more or less stable during hyperinflation - by you stating that is irrelevant makes it very difficult to agree anything with you.

You can similarly state any fundamental fact is "irrelevant." It is difficult to agree on anything when one participant in the debate assumes the right to state proven historical facts are irrelevant.

What happened in Brazil during those 30 years is relevant to our discussion.

They did maintain the real value of all non-monetary items - variable and constant items - by measuring them in units of constant purchasing power - for 30 years: something they could not have done if they had implemented HCA, i.e. the stable measuring unit assumption during those 30 years. Value existed, yes, and they maintained those real values by means of measurement in units of constant purchasing power. If they had chosen HCA during those 30 years they would not have been able to maintain their real values: their choice of accounting model, not inflation, would have destroyed the real value.

Value thus does not simply exist irrespective of the ACCOUNTING measure we choose to implement over a period of time: during the financial year. When we choose HCA, we destroy the real value of constant items NEVER MAINTAINED during low inflation and hyperinflation - over the period of time of the financial year.

Measuring an item in units of constant purchasing power does maintain its real value - over time: the accounting period. As such it does affect the economy. The real value first has to exist. Measuring it in units of constant purchasing power (inflation-adjusting it) does maintain its existing real value during the accounting period during inflation. It is the choice of the accounting method, the choice of the measuring unit, namely, actually choosing measurement in units of constant purchasing power during inflation (rejecting the 3000 year old stable measuring unit assumption) that maintains the real value of the item - over time. By maintaining the real value - over time - by choosing the accounting method or measuring unit namely units of constant purchasing power, the existing real value is not destroyed - over time: the accounting period. It is not inflation doing the destroying in the non-monetary item. The real value of the non-monetary item is destroyed when the accountant chooses to measure its value in nominal monetary units during inflation - over a period of time: the accounting period. So, it is the choice of the accounting model or accounting method or measuring unit that is doing the destroying because when the accountant chooses measurement in units of constant purchasing power, the non-monetary item´s real value is maintained irrespective of the rate of inflation - always over time.

It is not inflation doing the destroying: it is the choice of applying the stable measuring unit assumption - over time during inflation. Measurement in units of constant purchasing power does affect the economy when it is applied over time. Measurement in units of constant purchasing power does not create real value over time where it NEVER existed. It simply MAINTAINS EXISTING real value in constant real value non-monetary items during low inflation - applied over time.

CA007,

Brazil was in high and hyperinflation for 30 years. Brazil was not a barter economy - as you believe - during those 30 years.

Venezuela is in hyperinflation now. Venezuela is not a barter economy now.

Zimbabwe was in hyperinflation for 18 or 19 years - Zimbabwe was not a barter economy.

The issue here is: does measuring a constant real value non-monetary item in units of constant purchasing power during low inflation affect the economy?

The answer is: yes.

It maintains the real value of the constant real value non-monetary item. It does not create new real value. It maintains it. It is the choice of measurement unit that maintains the real value: when the accountants chooses measurement in units of constant purchasing power during low inflation as authorized in IFRS in the Framework, Par 104 (a) DURING LOW INFLATION, then the real value of the non-monetary item is maintained, i.e. it is not destroyed. It is not inflation doing the destroying.

When the accountant chooses to measure the value of a constant real value non-monetary item in nominal monetary units, i.e. the accountant chooses to apply the stable measuring unit assumption during low inflation, i.e. the accountant chooses to assume there is no inflation DURING LOW INFLATION, then the implementation of that choice of measurement destroys the real value of the constant real value non-monetary item DURING INFLATION.

It is able to prove that measurement in units of constant purchasing power during low inflation maintains the real value of constant items in many ways.

It is able to prove that the accountant´s choice to implement the stable measuring unit assumption and not inflation is doing the destroying in many ways.

CA007´s reply was:

"You certainly know what you are talking about and I will need time to think it over.

I will concede: the Brazil example is not irrelevant to our debate.

Your question:

“ CA007, do you accept measurement in units constant purchasing power during LOW inflation as authorized in IFRS? “

My answer: Yes. I accept for both economic and financial reporting purposes

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Is the process of financial reporting the same as a process of wealth creation?

   Here you will find everything SAICA banned from continued being published on   

   their public Discussion Forum about SA accountants - including CA(SA)s -            

   unknowingly destroying about R167 billion per annum in the SA non-monetary   

   economy with their very destructive stable measuring unit assumption.               

  SAICA: "We do not concur with the suggestion that the standards should    

  reject the stable unit measuring assumption."                                                  

  It´s rejection during LOW inflation was authorized in IFRS in the Framework, Par 

  104 (a) twenty one years ago: something SAICA apparently did not realize.        

  SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                 

  environment insult the user."                                                                             

  Most accountants, including CA(SA)s, inflation-adjust salaries, wages, rentals,     

  etc. during low inflation.                                                                                         

Missive Nº 396

Hi,

That was the question asked by CA007 after he came to accept financial capital maintenance in units of constant purchasing power during LOW inflation as authorized in IFRS in the Framework, Par 104 (a) in 1989 on our Mother of all Debates

This was my answer:

This one is easy to answer immediately:

The answer is NO.

I emphatically always state that accountants do not and can not create wealth or real value out of nothing: out of thin air: by simply passing some update or inflation-adjustment accounting entries. They never do.

Accountants can only MAINTAIN EXISTING real value, BUT, ONLY with measurement in units of constant purchasing power during low inflation and hyperinflation.

(OR - ONLY in the case of the real value of SHAREHOLDERS´ EQUITY - not the real value of any other constant real value non-monetary item under HCA - under HCA during low inflation - when 100% of all contributions to the equity balance is continuously invested in revaluable fixed assets with an equivalent updated real value (revalued or not) - something that is only generally the case with property, hospital and hotel companies. This is where the unknowing destruction of real value by accountants choosing to implement the stable measuring unit assumption, i.e. assuming that inflation is zero percent during actual low inflation of up to 25% during three years in a row - enters the picture: they unknowingly destroy real value in that portion of equity that is never backed or maintained by investment in revaluable fixed assets with an equivalent updated real value under HCA during low inflation.)

How do accountants maintain EXISTING constant real non-monetary value during low inflation?

By NOT DESTROYING IT: i.e by measuring it in units of constant purchasing power: i.e. the OPPOSITE of what they do under HCA when they assume that there is no inflation even if inflation is 25% per annum forever. They destroy the real value by measuring the constant real value non-monetary items in nominal montary units: exactly the same as monetary units: treating constant real value non-monetary items the same as cash.

The constant real non-monetary value must first legally exist, then, accountants can MAINTAIN (instead of destroy with applying the stable measuring unit assumption; i.e ASSUMING there is no inflation and measuring it in nominal monetary units during low inflation) its real value ONLY with measurement in units of constant purchasing power during low inflation and hyperinflation.

We must remember that accounting has that little-understood magic: it is double entry: for every debit there is an equivalent credit.

The existing constant real non-monetary value of all constant real value non-monetary items is only maintained constant in all entities that at least break even when all constant real value non-monetary items are measured in units of constant purchasing power, all variable items are correctly valued in terms of IFRS and the net monetary gain or loss from holding monetary items is accounted in the income statement during low inflation.

This requires the CORRECT definition of monetary items.

Why?

Because both I and the IASB agree that non-monetary items are all items that are not monetary items.

Thus: define monetary items wrongly - as it is defined incorrectly in IFRS and US GAAP and by PricewaterhouseCoopers, and, we have the wrong split (classification) of monetary and non-monetary items - as we do have at the moment.

Here is the correct definition of monetary items:

Monetary items are money held and items with an underlying monetary nature.

Here is the IFRS (wrong) definition of monetary items:

Monetery items are money held and items to be received of paid in money. IAS 29, Par 12

Almost all non-monetary items are also received or paid in money.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

9 Fundamental flaws in IFRS and US GAAP.

   Here you will find everything SAICA banned from continued being published on   

   their public Discussion Forum about SA accountants - including CA(SA)s -            

   unknowingly destroying about R167 billion per annum in the SA non-monetary   

   economy with their very destructive stable measuring unit assumption.               

  SAICA: "We do not concur with the suggestion that the standards should    

  reject the stable unit measuring assumption."                                                  

  It´s rejection during LOW inflation was authorized in IFRS in the Framework, Par 

  104 (a) twenty one years ago: something SAICA apparently did not realize.        

  SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                 

  environment insult the user."                                                                             

  Most accountants, including CA(SA)s, inflation-adjust salaries, wages, rentals,     

  etc. during low inflation.                                                                                         

Missive Nº 395

Hi,

9 Fundamental flaws in IFRS and US GAAP

1. The premise that there are only two fundamentally different basic economic items in the economy; namely, monetary items and non-monetary items, when, in fact there are three: (i) Monetary items (ii) Variable real value non-monetary items and (iii) Constant real value non-monetary items.
2. The statement in IFRS that are only two concepts of capital and capital maintenance, namely physical and financial capital and capital maintenance in nominal monetary units, when in fact, there are three stated in IFRS (US GAAP only has the already stated two): (a) Physical capital and capital maintenance (b) Financial capital and capital maintenance in nominal monetary units (c) Financial capital and capital maintenance in units of constant purchasing power. (c) is not allowed for under US GAAP.
3. The fallacy of financial capital maintenance in nominal monetary units: it is impossible to maintain the real value of financial capital constant in nominal monetary units per se during inflation and deflation.
4. The fallacy that the erosion of business profits and invested capital is caused by inflation: Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. Equity is a constant real value non-monetary item. It is thus impossible for inflation to erode or distort or destroy the real value of equity.
5. The fallacy that money is perfectly stable as implemented in the stable measuring unit assumption. Money is never perfectly stable on a sustainable basis.
6. The fallacy that value exists independently of how we account it; when, in fact, this is only true in the case of monetary and variable items and only with equity under HCA when 100% of the updated original real value of all contributions to the equity balance are invested in revaluable fixed assets (revalued or not) with an equivalent updated real value. The values of all other constant real value non-monetary items depend on the primary accounting measurement option selected by the accountant and whether they are maintained or not under inflation and hyperinflation. Their real values can only be maintained constant during inflation, hyperinflation and deflation with measurement in units of constant purchasing power.
7. The wrong definition of monetary items. Non-monetary items are all items that are not monetary items. Thus, if the definition of monetary items is wrong – as it is in IFRS and US GAAP – then we will have an incorrect split between monetary and monetary items – as we actually have. Here is the IFRS definition of monetary items (which is wrong): Monetary items are money held and items to be received or paid in money. Most non-monetary items are also received and paid in money. Here is the correct definition: Monetary items are money held and items with an underlying monetary nature.
8. The net monetary loss or gain not accounted under HCA but accounted under Constant Purchasing Power Accounting during hyperinflation.
9. Only certain constant items are inflation-adjusted under HCA – not all. Only items like salaries, wages, rental, etc are inflation-adjusted. Items like equity, trade debtors, trade creditors, etc. are not.

Bruce Pounder - the US corporate financial reporting expert and author regarding IFRS and US GAAP convergence - states that there are “many inherent flaws in current US GAAP and IFRS.” 

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Four accounting models authorized in IFRS.

On this blog you will find everything SAICA banned from continued being published

on their public Discussion Forum about SA accountants [ including CA(SA)s ]          

unknowingly destroying about R167 billion per annum in the SA non-monetary      

economy with their very destructive stable measuring unit assumption.                  

SAICA: "We do not concur with the suggestion that the standards should       

reject the stable unit measuring assumption."                                                   

It´s rejection during low inflation was approved in IFRS 21 years ago.                   

SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                   

 environment insult the user"                                                                               

Most countries, including SA, inflation-adjust salaries, wages, rentals, etc. during  

low inflation.                                                                                                              

Missive Nº 394

Hi,

A: Financial capital maintenance in nominal monetary units during low inflation and deflation: traditional Historical Cost Accounting (see the Framework, Par 104 (a))

B: Financial capital maintenance in units of constant purchasing power; i.e. Constant ITEM Purchasing Power Accounting  under which ONLY constant real value non-monetary items (NOT variable items) are inflation-adjusted during low inflation and deflation. This is NOT Constant Purchasing Power Accounting which is an inflation-accounting model required ONLY during hyperinflation under which ALL non-monetary items – BOTH variable and constant items – are inflation-adjusted. (see the Framework, Par 104 (a)). This accounting model is unique to IFRS. It is not authorized under US GAAP.

IFRS also specifically requires

C: Current Cost Accounting when an entity selects physical capital maintenance in terms of the Framework, Par 102 and 104 (b).

IAS 29 Financial Reporting in Hyperinflationary Economies requires

D: Constant Purchasing Power Accounting, i.e. inflation-accounting under which all non-monetary items – both variable and constant items – are inflation-adjusted ONLY during hyperinflation (different from the above Constant ITEM Purchasing Power Accounting authorized in Par 104 (a) during LOW inflation and deflation under which ONLY constant items – NOT variable items – are inflation-adjusted during LOW inflation and deflation).

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Value does not exist independently of how we measure it.

On this blog you will find everything SAICA banned from continued being published

on their public Discussion Forum about SA accountants [ including CA(SA)s ]          

unknowingly destroying about R167 billion per annum in the SA non-monetary      

economy with their very destructive stable measuring unit assumption.                  

SAICA: "We do not concur with the suggestion that the standards should       

reject the stable unit measuring assumption."                                                   

It´s rejection during low inflation was approved in IFRS 21 years ago.                   

SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                   

 environment insult the user"                                                                               

Most countries, including SA, inflation-adjust salaries, wages, rentals, etc. during  

low inflation.                                                                                                              

Missive Nº 393

Hi,

Prof Geoff Everingham stated:

“I see the existence and value of economic resources existing independently of how we measure them.”

He is wrong – again.

The best example is his salary: when it is measured at Historical Cost, it has one value and when it is inflation-adjusted, i.e. measured in units of constant purchasing power, it has another - totally different - value.

This is also true for wages, rentals, etc.

Salaries, wages, rentals, etc are constant real value non-monetary items.

The same is true for all constant real value non-monetary items. Other examples are trade debtors, trade creditors, taxes payable, taxes receivable, etc.

Trade debtors, trade creditors and other non-monetary payables and receivables are mostly incorrectly defined by PricewaterhouseCoopers, the FASB, the IASB and others as monetary items and measured at Historical Cost in today´s economy.

185 million Brazilians measured all trade debtors, trade creditors, all other non-monetary payables and receivables daily in units of constant purchasing power by indexing them daily during 30 years from 1964 to 1994 with reference to a daily index supplied by the various governments during that period in the entire Brazilian economy.

This is totally ignored by PricewaterhouseCoopers, the FASB and the IASB today. PricewaterhouseCoopers´auditors must have audited many Brazilian companies doing that during those 30 years. The message never got through to the PwC accountants who wrote their publication: Understanding IAS 29 - Financial Reporting In Hyperinflationary Economies in which PwC define trade debtors and trade creditors as monetary items. The FASB also specifically define trade debtors and trade creditors as monetary items.

Dr Gustavo Franco was the Governor of the Central Bank of Brazil during the last few years of that period of indexation. He was the head of the team that famously killed hyperinflation in Brazil in 1994 (they took 10 years to do it) with their Unidade Real de Valor (URV) or Real Value Unit.

I sent him the following email:

? Dear Dr Franco,
>
> I would appreciate it very much if you could perhaps clear up a point for me regarding trade debtors and trade creditors under the URV.
>
> Were trade debtors and trade creditors treated as monetary items under the URV and not updated or were they treated as non-monetary items an updated in terms of the URV?
>
> What are trade debtors and trade creditors in your opinion? Are they monetary or non-monetary items?

He answered as follows:

"Dear Mr. Smith

Two observations are in order. First, for spot transactions the existence of the URV is immaterial, sums of means of payment are surrendered in exchange for goods, all delivered and liquidated on spot. Second, the unit of account enters the picture only when at least one leg of a commercial transaction is deferred. In this case, the URV serves the purpose of defining the price at the day of the contract. The same quantities of URVs are to be paid at the payment day, though this should represent LARGER QUANTITIES OF WHATEVER MEANS OF PAYMENT IS USED. (my capitals)

It was essential, in the Brazilian case, and this may be a general case, that the URV was defined as part of the monetary system. It has a lot to do with jurisprudence regarding monetary correction; URV denominated obligations had to be treated as if they were obligations subject to monetary correction. In the URV law it was defined that the URV would be issued, in the form of notes, and when this would happen, the URV would have its name changed to Real, and the other currency, the old, the Cruzeiro, was demonetized.

Att

GF"


So: there it is from the best possible source: trade debtors and trade creditors are non-monetary items.

PricewaterhouseCoopers, the IASB and the FASB and all of us can be educated about financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) from what Dr Franco confirmed.

Equity is measured at Historical Cost during low inflation and deflation in all economies world wide.

Equity is measured, not at Historical Cost, but, in units of constant purchasing power in terms of IAS 29 in Venezuela today by all Venezuelan companies which implement IFRS as well as foreign holding companies (applying IFRS) of Venezuelan subsidiaries and in all hyperinflationary economies

So, it is very clear that what Prof Everingham stated is wrong: the value of any economic resource does not exist independently of how it is measured.

That statement is ONLY true in the case of

(1)  variable real value non-monetary items, e.g. property, plant, equipment, inventory, etc. and monetary items - per se - under all accounting and economic models

(that is exactly what Prof Everingham meant, BUT, as Emeritus Professor of Accounting at the University of Capetown, the Nº 1 accounting faculty in SA - which makes him the Nº 1 accountanting professor in SA - he has to know that everything he states in public - for example, in email correnspondence with me, after responding publicly (which put the subsequent email correspondence in the public domain) in the Financial Mail in 2008 to my Letter to the Editor and stating various times that what I state "has no substance" (educated and polite-speak for  totally wrong) (basically very effectively rubbishing my name right from day one which was blindly followed by SAICA and led to them banning me from continuing leaving these statements on their public Discussion Forum) AFTER HE completely misread and misunderstood my letter and totally ignored my new concept "constant items" - that everything he states will be analysed very carefully)

and (the following qualification Prof Everingham did not even dream about when he stated what he stated above)

(2)  ONLY equity (not all constant items) during low inflation and deflation under Historical Cost Accounting ONLY when 100% of the updated original real value of all contributions to the equity balance are continuously invested in revaluable fixed assets (revalued or not) with an equivalent updated real value. This is – generally – rarely the case. It is most probably the case in property, hospital and hotel companies.

The statement that “value exists irrespective of how it is accounted” is thus the fourth accounting fallacy not yet extinct.

The four accounting fallacies (blindly believed by Prof Geoff Everingham and SAICA) not yet extinct are:

1. Financial capital maintenance in nominal monetary units: it is impossible to maintain the real value of financial capital constant - per se - with measurement in nominal monetary units during inflation and deflation.
2. The stable measuring unit assumption that is based on the fallacy that changes (up to 25% annual inflation for three years in a row) in the real value of the monetary unit of account are not sufficiently important for accountants to choose financial capital maintenance in units of constant purchasing power during low inflation and deflation as authorized in IFRS in the Framework, Par 104 (a).
3. The erosion of business profits and invested capital is caused by inflation as wrongly stated by the FASB in FAS 33 in 1979 and wrongly confirmed by Prof Geoff Everingham who stated “In my opinion, it is inflation doing the destroying, not accountants.” This is believed by almost all accountants and economists. In fact: “inflation is always and everywhere a monetary phenomenon” as so famously stated by Milton Friedman, the late Noble Laureate. Inflation has no effect on the real value of any nonmonetary item ever. It is impossible for inflation – per se - to erode, distort or destroy any non-monetary item ever. This is confirmed by two top Turkish academics who state:

“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.

http://www.mufad.org/index2.php?option=com_docman&task=doc_view&gid=9&Itemid=100

4. “Value exists irrespective of how it is accounted.” This is only true in the case of variable items and monetary items per se under all accounting and economic models and only equity during HCA during low inflation and deflation if the 100% investment requirement of the updated original real value of all contributions to the equity balance in revaluable fixed assets with an equivalent updated real value is met.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

You can follow the mother of all debtes  - between CA007 and me - about my views about accounting (41 comments and counting) ,  blow by blow, on my Afrikaans blog ReeleWaardeRekeningkunde ( 216 163 views ) on Sake24 - in English - on my blogpost

Prof Geoff Everingham sê die mees sinnelooste ding oor Rekeningkunde ooit.

Prof Geoff Everingham´s statements regarding inflation destroying the real value of non-monetary items have no substance at all.

On this blog you will find everything SAICA banned from continued being published

on their public Discussion Forum about SA accountants [ including CA(SA)s ]          

unknowingly destroying about R167 billion per annum in the SA non-monetary      

economy with their very destructive stable measuring unit assumption.                  

SAICA: "We do not concur with the suggestion that the standards should       

reject the stable unit measuring assumption."                                                   

It´s rejection during low inflation was approved in IFRS 21 years ago.                   

SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                   

 environment insult the user"                                                                               

Most countries, including SA, inflation-adjust salaries, wages, rentals, etc. during  

low inflation.                                                                                                              

Missive Nº 392

Hi,

Prof Geoff Everingham, Emeritus Professor of Accounting, from the University of Cape Town stated in 2008 that there is no doubt that inflation destroys the real value of monetary items and non-monetary items which do not hold their value in terms of purchasing power. I agreed with him at the time. Afterwards it became very clear to me that inflation is only a monetary phenomenon and can only destroy the real value of money and other monetary items.

It is very clear that inflation has no effect on the real value of non-monetary items as Milton Friedman, the late American Noble Laureate stated so famously: "Inflation is always and everywhere a monetary phenomenon." It is impossible for inflation per se to destroy the real value of any non-monetary item ever.

I am not the only person stating and understanding that. This is what two Turkish academics state:

“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.

http://www.mufad.org/index2.php?option=com_docman&task=doc_view&gid=9&Itemid=100

Prof Geoff Everingham´s statement that inflation destroys the real value of non-monetary items that do not hold their real value has no substance at all. Just like his statement that valuing items in units of constant purchasing power makes no difference to the economy as well as his statement that inflation does the destroying in companies´capital and profits and not accountants.

Prof Everingham´s statement correctly confirms that there are two types of non-monetary items. Those that hold their real values in terms of purchasing power and those that do not hold their real values in terms of purchasing power under HCA during low inflation;  i.e., as a result of the stable measuring unit assumption. These are constant real value non-monetary items incorrectly measured in nominal monetary units instead of in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) in 1989 which states:

"Financial capital maintenance can be measured in nominal monetary units or units of constant purchasing power."

The IASB only makes a distinction between monetary and non-monetary items. The stable measuring unit assumption allows the IASB to side-step the split between variable and constant real value non-monetary items.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Variable items exist independently of how SA accountants value them.

On this blog you will find everything SAICA banned from continued being published

on their public Discussion Forum about SA accountants [ including CA(SA)s ]          

unknowingly destroying about R167 billion per annum in the SA non-monetary      

economy with their very destructive stable measuring unit assumption.                  

SAICA: "We do not concur with the suggestion that the standards should       

reject the stable unit measuring assumption."                                                   

It´s rejection during low inflation was approved in IFRS 21 years ago.                   

SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                   

 environment insult the user"                                                                               

Most countries, including SA, inflation-adjust salaries, wages, rentals, etc. during  

low inflation.                                                                                                              

Missive Nº 391

Hi,

Variable items are non-monetary items with variable real values over time.

Measurement is the process of determining the monetary amounts at which variable items are to be accounted/recognised and carried in the financial reports. This involves the selection of a particular basis of measurement. SA accountants value variable items in terms of IFRS or SA GAAP.

Variable items in the SA non-monetary or real economy are valued at, for example, fair value or the lower of cost and net realizable value or recoverable value or market value or present value in terms of IFRS or SA GAAP. “Listed companies use IFRS and the unlisted companies could use either IFRS or Statements of GAAP” – as per SAICA.

SA accountants value variable items correctly in terms of IFRS or SA GAAP at the financial report date – excluding those variable items valued at original nominal Historical Cost when that original date is not the financial report date on a primary valuation basis. The fundamental real values of variable items exist independently of being valued at their original nominal HC values after the original date they came about or were acquired by the entity. Valuing a variable item at its original nominal HC during its lifetime does not destroy its real value because it would be valued at its current market value whenever it is finally exchanged or sold or disposed of in the future.

All items in financial statements - monetary, variable and constant items - were valued at Historical Cost before there were any GAAPs and IFRS, since money – the monetary unit of account – was generally assumed to be stable in real value over time: the infamous stable measuring unit assumption. Today, SA accountants maintain this very destructive and very economically destabilizing assumption only for the valuation of the majority of income statement items (excluding salaries, wages, rents, etc which SA accountants generally value in units of constant purchasing power) and all balance sheet constant items during low inflation and deflation.

SA accountants implement the HC model when they choose to measure financial capital maintenance in nominal monetary units per se (which is a fallacy during inflation and deflation) in terms of the IASB´s Framework, Par 104 (a). They implement their very destructive stable measuring unit assumption. In so doing, they- and not inflation - are unknowingly destroying the real value of constant items never maintained during low inflation.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

The silliest statement in accounting ever: by Prof Geoff Everingham.

On this blog you will find everything SAICA banned from continued being published

on their public Discussion Forum about SA accountants [ including CA(SA)s ]          

unknowingly destroying about R167 billion per annum in the SA non-monetary      

economy with their very destructive stable measuring unit assumption.                  

SAICA: "We do not concur with the suggestion that the standards should       

reject the stable unit measuring assumption."                                                   

It´s rejection during low inflation was approved in IFRS 21 years ago.                   

SAICA: "Ultimately, inflation-adjusted accounts in a low inflation                   

 environment insult the user"                                                                               

Most countries, including SA, inflation-adjust salaries, wages, rentals, etc. during  

low inflation.                                                                                                              

Missive Nº 390

Hi,

Changing the current destructive Historical Cost paradigm to a real value maintaining Constant Item Purchasing Power paradigm would mean that salaries, wages, rentals, etc are updated monthly every time the CPI changes.

Salaries and wages would thus maintain their constant real values constant all the time – month after month. Annual increase negotiations between unions and employers would then be about a 1 or 2 or 3% productivity increase.

Trade debtors, trade creditors, taxes payable, taxes receivable, all other payables and receivables would be updated monthly as the CPI changes. There would thus be greater systemic economic stability.

A big impact would come from updating all companies´ shareholders´ equity monthly as the CPI changes. That would mean that the investment base in the economy would remain at least constant in real terms. The multiplier effect would be very positive for the economy.

It would make a real difference reducing banking crises resulting from banks not having enough capital: once they have sufficient capital, the new paradigm would automatically keep them at that level all the time – indefinitely - as long as they at least break even. This would also improve systemic economic stability.

Amazingly, unbelievably and inexplicably, Prof Geoff Everingham, Emeritus Professor of Accounting at the University of Cape Town, stated that measuring items in units of constant purchasing power makes no difference in the economy.

That is the silliest and most mistaken statement about accounting I have ever encountered.

It is only rivalled by the South African Institute of Chartered Accountant´s official policy statement in August 2008 that they do not concur with the suggestion (which they imagined since no-one suggested that) that the standards should reject the stable measuring unit assumption - when in fact, the rejection of the stable measuring unit assumption, i.e. financial capital maintenance in units of constant purchasing power during low inflation and deflation, has already been authorized in IFRS twenty one years ago: something SAICA apparently did not know in August 2008.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Effects of rejecting the current 3000-year-old Historical Cost paradigm and changing over to a Constant Item Purchasing Power paradigm:

All non-monetary receivables and payables would be updated monthly with the change in the CPI. E.g. trade debtors, trade creditors, taxes payable, taxes receivable, etc would be updated monthly.

Salaries and wages would be updated monthly.

Result: a law would be rushed through parliament in the first month of monthly deflation (as already happened in one American state very recently - actually I think I have it wrong: the law was rushed thru parliament in Portugal while an American state actually decreased state salaries in line with monthly deflation!) to prevent salaries from being decreased in line with monthly deflation (as they should be in order to maintain economic stability).

This would result in an increase in the real value of salaries and wages when they are kept the same during a month of monthly deflation.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

PricewaterhouseCoopers, the IASB and the FASB bamboozled by accountants´ notorious stable measuring unit assumption

Most accountants and economists will confirm that real value is being destroyed in banks´ and companies´ capital over time. The banking crisis – remember?

Most of them blame inflation – except two Turkish academics, the head of the Turkish Accounting Standards Department, the late Milton Friedman – and I.

It is not inflation doing the destroying as our Prof Geoff Everingham, Emeritus Professor of Accounting at the University of Cape Town stated. It is them assuming there is no inflation when they never update companies´ and banks´ capital when they implement their very destructive stable measuring unit assumption.

Most of them believe the FASB when it tells them that the erosion of business profits and invested capital is caused by inflation.

They are all dead wrong: Friedman was right: inflation is always and everywhere a monetary phenomenon: inflation per se has no effect on any non-monetary item ever – as confirmed by the two Turkish academics.

What will happen when we change the global 3000 year old Historical Cost paradigm to the IFRS approved units of constant purchasing power regime?

First of all: accountants´ brains get filled by one word when they read or hear the term units of constant purchasing power:

INFLATION-ACCOUNTING!!!

Accountants forget that most of them inflation-adjust salaries, wages, rentals, etc annually. SAICA even went so far as to state on their website:

"Ultimately, inflation-adjusting accounts in a low inflation environment insult the user."

Imagine that!! SAICA stating something as silly as that!!

However, IFRS authorized financial capital maintenance in units of constant purchasing power at ALL levels of inflation and deflation in the Framework, Par 104 (a) twenty one years ago.

Inflation-adjusting ONLY constant real value non-monetary items during low inflation (not all non-monetary items as required by inflation-accounting during hyperinflation) would mean that SA accountants would knowingly maintain about R167 billion in the constant real value of existing constant items currently unknowingly and unnecessarily being destroyed by them PER ANNUM in the SA real economy in, for example, that portion of companies´ capital not backed by sufficient revaluable fixed assets as a result of them implementing the stable measuring unit assumption.

The magic of accounting is that it is double entry: for every debit there is an equivalent credit.

So, if companies´ equity is to be inflation-adjusted (an increase in nominal credit values to maintain real values constant during low inflation) where does the opposite increase in nominal debit values come from?

For example from trade debtors: currently trade debtors are incorrectly classified by the IASB, the FASB, PricewaterhouseCoopers, etc, as monetary items. They are constant real value non-monetary items.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Would we be able to borrow more?

Bertie: Nicholaas, how would business be different in SA if that value was not being destroyed? In practical terms. I now buy into your point. But blog for us on what difference the opposite approach would have for everyday business in SA. Would we be able to borrow more? Lend more? Produce more? Market more lavishly?

Would we be able to borrow more?

Yes.

With all capital and retained profits revalued monthly, it means that the real value of the part of SA´s investment capital base represented by companies´ equity will be maintained constant in real value terms on a national and company by company basis: in units of constant purchasing power.

The company with R1 million in capital on 1^st Jan 1981 still has R1 million today under the current 3000-year-old Historical Cost paradigm and is able to borrow accordingly from the banks today as well as in 29 years time from today if inflation is exactly the same over the next 29 years as it was over the last 29 years and we maintain the Historical Cost paradigm. In 29 years´ time the company will still have R1 million capital - but at the 2039 price level; i.e. 1/14th of today´s real value exactly the same when today´s R1 million is 1/14th of the real value of what it was on 1st Jan 1981.

Under the Constant Item Purchasing Power (CIPP) paradigm, the company with R14 million in capital on 1^st Jan 1981 (today´s price level; R1 million at 1981 price level: the 1981 value simply being a Historical Cost reference item, not a value in terms of today´s price level) would still have R14 million at today´s price level and would be able to borrow accordingly from the banks today as well a in 29 years time from today when the nominal value would be 14 X 14 million at the 2039 price level but still R14 million for us at today´s price level. We live today. Our minds can only evaluate the value of the Rand at today´s price level. We cannot put our minds (value evaluation mind processes) back or forward – although we imagine that we are doing that today and did in the past.

The multiplier effect would come into play and the economy as a whole would benefit.

We would have fewer banking crises as a result of insufficient bank capital. Banks´ capital would be automatically maintained at its constant real value over time - not like today when that portion of banks´ (and companies´) capital NEVER backed by sufficient revaluable fixed assets is unknowingly and unnecessarily being destroyed by the banks´ accountants implementing the stable measuring unit assumption as part of the Historical Cost Accounting model.

The CIPP paradigm would be the same as zero inflation ONLY for constant real value non-monetary items, e.g. companies´ shareholders´ equity, salaries, wages, rentals, all other items in the income statement, trade debtors, trade creditors, taxes payable, taxes receivable, all non-montary payables, all non-monetary receivables, provisions, etc.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

How would business be different in SA? - Part 1

Bertie: Nicholaas, how would business be different in SA if that value was not being destroyed? In practical terms. I now buy into your point. But blog for us on what difference the opposite approach would have for everyday business in SA. Would we be able to borrow more? Lend more? Produce more? Market more lavishly?

The opposite approach means a once-in-3000-year paradigm change. Everything used to be accounted at historical cost. It could also be seen as the last step in a 100 year process of changing this global 3000 year old Historical Cost paradigm.

Over the last 100 years or so, accountants have realized that variable real value non-monetary items, e.g. property, plant, equipment, shares, inventories, etc cannot be accounted/valued/measured at their 200 year old or 20 year old or 1 year old or any historic price that is not the price/fair value at the balance sheet date.

IFRS and US GAAP are really about defining rules for the measurement of the above mentioned variable items.

Both US GAAP and IFRS value constant real value non-monetary items, e.g. issued share capital, retained profits, capital reserves, equity and most items in the profit and loss account still at Historical Cost as they have been for the last 3000 years: they ASSUME there was no inflation, there is no inflation and there never will be inflation ONLY as far as these items are concerned: they, in principle, ASSUME all monetary units are perfectly stable during low inflation and deflation ONLY for this purpose.

By doing this SA accountants unknowingly, unnecessarily and unintentionally destroy about R167 billion per annum in the real value of SA companies´ equity never backed by sufficient revaluable fixed assets (revalued or not) as well as other constant items never maintained PER ANNUM under HCA as long as annual inflation stays at more or less 5%.

Luckily for workers, they do change their minds for the constant items salaries, wages, rentals, etc. They value them in units of constant purchasing power: i.e. they inflation-adjust them annually. But, ONLY for a selected few profit and loss account items: no balance sheet constant items at all.

Only IFRS, not US GAAP, authorized accountants 21 years ago already, to inflation-adjust all constant items: all profit and loss account and all balance sheet constant items during low inflation and deflation. SA accountants would knowingly maintain instead of destroy about R167 billion PER ANNUM in the real value of all constant items of all SA companies´ that at least break even whether they own any revaluable fixed assets or not – ceteris paribus – forever, when they freely change over to financial capital maintenance in units of constant purchasing power during low inflation: inflation-adjusting ONLY constant items (NOT variable items) during low inflation (this is not inflation-accounting required to be implemented only during hyperinflation).

No-one does it.

Why?

Because they all believe that inflation is doing the destroying because they have been taught like that and everyone “knows” that to be a “fact”. In SA Prof Geoff Everingham, Emeritus Professor of Accounting at the University of Cape Town stated that in so many words and SAICA confirmed that: accountants have no control over inflation; so, it has nothing to do with them: they can not fix it: they can not stop the destruction.

However, inflation is always and everywhere a monetary phenomenon: it is impossible for inflation per se to destroy the real value of any non-monetary item ever. All items in shareholders´ equity are constant real value non-monetary items: all accountants would confirm that. So, it is not inflation doing the destroying: it is accountants´ free choice of implementing the stable measuring unit assumption as part of traditional HCA. When they reject the stable measuring unit assumption and implement financial capital maintnenance in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago, the destruction stops - in all entities that at least break even.

How would business in SA be different when SA accountants implement financial capital maintenance in units of constant purchasing power during low inflation: inflation-adjusting ONLY constant items as authorized in IFRS in the Framework, Par 104 (a) in 1989: the opposite approach?

There are obviously two aspects to the change-over from the current Historical Cost paradigm to a units of constant purchasing power paradigm or Constant Purchasing Power (CPP) paradigm: (1) the actual change-over which would be a once-in-3000-year event and then (2) the actual effects of the change. Bertie´s questions are about Nº 2: the actual effects of the change-over. The US regards changing from US GAAP to IFRS as a once-in-a-100-year event. Imagine when they then have to change again in this once-in-a-3000-year event? Accounting, auditing and consulting companies are going to make billions in extra retraining fees.

In general

Everybody will have to get used to think in real terms or CPP terms instead of Historical Cost terms. Everybody in SA will have to get used to the fact that the value of the Rand changes once a month: that the Rand is not perfectly stable as all SA accountants ASSUME only for this ONE purpose and that all EXISTING constant items´ nominal values would be revalued/remeasured/updated correctly and automatically in businesses (in the whole real or non-monetary economy) to maintain their EXISTING CONSTANT real values constant forever in all entities that at least break even and that all financial statements would show this monthly - once all financial statements are updated automatically digitally on a montly basis: no real value would be destroyed any more by accountants simply in the way they do accounting. But, the EXISTING CONSTANT real value of EXISTING CONSTANT REAL VALUE ITEMS would be maintained automatically by the way accountants do accounting in a better way.

Hard copy printed financial statements would be correct only for the first month after the year-end or period-end – in general - and only if the first set of statements were produced within the first month after the year-end or period-end: during the month of the year-end or period-end CPI. Sometimes SA has two or even three months of zero MONTHLY inflation (I remember that): the CPI stays the same for two or even three months in a row. No change would be made to financial statements only during those zero MONTHLY inflation months. Otherwise all financial statements would change monthly: i.e. every time the CPI changes.

It would be best for companies to keep their financial statements only in digital form so they can be updated monthly with the change in the CPI. Companies would end up with a digital set of financial statements only in digital form that would automatically be updated monthly. Only the latest updated version would be correct. There will always only be one set of financial statements that are correct, namely, the latest ones updated at the latest CPI. No copies of statements at previous CPI levels will be kept ever because it is not possible for us to put our minds and thinking and evaluating processes back in time: it is impossible to do that - although that is how we have been doing accounting (wrongly) for the last 3000 years.

I will answer more of Bertie´s questions tomorrow. This blog is getting rather long.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

It´s the stable measuring unit assumption, stupid!

We have seen so far that accountants implement the Historical Cost Accounting model because it is the traditional model for the last 3000 years – or more.

Historical Cost Accounting is based on the fallacy of financial capital maintenance in nominal monetary units: it is impossible to maintain the real value of financial capital constant in nominal monetary units per se during inflation and deflation.

They accept and admit that companies´ capital and retained profits are constantly being eroded (which is the same as destroyed). They all believe and are taught that this erosion is caused by inflation. They are told as much by Prof Geoff Everingham, SAICA, the FASB and the IASB.

However:

It´s the stable measuring unit assumption, stupid! as Bill Clinton would have said.

Accountants unknowingly, unnecessarily and unintentionally destroy the real value of that portion of companies´ equity never maintained constant by sufficient revaluable fixed assets under HCA during inflation because they implement the stable measuring unit assumption.

They would stop this destruction when they freely change over to financial capital maintenance in units of constant purchasing power as they have been authorized in IFRS in the Framework, Par 104 (a) in 1989. It states:

“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”

When SA accountants do that they will knowingly maintain about R167 billion per annum in the SA real economy for as long as annual inflation stays at about 5%.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith