Accountant you destroy your coÂ´s retained income

Accountant you destroy your coÂ´s retained income - Printable Version

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Accountant you destroy your coÂ´s retained income - Nick Smith - 06-15-2007

RealValueAccounting.Com - The Next Step in Our Fundamental Model of Accounting

A free download of the book is available at the Social Science Research Network at http//ssrn.com/abstract=946775

Abstract

Historical Cost Accounting is the global generally accepted basic accounting model. The International Accounting Standards Board recognizes only two instead of three economic items

1. Monetary items (monetary items and certain non-monetary items classified as monetary items â in terms of the IASB definition of monetary items).

2. Non-monetary items variable real value non-monetary items valued, for example, at fair value, market value, present value, net realizable value, recoverable value - and Historical Cost items based on the stable measuring unit assumption which makes these Historical Cost items equal to (1) monetary items.

The split between variable and constant real value non-monetary items is thus ignored by the IASB as a result of the implementation of the stable measuring unit assumption - the cornerstone of the Historical Cost Accounting model - whereby it is accepted in low cash inflationary economies that the functional currency's internal real value is constantly being destroyed by cash inflation - but, this destruction of real value is regarded as of not sufficient importance to adjust the real values of constant real value non-monetary items in the financial statements.

They are valued at Historical Cost which results in their destruction at the rate of inflation/hyperinflation year after year when they are not updated at all or not fully updated. This destruction commenced in about the year 1300 when the double entry accounting model was introduced.

Real Value Accounting

Three economic items

I. Monetary items (only money held and accounted monetary values pertaining only to money)

II. Variable real value non-monetary items (the same as under Historical Cost Accounting excluding the stable measuring unit assumption).

III. Constant real value non-monetary items (The Third Economic Item) constantly having been and being destroyed at the rate of inflation and hyperinflation when they are not updated at all or not fully updated in all entities with double entry accounting.

Real Value Accounting stops this destruction.

Real Value Accounting identifies inflation's second consequence, namely, its non-monetary consequence called Historical Cost Accounting inflation.

The stable measuring unit assumption is revoked under Real Value Accounting.

A free download of the book is available at the Social Science Research Network at http//ssrn.com/abstract=946775

Nicolaas Smith
realvalueaccounting@yahoo.com

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- Muhammad Amir - 06-20-2007

What do you mean by this subject "Accountants you destroy the wealth of nations"

- Nick Smith - 06-21-2007

Retained income is a constant real value non-monetary item valued at Historical Cost which makes it subject to the destruction of its real value by cash inflation â exactly the same as in cash. It is forbidden to update Retained IncomeÂ´s nominal value under the rules of the Historical Cost Accounting model in low inflation economies.

This is the immensely destructive result in the world economy of the implementation of the stable measuring unit assumption.

Accountants in all low inflation economies assume that money is stable in real value, but, only for the purpose of valuing constant real value non-monetary items; that is, changes in the moneyÂ´s general purchasing power are not considered sufficiently important to require adjustments to the nominal values of constant real value non-monetary items in the basic financial statements.

Hundreds of billions of US Dollars in Retained Income real value have been destroyed every single year in the past and are this year being destroyed in the world economy.

Companies are free to revoke this very destructive stable measuring unit assumption which you accountants now only apply in the valuation of constant real value non-monetary items.

Adopting the Real Value Accounting model will allow companies to maintain billions of US Dollars in Retained Income real value in the world economy for an unlimited period of time - all else except inflation being equal.

This will have an important and sustained impact on economic growth in the world economy for an unlimited period of time - all else except inflation being equal.

At the moment you accountants are destroying hundreds of billions of US Dollars in retained income real value year in and year out. It is a fact. No-one can deny it.

If you are an accountant and your company has retained income in its balance sheet then you are desroying the real value of that retained income at the rate of inflation. You are free to revoke the stable measuring unit assumption. You will gain your company the average retained income balance per annum times the average annual inflation rate in real value for an unlimited period of time - all else except inflation being equal.

You are free to implement Real Value Accounting instead of Historical Cost Accounting. International Accounting Standards do not prescribe which basic accounting model has to be used. It simply notes that Historical Cost Accounting is the most widely used by companies.

- Nick Smith - 06-21-2007

Do you agree that as accountants you destroy the wealth of nations? Do you understand that? Can you see that it is true?

- Nick Smith - 06-22-2007

Can you see that you as your companyÂ´s accountant are destroying your companyÂ´s retained income right now at the rate of inflation because you implement the stable measuring unit assumption?

You are free to implement Real Value Accounting.

What will you gain from revoking the stable measuring unit assumption?

Here is the value for your company take the average value of your retained income in your balance sheet for the last 12 months and multiply it by the average increase in inflation over the last 12 months. For example for every USD 1 million in average retained income at an annual inflation rate of 2% implementing Real Value Accounting is worth USD 20 000 for you for an unlimited period of time - all else except inflation being equal. Over the next 30 years that would be worth USD 600 000 to your company.

Obviously for every USD 1 Billion of retained income implementing Real Value Accounting would be worth USD 20 million immediately and USD 600 million over the next 30 years.

Makes you think, doesnÂ´t it?

- Nick Smith - 06-26-2007

Historical Cost Accounting Inflation on Wikipedia

http//en.wikipedia.org/wiki/Inflation#Historical_Cost_Accounting_Inflation

- Astute Accountant - 06-28-2007

Yes Nick, this really is a short coming of historical cost accounting that it doesnât take account of inflation and does assume that the currencies of the countries remain stable.

- Nick Smith - 06-28-2007

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Astute Accountant
 Yes Nick, this really is a short coming of historical cost accounting that it doesnât take account of inflation and does assume that the currencies of the countries remain stable.
<hr height="1" noshade id="quote"></blockquote id="quote">

It destroys USD 30 Billion in the real value of just 30 companies in the US every single year. Yes, USD 30 Billion in only 30 companies. Obviously the 30 Dow companies. Each and every year as it has been doing for the last 600 years in all companiesÂ´ retained income balances.

I estimate, conservatively, that accountants world wide destroy at least USD 200 Billion in the real value of companiesÂ´ retained income balances each and every year. Retained income can be declared as dividends. So accountants destroy at least USD 200 Billion in shareholder value each and every year.

Any company can freely revoke the stable measuring unit assumption.

The IASBÂ´s International Accounting Standards and International Financial Reporting Standards do to prescibe which basic accounting model has to be used.

They only state

âIn most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued.â

No-one stops you from revoking the stable measuring unit assumption.

It is easy to see what your company will gain per annum your companyÂ´s average annual retained income times the average annual inflation rate.

- Nick Smith - 06-28-2007

Unpacking the Audit Report

Should the Audit Report specify the value destroyed in Retained Income by the implementation of the stable measuring unit assumption?

âIn most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be revalued.â Â¹

The International Accounting Standards Board (IASB) only recognizes two economic items

1.) Monetary items defined as âmoney held and items to be received or paid in money;â and

2.) Non-monetary items All items that are not monetary items.

Non-monetary items include variable real value non-monetary items valued, for example, at fair value, market value, present value, net realizable value or recoverable value.

They also include Historical Cost items based on the stable measuring unit assumption.

One of the basic principles in accounting is âThe 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.â Â²

This makes these Historical Cost items equal to monetary items in the case of companiesÂ´ Retained Income balances and the issued share capital values of companies with no well located and well maintained land and/or buildings or other variable real value non-monetary items able to be revalued at least equal to the original real value of each contribution of issued share capital.

Retained Income is a constant real value non-monetary item valued at Historical Cost which makes it subject to the destruction of its real value by cash inflation â exactly the same as in cash.

It is an undeniable fact that South Africaâs functional currencyâs internal real value is constantly being destroyed by cash inflation in the case of our low inflationary economy, but this is not considered important enough to adjust the real values of constant real value non-monetary items in the financial statements - the universal stable measuring unit assumption.

The combination of the Historical Cost Accounting model and low inflation is thus indirectly responsible for the destruction of the real value of Retained Income equal to the annual average value of Retained Income times the average annual rate of inflation. This value is easy to calculate in the case of each and very company in South Africa with Retained Income. It is also possible to calculate this value for all companies in the world economy with Retained Income.

It is broadly known that the destruction of the internal real value of the monetary unit of account is a very important matter and that inflation thus destroys the real value of all variable real value non-monetary items when they are not valued at fair value, market value, present value, net
realizable value or recoverable value.

But, everybody suddenly agrees, in the same breath, that for the purpose of valuing Retained Income - a constant real value non-monetary item - the change in the real value of money is not regarded as important to update the value of Retained Income in the financial statements. Everybody suddenly then agrees to destroy hundreds of billions of Dollars in real value in all companiesÂ´ Retained Income balances all around the world.

Yes, inflation is very important!

All central banks and thousands of economists and commentators spend huge amounts of time on the matter. Thousands of books are available on the matter. Financial newspapers and economics journals dedicate thousands of columns to the fight against inflation.

But, when it comes to constant real value non-monetary items, it doesnât seem as if inflation is important. We happily destroy hundreds of billions of Dollars in Retained Income real value year in year out.

However, when you are operating in an economy with hyperinflation (perhaps only Zimbabwe at the moment with 3 713% inflation), then we all agree that you have to update everything in terms of International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies. You have to update variable AND constant real value non-monetary items.

But, ONLY as long as your annual inflation rate has been 26% for three years in a row adding up to 100% - the rate required for the implementation of IAS 29.

Once you are not in hyperinflation anymore, for example, 15% annual inflation for as many years as you want, then you are not allowed to update constant real value non-monetary items any more. Then you must destroy their real value again â at 15% per annum. Or 7.0% per annum in the case of South Africa (April 2007).

For example

Shareholder value permanently destroyed by the implementation of the Historical Cost Accounting model in Exxon Mobil's Retained Income during 2005 exceeded $4.7bn for the first time. This compares to the $4.5bn shareholder real value permanently destroyed in 2004 in this manner. (Dec 2005 values).

The application by BP, the global energy and petrochemical company, of the stable measuring unit assumption in the accounting of their Retained Income resulted in the destruction of at least $1.3bn of shareholder value during 2005. (Dec 2005 values).

Royal Dutch Shell Plc, a global group of energy and petrochemical companies, permanently destroyed $2.974 billion of shareholder value during 2005 as a result of the application of the stable measuring unit assumption in the accounting of their Retained Income. (Dec 2005 values).

Should this value be reflected in the financial statements? Maybe it should.

Nicolaas Smith

Footnotes

Â¹ International Accounting Standards Committee, (1995), International Accounting Standard 1995, London, IASC, Page 502
Â² Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York Harcourt Brace Javonovich, Inc. Page 429.

- Nick Smith - 06-28-2007

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Nick Smith
 [quote]Originally posted by Astute Accountant
 Yes Nick, this really is a short coming of historical cost accounting that it doesnât take account of inflation and does assume that the currencies of the countries remain stable.
<hr height="1" noshade id="quote"></blockquote id="quote">

That is easy to say in the low inflation world.

In Zimbabwe this single stable measuring unit assumption is destroying a whole economy of 12 million people - this very moment as I am writing here.

And not a single one of them understands it.

Imagine, an accounting assumption destroying a country.

Osama Bin Laden would give anything for the power of the stable measuring unit assumption.

Real Value Accounting stops the power of the stable measuring unit assumption to destroy any value at all in all non-monetary items under any level of inflation; from 0.01 to 1000 000 %.

http://http//en.wikipedia.org/wiki/Historical_cost#Historical_cost_principle

- Nick Smith - 06-28-2007

"Yes Nick, this really is a short coming of historical cost accounting that it doesnât take account of inflation and does assume that the currencies of the countries remain stable."

Your answer is the typical accountantÂ´s answer everyone is doing it, so what.

I am going to bring it to everyoneÂ´s notice how many hundreds and hundreds of billions of USDollar are being destroyed by accountants who do not even know that they are doing it.

Imagine. Hardly any accountant even know that he or she is doing this.

- Nick Smith - 07-03-2007

.

- Nick Smith - 07-27-2007

Interpretation about your bookStandard Header|Full Message ViewCemal KÃÃÃKSÃZEN <-----------@spk.gov.tr>ViewMonday, October 17, 2005 121115 PMTorealvalueaccounting@yahoo.com
Cc
RealValueAccounting Com(The Book) Nick Smith Not.doc (27KB); Market Cap-Float Ratio As of 30 Sept.xls (61KB)
Find

"Dear Mr. Smith,
As we have talked on the phone, you can find my interpretation about your book, attached to this e-mail.
Please do not hesitate to contact for any point.
Best regards,

http//www.cmb.gov.tr/aboutus/organization/msd.html Cemal KÃÃÃKSÃZEN, Ph.D.

Head of Accounting Standards Department

Capital Markets Board of Turkey

phone +90 (312) 292 80 50- 51

fax +90 (312) 292 90 00

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Dear Nick Smith,

I examined your book and understood that Real Value Accountingâ¢ is based on the continuous updating of non-monetary units in terms of the Consumer Price Index to todayâs real value.

Theoretically, '''''I totally agree with you.''''' But, as you know, there is a trend toward the acceptance of International Accounting Standards and International Financial Reporting Standards issued by the International Accounting Standards Board all over the world. For example, the International Organization of Securities Commissions (IOSCO) recommends harmonization of national accounting standards with IAS and IFRS. Also, the European Union introduced the requirement that from 2005 onwards, all listed companies have to prepare their consolidated accounts in accordance with IAS and IFRS adopted for application within the European Community. Considering international developments and as a candidate country for full membership, Turkey has issued a communiquÃ© involving all IAS and IFRS and began application of them from the beginning of 2005 (As you know, we began application of IAS 29 in 2003).

'''''In this regard, we can change over to real value accounting when there is a change in IAS/IFRS toward real value accounting or there is a trend toward real value accounting all over the world.'''''

Regarding to tax regulation, I want to emphasize that tax regulation required restatement of assets and liabilities according to inflation (in terms of IAS 29) for the date of 31.12.2003 but taxes were not taken according to restated values in 2003. In 2004, financial statements were restated and taxes were taken based on restated values. In 2005, tax authority declared that high inflation period has ended, so entities did not do restatement according to inflation in first, second and third quarter of 2005. At the end of 2005, both Board and tax authority will evaluate economic conditions again and decide whether there is a need to restatement according to inflation.

Lastly, you stated in your book âpublicly held companies and capital market institutions must account for perhaps an estimated 80 percent of the Turkish economyâ. Unfortunately, I couldnât give such statistical information. Besides, I attached a file that includes information about market value of publicly held companies. As you can see in that file, total market value of publicly held companies is approximately $ 174.3 billion and market value of floating part is about $ 54 billion. Total portfolio value of the investment funds is about $ 20 billion where brokerage firms have an estimated market value of $ 2 billion.

On the other hand, I can say that when there is hyperinflation in terms of IAS 29, with some exceptions (small firms), most of the Turkish companies have to restate their assets and liabilities according to regulation of the CMB and the tax authorities.

Best regards."