If you are standing on the edge of a cliff, moving forward with speed is a bad idea. It is indeed what the current Zimbabwe government is likely to do.

Turning around and going back is a better plan.

What are the real values of items in Zimbabwe? (Right now, we have to agree that we will use money as the unit of account to describe “items”: that is, all items – even pre-monetary items - will be described in monetary terms.)

First, we have to know how many different type of “items” there are in Zimbabwe and why we landed up with more than one type of item. At the basic level there is only one item in any economy, namely real value items. Everything has simply a real value, but, in practice we have three types of “items” in our economy. They came about as follows:

Everyone knows that very long ago our economy was a barter economy. There was no money and all items were non-monetary items (see above). In fact they were (1) variable real value non-monetary items since their real values varied depending on supply and demand. Today’s examples of variable real value non-monetary items are land, buildings, machinery, vehicles, raw materials, finished goods, services, quotes shares, foreign exchange, etc.

Next we invented money and we had (2) monetary items. Obviously, monetary items can only be actual money or accounted values only of money. In the beginning money consisted of actual metal coins and had an intrinsic value. Today all bank notes and bank coins in all economies have no intrinsic values in themselves. Today we have money created by government fiat or decree. We have fiat money. Examples are actual bank notes, bank coins, bank balances, capital amounts of money loans, etc.

Round-about 1300 we introduced the double entry accounting model into our economy which brought about the third item, namely (3) constant real value non-monetary items. Examples are salaries, wages, rent, fees, interest, taxes, dividends, issued share capital, retained income, accumulated losses, provisions, capital reserves, share premiums, share discounts, etc. These items have constant real values.

How come the real values of all these items are hyper destroyed daily in the Zimbabwe economy? As follow:

Variable real value non-monetary items are valued in terms of International Accounting Standards at, for example: fair value, market value, net realizable value, recoverable value, present value and so on. In Zimbabwe you have to value variable real value non-monetary items always at the parallel rate at the date of costing, sales and payment receipt. The costing, sales and trade debtors/trade creditor values relating to these items have to be updated every time the parallel rate changes. In that way no value is destroyed. Basically you keep these values at US Dollar values. When you do not do this, you destroy real value in these items all the time. You obviously have to ignore the Historical Cost Accounting stable measuring unit assumption.

Constant real value non-monetary items have to be valued at the parallel rate too and have to be updated every time the parallel rate changes. When you all do that all the time no value will be destroyed. You only destroy the real value of these items because your accountants follow the stable measuring unit assumption which is what Historical Cost Accounting is based on. In low inflation countries we know that low inflation rates continuously destroy the real value of our money, but we regard the change in the real value our money ( Euros, US Dollars, etc) as of not sufficient importance to change the real values of our constant real value non-monetary items. We destroy them at our annual rate of inflation in all our low inflation countries.

Your accountants do the same to your real values and your companies and the capital in Zimbabwe. But, not at the rate of two per cent per annum in Europe whereby we destroy 51 % of the real value of all our retained income over the next 35 years. You do it very, very quickly in Zimbabwe. You do it at the rate of value destruction as expressed in the parallel rate. That is : 1375 per cent in 2005. You and your accountants destroy your constant real value items extremely quickly.

When all your accountants update all the above constant real value non-monetary items all the time – as allowed under IAS 29 – you will stop destroying their real values.

So, that deals with your non-monetary items in Zimbabwe: to summarise – all non-monetary items have to be updated every time the parallel rate changes. When you all do that all the time no real value is destroyed. When you all fail to do that every time the parallel rate changes, you all destroy the real value in all your non-monetary items all the time.

Now we have to deal with your monetary items, i.e. the Zim Dollar. You are a society and an economy that creates value every day. You do have a banking system. The only way the banking system can work is when a bank lends out money at a real rate of interest. In Zimbabwe the real rate of interest is the following: the parallel rate plus what a bank needs to make a reasonable after tax rate of return. That will depend on the efficiency of the bank. It will most probably be the parallel rate plus 7 to 12 per cent per annum – depending on the bank.

For example: a Zimbabwean commercial bank has to lend Zim Dollars to a business at the parallel rate plus 8 per cent per annum. That means the borrower has to pay back the loan updated at the parallel rate at the date of repayment plus the 8 per cent interest per annum also calculated at the repayment date rate. The Zimbabwean business person takes the Zim Dollars and buys consumer products to resell. This business person updates all non-monetary items in the business at the parallel rate all the time. That includes Trade Debtors when this person sells on credit. The business is a viable business since it sells a product in good demand; the markup and margin allow a net profit to be made. The business person thus receives updated values all the time and pays the bank back at the parallel rate plus 8 per cent per annum – calculated at the parallel rate at the date of repayment. It is very simple to understand: it is the same as dollarizing your economy.

Running your economy at real values does not automatically mean that you will prosper. You have to run profitable businesses (at the parallel rate), you have to maintain those profits at real values (at the parallel rate) and you have to have a stable society with open trade with everybody.

Nick Smith
RealValueAccoutning.Com(The Book) – The next step in our fundamental model of accounting.
realvalueaccounting@yahoo.com