Over the years, economies have suffered many currency crises, soaring interest rates and hyper-inflation. Luckily, in my time as an accountant I have not had to deal with financial statements or other accounting information where the value of money became, well worthless. Runaway inflation for example occurred in Germany in the 1920′s and today it is still present in countries like Zimbabwe. In times of hyper-inflation, accounting standards do give us some guidance. IAS 29 suggests hyperinflation may have several characteristics
1) the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;
2) the general population regards monetary amounts not in terms of the local
currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;
3) sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
4) interest rates, wages and prices are linked to a price index; and
5) the cumulative inflation rate over three years is approaching, or exceeds, 100%.
Without going into too much detail on IAS 29, when such hyperinflation exists, the financial statements have to be restated to a monetary value using some form of price index.
I recently had the good luck to see real financial statements prepared during a hyperinflation period. The accounts were if a German brewery and dated back to 31/12/1923 – long before IAS 29 was even thought about. The inventory figure had 18 digits, which I think is called a quintillion. I cannot imagine what it must have been like to deal with figures like this. Mind you the kinds of figures being thrown around nowadays on sovereign debt are getting close to these kind of numbers. Just out of interest the accounts on 1/1/1924, showed a figure of about 2 million marks – a new mark was issued and pegged to gold I think.
A small delve into economics, sorry. I read this article on the Wall Street Journal about my homeland (well, my dear home too!) and it make me think, well, we not total gobshites! Of course, we’re not, no matter what Fr. Jack (left says!). But in all seriousness, I can’t help but compare what the articles says to my own experience of talking to and helping small Irish businesses. I don’t know anyone who is not worried about the future of their business, but yet they all pulled-up their socks and did what any management accountant would advise – look at your costs, your processes, what you do and so on. I know two businesses who realised they needed to work 3-days weeks for almost a year, but they are now fine again. Others dropped price, or just worked smarter. I also can think of others who just would not adjust their cost structure, prices, staff or anything. Where do you think these guys are? Well nowhere simply. Of those businesses that adapted to survive, they have learned a hard lesson on cost structures, doing things well, adjusting price and looking after customers. Those, like the WSJ article say about Ireland, will be the stronger firms in the future ( I hope ).
I don’t write very often about economics and politics- not really my thing. However, while on holidays I read a great article in the Guardian about the on-going pension problem/debate in the public and private sector. Have a read, I think it is a great summary of the many issues with our future pensions. Here us the link http://m.guardian.co.uk/business/2011/jul/03/pensions-unions-government-young-sacrificed?cat=business&type=article
If you have studied business or economics, you’ll know what an opportunity cost is. Just in case, an opportunity cost is the cost forgone by choosing one course of action over another. I often ask my students ” what is the opportunity cost of who sitting here listening to me? Can you put a money value on it?” Usually one or two of them realise that they could be out working, so they answer with the minimum wage rate, which is a reasonable answer.
Two things prompted me to write this post. First, someone I know was made redundant as a systems trainer a few years ago, due to the role being outsourced. Now, after much failures by the outsourcing company, that same person is back in the company as a contractor earning a tidy daily fee. Why? Well, the outsourcing/redundancy meant a huge body of knowledge was lost from the company, which to cut it short resulted in poor systems training. I wonder how much this mistake actually cost the company? WI had this thought in the back of my mind when I read a post on Marc Lepere’s Blog on the CIMAGlobal website. Marc talks about the opportunity costs of employees. It’s not something I have ever thought about, but I think he is right on the button. Marc’s company have devised too useful concepts called Cost of Replacing Talent® (CORT) and Cost of Loosing Talent®. Taking both together, you can imagine a substantial cost of losing valuable staff. In my example, the cost of loosing talent included a massive knowledge loss, which is a cost that might be hard to put a monetary value on but is a cost. Within the CORT is an estimate of the opportunity cost of replacing staff, which is something like the time in weeks it take the new staff to become effective. This could be up to 30 weeks for senior managers, according to the post. So be careful when putting too much pressure on your staff; losing the good ones costs more than you might think.
I don’t normally delve too much into the world of economics and marketing, but this piece from The Economist (April 15th, 2010) caught my eye.
Antoine van Agtmael, a Dutch investment banker, actually coined the phrase “emerging markets” almost 30 years ago. In this time some of what were emerging markets are now the largest markets in the world – China and India for example. Market knowledge is a must for any business, even small ones, but when a business gets to the global level a detailed knowledge of (and arguably a presence in) all global markets is a must – emerging markets included. Van Agtmael cautions though on the use of the term “emerging markets”. Some markets, for example China, Brazil, South Korea and Mexico, have not only emerged, but upstaged developed economies. For example, the SamSung brand from South Korea is one of the worlds best known electronics brands. Perhaps a mindset change is needed to appreciate the business challenges of some economies which have now well and truly emerged.
Here’s a link to the full article: Schumpeter: An emerging challenge | The Economist.
Over the years, economies have suffered many currency crises, soaring interest rates and hyper-inflation. Luckily, in my time as an accountant I have not had to deal with financial statements or other accounting information where the value of money became, well worthless. Runaway inflation for example occurred in Germany in the 1920′s and today it is still present in countries like Zimbabwe. In times of hyper-inflation, accounting standards do give us some guidance. IAS 29 suggests hyperinflation may have several characteristics
