New Theory for Saving the International Economics
Author's Name:
Dr. Tamer Momtaz (DBA, MBA) - Deputy Manager - Arab African International Bank.
E Mail:
Key words:
Inflation, financial statements, inflation Provision, saving the international economy, bankruptcy, Overcome the inflation.
Introduction
The value of money decreases by the same value which the prices increase, accordingly there should be an “Inflation Provision“ deducted from the profit before taxes.
If The Governments refuse to reduce taxes, there will be an alternative solution to pay the full taxes but it must be recognized as retained earnings with the same value of inflation provision.
It is worth mentioning that this Theory does not require any legislations or laws and does not violate the Generally Accepted Accounting Principles and fully in the authority of the enterprise’s management.
I discussed this theory with :
<!--Members of the International Accounting Standards – IFRS in London on 25 October 2012 .
<!--Egyptian Americans Scientists 25 December 2012 .
<!--Cairo University20 May2012 & 28 December 2013.
They had acknowledged the theory and said that it will protect the global economies especially the countries that suffer from inflation.
I have already applied my theory in practice on Egypt and on the Egyptian companies, Egypt was the first case study and I intend to apply the theory later on other countries that suffer from inflation.
Inflation by Country
There are 102 countries suffering from inflation that varies between 3% to 56%, the matter that would lead to their bankruptcy.
The impact of the price increase on the companies and how it affects the company's ability to re-transfer the money back to reproduction requirements:
1- The collapse of local currency due to inflation might not allow them to buy (import) any other raw materials for re-production cycle, and the prices would increase.
2- Prices would increase more and more due to the low supply of goods and services in the market.
3- As the bankrupted company will stop paying its obligations ( due money) to other companies it increases the possibilities of the these companies to go bankrupted too, Due to ( based on ) the buying and selling relations.
4-Unemployment rates will increase.
5- The bankruptcy of the companies would lead eventually to the bankruptcy of the whole economy of the country, as the inflation eats up any efforts.
6- It would lead to the spread of diseases and the increase of poverty rate.
7- This will put pressure on the developed countries that provide economic aid or .... This will put pressure on the developed donor countries that provide aid .
8- It might lead to a turmoil or economic failure .
Example :
A company owns average of 1,000,000 EGP during the year in the form of cash and receivables.
The raw materials prices increased by 20% and this result frominflation,The Companycannot buy raw materials anymore, which means that there is a loss of 200,000L.E that must be accounted for.
The company distributes profits in the end of the year, it imagine that this is a real profit, but when we look at the profit , we can divide it into two items:
1- Real profit results from the activity.
2- False profit results from assets. This means that we distribute our assets to the shareholders every year.
Thus year by year the assets will disappear eventually.This is the secret behind bankruptcy of all inflated economies.
“Equation“
Inflation Provision =Annual average of (Cash + Accounts Receivable + prepaid expenses) – (Accounts Payable + Debt) * inflation rate.
- Inflation rate varies from one industry to another.
In case we have a profit500,000 L.E, we distribute all profits, but with the new theory we will distribute the real profit only 300,000L.E and we will keep the other part which is 200,000 L.E that won’t be distributed.
The application of this theory does not require any regulations or special laws,Because the management is (the company’s managers) in charge of controlling the profit distribution.
If the government accepts the theory, It is necessary to reduce the tax on the profit because the profit will go down .
If we assume that the tax difference will be 10,000 L.E, the government won’t pay this sum of money to the companies, but instead it will buy share in a new factory which will be built in the districts which are ( are not very popular for investors) not very appealing ( attractive) to the investors .
By doing so, the government will redraw the map of investments and consequently it will redraw also the map of populations.
This type of share cannot be sold before 10 years. It is not a big deal ( not a problem) if the government rejects this solution, because in this situation the companies will pay the tax but won’t allow the distribution of all the profit as I had mentioned above.
we can overcome the inflation:
1- The companies will not close down because of bankruptcy.
2- There won’t be shortage of products in the market, so the prices will go down.
3- The number of companies will increase as they share with the difference of tax ,This will increase the supply in the market and help bringing the prices down.
Thus, We will get stability in the value of money as it will not deteriorate, So the price of products won’t increase.
Now we can overcome the inflation.
Now we can save 102 countriesfrom bankruptcy
