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Friday, 23 April 2010

To be or not to be a monetary item, that is the question

Monetary items are incorrectly defined in IAS 21 The Effects of Changes in Foreign Exchange Rates, Par 8 too:

Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.

Not all assets and liabilities to be received or paid in a fixed or determinable number of units of currency are monetary items – per se. Non-monetary items are often paid in a fixed or determinable number of units of currency. Fixed salary, wage and rentals payments do not transform these constant real value non-monetary items into monetary items. Salaries, wages, rentals, etc are constant real value non-monetary items. They are not monetary items. They are simply paid in money as the medium of exchange. They are sometimes paid in a fixed or determinable number of units of currency because they are measured in nominal monetary units under the current Historical Cost paradigm during low inflation and not in units of constant purchasing power. This does not make them into monetary items simply because they are paid in fixed historical cost values. They remain constant real value non-monetary items.
Definition of monetary items

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

Money is the functional currency; i.e., “the currency of the primary economic environment in which the entity operates.” IAS 21 Par 8

Fiat money cannot be declared by statute or by institutional definition to be a non-monetary item. To be money it has to fulfil the three functions of money in an economy: medium of exchange, store of value and unit of account. Trade debtors and trade creditors are defined incorrectly by the IASB, the FASB and PricewaterhousCoopers to be monetary items. They are constant real value non-monetary items. All street vendors in hyperinflationary economies know by experience that paying for a non-monetary item on credit means the value at the date of the sale has to be inflation-adjusted over time, even when they have never been to school. The IASB, the FASB and PricewaterhousCoopers still get this wrong.

Money is a monetary item that is generally accepted as a medium of exchange, store of value and unit of account within an economy. Only an economic item that fulfils all three functions of money at the same time can be the functional currency in a specific economy or monetary union. Fulfilling only two of the three functions does not qualify an item as the functional currency. See Foreign Exchange.

A foreign currency is not the functional currency in a non-dollarized economy since it is not the monetary unit of account.

Money held are bank notes and coins on hand and demand deposits in banks.
People often google "what is the real value of money" and then land up on my other blog. It seems to be not so well understood that inflation always destroys the real value of money over time.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith