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Friday, 20 August 2010

Statement regarding inflation destroying the real value of non-monetary items have no substance at all.

After 2008 it became very clear to me that inflation is only a monetary phenomenon and can only destroy the real value of money and other monetary items.

It is very clear that inflation has no effect on the real value of non-monetary items as Milton Friedman, the late American Noble Laureate stated so famously: "Inflation is always and everywhere a monetary phenomenon." It is impossible for inflation per se to destroy the real value of any non-monetary item ever.

I am not the only person stating and understanding that. This is what two Turkish academics state:

“Purchasing power of non monetary items does not change in spite of variation in national currency value.”

Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.

http://www.mufad.org/index2.php?option=com_docman&task=doc_view&gid=9&Itemid=100

The statement that inflation destroys the real value of non-monetary items that do not hold their real value has no substance at all. Just like the statement that valuing items in units of constant purchasing power makes no difference to the economy as well as the statement that inflation does the destroying in companies´capital and profits and not accountants.

The statement correctly confirms that there are two types of non-monetary items. Those that hold their real values in terms of purchasing power and those that do not hold their real values in terms of purchasing power under HCA during low inflation; i.e., as a result of the stable measuring unit assumption. These are constant real value non-monetary items incorrectly measured in nominal monetary units instead of in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) in 1989 which states:

"Financial capital maintenance can be measured in nominal monetary units or units of constant purchasing power."

The IASB only makes a distinction between monetary and non-monetary items. The stable measuring unit assumption allows the IASB to side-step the split between variable and constant real value non-monetary items.

Copyright © 2010 Nicolaas J Smith