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Friday, 17 September 2010

Constant items defined in IFRS

The definition of constant items is confirmed by the IASB in the Framework by implication.

The fact that certain non-monetary items have constant real non-monetary values is implied by the IASB in the Framework for the Preparation and Presentation of Financial Statements.

“In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8."

IAS Plus, Deloitte. Date: 21st March, 2010 http://www.iasplus.com/standard/framewk.htm

There are no applicable IFRS or Interpretations regarding the capital concepts, the capital maintenance concepts and the valuation of constant items. The explicit and implied definitions of these items in the Framework are thus applicable.

The Framework, Par 102 states that most companies choose a financial concept of capital to prepare their financial reports. An entity’s capital is the same as its shareholders´ equity or net assets when it adopts a financial concept of capital, for example, invested purchasing power or invested money.

Par 103 states that the needs of financial report users should determine the choice of the correct concept of capital by a company. If the users of financial reports are mainly concerned with the maintenance of nominal invested capital or the maintenance of the purchasing power of invested capital then a financial concept of capital should be chosen.

Par 104 states that the concepts of capital stated in Par 102 give origin to the financial capital maintenance concept. Par 104 (a) states:

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

Constant items are non-monetary items with constant purchasing power values.

“It is essential to the credibility of financial reporting to recognize that the recovery of the real cost of investment is not earnings — that there can be no earnings unless and until the purchasing power of capital is maintained.”

US Financial Accounting Standard FAS 33 p. 24
Copyright © 2010 Nicolaas J Smith