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Wednesday, 19 January 2011

Conflict in IFRS

There is a conflict with the continuous financial capital maintenance in units of constant purchasing power concept as stated in the Framework, Par 104 (a) when IFRS treat constant real value non-monetary items like monetary items or variable real value non-monetary items, e.g. treating trade debtors and trade creditors like monetary items instead of constant real value non-monetary items. The only way the financial capital concept of continuously measuring financial capital maintenance in units of constant purchasing power in terms of the provision in the Framework, Par 104 (a) can be correctly implemented, is with the correct treatment of all constant items as constant items and not as monetary or variable items. The incorrect treatment of constant items as monetary or variable items in terms of IFRS would lead to the incorrect calculation of the Net Monetary Loss or Gain from holding monetary items as required when measuring financial capital maintenance in units of constant purchasing power in terms of the Framework, Par 104 (a) (Constant ITEM Purchasing Power Accounting) during low inflation and deflation and as required in IAS 29 (Constant Purchasing Power Accounting) during hyperinflation.

The crucial factor is the correct definition of monetary items because non-monetary items are correctly defined in IAS 29 as all items that are not monetary items. When the definition of monetary items is wrong – as it is under IAS 29 and IAS 21 – then the calculation of the net monetary loss or gain would be wrong as it is under current IFRS, namely in terms of IAS 29 and IAS 21. Monetary items are money held and other items with an underlying monetary nature. Monetary items are not items to be received or paid in money as stated in IAS 29. All items – monetary and non-monetary items - are normally received or paid in money.

Nicolaas Smith


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