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Tuesday, 22 March 2011

The statement that inflation erodes the real value of non-monetary items has no substance.

Presently, inflation accounting describes a complete price-level inflation accounting model, namely the Constant Purchasing Power inflation accounting model defined in IAS 29 required by the IASB to be implemented during hyperinflation. It serves to maintain the real values of all non-monetary items – variable and constant real value non-monetary items - by inflation-adjusting them by means of the CPI during hyperinflation which is an exceptional circumstance.
“In a hyperinflationary economy, reporting of operating results and financial position in the local currency without restatement is not useful. Money loses value at such a rate that comparison of amounts from transactions and other events that have occurred at different times, even within the same accounting period, is misleading.” IAS 29.2

Some people believe that there is no doubt that inflation erodes the real value of monetary as well as non-monetary items that do not maintain their real value in terms of purchasing power.

At the time (2008), I agreed. Subsequently it became very clear to me that inflation has no effect on the real value of non-monetary items over time. The understanding of the real value eroding effect of the stable measuring unit assumption is a work in progress. Not inflation, per se, but the implementation of the stable measuring unit assumption during low inflation as it forms part of the HCA model, erodes the real value of constant real value non-monetary items never or not fully updated over time.

There is no substance in the statement that inflation erodes the real value of non-monetary items which do not hold their real value over time. Inflation has no effect on the real value on non-monetary items over time.

"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


HC accounting unknowingly erodes or maintains (please note: not create) the real value of constant real value non-monetary items (please note: not variable real value non-monetary items) depending on whether the  IASB-approved real value eroding traditional HCA model under the very erosive stable measuring unit assumption is implemented during non-hyperinflationary periods for an unlimited period of time during indefinite inflation or the IASB approved real value maintaining Constant Item Purchasing Power Accounting model under which the stable measuring unit assumption is rejected at all levels of inflation and deflation for an unlimited period of time.

Nicolaas Smith

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