Pages

Thursday, 11 August 2011

Valuing monetary items

Measurement of monetary items in the economy

Measurement is determining the particular basis at which monetary items are to be valued and accounted on a daily basis in the functional currency - the legal unit of account for accounting purposes - in an economy under all levels of inflation and deflation. The functional currency is the currency of the primary economic environment in which an entity operates. The functional currency is normally the national (or monetary union) monetary unit which is legal tender in the economy. In dollarized economies the adopted hard currency is the functional currency for accounting purposes.

Entities implement financial capital maintenance in nominal monetary units when they prepare their financial reports in terms of the HCA model. The stable measuring unit assumption is applied to some - not all - items under HCA.  Changes in money´s general purchasing power are not considered sufficiently important to require financial capital maintenance in units of constant purchasing power under HCA as authorized in IFRS.

Monetary items are thus generally not inflation–adjusted. The Chilean banking system is partially indexed using the Unidad de Fomento. Monetary items are also inflation-adjusted in other economies, e.g.  TIPS in the US economy, where HCA is the generally accepted accounting model.

Under CIPPA, i.e. financial capital maintenance in units of constant purchasing power during inflation and deflation, there is no stable measuring unit assumption as authorized in IFRS. All monetary items are thus inflation-adjusted on a daily basis in terms of the Daily Index. Historical monetary items as well as current financial period monetary items are inflation-adjusted. This requires inflation-adjustment of all monetary items in the banking system. Complete coordination in the economy eliminates the cost of inflation completely from the monetary economy when all money is in the banking system and all monetary items outside the banking system are also inflation-adjusted in terms of the Daily Index.

Chile is the country closest to achieving this. HCA is the generally accepted accounting model in Chile.

Nicolaas Smith

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.