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Tuesday, 15 November 2011

The three fundamentally different basic economic items

The three fundamentally different basic economic items

They are defined and described in the order that they appeared in the economy.

A. Variable real value non-monetary items
B. Monetary items
C. Constant real value non-monetary items

A. Variable items

Definition: Variable items are non–monetary items with variable real values over time.

Examples of variable items are property, plant, equipment, inventories, quoted and unquoted shares, raw material stock, finished goods stock, patents, trademarks, foreign exchange, etc. Variable items are everything you see around you generally bought/sold/traded in markets and shops excluding money and anything to do with money, e.g. bank statements, loan statements, etc.

The first economic items were variable items. Their values were not yet expressed in terms of money because money was not yet invented at that time.

B. Monetary items

Definition: Monetary items are money held and items with an underlying monetary nature.

Examples of monetary items are bank notes and coins, bank loans, bank savings, other monetary savings, other monetary loans, bank account balances, treasury bills, commercial bonds, government bonds, mortgage bonds, student loans, car loans, consumer loans, credit card loans, notes payable, notes receivable, etc. Under Historical Cost Accounting monetary items are fixed in nominal terms while their real values change inversely with the rate of inflation, deflation and hyperinflation. The net monetary loss or gain from holding monetary items is not calculated and accounted under HCA. It is required to be calculated in terms of IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation. It is also required to be calculated under financial capital maintenance in unit of constant purchasing power accounting as authorized in IFRS in the original Framework (1989), Par 104 (a) [Conceptual Framework (2010), Par 4.59 (a)] which states:

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

The entire money supply (excluding actual bank notes and coins) can be inflation–adjusted on a daily basis. According to the Banco Central de Chile 20 to 25% of the Chile´s broad M3 money supply is currently inflation–indexed daily in terms of the Unidad de Fomento which is a monetized daily indexed unit of account.

Money has the following three attributes during inflation and deflation:

a. Unstable medium of exchange

b. Unstable store of value

c. Unstable unit of account

Only unstable money and other unstable monetary items´ real values are continuously being eroded by inflation and hyperinflation over time. Inflation and hyperinflation have no effect on the real value of non–monetary items. Deflation increases the real value of only unstable money and other unstable monetary items over time. Deflation also has no effect on the real value of non–monetary items.

C. Constant items

Definition: Constant items are non–monetary items with constant real values over time.

Examples of constant real value non–monetary items are all income statement items as well as balance sheet constant items, e.g. issued share capital, retained earnings, capital reserves, share issue premiums, share issue discounts, revaluation surplus, all other shareholder’s equity items, trade debtors, trade creditors, provisions, taxes payable and receivable, deferred tax assets and liabilities, dividends payable and receivable, royalties payable and receivable, all other non–monetary payables and receivables, etc.

Constant items are fixed in terms of real value while their nominal values change daily in terms of the Daily Consumer Price Index.

Non-monetary items
Definition: Non–monetary items are all items that are not monetary items.

Non–monetary items in today’s economy are divided into two sub–groups:

a)           Variable real value non–monetary items

b)           Constant real value non–monetary items
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