Pages

Wednesday, 11 January 2012

IFRIC 7 relates to the stable measuring unit assumption and not inflation

IFRIC 7 relates to the stable measuring unit assumption and not inflation

IFRIC Interpretation 7, Par. 3

Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies states:

‘Consensus

In the reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency, not having been hyperinflationary in the prior period, the entity shall apply the requirements of IAS 29 as if the economy had always been hyperinflationary. Therefore, in relation to non-monetary items measured at historical cost, the entity’s opening statement of financial position at the beginning of the earliest period presented in the financial statements shall be restated to reflect the effect of inflation from the date the assets were acquired and the liabilities were incurred or assumed til the end of the reporting period. For non-monetary items carried in the opening statement of financial position at amounts current at dates other than
those of acquisition or incurrence, that restatement shall reflect instead the effect of inflation from the dates those carrying amounts were determined until the end of the reporting period.’ 

Milton Friedman stated more than 50 years ago:

‘Inflation is always and everywhere a monetary phenomenon.’

Profs Gucenme and Arsoy state:

 ‘Purchasing power of non monetary items does not change in spite of variation in national currency value.’

Conclusion to be reached from Milton Friedman´s and Profs Gucenme´s and Arsoy´s statements:

Inflation has no effect on the real value of non-monetary items. It is impossible for inflation to have any effect on non-monetary items. Inflation only has an effect on money and other monetary items. Nothing else.
What IFRIC 7 is referring to is not the effect of inflation on non-monetary items, but, the effect of the stable measuring unit assumption, the underlying principle of Historical Cost Accounting, on non-monetary items.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.