Friday, 24 February 2012

Valuation of monetary items

Valuation of monetary items

         Accounting values and accounts unstable monetary items on recognition at their nominal values in nominal monetary units under all accounting models – including CIPPA. Monetary items not inflation-adjusted daily over time (this currently – in 2012 – always includes all bank notes and coins) are then valued daily in fixed nominal monetary units (unstable in real value) only during the current financial period. The net monetary loss or gain is, logically and necessarily, calculated and accounted under CIPPA which implements financial capital maintenance in units of constant purchasing power. The net monetary loss or gain is also calculated and accounted as required in IAS 29 Financial Reporting in Hyperinflationary Economies. IAS 29 is not a departure from, but an extension to Historical Cost Accounting. All historical monetary items are inflation-adjusted daily in terms of the current (today´s) Daily CPI thereafter, i.e. once they are reported in historical financial reports, whether for comparison purposes or not. The historical net monetary loss or gain (a constant real value non-monetary item once accounted) is thereafter measured in units of constant purchasing power in terms of the current (today´s) Daily CPI or daily rate.

Low inflation, high inflation, deflation and hyperinflation determine the always current unstable real value of the unstable monetary unit (US Dollar, Euro, British Pound, Bolívar, Yen, Yuan, etc.) and other unstable monetary items within the monetary economy. This is because of the monetary nature of money.

The real value of money held and other unstable monetary items changes equally (all unstable monetary units are affected evenly) on a daily basis at all levels of inflation and deflation. The change is quantified with the daily publication of the Daily CPI or monetized daily indexed unit of account value during low inflation, high inflation and deflation and the daily US Dollar or other hard currency parallel rate or Brazilian-style daily Unidade Real de Valor during hyperinflation. The daily black market or parallel US Dollar exchange rate or street rate is generally constantly (24/7, 365 days a year) available in a hyperinflationary economy.

Nicolaas Smith

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