Monday, 20 February 2012

Valuing the three basic economic items

Valuing the three basic economic items

Monetary items

(1)                    The real value of the unstable monetary unit (money) and all other unstable monetary items not inflation-adjusted daily in the unstable monetary economy generally changes every day at all levels of inflation and deflation in terms of a Daily Consumer Price Index or daily monetized unit of account, e.g. the Unidad de Fomento in Chile, during low inflation, high inflation and deflation and in terms of the daily US Dollar or other relatively stable foreign currency parallel rate or a Brazilian-style daily Unidade Real de Valor index during hyperinflation.

Bank notes and coins currently (2012) cannot be inflation-adjusted. Inflation and deflation always affect the real value of bank notes and coins. All other monetary items can be inflation-adjusted on a daily basis. 20 to 25 per cent of the broad M3 money supply in Chile is inflation-adjusted daily in terms of the Unidad de Fomento according to the Banco Central de Chile. $ 2.89 trillion of sovereign inflation-linked bonds are inflation-indexed daily worldwide in terms of country specific Daily Consumer Price Indices. Inflation-adjusting the total money supply (excluding bank notes and coins) would eliminate the entire cost of inflation (not inflation) from the monetary economy. This would require complete co-ordination (everyone doing it).

Months of zero annual inflation are rare and generally not sustained for more than a month of two. During hyperinflation the real value of the very unstable monetary unit and all other very unstable monetary items often changes once per day, but, during severe hyperinflation it can change every 8 hours or so. (Hanke – Cato Journal)

Variable items

(2)                    The real values of variable real value non–monetary items may change all the time, e.g. the price of foreign currencies, precious metals, quoted shares, commodities, properties, finished goods, services, raw materials, etc. Variable items are valued on a daily basis in terms of IFRS excluding the stable measuring unit assumption and the cost model in the valuation of property, plant, equipment and investment property after recognition under capital maintenance in units of constant purchasing power (CIPPA). Their historic prices (e.g., of the day before) are updated on a daily basis to the current (today´s) rate in terms of a Daily CPI or daily rate when they are not valued at the current date (today) in terms of IFRS as qualified.

Inflation and deflation have no effect on the real value of non-monetary items. Historic variable items are thus not inflation-adjusted or deflation-adjusted daily. They are updated daily when they are not valued daily in terms of IFRS as qualified.

Constant items

(3)                    Constant real value non-monetary items are always and everywhere (historic and current period constant items) measured in units of constant purchasing power in terms of the current (today´s) Daily CPI or other daily rate.

Financial reporting has to take all three scenarios – occurring simultaneously – into account over time when an entity´s economic activities are accounted daily and financial reports are prepared and presented periodically and accessed or viewed today at the current Daily CPI or other daily rate.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.