Concept of a constant real value non–monetary item derived in IFRS

Concept of a constant real value non–monetary item derived in IFRS

Owners´ equity (capital) is defined as a non-monetary item in IAS 29, Financial Reporting in Hyperinflationary Economies in various paragraphs including paragraphs 24 and 25. All items in owners´ equity are thus non-monetary items.

In the original Framework for the Preparation and Presentation of Financial Statements (1989), Par. 104 (a) [now the Conceptual Framework for Financial Reporting (2010), Par. 4.59 (a)] it is stated:

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

 Financial capital maintenance can thus be measured in units of constant purchasing power over time in terms of IFRS under the Constant Item Purchasing Power (CIPP) paradigm. The original Framework (1989), Par. 104 (a) authorized the constant item purchasing power principle on which the CIPP paradigm is based. The CIPP paradigm is fundamentally different from the Historical Cost (HC) paradigm. The stable measuring unit assumption is applied in the valuation of, for example, owners´ equity and other items measured in nominal monetary units under the HC paradigm. The stable measuring unit assumption is never applied under financial capital maintenance in units of constant purchasing power; i.e., under the Constant Item Purchasing Power paradigm. Financial capital maintenance in units of constant purchasing power (Constant Item Purchasing Power Accounting) is fundamentally different from financial capital maintenance in nominal monetary units (Historical Cost Accounting).

 The real value of financial capital can thus be maintained constant in units of constant purchasing power by measuring financial capital maintenance in units of constant purchasing power over time. The constant real non-monetary values of all items in owners´ equity would be maintained constant when financial capital is maintained in units of constant purchasing power over time.

 Issued share capital and all other items in owners´ equity are thus constant real value non-monetary items. The concept of a constant real value non–monetary item is thus derived in IFRS which are principles-based standards.

Nicolaas Smith

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