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Friday, 16 March 2012

Split of non-monetary items derived in IFRS

Split of non-monetary items derived in IFRS

It is generally accepted that there are only two basic, fundamentally different economic items in the economy; namely, monetary and non–monetary items and that the economy is divided in the monetary and non–monetary or real economy. However, non–monetary items are not all fundamentally the same. The split of non-monetary items is implied 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.

The original Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010), Par. 4.59 (a)] furthermore states: ‘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 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 is fundamentally different from financial capital maintenance in nominal monetary units (Historical Cost Accounting).

The real value of financial capital can thus be maintained in units of constant purchasing power by measuring capital maintenance in units of constant purchasing power over time. The 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.

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 implied in IFRSs, which is logical since IFRSs are principles-based standards.

Measurement in units of constant purchasing power is not simply the restatement of items in the statement of financial position and the statement of comprehensive income from financial reports produced under whatever capital maintenance model as stated by Gamble. There are actually economic items with constant real values over time; namely, constant real value non-monetary items. Examples include all items in owners´ equity, all income statement items, salaries, wages, pensions, borrowing costs, interest, bank charges, fees, rentals, trade debtors, trade creditors, all other non-monetary payables and receivables, provisions, etc.

However, not all non-monetary items are measured in units of constant purchasing power in terms of Par. 104 (a).

Non–monetary items which are not constant real value non–monetary items are thus variable real value non–monetary items valued in terms of IFRS, e.g. property, plant, equipment, inventory, shares, etc. Their real values vary over time. They are valued at net realizable value, fair value, present value, recoverable value, etc. in terms of IFRS – excluding the stable measuring unit assumption – because the stable measuring unit is never applied under financial capital maintenance in units of constant purchasing power.

Conclusion: The split of non-monetary items in variable and constant real value non-monetary items is derived in IFRS.

There are thus three fundamentally different, basic economic items in the economy:

(a)               Monetary items

(b)               Variable real value non–monetary items

(c)               Constant real value non–monetary items

Nicolaas Smith

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