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Monday, 7 May 2012

Valuation of variable items


Valuation of variable items



Variable items are valued in terms of IFRS, excluding the stable measuring unit assumption, under financial capital maintenance in units of constant purchasing power (CIPPA). They are then updated daily in terms of the Daily CPI when they are not valued daily thereafter. They are valued / accounted in terms of the daily parallel rate or the daily index rate during hyperinflation.



Under financial capital maintenance in units of constant purchasing power (CIPPA) all accounting entries contain four elements:



21      An indication whether the item valued / accounted is



a.      A monetary item (m),

b.      A constant item (c) or

c.           A variable item (v).



22      The value of the item expressed in terms of the functional currency.

23      The date of the accounting entry.

24      The Daily CPI or monetized daily indexed unit of account at the date of the accounting entry during low and high inflation and deflation or the daily parallel or other index rate during hyperinflation.



         Variable items valued in terms of IFRS at Historical Cost as well as all other historical variable item IFRS valuations are updated in ledger accounts and in financial reports and publications in whatever format in terms of the Daily CPI till the next valuation in terms of IFRS because there is no stable measuring unit assumption under CIPPA during inflation and deflation. This is done in order to always reflect the IFRS valuation in terms of the current depreciated or appreciated real value of money over time. Variable items are always updated – per se – in terms of the current daily parallel or other daily index rate during hyperinflation.          

         The fact that specific variable items are valued at Historical Cost in terms of IFRS, e.g. stock valued at the lower of cost or net realizable value, does not mean that the HCA model is being implemented because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power (CIPPA).

        The Framework states that the concept of capital maintenance plus the measuring basis chosen determines the accounting model implemented. Under CIPPA financial capital maintenance is measured in units of constant purchasing power: there is no stable measuring unit assumption under CIPPA. Historical Cost is one of the various measurement bases used under CIPPA. HC valuations are thus always updated daily at the current, today´s, Daily CPI under CIPPA; i.e. the stable measuring unit is never applied.

         Under CIPPA monetary items in ledger accounts and in current period financial reports published during the current accounting period are valued / accounted in  nominal monetary units, but, the net monetary loss or gain is always calculated and accounted: i.e. there is no stable measuring unit assumption as implemented under Historical Cost Accounting. The net monetary loss or gain is not calculated and accounted under HCA because the stable measuring unit assumption is implemented.

       Specific variable items are valued at HC in terms of IFRS, but, then they are continuously updated during inflation, deflation and hyperinflation under financial capital maintenance because there is no stable measuring unit assumption under CIPPA.


Nicolaas Smith

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