Tuesday, 10 July 2012

Measurement of constant items

Measurement of constant items

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1 Definition 

A constant item is a non-monetary item with a constant real value over time that is not generally determined in a market on a daily basis within an entity.

Constant real value non-monetary items are fixed in terms of real value while their nominal values change daily in terms of a Daily CPI or other daily index under financial capital maintenance in units of constant purchasing power (CIPPA).

2 Measurement

Measurement of constant items is the generally accepted accounting practice of determining the monetary amounts at which constant items are to be recognised, valued, carried and accounted on a daily basis in the economy under all levels of inflation and deflation. This involves the selection of the particular basis of measurement. Constant items can only be measured in units of constant purchasing power during inflation and deflation because the stable measuring unit assumption is not applied in their measurement. Constant items are always and everywhere valued in terms of IFRS in units of constant purchasing power by applying the Daily CPI or a monetized daily indexed unit of account at the current (today’s) rate under financial capital maintenance in units of constant purchasing power (CIPPA) during low and high inflation and deflation. Constant items would always and everywhere be valued on a daily basis in terms of a relatively stable foreign currency parallel rate or a Brazilian-style Unidade Real de Valor index rate during hyperinflation.

Financial capital maintenance in nominal monetary units (HCA) and its IFRS–authorized alternative – financial capital maintenance in units of constant purchasing power (CIPPA) – would be one and the same accounting model at permanently sustainable zero inflation. This is proof that financial capital maintenance in units of constant purchasing power (CIPPA) is the logical next step in our fundamental model of accounting.

The IASB defined monetary items in IAS 29 incorrectly as money on hand and items to be paid in money or to be received in money. Most variable real value non–monetary items as well as constant real value non–monetary items are generally received or paid in money as the generally accepted monetary medium of exchange. The fact that the IASB defines non–monetary items as all items in the income statement and all other assets and liabilities in the balance sheet that are not monetary items, after having defined monetary items incorrectly, leads to the wrong classification of some constant real value non–monetary items, notably trade debtors and trade creditors, as monetary items by, for example, PricewaterhouseCoopers in their publication Understanding IAS 29. This results in the net monetary gain or loss generally being calculated incorrectly by companies implementing IAS 29 in hyperinflationary economies.

The definition of non–monetary items as being all items that are not monetary items is a generic definition. It is thus premised by the IASB that there are only two fundamentally distinct items in the economy: monetary and non–monetary items and that the economy is divided into two parts: the monetary and non–monetary economy. IAS 29 and other IFRS are based on this premise of only two fundamentally different items in the economy. This is a false premise.

It is not true that there are only two basic economic items as defined in IFRS. There are three fundamentally different basic economic items in the economy:

1 Monetary items

2 Variable real value non–monetary items

3 Constant real value non–monetary items

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