Constant Item Purchasing Power Accounting - CIPPA

Accounting values everything that happens in the economy on a daily basis

2012-02-17T11:29:00.001Z

Accounting values everything that happens in the economy on a daily basis

Financial reporting is thevaluing, recording, classifying, summarizing and reporting of economictransactions and events of the three basic economic items in terms of an unstabledepreciating functional currency during all levels of inflation and an unstableappreciating functional currency during deflation.

Accounting is the daily valuation and recording of an entity´s economicactivities.

Accounting always deals with economic values on a daily basis when anentity´s daily economic activities are accounted.

Financial reporting is a real net asset valuation of an entity on aspecific day in terms of a Daily Consumer Price Index or daily monetizedindexed unit of account, e.g. the Unidadde Fomento in Chile during low inflation, high inflation and deflation or adaily rate, for example the US Dollar parallel rate or a Brazilian-style Unidade Real de Valor daily index rate during hyperinflation. The realnet asset value of an entity is reported in financial terms by means ofvaluations of the three economic items in terms of IFRS by means of theimplementation of the practice of financial reporting.

A statement of financial position (a financial report) is preparedperiodically reporting the real net asset value (not the real market value orthe real intrinsic value) of an entity on a specific day, e.g. the end of amonth, the end of a quarter, the end of six months, the end of a financial yearor sometimes a longer financial period.

Financial reporting is a financial report relating to an instant in anentity´s economic activity. A report about the real net asset value of anentity on one single day: on the date of the financial report in terms of theDaily Consumer Price Index or daily rate on that day when the financial reportis accessed or viewed on that day under capital maintenance in units ofconstant purchasing power (CIPPA).

The next day, and every day thereafter, the real net asset value of theentity is generally different because the daily valuations of variable realvalue non-monetary items have changed, the entity has created more constantreal value in the form of constant real value non-monetary net income, hassuffered a constant real value non-monetary net loss or extra capital or otherresources have been contributed by shareholders or other third parties. Theentity is a going concern and its real net asset value generally changes dayafter day.

However, the real net asset value of the entity as reported in thestatement of financial position on the date of the report stays constant inreal value (not in nominal value during inflation and deflation) for anindefinite period of time with reference to the date of the financial report.But, the real value of the unstable monetary unit of account (the functionalcurrency), as represented by the Daily CPI or monetized daily indexed unit of accountin a non-dollarized economy has changed as evidenced by the daily nominal changeof the index value during all levels of inflation and deflation. Thus, allitems in a historic statement of financial position and all historic financialreports have to be valued at the current, i.e. today´s, Daily CPI or daily rateunder capital maintenance in units of constant purchasing power (CIPPA).

Economic items are valued or measured whenever economic transactions andevents are accounted. Financialreporting under capital maintenance in units of constant purchasing power doesnot simply report on what took place in the past in nominal historical costterms.Accounting is not just a scorekeeping exercise of what happened in the past.Accounting values everything that happens in the economy on a daily basis.

The three fundamentally different basiceconomic items in the economy, namely, monetary items, variable items and constantitems, have economic values expressed in terms of unstable money; i.e. the unstablemonetary unit of account. Economic transactions and events involving thesethree basic economic items are accounted in an organized manner when a doubleentry accounting model is implemented: journal entries, general ledgeraccounts, trial balances, cash flow statements, income and expenses in theincome statement, assets and liabilities in the statement of financial positionplus other financial, management and costing reports.

Accounting entries are valuations of the economic items (the debit itemsand the credit items) being accounted.

Nicolaas Smith

Measurement myths in IFRS

2012-02-16T17:16:00.002Z

Measurement myths inIFRS

1. Financial capital maintenance can be measured in nominal monetary units.

This was originally authorized in the Framework (1989), Par. 104 (a)[now Conceptual Framework (2010), Par. 4.59 (a)] which states:

‘Financial capital maintenance can bemeasured in either nominal monetary units or units of constant purchasingpower.’

It is impossible to maintain the real value of capital in nominalmonetary units during low inflation, high inflation or hyperinflation per se. It is only possible in the single casewhere an entity always invests 100 per cent of the updated real value of allcontributions to shareholders´ equity in revaluable fixed assets (revalued ornot) with an equivalent updated fair value which is most probably only the casein hotel, hospital and other property-intensive entities.

In the vast majority of cases the stable measuring unit assumption (notinflation - as generally accepted) erodes the real value of that portion ofshareholders´ equity (e.g. total retained earnings) never maintained constantunder Historical Cost Accounting with sufficient revaluable fixed assets(revalued or not) currently amounting to hundreds of billions of USD of constantitem real value eroded in the world´s capital investment base each and everyyear for as long as HCA is implemented as the global, traditional accountingmodel. (See the ongoing financial crisis).

2. Companies´ invested capital andretained earnings are eroded by inflation.

Inflation has no effect on the real value of non-monetary items.

‘Purchasing power of non monetary items does not change in spite ofvariation in national currency value.’

Gucenme, U.and Arsoy, A. P. (2005). Changesin financial reporting in Turkey, Historical Development of InflationAccounting 1960 – 2005. Special Issue Accounting for the Global and the Local: The Case of Turkey. Critical Perspectives on Accounting, Volume 20,Issue 5, July 2009, p. 568–590.

The erosion of companies´ capital and retained profits is caused by the implementationof the stable measuring unit assumption as part of the traditional HCA modelduring inflation.

3. Changes in the purchasing power of money are not sufficiently importantto require CapitalMaintenance in Units of Constant Purchasing Power.

This is the stable measuring unit assumption as authorized in IFRS as part of the authorization of the Historical Cost Accounting model in the original Framework (1989), Par. 104 (a).

Changes in the purchasing power of unstable money logically requirefinancial Capital Maintenance in Units of Constant Purchasing Power during lowand high inflation, hyperinflation and deflation.

Nicolaas Smith

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

Inflation is generally paying more money for the same real value.

2012-02-15T12:12:00.002Z

Inflation is generally paying more money for the same real value

Inflation is the erosion of the real value of monetary items over time.

Inflation only erodes the real value of monetary items not inflation-adjusted daily in terms of a Daily Consumer Price Index or monetized daily indexed unit of account, e.g. the Unidad de Fomento in Chile during low and high inflation or a daily foreign currency parallel rate (normally the US Dollar daily parallel rate) or a Brazilian-style Unidade Real de Valor daily index rate during hyperinflation.

The cost of inflation is the consequence of not inflation-adjusting a monetary item on a daily basis. There is no cost of inflation when a monetary item is inflation-adjusted on a daily basis. 20 to 25 per cent of the broad M3 money supply in Chile is inflation-adjusted on a daily basis in terms of the Unidad de Fomento according to the Central Bank of Chile. $ 2.89 trillion of government inflation-linked bonds are inflation-adjusted daily in terms of a Daily Consumer Price index worldwide.

Paying more money for more real value is a price increase. That is not inflation. That is simply a real value price increase. Generally paying more money for the same real value is inflation. That is an increase in the general price level.

Nicolaas Smith

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

Only a non-revisable Daily Consumer Price Index should be used with Capital Maintenance in Units of Constant Purchasing Power

2012-02-14T11:25:00.000Z

Only a non-revisable Daily Consumer Price Index should beused with Capital Maintenance in Units of Constant Purchasing Power

The French National Statistics Institute makescorrections in the monthly published CPI during the next month. That is anacceptable method under Capital Maintenance in Units of Constant PurchasingPower in terms of a Daily Consumer Price Index or daily rate as implemented with CIPPA.

Revising previously published CPI data is notpractical under Capital Maintenance in Units of Constant Purchasing Power sincethe monthly published CPI value is used for the calculation of the Daily CPIwhich is used on a daily basis under this capital maintenance model.

Legally binding transactions are concluded using theDaily CPI. It is not practical to revise all daily legal contracts executed interms of a Daily CPI that can be revised afterwards.

Nicolaas Smith

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

What would happen if Greece leaves the European Monetary Union

2012-02-13T16:42:00.002Z

What would happen if Greece leaves the European Monetary Union

The Euro would become a foreign currency like the US Dollar in Greece. Very little would actually change.

It would be illegal for the Greek monetary authority to overprint a foreign currency, the Euro or the US Dollar, stating it is worth 50 per cent less. Foreign currencies, for example the US Dollar or the Euro, trade in foreign exchange markets. The US Dollar cannot be overprinted by the Greek goverment stating that it is now 50 per cent less in real value. The same is true for the Euro as a foreign currency.

Greek citizens would own a lot of foreign currency, namely, Euros, which play a very important role in the world economy, exactly like the US Dollar. Greek citizens would never lose one cent in value. Greeks will never lose real value holding US Dollars, Yen, Swiss Franks, OR EUROS.

All companies would carry on quoting prices in the Euro, which would be generally available in Greece, and the New Drachma, IF it were to be introduced.

Payments would be accepted in the Euro, a generally available foreign currency. There would never be an overprinting of Euros in Greece as a Drachma worth 50% less. The Euro would simply be a foreign currency like the US Dollar, the Rouble, the Chinese Yuan, the Japanese Yen, the British Pound or the South African Rand.

The Greek central bank would manage the creation of new Drachmas in Greece via fractional reserve banking in Greece. Credit would be created in New Drachmas via fractional reserve banking just like in all other economies. The Euro would circulate in the Greek economy with the new Drachma, the US Dollar, Swiss Francs, etc.. The Euro would simply be a very generally available foreign currency. All products in Greece would have an almost permanently stable price in Euros and maybe an increasing price in the New Drachma, depending on how badly or how well the new economic regime in Greece outside the EMU is being managed by the Greek private sector, not the Greek government.

This is not new territory. Many countries have passed this way in the past.

Inflation-adjusting the entire Greek money supply would remove the total cost of inflation (not inflation) from the Greek economy under complete co-ordination (everybody doing it).

Capital maintenance in units of constant purchasing power as authorized in IFRS would automatically maintain the constant purchasing power of all Greek companies constant for an indefinite period of time in al Greek companies that at least break even in real value at any level of inflation or deflation - ceteris paribus - whether they own any revaluable fixed assets or not.

Nicolaas Smith

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

IFRS authorize Capital Maintenance in Units of Constant Purchasing Power except during hyperinflation

2012-02-13T11:50:00.003Z

IFRSauthorize Capital Maintenance in Units of Constant Purchasing Power except duringhyperinflation

Capital is required to create wealth. Sustainable wealthcreation is the sustainable profitable application of real capital. Capital isgenerally saved up wealth or borrowed financial resources at a financial cost.

Capital needs to be separate from the human owners ofcapital. It is not reasonable to expect people to risk losing their homes bystarting a company.

A legal company structure is thus required plus adouble-entry accounting model.

A perfectly stable unit of account is required fordouble-entry accounting. All generally accepted units of measure, e.g. inch, centimeter,pound, gram, etc., are perfectly constant values. There is no perfectly stable monetaryunit of account. A Daily Consumer Price Index is thus required to measure constantreal value non-monetary items in units of constant purchasing power.

Capital is a constant real value non-monetary item.The constant real value of capital has to be maintained constant over time. A CapitalMaintenance in Units of Constant Purchasing Power accounting model (CIPPA) isthus required.

The above is the ideal method of creating wealthduring low inflation, high inflation, hyperinflation and deflation.

A reasonable person would apply the above method ofcreating wealth even if it is not authorized or required under IFRS.

Capital maintenance in units of constant purchasingpower was authorized at all levels of inflation and deflation in IFRS in the originalFramework (1989), Par. 104 (a) which states:

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

Capital maintenance in units of constant purchasing isnot required in terms of IFRS during low inflation, high inflation,hyperinflation or deflation. It is optional to Historical Cost Accounting(financial capital maintenance in nominal monetary units) during low inflation,high inflation and deflation. It is not optional during hyperinflation. IAS 29Financial Reporting in Hyperinflationary Economies requires the restatement ofHistorical Cost or Current Cost period-end financial statements in terms of theperiod-end CPI. IAS 29 thus disautorized Capital Maintenance in Units ofConstant Purchasing Power during hyperinflation.

PricewaterhouseCoopers states the following regardingthe use of the HCA model during hyperinflation:

‘Inflation–adjusted financial statements are anextension to, not a departure from, historical cost accounting.’

Financial Reporting in Hyperinflationary Economies –Understanding IAS 29, PricewaterhouseCoopers, May 2006, p 5.

A standard takes precedence over the Framework accordingto IAS 8, Par. 11. IAS 29 thus applies during hyperinflation: thus, CapitalMaintenance in Units of Constant Purchasing Power is not authorized in IFRSduring hyperinflation.

Financial capital maintenance in nominal monetaryunits (HCA) is a fallacy: it is impossible to maintain the real value ofcapital in nominal monetary units during inflation per se. It is only possiblein the single case where an entity always invests 100 per cent of allcontributions to shareholders´ equity in revaluable fixed assets (revalued ornot) with an equivalent updated fair value which is most probably only the casewith hotel, hospital and other property-intensive entities.

Every company in the world implementing IFRS can nowchange over to Capital Maintenance in Units of Constant Purchasing Power (CIPPA),except entities in economies subject to hyperinflation. Entities in economies subject to hyperinflation should implement Capital Maintenance in Units of Constant Purchasing Power even if it is not currently authorized in IFRS. See IFRS 'X' Capital Maintenance in Units of Constant Purchasing Power. Zimbabwean listed companies implemented IAS 29 Financial Reporting in Hyperinflationary Economies during the last six years of hyperinflation in that country. The implementation of IAS 29 in Zimbabwe made absolutely no difference.

Capital maintenance in units of constant purchasing power (CIPPA) automatically maintains the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation - ceteris paribus - whether they own any revaluable fixed assets or not.

Nicolaas Smith

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

2012-02-10T10:57:00.000Z

Financial reporting values everything that is accounted

Financial reporting involvesthe valuing, recording, classifying, summarizing and reporting of transactionsand events involving the three basic economic items in terms of a depreciatingfunctional currency during inflation and an appreciating functional currencyduring deflation.

Accounting deals with the valuation and recording of an entity´s dailyeconomic activities.

Accounting deals with economic values on a daily basis when an entity´seconomic activities are accounted daily in terms of the three basic economicitems. Accounting is the daily valuation of the activities of an economicentity. Accounting is a real net asset valuation of an entity on a daily basisin terms of a Daily Consumer Price Index or daily rate, for example the USDollar parallel rate during hyperinflation. The real net asset value of anentity is presented in terms of valuations of the three economic items in termsof IFRS by means of the process of accounting.

A statement of financial position (a financial report) is preparedperiodically reporting the real net asset value (not the market value or theintrinsic value) of an entity on a specific day, e.g. the end of the month, theend of the quarter, the end of six months, the end of the financial year orsometimes a longer financial period.

Financial reporting is an instant in an entity´s economic activity: a reportabout the real net asset value of an entity on one single day: on the date ofthe financial report in terms of the Daily Consumer Price Index or daily rate onthat day when the financial report is accessed or viewed on that day undercapital maintenance in units of constant purchasing power.

The next day, and every day thereafter, the real net asset value of theentity is generally different because the daily valuations of variable realvalue non-monetary items have changed, the entity has created more constantreal value in the form of net income, has suffered a net loss or extra capitalor other resources have been contributed by shareholders or third parties. Theentity is a going concern and its real net asset value generally changes dayafter day.

However, the real net asset value of the entity as reported in thestatement of financial position on the date of the report stays constant for anindefinite period of time with reference to the date of the financial report.But, the human perception of value, as represented by the Daily CPI has changedas evidenced by the daily nominal change of the index value. Thus, all items ina historic statement of financial position have to be valued at the current,i.e. today´s, Daily CPI or daily rate.

A statement of financial position prepared under capital maintenance inunits of constant purchasing power relates to the real net asset value of anentity on one single day: the date the statement of financial position wasprepared when the financial report is accessed or viewed on that day. Thereafterall the values (excluding current period monetary items not inflation-adjustedon a daily basis) change daily either in terms of the Daily CPI or theirspecific variable item daily valuations.

Economic items are valued or measured when economic transactions andevents are accounted. Financialreporting does not simply report on what took place in the past. Accounting is notjust a scorekeeping exercise of what happened in the past. Accounting valueseverything that happens in the economy.

Accounting entries are valuations of the economic items (the debit itemsand the credit items) being accounted.

Nicolaas Smith

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

General purpose financial reports are designed to show the value of a reporting entity

2012-02-09T15:29:00.004Z

General purpose financial reports are designed to showthe value of a reporting entity

The ConceptualFramework for Financial Reporting (2010), paragraph OB7 states:

‘Generalpurpose financial reports are not designed to show the value of a

reporting entity.’

A reporting entity´s value can be one ofthree values:

1. Real market value

2. Real intrinsic value

3. Real net asset value

The Conceptual Framework is correct in thecase of real market value and real intrinsic value. General purpose financialreports are not designed to show the real market value or real intrinsic valueof a reporting entity.

It is stated in the original Framework(1989), Par. 104 (a) [now Conceptual Framework (2010), Par. 4.59 (a)]:

‘Financialcapital maintenance can be measured in either nominal monetary units or unitsof constant purchasing power.’

General purpose financial reports preparedunder the concept of capital maintenancein units of constant purchasing power in terms of a Daily Consumer PriceIndex or daily rate (e.g. the daily US Dollar parallel rate duringhyperinflation) are designed – as a result its combination with thedouble-entry accounting model – toautomatically maintain the constant purchasing power of capital constant for anindefinite period of time in all entities that at least break even in realvalue at all levels of inflation and deflation – ceteris paribus – whether theyown any revaluable fixed assets or not.

The real value of capital is always equal tothe real value of net assets under capital maintenance in units of constant purchasingpower in terms of a Daily CPI or daily rate.

Conclusion:

General purpose financial reports preparedunder the concept of capital maintenancein units of constant purchasing power as authorized in IFRS are designed toshow the real net asset value of a reporting entity and to maintain it constantfor an indefinite period of time as qualified above.

The real net asset value of an entity asreported on the date of the statement of financial position is only valid forthat day when the statement is accessed or viewed on that day. Thereafter the historicconstant real net asset value of the entity as reported on the date of thestatement of financial position remains constant for an indefinite period oftime, but, its nominal value changes daily in terms of a Daily Consumer PriceIndex or other daily rate.

Monetary items in the historic statement offinancial position or other financial report have to be inflation-adjusted,variable items have to be updated and constant items have to be measured inunits of constant purchasing power in terms of the current (today´s) Daily CPIor other daily rate after the date of the financial report.

The actual real net asset value of anentity also generally changes daily as a result of an entity being a going concernand generally involved in daily operations.

Nicolaas Smith

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

Only capital indexed inflation-linked bonds maintain the real value of capital

2012-02-08T11:51:00.002Z

Only capitalindexed inflation-linked bonds maintain the real value of capital

Only capital indexed inflation-linked bonds maintainthe real value of the capital amount during inflation. A capital indexed inflation-linkedbond´s capital value is maintained constant during inflation as well as thereal value of the periodic coupon payments.

A coupon indexed inflation-linked bond´s capitalvalues is a nominal value. It´s real value is not maintained constant during inflation.

See: The French Bond Association, Inflation-linkedBonds, CNO, 2.1.1 Comparison of Capital Indexed, Coupon Indexed and Nominalcash flows, p. 14.

Nicolaas Smith

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

IFRS 'X' Capital Maintenance in Units of Constant Purchasing Power

2012-02-07T10:40:00.001Z

Submitter Organization Date

Nicolaas Smith Constant Item Purchasing PowerAccounting 26 January 2012

International Accounting Standards Board

30 Cannon Street

London EC4M 6XH

United Kingdom

Dear Mr Hoogervorst,

I wish to thank the IASBand the Special Commission created by the FederaciónArgentina de Consejos Profesionales de Ciencias Económicas for giving me access to the Commission´s Research Paper: Inflation.

I would kindly like tomake the following comments regarding this excellent research paper.

The Argentinean Federation states that:

Theproposal is for International Financial Reporting Standards to be ‘in aposition to provide an adequate answer to the effects of inflation on financialreporting;’

‘An inflation rate of100% over three years (the limit currently included in IAS 29) equals 26% peryear, but much lower rates are sufficient to distort financial statements, ifinflation effects are not properly recognized,’ and

‘The main effects ofinflation on financial statements’ relate to items such as capital contributedand comprehensive income.

The Federation indicates in the Basisfor Conclusions, Effectsof the omission of inflation restatements thatinflation affects revenues, expenses, inventories, property, plant, equipment,intangible assets, investment properties, goodwill, dividends and interest.

It is noted that:

‘Inflation is always and everywhere a monetary phenomenon,’ per MiltonFriedman.

‘Purchasing power of non monetary items does not change in spite ofvariation in national currency value.’

Gucenme, U. and Arsoy, A. P.(2005). Changes in financial reporting in Turkey, Historical Developmentof Inflation Accounting 1960 – 2005. Special Issue Accounting for the Global andthe Local: The Case of Turkey. Critical Perspectives on Accounting, Volume20, Issue 5, July 2009, p. 568–590.

Inflation anddeflation have no effect on the real value of non-monetary items.

Comprehensive income, revenues, expenses,contributions from and distributions to owners and interest, for example, are constant real valuenon-monetary items. Inventories, property, plant, equipment, intangible assets, investmentproperties and goodwill are variable real value non-monetary items. IAS 29 defines them asnon-monetary items. The definition of a constant real value non-monetary itemis derived in IFRS.

It is not inflationand deflation affecting the real value of constant real value non-monetaryitems not maintained constant over time. It is the implementation of the stablemeasuring unit assumption as part of the traditional Historical Cost Accountingmodel during inflation and deflation.

Inflation erodesthe real value of only monetary items not inflation-adjusted in terms of aDaily Consumer Price Index. Deflation creates real value in only monetary itemsnot deflation-adjusted in terms of a Daily Consumer Price Index. It iscurrently (2012) impossible to inflation-adjust or deflation-adjust bank notesand coins. Their real values are always affected by inflation and deflation.

Inflation inmany different countries has no effect on the real value of monetary items inflation-adjustedin terms of a Daily CPI, for example the more than 2.68 trillion US Dollars(2009)¹ of government inflation-indexed bonds currently inflation-adjusteddaily in the world economy in terms of a Daily CPI which is a lagged, daily interpolationof the monthly published CPI.

¹ (StandardLife Investments. (2012). An Investor´s Guide to Inflation–Linked Bonds.Retrieved 7 January 2012, from Standard Life Investments’s Web site.)

According to the Banco Central de Chile, 20 to 25 percent of the broad M3 money supply in Chile is currently inflation-adjusted dailyin terms of the Unidad de Fomento (Writtencommunication. (2011)) which is a monetized daily indexed unit of account started in 1967 andpublished daily by the Banco Central deChile since 1990.

The above are allmonetary items that exist in a zero cost of inflation (not zero inflation)space. They are all monetary items, but, their real values are not affected byinflation. Inflation-adjusting the entire money supply (excluding bank notesand coins of the fiat functional currency created by means of fractionalreserve banking within an economy) under complete co-ordination would result inzero cost of inflation (not zero inflation) in only the complete money supply(as qualified) in an economy.

The requirement in IAS29, Par. 9 that ‘thegain or loss on the net monetary position shall be included in profit or loss and separately disclosed,’ deals with the ‘effects of inflation’ on only monetary items not inflation-adjusted in termsof a Daily CPI only during hyperinflation.

However, thedefinitions of monetary items in IAS 29, Par. 12 and IAS 21, Par. 8 need to beimproved because non-monetary items are all items that are not monetary items.The definition of monetary items thus determines which items are non-monetaryitems per IFRS. When the definition of monetary items is incorrect then thedivision of monetary and non-monetary items is incorrect as it currently is interms of IFRS.

IAS 29 is ineffective²regarding the effect of the stable measuring unit assumption (not the ‘effectsof inflation’) on constant real value non-monetary items, e.g. capitalcontributed and comprehensive income, not maintained constant duringhyperinflation.

²See my comment letter on the Agenda Consultation 2011.

A monetary item is oneof the three basic economic items:

(a) Monetary items

(b) Variable real value non-monetary items

Definition

Monetary items are units of money held and items withan underlying monetary nature which are substitutes for units of money held.

The concept of a constant real value non-monetary itemis derived in IFRS

IFRS are principlesbased standards. The definition of a constant real value non-monetary item isderived from the authorization of financial capital maintenance in units ofconstant purchasing power as the third capital maintenance concept at alllevels of inflation and deflation in IFRS in the original Framework (1989),Par. 104 (a), (now the Conceptual Framework (2010), Par. 4.59 (a)) whichstates:

‘Financial capital maintenance can be measured ineither nominal monetary units or units ofconstant purchasing power.’

When financial capitalmaintenance is measured in units of constant purchasing power it means, inprinciple, that capital (all items in shareholders´ equity) is a constant realvalue non-monetary item and that the real value of capital is equal to the realvalue of net assets.

Definition

A constant real value non-monetary item is anon-monetary item with a constant real value over time whose value within anentity is not generally determined in a market on a daily basis.

Examples include borrowingcosts, comprehensive income, interest paid, interest received, bank charges,royalties, fees, short term employee benefits, pensions, salaries, wages, rentals, all other incomestatement items, issued share capital, share premium accounts, share discountaccounts, retained earnings, retained losses, capital reserves, revaluationsurpluses, allaccounted profits and losses, all other items in shareholders´ equity, trade debtors, trade creditors,dividends payable, dividends receivable, deferred tax assets, deferred taxliabilities, all taxes payable, all taxes receivable, all other non-monetarypayables, all other non-monetary receivables, provisions, etc.

On the other hand: a non–monetaryitem which is not a constant real value non–monetary item is a variable realvalue non–monetary item.

Examples include quotedand unquoted shares, property, plant, equipment, inventory, intellectualproperty, goodwill, foreign exchange, finished goods, raw material, etc.

Definition

A variable real value non-monetary item is anon-monetary item with a variable real value over time.

The ArgentineanFederation states:

‘It is also a basic principle, an implicit but anobvious one, that the measurement unit, i.e. the currency, must have a constantvalue over time.’

‘It is not acceptable either that accounting uses asthe common denominator a measurement unit whose value is variable.’

‘The use of different currencies in different times orcircumstances during a period would be unreasonable. However, the current IFRSsallow preparing the financial statements by using a currency that may have avery different value at the beginning and the end of the period.’

All functional currencieswithin free and open internal economies, with no governmental interference inmonetary policy, generally do not have a constant real value over time for morethan a month or two. A functional currency is generally unstable in real valueover time within a free and open internal economy.

One of the underlyingprinciples of the globally implemented, generally accepted, traditional HistoricalCost Accounting model is the stable measuring unit assumption whereby it isassumed that changes in the purchasing power of money are not sufficientlyimportant to require financial capital maintenance in units of constantpurchasing power during inflation and deflation. HCA was originally authorized inIFRS in the Framework (1989), Par. 104 (a) as an optional accounting model. Theother option authorized in Par. 104 (a) in 1989 was financial capitalmaintenance in units of constant purchasing power at all levels of inflationand deflation under which there is no stable measuring unit assumption.Financial capital maintenance in units of constant purchasing power isfundamentally different from financial capital maintenance in nominal monetaryunits (HCA).

‘In the opinion of the Commission, the application ofthe proposed standard will significantly improve the financial reporting byrequiring that all the components in

a set of financial statements be expressed in the sameunit of measurement.’ Covering letter, p. 8

The ArgentineanFederation thus requires financial capital maintenance in units of constantpurchasing power in the application of the proposed standard. I agree with theFederation´s choice.

‘The financial statements from the application of themechanism proposed will recognize both gains and losses produced by the effectsof inflation on monetary items.’ p. 8

The ArgentineanFederation thus recognizes that inflation and deflation only affect the realvalue of monetary items not inflation-adjusted and deflation-adjusted daily, respectively, in terms of a Daily Consumer Price Indexand not non-monetary items.

‘The financial statements will recognize lossesproduced by impairment losses that remain concealed when financial statementsare not adjusted.’ p. 8

The ArgentineanFederation thus recognizes that there are two totally different processes ofreal value erosion involved in an economy during inflation:

(1) One eroding thereal value of only monetary items not inflation-adjusted daily in terms of aDaily CPI, namely, the economic process of inflation and

(2) A totally differentone eroding only the real value of constant real value non-monetary items notmaintained constant daily, namely, the implementation of the Generally AcceptedAccounting Practice of applying the stable measuring unit assumption duringinflation under HCA as authorized in IFRS in 1989.

Everybody whoimplements IFRS has to choose a capital concept which will indicate the capitalmaintenance concept as well as the measurement bases which determine theaccounting model to be used. There are three capital and capital maintenanceconcepts authorized in IFRS:

(a) Three concepts of capital

The concepts ofcapital in the Conceptual Framework (2010), paragraph 4.57 give rise to thefollowing three fundamentally different concepts of capital during inflationand deflation:

(i) Physical capital.See Par. 4.57 & 4.58.

(ii) Nominal financialcapital. See Par. 4.59 (a).

(iii) Constantpurchasing power financial capital. See Par. 4.59 (a).

(b) Three concepts of capital maintenance

The concepts ofcapital in Par. 4.57 give rise to the following three fundamentally different conceptsof capital maintenance during inflation and deflation:

(i) Physical capital maintenance. Optionalduring inflation and deflation. The Current Cost Accounting model is prescribedin IFRS when the physical capital maintenance concept is implemented. See Par.4.61.

(ii) Financial capital maintenance in nominalmonetary units (HCA). Authorized in IFRS but not prescribed—optional duringinflation and deflation. See Par. 4.59 (a).

(iii) Financial capital maintenance in units ofconstant purchasing power. Authorized in IFRS but not prescribed—optionalat all levels of inflation and deflation. See Par. 4.59 (a).

It is clear from the ArgentineanFederation´s covering letter that they propose to implement the third capitalmaintenance concept authorized in IFRS, namely, financial capital maintenancein units of constant purchasingpower, in the proposed new IFRS.

Certain rules forfinancial capital maintenance in units of constant purchasing power are defined in IAS 29 which makes it a veryimportant IFRS.

It is clear that theArgentinean Federation proposes a change of the fundamental accounting model: adeparture from HCA.

‘Restatement offinancial statements’ as required in IAS 29 is not a departure from HCA.

IAS 29 Par. 39 (b)states:

‘The following disclosuresshall be made:

(b) whether the financial statements are basedon a historical cost approach or a current cost approach.’

PricewaterhouseCoopersstates:

‘Inflation-adjustedfinancial statements are an extension to, not a departure from, historical costaccounting.’

PricewaterhouseCoopers.(2006). Financial Reporting inHyperinflationary Economies, Understanding IAS 29, p. 3.

It is clearly theintention of the Argentinean Federation to affect a fundamental change in thefinancial capital maintenance concept implemented, namely, from financialcapital maintenance in nominal monetary units (HCA) to financial capitalmaintenance in units of constant purchasing power: a departure from what isdone in terms of IAS 29.

Taking all of the aboveinto account:

When entities implementa fundamental change in their accounting model, namely, financial capitalmaintenance in units of constant purchasing power when annual inflation is equalto or greater than 10 per cent or cumulative inflation over three years isequal to or greater than 26 per cent, as the proposed new IFRS would requirethem to do, it would, in my opinion, not be reasonable to require them to changeback to a fundamentally different accounting model, namely, financial capitalmaintenance in nominal monetary units (HCA) when inflation returns to lowerlevels.

(1) Primarily when itis taken into account that financial capital maintenance in units of constantpurchasing power as proposed by the Argentinean Federation would automaticallymaintain the constant purchasing power of shareholder´s equity constant for anindefinite period of time in all entities that at least break even in realvalue at all levels of inflation and deflation – ceteris paribus – whether theyown any revaluable fixed assets or not.

When entities followthe Argentinean Federation´s proposal and when they then experience and see andrealize in practice for themselves and when the automatic, indefinite-period,real value maintaining effect of financial capital maintenance in units of constantpurchasing power in terms of a Daily CPI at all levels of inflation anddeflation as qualified above is specifically pointed out to them, then it wouldnot be reasonable to require them to go back to HCA: to require them to go backto implementing the very erosive stable measuring unit assumption again.

(2) It also has to benoted that the Argentinean Federation stated:

‘Most of the Commission members haveconsidered that such decision would involve a drastic change in the accountingpractices, particularly, for those countries without an inflationarytrack-record.’

(3) It would also bevery costly to an entity and to a country´s economy as it has always been inthe past and as it still is today:

Althoughnominal financial capital is always equal to nominal net assets measured innominal monetary units under financial capital maintenance in nominal monetaryunits (HCA) as authorized in IFRS, it is only true in real value duringinflation in the single case where an entity always invests 100 per cent of the original updated real value of allcontributions to shareholders´ equity in revaluable fixed assets (revalued ornot) withan equivalent updated fair value which is most probably only the case in hotel, hospital and otherproperty-intensive entities.

In the vast majorityof cases the stable measuring unit assumption (not inflation - as generallyaccepted) erodes the real value of that portion of shareholders´ equity (e.g.total retained earnings) never maintained constant under HCA with sufficientrevaluable fixed assets (revalued or not) currently amounting to vast amountsof constant item real value eroded in the world´s capital investment base eachand every year for as long as HCA is implemented as the global, traditionalaccounting model. (See the ongoing financial crisis).

(4) Financialcapital maintenance in units of constant purchasing power as proposed by theArgentinean Federation would automatically stop this erosion for an indefiniteperiod of time in all entities that at least break even in real value at alllevels of inflation and deflation – ceteris paribus – whether they own anyrevaluable fixed assets or not, and instead would maintain vast amounts perannum for an unlimited period of time in constant item real value in theworld´s capital investment base at current levels of world inflation - if itwere to be implemented worldwide.

Prof.Rachel Baskerville, Associate Professor, School of Accounting and CommercialLaw at the Victoria University in Wellington, New Zealand, changed herpublication 100 Questions (and Answers) about IFRS (question 38) onthe Social Science Research Network to confirm that there are three concepts ofcapital maintenance authorized in IFRS after I pointed it out to her. Prof.Baskerville discussed the change with her colleague Prof. Kevin Simpkins beforechanging her article. He is the Chairman of the New Zealand AccountingStandards Review Board. She then added this conclusion to her article:

‘There is much to be gainedfrom moving away from reporting on the basis Financial Capital Maintenance inNominal Monetary Units.’ (Baskerville, 2010)

The Deutsche Bundesbankvery wisely stated:

‘The benefits of price stability, on the other hand, canscarcely be overestimated, especially as these are, in principle, unlimited in duration and accrue yearafter year.’

Deutsche Bundesbank. (1996). Annual Report, p. 83.

Financial capitalmaintenance in units of constant purchasing power as proposed by theArgentinean Federation would mean automatic complete ‘price stability’ for anindefinite period of time in the constant purchasing power of an entity´s shareholder´sequity as qualified above and consequently in that part of a country´s and theworld´s capital investment base if it were to be applied worldwide.

In my opinion entities should be required to carry onwith financial capital maintenance in units of constant purchasing power at allfuture levels of inflation and deflation once they have made the fundamentalchange from financial capital maintenance in nominal monetary units (HCA) tofinancial capital maintenance in units of constant purchasing power.

The understanding ofthe very erosive effect (the cost) of the stable measuring unit assumption (notinflation) on the real value of only constant real value non-monetary itemsnever maintained constant under HCA during inflation (currently still generallyconfused with or seen as the same as the cost of inflation in monetary itemsnot inflation-adjusted daily in terms of a Daily CPI which is not calculatedand accounted under HCA during low inflation and deflation) as well as the automatic,indefinite, real value maintaining effect on constant real value non-monetaryitems of financial capital maintenance in units of constant purchasing power interms of a Daily CPI at all levels of inflation and deflation as qualifiedabove (authorized in IFRS in 1989) are notyet generally accepted, but easy to understand.

Entities implementingthe stable measuring unit assumption (HCA) operating in economies withinflation rates below 10 per cent per annum or below 26 per cent cumulativeinflation over three years should be very strongly encouraged to change over tofinancial capital maintenance in units of constant purchasing power as proposedby the Argentinean Federation. They should then not be required to change backto HCA at any future rate of inflation or deflation.

Financial capital maintenance in units of constantpurchasing power requires a daily rate

I agree with theArgentinean Federation that the Consumer Price Index should be used as ageneral price level index.

It is noted that:

(1) When it is intended to maintain the real value ofan item, for example, a government inflation-indexed bond, it is immediatelyrealized that a Daily Consumer Price Index is required since these bonds tradeon a daily basis. Many countries use Daily CPIs to value these bonds on a dailybasis.

(2) During hyperinflation adaily US Dollar (or other relatively stable foreign currency) parallel rate is alwaysspontaneously used by the population and in the consumer markets.

(3) Brazil, for example, used governmentsupplied daily indices from 1964 to 1994 to index non-monetary items on a dailybasis in the entire economy during 30 years of very high inflation andhyperinflation of up to 2000 per cent per annum.

(4) Chile has been using amonetized daily indexed unit of account, the Unidad de Fomento, since 1977. Its daily value is calculated and published daily by the Banco Central de Chile since 1990.

(5) Prof. RobertShiller stated:

‘Another coordination problem isthat we must decide, and agree, on a way to smooth the CPI. We should notdefine prices just in terms of the latest CPI because the CPI is vulnerable tosudden jumps from month to month. This is particularly true when we are talkingabout indexing financial contracts to the CPI. A unit of account like the UFwould smooth out the CPI movements, otherwise there would be important jumps indeposit balances on the dates of new announcements of the CPI. Thus, thesmoothing of the CPI in producing the UF has also been a fundamental part ofthe functioning of the UF as an analogue of money.’

Shiller, R.J. (1998). Indexed Units of Account: Theory andAssessment of Historical Experience. Cowles Foundation Discussion Paper, No1171, p. 13.

A Daily CPI is thus a fundamental requirement whenimplementing financial capital maintenance in units of constant purchasingpower in terms of a daily rate as the basic accounting model in the economy.

Many countries issue government and commercial inflation-indexedbonds. Themost liquid markets are US Treasury Inflation Protected Securities (TIPS), theUK Index–linked Gilts and the French OATi/OAT€I market. Japan, Germany, Italy, Canada, Australia, Sweden, Iceland,Portugal, Greece, Finland, Netherlands, Spain, Saudi Arabia, Qatar, Kuwait,UAE, South Korea, New Zealand and Hong Kong also issue inflation–indexed governmentbonds, as well as a number of Emerging Markets such as Brazil, Turkey, Chile,Mexico, Colombia, Argentina and South Africa.

The British government beganissuing inflation–linked Gilts in 1981.

Most of these countries use a DailyCPI to value these bonds on a daily basis. A Daily CPI is a one or two monthlagged, daily interpolation of the monthly published CPI.

Acountry which issues inflation–indexed government bonds and uses a one or twomonth lagged interpolated Daily CPI to determine the daily prices of thesebonds can use the Daily CPI (already in use in many countries for many years) forthe implementation of financial capital maintenance in units of constantpurchasing power in terms of a daily index at all levels of inflation anddeflation as proposed by the Argentinean Federation.

Acountry with no inflation–indexed sovereign bond market can use a Daily CPIbased on the formula used to calculate the Unidadde Fomento in Chile.

The Central Bank of Chiletranslates the Unidad de Fomento ontheir website as An Inflation–Indexed Accounting Unit and CPI–Indexed Unit of Account (UF).

The UF´s nominal value in Chilean escudos was originally (1967) updatedevery quarter which would be the official rate for the following quarter. Thenominal index was updated monthly from October 1975, with the currencychangeover to pesos, till 1977. Since July 1977 the change in the nominal valuewas calculated daily by interpolation between the tenth of each month and theninth of the following month, according to the monthly variation of the Indice de Precios al Consumidor (IPC), the ChileanConsumer Price Index.The Banco Central de Chile hascalculated and published the UF´svalue daily since 1990. The UF is amonetized lagged daily interpolation of the monthly published Chilean CPI. The IPC is independently calculated andpublished monthly by the Chilean National Statistical Institute.

The UF daily rate is available on the Chilean CentralBank´s website.

Usingthe CPI published monthly may result in sudden increases or decreases in valueson the date the new monthly CPI is published. A Daily CPI solves this problem:it smooths the CPI. There are no surprises. The UF is a very successful monetized daily indexed unit of account usedin Chile during the last 45 years (2012) and was copied by Colombia, Ecuador, Mexico, and Uruguay.

A Daily CPI is the daily indexused to calculate the daily price of a government inflation–indexed bond in aparticular country or is based on the formula used to calculate the UF in Chile.

Formula

‘The UF is now a lagged dailyinterpolation of the monthly consumer price

index. The formula for computation ofthe UF on day t is:

UF_t = UF _t_–1 × (1+ π) ^1/d

where π is the inflation rate for thecalendar month preceding the calendar month in which t falls if t is between day ten and the last day of themonth (and d is the number ofdays in the calendar month in which t falls),and π is the inflation rate for thesecond calendar month before the calendar month in which t falls if t is between day one and day nine of the month (and d is the number of days in thecalendar month before the calendar month in which t falls).’ (Shiller, 1998, p.3)

The above formula applies tothe UF in Chile where the CPI for thecurrent calendar month used to be available on the tenth of the next calendarmonth. The general case formula for a UF –based Daily CPI is stated as follows:

On day t

DI _t = DI _t–1X (1 + π) ^1/d

where π is the monthly inflation rate for the second calendarmonth before the calendar month in which t falls if t is on or betweenday one and the day of publication of the CPI of the previous calendar month(and dis thenumber of days in the calendar month before the calendar month in which t falls), and π is the monthly inflation rate for the calendar monthpreceding the calendar month in which t falls if t is on or betweenthe day the CPI for the previous calendar month is published and the last dayof the month (and d is the number of days in the calendar month in which t falls).

A Daily CPI is very similarto, but not exactly the same as a monetized daily indexed unit of account, e.g.the UF in Chile. The UF is monetized; i.e. it is stated interms of the Chilean peso. A Daily CPI is not automatically monetized.

A Daily CPI is, like themonthly CPI on which it is based, a non–monetary general price level indexvalue. Monetization depends on generally accepted monetary practices in aneconomy (see the UF in Chile). A DailyCPI can be monetized and used as a monetized daily indexed unit of account withpayments being made in the national monetary unit – depending on users in aneconomy. Monetization is not a necessity.

A Daily CPI is not a unit ofaccount just like the CPI is not a unit of account for accounting purposes. TheUS Dollar, Euro, Yen, Yuan, etc. are the internal nominally fixed monetaryunits of account, unstable in real value, used in their respective countries asthe national unstable monetary unit of account for accounting purposes duringlow inflation, high inflation, hyperinflation and deflation. The US, EU,Japanese and Chinese CPIs are not units of account for accounting purposes.They are non–monetary general price level indices. So are their Daily CPIs.Prices are not quoted in CPIs or in Daily CPIs – although they can be.

Conclusion

IFRS are principles basedstandards. The Argentinean Federation´s proposed new IFRS should thus state theprinciples involved in financial capital maintenance in units of constantpurchasing power in terms of a Daily CPI at all levels of inflation anddeflation.

They include:

1 The real value of capital isalways equal to the real value of net assets.

2 Thecapital concept to be implemented: Constant purchasing power capital.

3 Thecapital maintenance concept to be implemented: Financial capital maintenance inunits of constant purchasing power in terms of a Daily CPI at all levels ofinflation and deflation.

4 Thestable measuring unit assumption is never implemented under capital maintenancein units of constant purchasing power in terms of a Daily CPI.

5 Monetary items are units of money held anditems with an underlying monetary nature which are substitutes for units of moneyheld.

6Non-monetary items are all items that are not monetary items

7Non-monetary items are sub-divided in:

(a)Variable real value non-monetary items and

(b)Constant real value non-monetary items.

A variable real valuenon-monetary item is a non-monetary item with a variable real value over time.

A constant real valuenon-monetary item is a non-monetary item with a constant real value over timewhose value within an entity is not generally determined in a market on a dailybasis.

8Daily measurement is required of all items in terms of:

(a) aDaily Consumer Price Index or monetized daily indexed unit of account, e.g. theUnidad de Fomento in Chile, duringlow inflation, high inflation and deflation and

(b)in terms of a relatively stable foreign currency parallel rate (normally the USDollar daily parallel rate) or a Brazilian-style Unidade Real de Valor daily index rate during hyperinflation.Hyperinflation is defined in IAS 29 as cumulative inflation being equal to orapproaching 100 per cent over three years, i.e. 26 per cent annual inflationfor three years in a row.

Measurement

9 Historicand current period monetary items are required to be inflation-adjusted on adaily basis as detailed above. When they are not inflation-adjusted on a dailybasis during the current financial period then the net monetary loss or gain asdefined in IAS 29 is required to be calculated and accounted. All monetaryitems of the fiatcurrency created within an economy by means of fractional reserve banking except actual banknotes and coins of this currency can be inflation-adjusted on a daily basiswithin an economy. This would remove the total cost of inflation (notinflation) from the entire money supply except from actual bank notes and coinswhich generally make up about seven per cent of the money supply in advancedeconomies.

10 Currentperiod variable real value non-monetary items are required to be measured on adaily basis in terms of IFRS excluding the stable measuring unit assumption andthe cost model in the valuation of property, plant, equipment and investmentproperty after recognition. When they are not valued on a daily basis in termsof IFRS as qualified, then they as well as historic variable real valuenon-monetary items are required to be updated daily in terms of a Daily CPI asindicated above. Current period impairment losses in variable real valuenon-monetary items are required to be treated in terms of IFRS. They areconstant real value non-monetary items once they are accounted. All accountedlosses and profits are constant real value non-monetary items.

11Historic and current period constant real value non-monetary items are alwaysand everywhere required to be measured in units of constant purchasing power interms of a Daily CPI as detailed above.

12 Thecalculation and accounting of the net constant item loss or gain is required whenconstant real value non-monetary items are not measured daily in terms of aDaily CPI in units of constant purchasing power.

13 Oncean entity has started financial capital maintenance in units of constantpurchasing power in terms of a Daily CPI, it is required to continue with thatmodel at all future levels of inflation and deflation.

14 Entitiesin economies with inflation rates below 10 per cent per annum or cumulative inflationover three years below 26 per cent should be very strongly encouraged toimplement financial capital maintenance in units of constant purchasing poweras proposed by the Argentinean Federation. Countries should be stronglyencouraged to do this on a national basis.

15 Inflationand deflation only affect the real value of monetary items notinflation-adjusted and not deflation-adjusted, respectively, on a daily basisin terms of a Daily CPI.

16 Thestable measuring unit assumption affects the real value of only constant realvalue non-monetary items not maintained constant daily by means of measurementin units of constant purchasing power in terms of a Daily CPI at all levels ofinflation and deflation.

17 Theterms ‘restatement’, ‘restated’, ‘inflation restatements’ and‘inflation-adjustment of financial statements’ are not be used in the proposednew IFRS.

18 Theproposed new IFRS is a departure from Historical Cost Accounting at all levelsof inflation and deflation.

I support the ArgentineanFederation´s excellent proposal as qualified in this comment letter as well asin the attached appendix in which I suggest some improvements to theArgentinean Federation´s proposal which would, in my opinion, result ineffective comprehensive financial capital maintenance in units of constantpurchasing power in terms of a Daily CPI at all levels of inflation anddeflation which would automatically maintain the constant real value ofshareholders´ equity constant for an indefinite period of time in all entitiesthat at least break even in real value at all levels of inflation and deflation– ceteris paribus – whether they own any revaluable fixed assets or not.

An ideal title for the new IFRS would beCapital Maintenance in Units of Constant Purchasing Power.

Pleasedo not hesitate to contact me if you need any further clarifications regardingthe concepts stated or any aspect of this comment letter and appendix.

Yours sincerely,

Nicolaas Smith

Constant Item Purchasing Power Accounting

I promote financialcapital maintenance in units of constant purchasing power as authorized in theoriginal Framework (1989), Par. 104 (a) in terms of a Daily Consumer PriceIndex at all levels of inflation and deflation.

CIPPA automaticallymaintains the constant purchasing power of shareholders´ equity constant for anindefinite period of time in all entities that at least break even in realvalue at all levels of inflation and deflation – ceteris paribus – whether theyown any revaluable fixed assets or not.

**********************************************************************************

Appendix: Suggested improvements to the draft IFRS prepared by the Special Commission created by the Federación Argentina de ConsejosProfesionales de Ciencias Económicas (September 2010) to replace IAS 29 Financial Reporting in Hyperinflationary Economies.

My suggestedimprovements are in italics.

Reasons forissuing the [Preliminary Draft] IFRS

IN2

The International Accounting Standards Board (IASB)undertook this project for these reasons:

(a) at present, IAS 29 applies only to the financialstatements of an entity whose functional currency is the currency of ahyperinflationary economy;

(b) in financialreporting ~~statements~~:

(i) only monetary items not inflation-adjusted interms of a daily index or rate may be materially affected by ~~changingprices~~ inflation and

(i) only constantreal value non-monetary items not maintained constant by means of capitalmaintenance in units of constant purchasing power in terms of a daily index orrate during inflation may be materially affected by the stable measuring unitassumption in economies that are inflationary but not“hyperinflationary”, as this term is characterized in IAS 29;

(i) ~~(high)~~ inflation on only monetary items not inflation-adjusted in terms of a daily indexor rate and

(ii) theeffect of the stable measuring unit assumption on only constant real valuenon-monetary items not maintained constant by means of capital maintenance in unitsof constant purchasing power in terms of a daily index or rate during inflationbefore an economy becomes hyperinflationary and IAS 29must be applied;

(d) it is difficult to justify a different accounting treatment when ~~high~~inflation but not hyperinflation exists;

(e) ~~Inflation restatements~~ Measures to remedy the effects of:

(i) inflationon only monetary items not inflation-adjusted in terms of a daily index or rateand

(ii) thestable measuring unit assumption on only constant real value non-monetary itemsnot maintained constant in terms of a daily index or rate during inflation arealready required in some countries where IFRSs are mandatory or are expected tobe mandatory for some issuers of financial statements.

Main featuresof the [Preliminary Draft] IFRS

IN3

The main objective of this [Preliminary Draft] IFRS isto require that, when the inflation rate accumulated in certain periods reachescertain limits, comprehensive ~~inflation restatements~~ capital maintenance in units of constant purchasingpower in terms of a daily index or rate be performed.

Significantchanges to previous IFRS

IN4

This [Preliminary Draft] IFRS:

(a) requires ~~inflation restatements~~ capital maintenance in units of constant purchasingpower in terms of a daily index or rate inenvironments where they are not mandatory according to IAS 29;

(b) explicitly specifies that ~~inflationrestatements are~~ once an entity hasadopted capital maintenance in units ofconstant purchasing power in terms of a daily index or rate, a return to capitalmaintenance in nominal monetary units is prohibited ~~unless certainconditions~~ ~~are met~~.

Benefits andcosts

IN5

The application of this [Preliminary Draft] IFRS in financial reporting will ~~significantlyenhance the usefulness of financial statements~~ maintain the constant purchasing power of shareholder´s equity constantfor an indefinite period of time in all entities that at least break even inreal value at all levels of inflation and deflation – ceteris paribus – andwill initially increase theaccounting costs of each issuer offinancial statements only by a small percentage of its annual total.

Effectivedate

IN6

An entity shall apply this [Preliminary Draft] IFRSfor annual periods beginning on or after 1 January 201X. Earlier application isencouraged. An entity that applies this [Preliminary Draft] IFRS for a periodbeginning before 1 January 201X shall disclose this fact.

Invitation tocomment

The IASB invites to make comments on all mattersincluded in this [Preliminary Draft] IFRS, particularly on the questions setout below. Comments are most helpful if they:

(a) Refer to the questions as stated;

(b) Indicate the specific paragraph or paragraphs towhich each comment relates;

(d) Include any alternative the Board should consider,if applicable.

Respondents should submit comments in writing for themto be received no later than [date to be determined by IASB]

Question 1) – [to be developed by IASB]

Question 2) – [to be developed by IASB]

Question …

[Preliminary Draft] International Financial ReportingStandard X ~~Inflation~~ CapitalMaintenance in Units of Constant Purchasing Power ([Preliminary Draft] IFRSX) is set out in paragraphs 1-50. All the paragraphs have equal authority.Paragraphs in bold type state the main principles. Terms defined in Appendix Aare in italics the first time they appear in the [Preliminary Draft] IFRS. Definitionsof other terms are given in the Glossary for International Financial ReportingStandards. [Preliminary Draft] IFRS X should be read in the context of its CorePrinciple and the Basis for Conclusions, the Preface to International FinancialRe-porting Standards and the Conceptual Frameworkfor ~~the Preparation and Presentation of~~ Financial ~~Statements~~ Reporting. IAS 8 Accounting Policies,Changes in Accounting Estimates and Errors provides a basis for selecting andapplying accounting policies in the absence of explicit guidance.

[PRELIMINARYDRAFT] INTERNATIONAL FINANCIAL REPORTING STANDARD X ~~INFLATION~~ CAPITAL MAINTENANCE IN UNITS OF CONSTANTPURCHASING POWER

Core Principles

General level of prices may increase (inflation) ordecrease (deflation). For convenience purposes, this [Preliminary Draft] IFRSrefers to inflation effects, but the concepts included below are also applicableto deflation effects2.

An entity shall ~~recognize the effects of inflation of its functional currency on its financialstatements~~ implement capitalmaintenance in units of constant purchasing power in terms of a daily index orrate in financial reporting ~~, if and only if~~ when the conditions described in paragraph 5 are met.

Scope

This[Preliminary Draft] IFRS shall be applied by all entities when preparingconsolidated or separate financial statements for a financial year or aninterim period.

This [Preliminary Draft] IFRS does not deal withtranslations of measurements made in a functional currency to a differentpresentation currency. This issue is covered by IAS 21 The Effects of Changesin Foreign Exchange Rates.

~~Inflation restatements~~ Capitalmaintenance in units of constant purchasing power

An entityshall perform comprehensive ~~inflation restatements~~ capital maintenance in units of constant purchasing power in terms of adaily index or rate when:

(a) Thecumulative inflation rate of its functional currency for the last 12 months isequal or higher than 10%; or

(b) Thecumulative inflation rate of its functional currency for the last 36 months isequal or higher than 26%. ~~; or~~

~~(c) Itspreceding financial statements were restated by applying this [PreliminaryDraft] IFRS and paragraph 47 does not apply.~~

Entities in economies with inflation rates below 10 per cent per annumor cumulative inflation over three years below 26 per cent are stronglyencouraged to implement financial capital maintenance in units of constantpurchasing power in terms of this IFRS.

An entity, once it has adopted capital maintenance inunits of constant purchasing power in terms of a daily index or rate as definedin this IFRS shall not ~~perform any inflation restatement~~ discontinue it when none of theconditions described in paragraph 5 is subsequentlymet.

Therefore, the following decision tree should beconsidered:

~~2Generally, deflation effects are not material. If so, deflation adjustments maybe omitted.~~

START

                                     |
Is the cumulative inflation rate for thelast   |     Yes
12 months equal or higher than 10%?          |-----------------------|

No | |

Is the cumulative inflationrate for the last | Yes |

36 months equal or higher than 26%? |------------------------|

No | |

Were the preceding financial statements     |                                  |
prepared in terms of capital maintenance   |    Yes                     |
in units of constant purchasing power in     |------------------------ |
in terms of this IFRS?                                       |                                  |
                          No    |                                                                            |
Entity is strongly encouraged toimplement|                                 |
capital maintenance in units ofconstant      |------------------------ |
purchasing power in terms of thisIFRS.       |                                |
                                                                                                                 |
                                                                                                                 V

Implement capital maintenancein units

of constantpurchasing power in terms
of thisIFRS.
Method
______________________________________________________________________________

Main rule

An accountingmeasure of an item in ~~a set of~~ financial ~~statements~~ reporting, shall be ~~restated~~ measured in terms of capital maintenance inunits of constant purchasing power in terms of a daily index or rate as definedin this IFRS by using a coefficient obtained by dividing:

(a) the daily price index or rate (e.g. a relativelystable foreign currency daily parallel rate during hyperinflation) correspondingto the current (today´s) date offor the item or financial statements by

(b) the daily price index or rate corresponding to the date of the purchasing power in whichthe measure is stated prior to ~~the restatement process~~ thecurrent (today´s) date.

Financialstatements should ideally never be printed on hard copy. They should ideally alwaysbe available only in electronic format with automatic daily inflation-adjustingof monetary items, daily updating of variable items and daily measurement ofconstant items in units of constant purchasing power in terms of a daily indexor rate always at the current (today´s) date.

Thedate of the purchasing power in which a measure is stated prior to ~~therestatement process~~ measurement interms of capital maintenance in units of constant purchasing power in terms ofa daily index or rate may be the date of a transaction, the date of thelast said measurement ~~or the dateof a previous restatement for inflation~~ (i.e. the previous day or the date of the previous financial statementsor, when ~~the restatements~~ said measurementsare computed on a monthly basis, theend of the previous month) provided thatitems in daily accounting entries, accounting records and financial reports arealways measured in terms of the current (today´s) daily index or rate whenaccessed or viewed at the current date (today) in any way or form.

For the purpose of applying paragraph 8, ~~restatements~~daily transactions shall be accounted interms of capital maintenance in units of constant purchasing power in terms ofa daily index or rate as defined in this IFRS. Financial reports ~~can beperformed and recorded~~ prepared each month (see [not yetdeveloped] Appendix B), or ~~they can be performed~~ at the date of the interim or annual financial statements shall be prepared in terms of capitalmaintenance in units of constant purchasing power in terms of a daily index orrate and accessed and viewed on the date of the report in terms of the dailyrate on that day and thereafter always updated at the current (today´s) dailyindex or rate. ~~In this last case, transactions shall be generallygrouped by month, and monthly price indexes shall be used. However:~~

~~(a) longer grouping periods may be used, providedthat the resulting restated measurements are not materially affected;~~

~~(b) shorter grouping periods shall be used ifrestated measurements resulting from monthly grouping are materially affected.~~

When daily priceindexes ~~related to the grouping periods~~ are not available, they shall be~~estimated~~ calculated by ~~averaging,~~ means of a lagged daily interpolation ~~or extrapolation~~ of the monthly published Consumer PriceIndex, e.g. based on the formula used to calculate the Unidad de Fomento inChile as follows:

On day t

DI _t= DI _t–1 X (1 + π) ^1/d

whereπ is the monthly inflation rate for the second calendarmonth before the calendar month in which t falls if t is on or between day one and the day of publication ofthe CPI of the previous calendar month (and d is the number of days in the calendar month before thecalendar month in which t falls), and π isthe monthly inflation rate for the calendar month preceding the calendar monthin which t falls if t is on or between the day the CPI for the previouscalendar month is published and the last day of the month (and d is the numberof days in the calendar month in which t falls).

Before applying rule 8, financial statements of otherentities used as basis for measurement when using the equity method or theproportionate consolidation method, shall be prepared according to this[Preliminary Draft] IFRS.

~~Restated~~ Accounting measures valued in terms of capital maintenance in units of constant purchasingpower it terms of a daily index or rate shall be treated by applying thecorresponding IFRSs excluding the stablemeasuring unit assumption and the cost model in the measurement of property,plant, equipment and investment property after recognition.

The daily price index or rate

The daily price index or rate used to compute ~~the inflation restatements~~ measurements in terms of capitalmaintenance in units of constant purchasing power required by this [Preliminary Draft] IFRSshall:

(a) be thesame for all financial ~~statements~~ reporting~~issued~~ in a particular country;

(b) give areliable representation of the daily changesin the purchasing power of the functional currency of the issuer of thefinancial statements;

(c) beprepared on the basis of a broad basket of goods and services;

(d) beprepared and issued on a ~~regular~~ dailybasis by an entity with recognized independence and seriousness;

(e) beavailable daily when it is needed.

~~Inflation restatements~~ Capital maintenance in units of constant purchasingpower in terms of a daily index or rate should be ~~made~~ implemented using the best daily price index or rate available, whichever its denomination. Once selected, thesame daily index or rate should be used consistently while the conditions remainmainly unchanged. In ~~some~~ themajority of cases, a lagged daily interpolationof the monthly published consumer price index shall be used. For example, the Daily Consumer Price Indexalready used to calculate the daily price of government inflation-indexed bondsor a Daily CPI based on the formula used to calculate the Unidad de Fomento inChile.

In some others, a laggeddaily interpolated wholesale price index will be more representative.

A relativelystable foreign currency daily parallel rate, normally the US Dollar parallelrate, should be used in hyperinflationary economies where the government doesnot make a Brazilian-style Unidade Real de Valor index available to thepopulation on a daily basis.

When the functional currency of the entity is thelegal currency of two or more countries, the daily price index to be used shall represent a weighted average ofthe changes in the purchasing power of that currency in all those countries. Ifan average daily index is notavailable, the daily index to be usedshall be the most representative of the inflation in the nation where thecurrency has been issued.

The Board suggests that the daily index to be used in each country or region be selected byeach standard setter. When choosing the daily price index, specialconsideration should be given to the fact that some consumer price indexes areaffected by governmental price controls.

Applicationof the main rule

Carryingamounts measured in terms of the dailypurchasing power of the functional currency at the closing date of thefinancial statements shall not be ~~restated~~ remeasured when the financial statements and the related notes are accessed or viewed on that date. Thereafterthey are measured in terms of this IFRS on a daily basis in terms of thecurrent (today´s) rate.

The preceding rule applies usually to accountingmeasures of:

(a) cash and cash equivalents (including the closingbalance shown in the statement of cash flows);

(b) assets or liabilities measured at their fairvalues, their fair values less costs to sell, their present values or byapplying the effective interest method;

(c) interests in other entities measured by using theequity method or the proportionate consolidation method, when applied onamounts stated in terms of the purchasing power of the functional currency atthe closing date of the financial statements or the reporting entity;

(d) assets stated at their recoverable amountscalculated at the closing date.

Accountingmeasures stated in terms of the purchasing power of the functional currency ata previous date shall be ~~restated~~ measuredin terms of this IFRS by applying paragraph 8.

The preceding rule applies usually to accountingmeasures of:

(a) contributions from (or distributions to) owners;

(b) revenue;

(d) expenses;

(e) interests in other entities measured by using theequity method or the proportionate consolidation method, when applied onamounts stated in terms of the purchasing power of the functional currency at adate prior to the closing date of the financial statements or the reportingentity;

(f) comparative information in respect of previousperiods;

(g) the opening balance of cash and cash equivalentsshown in the statement of cash flows;

(h) increases and decreases of cash and cashequivalents shown in the statement of cash flows.

The purchasing power of a previous measure maycorrespond to the date of its recording or to a previous date. For example,the purchasing power of a (non-adjusted) charge to income for the depreciationof a machine is the purchasing power in which its cost is expressed, regardlessof the period in which the depreciation is recognized as an expense.

[This appliesto Historical Cost Accounting.]

When IFRSs are applied for the first time, theconsequences of any partial ~~inflation restatement~~ revaluationincluded in any measurement must be eliminated before applying paragraph 8,unless such ~~inflation restatement~~ measurementis a component of a deemed cost determined under IFRS 1.

When a previous ~~inflation restated~~ measurement in terms of capital maintenance inunits of constant purchasing power in terms of a daily index or rate isavailable, the corresponding adjusted figure at the date of the financialstatements may be obtained by ~~restating~~measuring the previous accountingmeasure from the date of its previous ~~restatement~~ measurement in terms of capital maintenance in units of constantpurchasing power in terms of a daily index or rate to the closing date of the financialstatements when they are accessed orviewed on the closing date. Thereafter they are always accessed or viewed atthe current (today´s) rate. This is the standard procedure when adjustingcomparative information in respect of previous periods.

Accountingmeasures resulting from the addition of two or more measures shall be ~~restated~~valued as follows:

(a) eachindividual measure shall be ~~restated~~valued in terms of capital maintenance in units of constant purchasing power interms of a daily index or rate by applying paragraph 8;

(b) a newaddition shall be made using the ~~restated~~ measurements obtained in theprevious step.

25

The preceding rule applies principally to accountingmeasures that accumulate amounts originated in several periods, such us:

(a) finished goods;

(b) construction in progress;

(d) contributions from owners;

(e) income;

(f) expenses;

(g) cash flows.

Whenrequired, comparisons between carrying amounts and recoverable amounts ofassets shall be made after ~~restating~~measuring carrying amounts in accordance with this [Preliminary Draft]IFRS.

Holding gainsand losses shall be computed andaccounted after ~~restating~~ measuring carrying amounts,respectively, in accordance with this [Preliminary Draft] IFRS.

Accountingmeasures resulting from the comparison of two or more measures shall be ~~restated~~valued as follows:

(a) eachmeasure compared shall be ~~restated~~ valuedby applying paragraph 8;

(b) a newcomparison shall be made using the ~~restated~~ measurements obtained in theprevious step.

The preceding rule applies mainly to accountingmeasures of:

~~(a) interest earned;~~

~~(b) exchange differences;~~

~~(c) borrowing costs recognized as expenses orcapitalized in accordance with IAS 23 Borrowing Costs;~~

(d) inflation losses or gains on cash balances or other net monetary item assets ornet monetary item liabilities notinflation-adjusted on a daily basis in terms of a daily index or rate ~~(thathave a nil amount in the non-adjusted financial statements)~~;

[There are no‘non-adjusted’ financial statements under capital maintenance in units ofconstant purchasing power. The stable measuring unit assumption is notimplemented under this IFRS. Current period monetary items notinflation-adjusted daily are stated at their nominal values and the netmonetary gain or loss is calculated. The same is true for constant items notmeasured daily in units of constant purchasing power. The constant item loss orgain is calculated. ]

~~(e) impairment losses;~~

~~(f) reversals of impairment losses;~~

~~(g) gains or losses from the reclassification ofassets to the class of non-current assets held for sale;~~

~~(h) gains or losses from the disposal of assets;~~

~~(i) other gains or losses recognized incomprehensive income.~~

(j) netconstant real value non-monetary item losses or gains.

~~In order to reflect financial revenues, exchangedifferences and borrowing costs in real terms, these items may be restated byapplying paragraph 28. However, they can also be restated by:~~

~~(a) applying paragraph 8 to the nominal amountsof financial revenues, exchange differences and borrowing costs;~~

~~(b) determining the inflation losses or gainsattributable to the assets or liabilities that caused the financial revenues,the exchange differences or the borrowing costs;~~

~~(c) offsetting the figures calculated in (a) and(b).~~

[Financialrevenues, interest earned, impairment losses, gains or losses from the disposalof assets, other gains or losses recognized in comprehensive income, gains orlosses from the reclassification of assets to the class of non-current assetsheld for sale, reversals of impairment losses, exchange differences andborrowing costs are not monetary items. They are constant real valuenon-monetary items. Inflation has no effect on the real value of non-monetaryitems.]

~~Accordingly, borrowing costs capitalized underIAS 23 shall be net of inflation effects~~.

32

~~Some~~ Net monetary item assets or net monetaryitem liabilities (~~i. e.~~ e.g. cash ~~and short-term employeebenefits~~) ~~do not cause nominal~~ aresubject to real financial gains or losses during inflation. Therefore, ~~their related~~ the ~~inflation~~gains or losses in their real valuescaused by inflation must be calculated andaccounted directly considering the effects of inflation on the real value of the balances of only the said net monetary item assetsor net monetary item liabilities not inflation-adjusted daily in terms of a dailyindex or rate.

Presentationand disclosure

All items in aset of financial statements presented using the functional currency shall be ~~stated~~measured in terms of the daily purchasing power of that currencyat the end of the reporting period whenthe financial statements are accessed or viewed at the closing date. Thereaftermonetary items shall be inflation-adjusted, variable items shall be updated andconstant items shall be measured in units of constant purchasing power daily interms of the current (today´s) daily index or rate.

The preceding rule applies to comparative information.

Disclosure of non-adjusted amounts of items in thefinancial statements and the related notes, with the exception of monetary items notinflation-adjusted on a daily basis in terms of a daily index or rate duringthe current financial period, is prohibited, unless required by a law orregulation. When such a requirement exists:

(a) the adjusted amount measured in terms of this IFRS of an item shall be disaggregatedbetween the amount required by the law or regulation and the difference withthe ~~restated~~ amount measured interms of this IFRS; or

(b) the amount required by the law or regulation shallbe reported using brackets.

~~Inflation~~ Net monetary gains and losses referredto in paragraph 32 shall be presented separately or, if not material, groupedwith other items presented in the statement of comprehensive income or theseparate income statement (if presented).

When an entity presents its financial statements usinga currency other than its functional currency, the measures made in terms ofthe purchasing power of the functional currency shall be translated to thepresentation currency by applying IAS 21.

An entitythat applies the comprehensive method of ~~inflation restatement~~ capital maintenance in units of constant purchasingpower in terms of a daily index or rate shall disclose:

(a) thisfact;

(b) whenfinancial statements and the relatednotes are presented using the functional currency, the fact that all theiritems were ~~restated~~ measured interms of capital maintenance in units of constant purchasing power in terms ofa daily index or rate ~~for~~ toreflect the daily changes in thegeneral purchasing power of the functional currency and, as a result, arestated in terms of the daily purchasingpower at the end of the reporting period updatedat the current (today´s) rate;

(c) whenfinancial statements are presented using another currency:

(1) the factthat all their items were ~~restated~~ measuredin terms of capital maintenance in units of constant purchasing power in termsof a daily index or rate ~~for~~ toreflect the daily changes in thegeneral purchasing power of the functional currency; and

(2) anexplanation of the rules applied to translate the resulting figures to thepresentation currency;

(d) theidentification of the daily priceindex or rate used to compute the ~~inflationrestatements~~ measurements in terms ofcapital maintenance in units of constant purchasing power in terms of a dailyindex or rate as defined in this IFRS and its percent change along all theperiods covered by the financial statements.

The disclosures required by this Standard shall makeclear the basis of dealing with the effects of:

(i) inflation on only monetary items not inflation-adjusted daily in terms of a dailyindex or rate and

(ii) thestable measuring unit assumption on only the constant real values of constant realvalue non-monetary items not measured daily in units of constant purchasing powerin terms of a daily index or rate in terms of this IFRS inthe financial statements.

They are also intended to provide other informationnecessary to understand that basis and the resulting amounts.

Effectivedate and transition

An entityshall apply this [Preliminary Draft] IFRS to its annual or interim financialstatements for periods beginning on or after 1 January 201X. Earlier applicationis permitted. If an entity applies this [Preliminary Draft] IFRS to itsfinancial statements for a period before 1 January 201X, it shall disclose thisfact.

Firstapplication of this [Preliminary Draft] IFRS

An entityshall perform comprehensive ~~inflation restatements~~ capital maintenance in units of constant purchasing power in terms of adaily index or rate to as reported in the financial statements of anannual or interim period in which the conditions described in paragraph 5 aremet, except as permitted by the next paragraph.

When preparing interim financial statements, an entitymay depart from the requirement in paragraph 41, if the conditions described inparagraph 5 are met in the closing month and the timely completion of therestatements is impracticable. If so, the fact will be disclosed in theaffected financial statements and the following financial statements of theentity shall be prepared according to this [Preliminary Draft] IFRS.

An entityshall apply this [Preliminary Draft] IFRS retrospectively in accordance with therequirements of IAS 8 Accounting Policies, Changes in Accounting Estimates andErrors, except as permitted by paragraph 46.

As required by paragraph 10(f) of IAS 1 Presentationof Financial Statements, the first financial statements prepared by applyingthis [Preliminary Draft] IFRS shall include a statement of financial positionas at the beginning of the earliest period for which it presents comparativeinformation, which is the date of transition to this [Preliminary

Draft] IFRS.

When preparing the statement of financial position atthe date of transition to this [Preliminary Draft] IFRS and the subsequentstatements of financial position, an entity shall:

(a) remeasure deferred tax assets and liabilitiesrecognized under IAS 12 Income Taxes by comparing (at the closing date of eachperiod updated at the current (today’s)rate) the ~~restated~~ carrying amounts measured in terms of this IFRS of assets and liabilities with theirrelated taxable basis;

(b) assess if comparisons of the ~~restated~~carrying amounts of assets measured interms of this IFRS with their recoverable values are needed and, if so,apply IAS 36.

When preparing the statement of financial position atthe date of transition to this [Preliminary Draft] IFRS, an entity may:

(a) for inventories, use their replacement cost astheir deemed historical cost ~~restated~~ measured in terms of this IFRS at the date of transition for this[Preliminary Draft] IFRS, provided that the ~~inflation restatement~~ measurement in terms of this IFRS of thereal historical costs is impracticable;

(b) for items in property, plant and equipment carriedusing the cost model in the previous HistoricalCost or Current Cost financial statements, use their fair value as theirdeemed historical cost ~~restated~~ measuredin terms of this IFRS at the date of transition, provided that ~~the~~ ~~inflationrestatement~~ measurement in terms ofthis IFRS of the real historical costs is impracticable;

(c) for investment property carried using the costmodel in the previous HCA or CC financialstatements, use their fair values as their deemed historical cost ~~restated~~measured in terms of this IFRS at thedate of transition, provided that ~~the inflation restatement~~ measurement in terms of this IFRS of thereal historical costs is impracticable;

(d) for cumulative translation differences recognizedin other comprehensive income under IAS 21, ~~assume that their restatedamount is nil~~ apply good judgement indetermining a current amount, provided that its recalculation isimpracticable.

Ceasing and restarting of ~~inflation restatements~~ capital maintenance in units of constant purchasingpower in terms of a daily index or rate

An entity that performed comprehensive ~~inflationrestatements~~ capital maintenance inunits of constant purchasing power in terms of a daily index or rate in termsof this IFRS when preparing the financial statements of the precedingannual (or part thereof or greater than)period shall continue that implementationat all future levels of inflation and deflation. ~~discontinue therestatements if, at the beginning of the current annual period, the cumulativeinflation rate of its functional currency has been lower than 15% during thelast 36 months.~~

48 When inflation restatements are discontinued,the amounts expressed in the measuring unit prevailing at the end of theprevious reporting period shall be used as the basis for the carrying amountsin its subsequent financial statements.

~~If, after the ceasing of inflation restatements,the conditions described in paragraph 5 are met again, the entity shall applythe rules in paragraphs 41-46.~~

Withdrawal of IAS 29 and IFRIC Interpretation 7

This [Preliminary Draft] IFRS supersedes IAS 29Financial Reporting in Hyperinflationary Economies and IFRIC Interpretation 7Applying the Restatement Approach under IAS 29 Financial Reporting inHyperinflationary Economies.

Appendix A –Defined terms

This appendix is an integral part of the IFRS.

amortizedcost

The amount at which a financial asset or a financialliability is measured at initial recognition minus principal repayments, plusor minus the cumulative amortization using the effective interest method of anydifference between that initial amount and the maturity amount, and minus anyreduction (directly or through the use of an allowance account) for impairmentor uncollectibility.

capital

The realvalue of capital is always equal to the real value of net assets.

capitalmaintenance in units of constant purchasing power

Maintenance of the constantpurchasing power of capital in units of constant purchasing power in terms of adaily index or rate at all levels of inflation and deflation which maintainsthe constant purchasing power of capital constant for an indefinite period oftime in all entities that at least break even in real value at all levels ofinflation and deflation – ceteris paribus – whether they own any revaluablefixed assets or not.

carryingamount

The amount at which an asset or a liability ismeasured in the accounting records.

constant purchasing power capital

Capitalmeasured in units of constant purchasing power in terms of a daily index orrate.

constant real valuenon-monetary item

A non-monetary item with a constant real value overtime whose value within an entity is not generally determined in a market on adaily basis.

daily consumer priceindex

A lagged, daily interpolation of the monthly publishedConsumer Price Index.

date oftransition to this [Preliminary Draft] IFRS

The beginning of the earliest period for which anentity presents full comparative information prepared using this [PreliminaryDraft] IFRS.

deemedhistorical cost

An amount used as a surrogate for historical cost ordepreciated historical cost at a given date.

deflation effect

The creationof real value in only monetary items not deflation-adjusted in terms of a dailyindex rate.

effectiveinterest method

A method of calculating the amortized cost of a financialasset or a financial liability (or group of financial assets or financialliabilities) and of allocating the interest income or interest expense over therelevant period.

fair value

The amount for which an asset could be exchanged or aliability settled, between knowledgeable, willing parties in an arm’s lengthtransaction.

fair valueless costs to sell

The amount obtainable from the sale of an asset orcash-generating unit in an arm’s length transaction between knowledgeable,willing parties, less the costs of disposal.

functionalcurrency

The currency of the primary economic environment inwhich the entity operates, according to IAS 21.

impracticable

Applying a requirement is impracticable when theentity cannot apply it after making every reasonable effort to do so.

inflation effect

The erosionof the real value of only monetary items not inflation-adjusted daily in termsof a daily index or rate.

inflationrate

Percentage of increase in the figure of the chosen consumer price index between two dates.

monetary items

Units of money heldand items with an underlying monetary nature which are substitutes for units ofmoney held.

money held

Bank notes and coinsof the fiat currency created within an economy by means of fractional reservebanking.

non-monetary items

All itemsthat are not monetary items.

price index

A number that shows the variations in the prices of aset of products and services over time.

present value

A current estimate of the present discounted value ofthe future net cash flows in the normal course of business.

recoverableamount

The higherst of an asset’s (or cash-generatingunit’s) fair value less costs to sell and its value in use.

stable measuring unit assumption

Assumes thatchanges in the purchasing power of money are not sufficiently important torequire capital maintenance in units of constant purchasing power in terms of adaily index or rate at all levels of inflation and deflation. The stablemeasuring unit assumption is never implemented under capital maintenance inunits of constant purchasing power in terms of a daily index or rate.

value in use

The present value of estimated future cash flowsexpected to arise from the continuing use of an asset and from its disposal atthe end of its useful life.

variable real valuenon-monetary item

A non-monetary item with a variable real value overtime.

Elaborations on the Defined Terms

cost of inflation

The cost of the erosion of the real value of onlymonetary items not inflation-adjusted daily in terms of a daily index or rate.

cost of the stablemeasuring unit assumption

The cost of the erosion of the real value of onlyconstant real value non-monetary items not measured in units of constantpurchasing power in terms of a daily index or rate currently still generallyconfused with or seen as the same as the cost of inflation which is notcalculated and accounted under Historical Cost Accounting during low inflationand deflation.

Daily measurement is requiredof all items in terms of

(a) a Daily Consumer PriceIndex or monetized daily indexed unit of account, e.g. the Unidad de Fomento inChile, during low inflation, high inflation and deflation and

(b) in terms of a relativelystable foreign currency parallel rate (normally the US Dollar daily parallelrate) or a Brazilian-style Unidade Real de Valor daily index duringhyperinflation. Hyperinflation is defined in IAS 29 as cumulative inflationbeing equal to or approaching 100 per cent over three years, i.e. 26 per centannual inflation for three years in a row.

Monetaryitems

Measurement

Historic and current periodmonetary items are required to be inflation-adjusted on a daily basis in termsof a daily index or rate. The net monetary loss or gain as defined in IAS 29 isrequired to be calculated and accounted when they are not inflation-adjusted ona daily basis during the current financial period. Inflation-adjusting the total money supply (excluding bank notes andcoins of the fiat functional currency created by means of fractional reservebanking within an economy) in terms of a daily index or rate under completeco-ordination would result in zero cost of inflation (not zero inflation) inonly the entire money supply (as qualified) in an economy.

Variablereal value non-monetary items

Examples include quoted and unquoted shares, property,plant, equipment, inventory, intellectual property, goodwill, foreign exchange,finished goods, raw material, etc.

Measurement

Current period variable real valuenon-monetary items are required to be measured on a daily basis in terms ofIFRS excluding the stable measuring unit assumption and the cost model in thevaluation of property, plant, equipment and investment property afterrecognition. When they are not valued on a daily basis, then they as well ashistoric variable real value non-monetary items are required to be updateddaily in terms of a daily rate as indicated above. Current period impairmentlosses in variable real value non-monetary items are required to be treated interms of IFRS. They are constant real value non-monetary items once they areaccounted. All accounted losses and profits are constant real valuenon-monetary items.

Constantreal value non-monetary items

Examples include borrowing costs, comprehensiveincome, interest paid, interest received, bank charges, royalties, fees, shortterm employee benefits, pensions, salaries, wages,rentals, all other income statement items, issued share capital, share premiumaccounts, share discount accounts, retained earnings, retained losses, capitalreserves, revaluation surpluses, all accounted profits and losses, all other items inshareholders´ equity, trade debtors, trade creditors, dividends payable,dividends receivable, deferred tax assets, deferred tax liabilities, all taxespayable, all taxes receivable, all other non-monetary payables, all othernon-monetary receivables, provisions, etc.

Measurement

Historic and current periodconstant real value non-monetary items are always and everywhere required to bemeasured in units of constant purchasing power in terms of a daily rate asindicated above.

[Not yetdeveloped] Appendix B – Methods to perform ~~restatements~~ capital maintenance in units of constant purchasingpower in terms of a daily index or rate.

[Not yetdeveloped] Appendix C – Illustrative examples

Appendix D – Modificationsto other IFRSs

This appendix is an integral part of the IFRS.

In IAS 1 Presentation of Financial Statements,paragraphs 51(d)-(e) are replaced by the following:

(d) the presentation currency, as defined in IAS 21;

(e) whether the financial statements reflect

(i) the ~~inflation~~ effects (cost) of inflation on only monetary items not inflation-adjusted dailyin terms of a daily index or rate

and

(ii) theeffects (cost) of the stable measuring unit assumption on only constant realvalue non-monetary items not measured in terms of financial capital maintenancein units of constant purchasing in terms of a daily index or rate

and, if so, the method used and the other disclosuresrequired by [Preliminary Draft] IFRS X ~~Inflation~~ Capital Maintenance In Units of Constant Purchasing Power; and

(f) the level of rounding used in presenting amountsin the financial statements.

In IAS 7 Statement of Cash Flows, the followingparagraphs are added:

10A. When anentity performs ~~the inflation restatements~~ capital maintenance in units of constant purchasing power in terms ofa daily index or rate described in IFRS X ~~Inflation~~ Capital Maintenance in Units of ConstantPurchasing Power, all the amounts presented in the face of the statement ofcash flows or in the related notes shall be measured in terms of the purchasingpower of the functional currency at the date of the financial statements when they they are accessed or viewed onthat date and thereafter updated at the current date´s (today´s) daily rate.

19A. When an entity performs ~~the inflationrestatements~~ capital maintenance inunits of constant purchasing power in terms of a daily index or rate describedin IFRS X ~~Inflation~~ CapitalMaintenance in Units of Constant Purchasing Power, and the statement ofcash flows is presented using the direct method, the inflation gains and losseson cash and cash equivalents shall be disclosed separately and assigned to cashflows of operating activities.

~~In IAS 23 Borrowing Costs, the second sentence ofparagraph 9 is amended as follows:~~

~~When an entity performs the comprehensivethe inflation restatements described in IFRS X Inflation, the measure of borrowing costs shall benet of inflation.~~

[BorrowingCosts is not a monetary item. It is a constant real value non-monetary item.Inflation has no effect on the real value of non-monetary items.]

In the rest of the components of the IFRSs:

(a) references to IAS 29 Financial Reporting inHyperinflationary Economies are

3 This appendix was prepared considering the IFRSsissued up to July 31, 2010.

changed to [Preliminary Draft] IFRS X ~~Inflation~~Capital Maintenance in Units of ConstantPurchasing Power;

(b) the word “hyperinflationary” is changed to“inflationary”;

In The Conceptual Framework for Financial Reporting(2010)

Conceptsof capital maintenance and the determination of Profit

Paragraph 4.59, 4.62 and4.63 are amended as follows:

4.59 Financial capital maintenance can be measured in either nominalmonetary units or units of constant purchasing power.

The concepts of capital in paragraph 4.57 give rise to the following three concepts of capital maintenance:

(a) Financial capital maintenance in nominalmonetary units

Under this concept a profit is earned only if the financial (or money)amount of the net assets at the end of the period exceeds the financial (ormoney) amount of net assets at the beginning of the period, after excluding anydistributions to, and contributions from, owners during the period.

(b) Financial capital maintenance in units of constant purchasing power

Under this concept a profit is earned only if theconstant purchasing power of the net assets at the end of the period exceedsthe constant purchasing power of net assets at the beginning of the period,after excluding any distributions to, and contributions from, owners during theperiod.

(c) Physical capital maintenance. Underthis concept a profit is earned only if the physical productive capacity (oroperating capability) of the entity (or the resources or funds needed toachieve that capacity) at the end of the period exceeds the physical productivecapacity at the beginning of the period, after excluding any distributions to,and contributions from, owners during the period.

4.62 The principal difference between the three concepts of capital maintenance is the treatment of theeffects of changes in the prices of assets and liabilities of the entity. Ingeneral terms, an entity has maintained theconstant purchasing power of its capital if it has as much constant purchasing power capital at theend of the period as it had at the beginning of the period. Any amount over andabove that required to maintain the constantpurchasing power of its capital at the beginning of the period is profit.

Paragraph OB2 of the Conceptual Framework forFinancial Reporting is amended as follows:

OB2 The objectives of generalpurpose financial reporting* are

(a) maintaining the constant purchasing power of capitalin units of constant purchasing power in terms of a daily index or rate and

(b) to provide financial information about the reportingentity that is useful to existing and potential investors, lenders and othercreditors in making decisions about providing resources to the entity. Thosedecisions involve buying, selling or holding equity and debt instruments, andproviding or settling loans and other forms of credit.

In the Measurement Chapter in the Conceptual Frameworkfor Financial Reporting ‘units of constant purchasing power in terms of a DailyConsumer Price Index’ is added as a fundamental measurement basis.

Appendix E –Modifications to material accompanying other IFRSs

Paragraph 18 of appendix A to IAS 12 Income Taxes andthe preceding title are amended as follows:

~~Inflation~~ The Stable Measuring Unit Assumption

18. ~~Some~~ Assetsand equity accounts are ~~restated~~ measuredby implementing capital maintenance in units of constant purchasing power interms of a daily index or rate in terms of the purchasing power of thefunctional currency at the date of the financial statements when they are accessed or viewed on that dayand afterwards updated at the current (today´s) rate (see IFRS X ~~Inflation~~Capital Maintenance in Units of ConstantPurchasing Power) for accounting purposes but not for tax purposes. (Note:The Standard requires an entity to account for the tax consequences oftransactions and other events in the same way as it accounts for thetransactions and other events themselves. Thus, for transactions and otherevents recognized in profit or loss, any related tax effects are alsorecognized in profit or loss. For transactions and other events recognizedoutside profit or loss, either in other comprehensive income or directly inequity, any related tax effects are also recognized outside profit or loss,either in other comprehensive income or directly in equity, respectively).

In paragraph BC40 of the basis for conclusions of IAS39 Financial Instruments: Recognition and Measurement, the phrase “(see IAS 29Financial Reporting in Hyperinflationary Economies)” is deleted.

In the rest of the material accompanying IFRSs:

(a) references to “IAS 29 Financial Reporting inHyperinflationary Economies” are changed to “[Preliminary Draft] IFRS X ~~Inflation~~Capital Maintenance in Units of ConstantPurchasing Power”;

(b) the word “hyperinflationary” is changed to“inflationary”;

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Capital Maintenance in Units of Constant Purchasing Power is authorized in IFRS

2012-02-06T11:34:00.000Z

Capital Maintenance in Units of Constant Purchasing Power is authorized in IFRS

Capital Maintenance in Units of Constant Purchasing Power is authorized as an alternative to Historical Cost Accounting in IFRS at all levels of inflaiton and deflation in the original Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010), Par. 4.59 (a)] which states:

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

IAS 29 is - currently - still required to be applied during hyperinflation.

Any entity implementing IFRS during low inflation, high inflation and deflation can thus immediately change over to capital maintenance in units of constant purchasing power (CIPPA).

Capital maintenance in units of constant purchasing power is a departure from Historical Cost Accounting. It is a fundamentally different accounting model than HCA, i.e. financial capital maintenance in nominal monetary units.

Capital maintenance in units of constant purchasing power automatically maintains the constant purchasing power of capital constant for an indefinite period of time in all entities that at least break even in real value at all levels of inflation and deflation - ceteris paribus - whether they own any revaluable fixed assets or not.

The attributes of capital maintenance in units of constant purchasing power are:

1 The real value of capital isalways equal to the real value of net assets.

2 Thecapital concept to be implemented: Constant purchasing power capital.

3 Thecapital maintenance concept to be implemented: Financial capital maintenance inunits of constant purchasing power in terms of a Daily CPI at all levels ofinflation and deflation.

4 Thestable measuring unit assumption is never implemented under capital maintenancein units of constant purchasing power in terms of a Daily CPI.

5 Monetary items are units of money held anditems with an underlying monetary nature which are substitutes for units of moneyheld.

6Non-monetary items are all items that are not monetary items

7Non-monetary items are sub-divided in:

(a)Variable real value non-monetary items and

(b)Constant real value non-monetary items.

A variable real valuenon-monetary item is a non-monetary item with a variable real value over time.

A constant real valuenon-monetary item is a non-monetary item with a constant real value over timewhose value within an entity is not generally determined in a market on a dailybasis.

8Daily measurement is required of all items in terms of:

(a) aDaily Consumer Price Index or monetized daily indexed unit of account, e.g. theUnidad de Fomento in Chile, duringlow inflation, high inflation and deflation and

Measurement

11Historic and current period constant real value non-monetary items are alwaysand everywhere required to be measured in units of constant purchasing power interms of a Daily CPI as detailed above.

15 Inflationand deflation only affect the real value of monetary items notinflation-adjusted and not deflation-adjusted, respectively, on a daily basisin terms of a Daily CPI.

17 Theterms ‘restatement’, ‘restated’, ‘inflation restatements’ and‘inflation-adjustment of financial statements’ are not be used in the proposednew IFRS.

18 Theproposed new IFRS is a departure from Historical Cost Accounting at all levelsof inflation and deflation.

Financial statements should ideally not be printed on hard copy

2012-02-03T11:15:00.000Z

Financialstatements should ideally not be printed on hard copy

Financial statements should ideally alwaysbe available only in electronic format under capital maintenance in units of constant purchasing power at all levels of inflation and deflation (CIPPA) with:

(1) automatic daily inflation-adjustingof all historic and current period monetary items (excluding bank notes and coins which now (2012) cannot be inflaiton-adjusted daily) in terms of a Daily Consumer Price Index or daily rate (e.g. a daily US Dollar parallel rate only during hyperinflation) always at the current (today´s) rate.

The net monetary loss or gain is required to be calculated and accounted as a separate item in the profit and loss account when curent period monetary items are not inflation-adjusted daily.

Monetary items are units of money heldand items with an underlying monetary nature which are substitutes for units ofmoney held.

Examples of units of money held are bank notes andcoins of the fiat currency created within an economy by means of fractionalreserve banking. Examples of items with an underlying monetary nature which aresubstitutes of money held include the capital amount of: bank loans, banksavings, credit card loans, car loans, home loans, student loans, consumerloans, commercial and government bonds, Treasury Bills, all capital and moneymarket investments, notes payable, notes receivable, etc. when these items arenot in the form of money held.

(2) daily measurement of variable real value non-monetary items in terms of IFRS excluding the stable measuring unit assumption and the cost model inthe valuation of property, plant, equipment and investment property afterrecognition.

Current period and historic variable items are required to be updated daily in terms of a Daily CPI or daily rate when not measured daily in terms of IFRS.

Variable item impairment losses are treated in terms of IFRS.

Variable real valuenon-monetary items are non-monetary items with variable real values overtime.

Examples include quoted and unquoted shares, property,plant, equipment, inventory, intellectual property, goodwill, foreign exchange,finished goods, raw material, etc.

(3) constant real value non-monetary items should always and everywhere be measured in units of constant purchasing power in terms of a Daily Consumer Price Indexor daily rate (e.g. a daily US Dollar parallel rate only during hyperinflation) always at the current (today´s) rate.

The net constant item loss or gain is required to be calculated and accounted when constant items are not measured in terms of units of constant purchasing power on a daily basis.

Examples include borrowing costs, comprehensiveincome, interest paid, interest received, bank charges, royalties, fees, shortterm employee benefits, pensions, salaries, wages,rentals, all other income statement items, issued share capital, share premiumaccounts, share discount accounts, retained earnings, retained losses, capitalreserves, revaluation surpluses, all accounted profits and losses, all other items inshareholders´ equity, trade debtors, trade creditors, dividends payable,dividends receivable, deferred tax assets, deferred tax liabilities, all taxespayable, all taxes receivable, all other non-monetary payables, all othernon-monetary receivables, provisions, etc.

Nicolaas Smith

Suggested amendement to the Objectives of Financial Reporting

2012-02-02T12:21:00.002Z

Suggested amendement to the Objectives of Financial Reporting

Paragraph OB2 of the Conceptual Framework forFinancial Reporting should be amended as follows:

OB2 The objectives of generalpurpose financial reporting* are

(a) maintaining the constant purchasing power of capitalin units of constant purchasing power in terms of a daily index or rate and

Suggested amendments to The Conceptual Framework for Financial Reporting

2012-02-01T12:51:00.001Z

Suggested amendments to The Conceptual Framework for Financial Reporting

In The Conceptual Framework for Financial Reporting(2010)

Conceptsof capital maintenance and the determination of Profit

Paragraph 4.59, 4.62 and4.63 should be amended as follows:

4.59 Financial capital maintenance can be measured in either nominalmonetary units or units of constant purchasing power.

The concepts of capital in paragraph 4.57 give rise to the following three concepts of capital maintenance:

(a) Financial capital maintenance in nominalmonetary units

(b) Financial capital maintenance in units of constant purchasing power

Accounting-dollarization

2012-01-31T17:46:00.005Z

Accounting-dollarization

Accounting-dollarization is running your daily businessand doing your daily accounting in terms of the US Dollar daily parallel rateor another foreign currency daily parallel rate during hyperinflation althoughyou many never even receive or make payments in the US Dollar or anotherforeign currency.

It is not the same as translating year-end financialstatements prepared under Historical Cost Accounting in a hyperinflationaryeconomy at the US Dollar exchange rate at the period-end date.

Accounting-dollarization results in capitalmaintenance in units of constant purchasing power in terms of the daily USDollar parallel rate which would maintain the constant purchasing power ofcapital constant for an indefinite period of time in all entities that at leastbreak even during hyperinflation – ceteris paribus.

Translating year-end HC financial statements at theyear-end US Dollar rate does not result in capital maintenance in units ofconstant purchasing power.

‘The use of units of account separate from money hasbeen known for millennia.’ (Shiller, R.J., 1998)

I developed accounting-dollarization during 1995 inAngola´s hyperinflationary economy and implemented it during 1996 in Auto-Sueco(Angola).

Inflation only affects bank notes and coins

2012-01-30T10:35:00.003Z

Inflation only affects bank notes and coins

Inflation and deflation haveno effect on the real value of non-monetary items.

‘Inflation is always and everywhere a monetary phenomenon,’ per MiltonFriedman.

‘Purchasing power of non monetary itemsdoes not change in spite of variation in national currency value.’

Gucenme, U. and Arsoy, A. P. (2005). Changes in financial reporting inTurkey, Historical Development of Inflation Accounting 1960 – 2005. Special Issue Accountingfor the Global and the Local: The Case of Turkey. Critical Perspectives onAccounting, Volume 20, Issue 5, July 2009, p. 568–590.

‘Assetsand liabilities linked by agreement to changes in prices, such as index linked bondsand loans, are adjusted in accordance with the agreement in order to ascertainthe amount outstanding at the end of the reporting period.’

IAS29, Par. 13

Inflation in many different countries has no effect onthe real value of monetary items inflation-adjusted in terms of a Daily CPI,for example the more than 2.68 trillion US Dollars (2009)¹ ofgovernment inflation-indexed bonds currently inflation-adjusted daily in theworld economy in terms of a Daily CPI which is a lagged, daily interpolation ofthe monthly published CPI.

¹ (StandardLife Investments. (2012). AnInvestor´s Guide to Inflation–Linked Bonds. Retrieved 7 January2012, from Standard Life Investments’s Web site.)

According tothe Banco Central de Chile, 20 to 25per cent of the broad M3 money supply in Chile is currently inflation-adjusted dailyin terms of the Unidad de Fomento (Written communication. (2011)) which is a monetized daily indexed unit ofaccount started in 1967 and published daily by the Banco Central de Chile since 1990.

The above areall monetary items that exist in a zero cost of inflation (not zero inflation)space. They are all monetary items, but, their real values are not affected byinflation. Inflation-adjusting the entire money supply (excluding bank notesand coins of the fiat functional currency created by means of fractionalreserve banking within an economy) under complete co-ordination would result inzero cost of inflation (not zero inflation) in only the complete money supply(as qualified) in an economy.

It is currently (2012) impossible to inflation-adjustor deflation-adjust bank notes and coins of fiat money created by means offractional reserve banking within an economy. Their real values are alwaysaffected by inflation and deflation.

Bank notes and coins make up about 7 per cent of thebroad M3 money supply in an advanced economy.

At an inflation target of 2 per cent per annum annualinflation the erosion of real value by inflation can be limited to 2 per centof 7 per cent of M3 under complete co-ordination; i.e. 0.14 per cent of themoney supply.

The inflation dragon has been cut down to size asevidenced in the US economy.

Nicolaas Smith

Monetary items

2012-01-27T12:01:00.000Z

Monetary items

The IFRS definitions ofmonetary items in IAS 29, Par. 12 and IAS 21, Par. 8 need to be improvedbecause non-monetary items are all items that are not monetary items. Thedefinition of monetary items thus determines which items are non-monetary itemsper IFRS. When the definition of monetary items is incorrect then the division ofmonetary and non-monetary items is incorrect as it currently is in terms ofIFRS.

IAS 29, Par. 12

'Monetary items are money held and items to be received or paid in money'

IAS 21, Par. 8

'Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.'

Definition

Monetary items are units of money held and items withan underlying monetary nature which are substitutes for units of money held.

Two totally different processes of real value erosion in an economy during inflation

2012-01-26T12:06:00.000Z

There are two totallydifferent processes of real value erosion involved in an economy duringinflation:

(1) One eroding thereal value of only monetary items not inflation-adjusted daily in terms of aDaily CPI, namely, the economic process of inflation and

Borrowing costs are not monetary items

2012-01-25T13:24:00.000Z

Borrowing costs are not monetary items

Borrowing costs, interest paid, bank charges, interestreceived, etc are constant real value non-monetary items.

They appear to be monetary items because banks almost alwayscharge them to bank accounts on the day they are due.

Inflation has no effect on the real value of non-monetaryitems. The above items are thus never affected by inflation.

When they are not measured in units of constant purchasingpower in terms of a Daily Consumer Price Index then their real values areeroded – at the rate of inflation because money is used as the medium ofexchange – by the stable measuring unit assumption.

Nicolaas Smith

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