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Showing posts with label Definition of monetary item. Show all posts
Showing posts with label Definition of monetary item. Show all posts

Monday 4 July 2011

Definition of monetary item

Definition of monetary item


The correct definition of monetary items is critical for the correct classification of non–monetary items since the latter are correctly defined as all items that are not monetary items. If the definition of monetary items is wrong – as it currently is in IFRS – then some constant real value non–monetary items are incorrectly classified as monetary items. This happens mainly with the incorrect classification of trade debtors and trade creditors as monetary items under current IFRS. This affects the correct valuing of these items, the calculation of the net monetary gain or loss and consequently the profit or loss for the reporting period which influences the correctness of the financial statements in terms of IAS 29 during hyperinflation. In an amazing contradiction of basic economic logic, there is no net monetary gain or loss calculation required when the traditional HCA model is chosen during low inflation and deflation. The calculation of the net monetary gain or loss is an essential part of the CIPPA model while it is non–existent under the HCA model. This is one of the fundamental failures of the HCA model which is corrected under the CIPPA model.

The incorrect treatment of the constant real value non–monetary items trade debtors and trade creditors and other non–monetary payables and receivables as monetary items is mainly due to the incorrect definition of monetary items in International Financial Reporting Standards.

It is taught that there are only two distinct economic items in the economy, namely, monetary and non–monetary items and that the economy is divided in the monetary and non–monetary or real economy.

Monetary items are defined by the International Accounting Standards Board in IAS 21 The Effects of Changes in Foreign Exchange Rates, Par 8 as follows:

“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.”

and in IAS 29 Financial Reporting in Hyperinflationary Economies, Par 12 as follows:

“Monetary items are money held and items to be received or paid in money.”

The correct defintion of Monetary Items

Monetary items constitue the Money supply.

Updated on 11-05-2013

The US Financial Accounting Standards Board and PricewaterhouseCoopers also define trade debtors and trade creditors incorrectly as monetary items. PwC is simply following the IASB lead.

The second part of the IAS 29 definition is not correct. When a non–monetary item, e.g. raw material, is bought on credit, the trade debtor amount in the supplier’s accounts is not a monetary item just because it will be paid in money or because it will be paid in a fixed or determinable number of units of currency. It can be paid in strawberries or diamonds too, if the supplier will accept strawberries or diamonds as a medium of payment. That will not make the non–monetary raw material a strawberry item or diamond item, just like payment in money does not make non–monetary raw material a monetary item. Money or strawberries or diamonds are simply used as the mutually agreed medium of exchange. The constant real value non–monetary trade debtor amount relates to the sale of a non–monetary item, namely the non–monetary raw material. The trade debt has an underlying non–monetary nature. All items – monetary and non–monetary items – are normally received or paid in money.

The buyer did not decide or agree to borrow money – exactly equal to the amount of the trade debt – from the supplier the moment the buyer decided not to pay the purchase cash on delivery or even if it was beforehand agreed that the buyer would not pay cash on delivery, but, would be granted credit. The supplier did not decide or agree to lend the buyer money– exactly equal to the amount of the trade debt – the moment the buyer did not pay the purchase cash on delivery. The trade debt relates to a non–monetary item: raw material. The trade debt is thus a constant real value non–monetary item the moment it comes about. The underlying non–monetary nature of the debt (raw material, furniture, vehicle, etc.) results in it being a constant real value non–monetary item the moment the debt comes about which has to be updated – over time – during low inflation, hyperinflation and deflation. Street vendors in hyperinflationary economies – some of whom have never been to school – know this instinctively.

When inflation erodes the real value of the monetary medium of exchange at 2% per annum, 2% more money has to be paid over a year to pay off the constant real value non–monetary item, the trade debtor amount.

Inflation is always and everywhere a monetary phenomenon – as per Milton Friedman. Money is only the monetary medium of exchange used for payment. Inflation can only erode the real value of money and other monetary items – nothing else. Inflation has no effect on the real value of non–monetary items. The debt is for the constant real non–monetary value of a non–monetary item mutually agreed and generally accepted to be paid in money: not for a monetary item. Money is simply the medium of exchange. No–one lent any money to anyone else. There is generally no money loans involved with trade creditors and trade debtors.


Nicolaas Smith

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