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Monday, 7 April 2008

Constant real value non-monetary items defined in IFRS

The term constant real value non-monetary item is defined indirectly in IFRS.

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South African accountants are 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 29, Par. 12 as follows:

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

The second part of this definition is not correct. When you buy your mobile phone on credit, the trade debtor amount in the supplier´s accounts is not a monetary item just because it has to be paid in money. You can pay it in strawberries too, if the supplier will accept strawberries as payment. The trade debtor amount relates to the sale of a variable real value non-monetary item, namely your mobile phone. You did not borrow money from the supplier. The trade debt is a constant real value non-monetary item.

When inflation destroys the real value of your money at 15% per annum you have to pay 15% more money over a year to pay off the constant real value non-monetary item, the phone you bought. It is impossible for inflation to destroy the constant real non-monetary value of your phone as long as the real value of your phone is determined in a free market. 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 destroy the real value of money and other monetary items. Inflation has no effect on the real value of non-monetary items. The debt is for the constant real non-monetary value of a constant real value 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. You did not borrow money. You bought a non-monetary item.

IAS 29 clearly defines monetary and non-monetary items as per the IASB.


Here follows the correct definition of Monetary items:

Monetary items are money held and items with an underlying monetary nature.


The above is not an IASB definition.


Non-monetary items are all items that are not monetary items. This IASB definition is correct for non-monetary items as a generic term. It is however taken that there are thus only two distinct items in the economy: monetary and non-monetary items. The standard to be applied in hyperinflationary economies, International Accounting Standard IAS 29 Financial Reporing in Hyperinflationary Economies was developed on this basis.

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

1. Variable real value non-monetary items
2. Monetary items
3. Constant real value non-monetary items

Constant real value non-monetary items are currently only recognized by definition and by name under

(1) Constant Item Purchasing Power Accounting article on Wikipedia,

(2) on this blog and


The IASB does not recognize constant real value non-monetary items directly by name or by definition, but, indirectly by implication. The fact that certain non-monetary items have constant real non-monetary values is implied by the IASB approval of the Constant ITEM Purchasing Power Accounting model in the Framework for the Preparation and Presentation of Financial Statements Par. 104 (a):

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

The IASB clearly defines issued share capital, capital reserves, retained earnings, all other items in shareholders´ equity, all items in the income statement, provisions, etc as non-monetary items. Since these non-monetary items can be measured in units of constant purchasing power they are obviously constant real value non-monetary items with constant real non-monetary values expressed in terms of a monetary unit of account over time.

Logic would thus imply and it is a fact that non-monetary items that are not measured in units of constant purchasing power during low inflation on a primary valuation basis but are valued in terms of specific IFRS at, for example, market value, fair value, recoverable value, net realisable value, present value, etc are not constant but variable real value non-monetary items, e.g. property, plant, equipment, shares, inventory, foreign exchange, etc.

Constant real value non-monetary items are also implied by the fact that the IASB states in the Framework that accountants can choose to implement a financial capital concept of invested purchasing power where under they choose to measure financial capital maintenance in units of constant purchasing power (the real value maintaining Constant ITEM Purchasing Power Accounting model) instead of in traditional Historical Cost nominal monetary units (the real value destroying Historical Cost Accounting Model).

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Kindest regards,

Nicolaas Smith