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Friday, 9 May 2008

Variable real value non-monetary items

There are three distinct economic items in the South African economy:


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1. Variable items
2. Monetary items
3. Constant items

They are valued in three distinctly different ways by South African Chartered Accountants. CA´s do not simply account economic activity. They value economic items when they account them in the accounting records and prepare financial reports of SA economic entities.

Monetary items are money held and monetary values pertaining only to money.

Non-monetary items are all items that are not monetary items. This is perhaps one of the very few undisputed economic definitions.

Non-monetary items are sub-divided into:

(a) variable items and
(b) constant items.


Constant items only came about with the introduction of the double entry accounting model that was concluded about seven centuries ago. There were no constant items before the double entry accounting model.

Barter economies

The first economies functioned without money. They were barter economies. People bartered economic items they possessed or produced in excess of their own personal needs for other products they desired from other people who had an excess of the products they in turn possessed or produced.

The first economic items had variable values. A baker baking bread bartered her extra rolls of bread for rabbits that a hunter would barter. When the hunter had many rabbits to barter he would accept a certain number of bread rolls for a rabbit. When he had few rabbits to barter and he was the only hunter in that area, then he would trade the rabbits for more rolls of bread per rabbit.

Both the rabbits and the bread rolls had variable values depending on demand and supply. This applied to all economic items in barter economies.

Neither money nor the double entry accounting model was invented yet. There was no Historical Cost Accounting model. There was no stable measuring unit assumption. There was no inflation. There was no medium of exchange. There was no monetary unit of account. There were no financial reports: no profit and loss accounts and no balance sheets.

There were no monetary items and no constant items. Only variable items.

Money

Money was then invented over a long period of time. Eventually money came to fulfil three functions:

a. Medium of exchange
b. Store of value
c. Unit of account

At that stage there were two distinct economic items in the economy: variable items and monetary items. The double entry accounting model was still not invented yet with the result that there were no constant items.

Original monetary inflation, then being only the destruction of real value in money, appeared soon after money was invented. There was no Historical Cost Accounting inflation in constant items since there was no double entry accounting model and there were no constant items.

Double Entry Accounting

Finally the introduction of the double entry accounting model was concluded round about the year 1300. This resulted in the creation of the third distinct economic item: a constant real value non-monetary item.

Variable real value non-monetary items

The first distinct economic item is a variable item.

Economic items we see around us - excluding constant items that appear in accounting records and financial reports - that are not monetary items, are variable items.

Examples

Property, plant, equipment, all forms of vehicles, office and home furniture and fixtures, information technology equipment, consumables, office, home and factory materials, etc.
Investment property
Raw materials, work in progress and finished goods stocks
Foreign currency
Quoted and unquoted shares
Consumer goods and similar economic items owned by economic entities.

Under Constant Item Purchasing Power Accounting (CIPPA), variable items are valued at fair value or the lower of cost or net realisable value or recoverable value or market value or present value in terms of International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs) and South African Generally Accepted Accounting Practice (SA GAAP) excluding the stable measuring unit assumption in all the aforementioned.

CIPPA is exactly the same as Historical Cost Accounting excluding the stable measuring unit assumption, International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies and the definition of monetary items in International Accounting Standard IAS 21.

Under CIPPA variable items are updated every time the Consumer Price Index (CPI) changes between valuations.¹ Footnote: All aspects of hyperinflation are dealt with in the chapter on hyperinflation.

Variable items are adequately valued in terms of IFRSs and SA GAAP. Originally all variable items were valued at historical cost. SA accountants, like their counterparts in the rest of the world, excluding the United States of America, accept that certain variable items, e.g. property, cannot be valued at historical cost. They accept fair value valuation for these items.

SA accountants agree with accountants in the rest of the world that raw materials, work in progress and finished goods stocks cannot be valued simply at historical cost. They value them at the lower of cost or net realizable value.

SA accountants also agree with generally accepted accounting practice world wide to value shares quoted on the stock exchange not at the historical cost purchase price, but at the market value at the balance sheet date.

The same is true with variable items valued at recoverable value or present value. SA accountants agree that these items cannot be valued at historical cost.

Variable items´ real values are not being destroyed by SA Chartered Accountants as a result of their implementation of IFRSs and SA GAAP. The real values of these items are not being destroyed uniformly at, e.g., the inflation rate because of IFRSs and SA GAAP.
Neither the Historical Cost Accounting model nor inflation nor the combination of the two nor IFRSs nor SA GAAP is destroying the real value of variable items.

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Where real losses are made in dealing with variable items in SA, these losses are the result of business and private or public decisions, e.g. selling at a bad price, obsolescence, etc, etc. They do not result from the application of the traditional accounting model or from the combination of the Historical Cost Accounting model and inflation.