Friday, 20 November 2009

Constant items

The Framework, Par. 102 states that most companies choose a financial concept of capital to prepare their financial reports. An entity’s capital is the same as its equity or net assets when it adopts a financial concept of capital, for example invested purchasing power or invested money.

Par. 103 states that the needs of financial report users should determine the choice of the correct concept of capital by a company. If the users of financial reports are mainly concerned with the maintenance of nominal invested capital or the maintenance of the purchasing power of invested capital then a financial concept of capital should be chosen.

Par. 104 states that the concepts of capital stated in Par. 102 give origin to the financial capital maintenance concept. Par. 104 (a) then states that:

"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 real value non-monetary items can be measured in units of constant purchasing power in terms of the Framework, Par. 104 (a), to implement a financial capital maintenance concept 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 in a low inflationary or deflationary economy.

Logic would thus imply and it is a fact that real value non-monetary items that are not measured in units of constant purchasing power during low inflation or deflation 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.

Examples of constant items

All income statement items once they are accounted
Cost of sales
Gross Profit
Investment revenues
Other gains and losses
Net monetary gains and losses
Share of profits of associates
Changes in inventories of finished goods and work in progress
Raw materials and consumables used
Depreciation and amortisation expense
Employee benefits expense
Distribution expenses
Marketing expenses
Occupancy expenses
Administration expenses
Finance costs
Consulting expense
Other expenses
Profit before tax
Income tax expense
Profit for the year from continuing operations
Profit for the year from discontinued operations
Profit for the year

All balance sheet constant items
Deferred tax assets
Finance lease receivables
Trade and other non-monetary debtors
Provision for doubtful debts
Current tax assets
Issued share capital
Share premium
Share discount
Capital reserves
General reserve
Properties revaluation reserve
Investments revaluation reserve
Equity-settled employee benefits reserve
Hedging reserve
Foreign currency translation reserve
Retained earnings
Retirement benefit obligation
Deferred tax liabilities
Employee benefits provision
Provision for rectification work
Provision for warranties
Onerous lease contract provision
Restructuring and termination costs provision
Decommissioning costs provision
Deferred Revenue
Trade and other non-monetary creditors
Current tax liabilities

The IASB only recognizes monetary and non-monetary items in the economy. The Board manages to side-step the split between variable and constant items with the stable measuring unit assumption which it accepts as part of HCA. Constant items are valued in nominal monetary units under HCA implementing the stable measuring unit assumption.

HCA makes no difference between variable real value non-monetary items and constant real value non-monetary items. Both variable and constant items are grouped together as simply non-monetary items as opposed to monetary items. Both variable items valued at HC (e.g. fixed property) and constant items valued at HC (Retained Earnings) are classified as simply non-monetary items under HCA.

Kindest regards,

Nicolaas Smit

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