Monday, 18 January 2010

To be or not to be a constant item, that is the question

The specific choice of measuring financial capital maintenance in units of constant purchasing power (the Constant ITEM Purchasing Power Accounting model) at all levels of inflation and deflation as contained in the Framework for the Preparation and Presentation of Financial Statements Par 104 (a), was approved by the International Accounting Standards Board’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.

“In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8."

IAS Plus, Deloitte. Date: 15 th January, 2010

IAS 8 Par 11 states that managers, in exercising their judgement, have to first apply the rules and regulations in IFRS and interpretations by the International Financial Reporting Interpretations Committee which deal with similar and related items and, only secondly the measurement concepts, criteria for recognition and definitions for expenses, income, liabilities and assets as stated in the Framework.

There are no applicable IFRS or Interpretations regarding the valuation of the constant real value non-monetary items issued share capital, reported retained earnings, capital reserves, share premium account, share discount account, the concepts of capital, the capital maintenance concepts, the determination of profit/loss concept, etc. The measurement concepts and direct and indirect definitions in the Framework are thus applicable. There are Standards related to the constant items trade debtors, trade creditors, other non-monetary payables, other non-monetary receivables, deferred tax assets, deferred tax liabilities, taxes payable and taxes receivable. In terms of IAS 8.11 the Standards take precedence over the Framework in the case of these items.


There is a conflict with the capital maintenance concept in the Framework where IFRS treat constant real value non-monetary items like monetary items or variable items. The only way the financial capital concept of continuously measuring financial capital maintenance in units of constant purchasing power in terms of the provisions in the Framework, Par 104 (a) can be correctly implemented, is with the correct treatment of all constant real value non-monetary items as constant items and not as monetary or variable items. The incorrect treatment of constant items as monetary or variable items may lead to the incorrect calculation of the Net Monetary Loss or Gain from holding monetary items as required when measuring financial capital maintenance in units of constant purchasing power in terms of the Framework, Par 104 (a) and as required in IAS 29.


Examples of constant real value non-monetary items in today’s economy are income statement constant items, e.g. salaries, wages, rentals, all other items in the income statement as well as balance sheet constant items, e.g. reported retained earnings, issued share capital, capital reserves, share issue premiums, share issue discounts, provisions, capital reserves, all other shareholder’s equity items, trade debtors, trade creditors, other non-monetary debtors and creditors, taxes payable and receivable, deferred tax assets and liabilities, dividends payable and receivable, royalties payable and receivable, all other non-monetary payables and receivables, etc.

Kindest regards,

Nicolaas Smith

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