The net monetary gains and losses puzzle

Entities with net monetary assets (weighted average of monetary assets greater than weighted average of monetary liabilities) over a period of time, e.g. a year, will suffer a net monetary loss (less real value owned/more real value – real assets – destroyed) during inflation – all else being equal. Companies with net monetary liabilities (weighted average of monetary liabilities greater than the weighted average of monetary assets) will experience a net monetary gain (less real value owed/more real liabilities destroyed) during inflation – ceteris paribus.


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Net monetary gains and losses are calculated and accounted during hyperinflation as required by IAS 29 Financial Reporting in Hyperinflationary Economies and with the measurement of financial capital maintenance in units of constant purchasing power in terms of the IASB´s Framework, Par 104 (a) during low inflation and deflation. Net monetary gains and losses are not required to be computed under the traditional Historical Cost Accounting model although it can be done.

“Computing the gains or losses from holding monetary items can be done and the information disclosed when the books are maintained on a historical-cost basis.”

Harvey Kapnick, Chairman of Arthur Anderson & Company, Value based accounting: Evolution or revolution, Saxe Lecture, 1976, Page 6. http://newman.baruch.cuny.edu/DIGITAL/saxe/saxe_1975/kapnick_76.htm

Net monetary gains and losses are constant real value non-monetary items once they are accounted in the income statement.

This omission to compute the gains and losses from holding monetary items is one of the consequences of the stable measuring unit assumption.

"The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements."

Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.

The practice of calculating and accounting net monetary gains and losses under hyperinflation and under low inflation and deflation only with the implementation of IFRS-authorized financial capital maintenance in units of constant purchasing power, but, not during the implementation of the traditional Historical Cost Accounting model is one of the various confounding generally accepted perplexities in the accounting profession.

Kindest regards

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Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith