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Monday, 13 September 2010

Constant real value non-monetary items

"One can say that capital, as a category, did not exist before double-entry bookkeeping". Sombart

Lane, Frederic C; Riemersma, Jelle, eds (1953). Enterprise and Secular Change: Readings in Economic History. R. D. Irwin. p. 38. (quoted in "Accounting and rationality")

Definition

Constant items are non-monetary items with constant real values over time.

Measurement of Constant Items in the Financial Statements

Measurement of constant items is the generally accepted accounting practice of determining the monetary amounts at which constant real value non-monetary items are to be recognised/accounted and carried in the financial reports. This involves the selection of the particular basis of primary measurement. Constant real value non-monetary items are valued in terms of IFRS in units of constant purchasing power by applying the CPI under the financial capital maintenance in units of constant purchasing power model, i.e. Constant ITEM Purchasing Power Accounting, as authorized in IFRS in the Framework, Par 104 (a) in 1989 where under only constant real value non-monetary items are inflation-adjusted during low inflation and deflation.

Hyperinflation is described as an exceptional circumstance by the IASB. All non-monetary items – both variable real value non-monetary items and constant real value non-monetary items - are required to be valued in units of constant purchasing power in terms of IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation.

Financial capital maintenance in nominal monetary units and its IFRS-authorized alternative - financial capital maintenance in units of constant purchasing power - would be one and the same basic accounting model at permanently sustainable zero inflation – something that has never been achieved in the past and is not likely to be achieve any time soon in the future.

The IASB defined monetary items in IAS 29 incorrectly as money on hand and items to be paid in money or to be received in money. Most variable real value non-monetary items and constant real value non-monetary items are generally received or paid in money as the monetary medium of exchange. The fact that the IASB defines non-monetary items as all items in the income statement and all other assets and liabilities in the balance sheet that are not monetary items, after having defined monetary items incorrectly, leads to the wrong classification of some constant items, notably trade debtors and trade creditors, as monetary items by, for example,

PricewaterhouseCoopers in their publication Understanding IAS 29. This results in the net monetary gain or loss generally being calculated incorrectly by companies implementing IAS 29 in hyperinflationary economies.

The definition of non-monetary items as being all items that are not monetary items is a generic definition. It is thus premised by the IASB that there are only two fundamentally distinct items in the economy: monetary and non-monetary items and that the economy is divided into two parts: the monetary and non-monetary economy. IAS 29 and other IFRS are based on this premise of only two fundamentally different items in the economy. This is a false premise.

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

1. Monetary items
2. Variable real value non-monetary items
3. Constant real value non-monetary items
Copyright © 2010 Nicolaas J Smith