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Wednesday, 6 July 2011

The definitive proof that trade debtors / creditors are non-monetary items

The definitive proof that trade debtors / creditors are non-monetary items


Monetary items are money held and items with an underlying monetary nature.

Money is the monetary unit.

Trade debtors and trade creditors are defined incorrectly in IFRS, by the FASB and by PricewaterhouseCoopers to be monetary items. They are constant real value non–monetary items. All street vendors in hyperinflationary economies know by experience - even when some of them have never been to school - that paying for a non–monetary item on credit means the value at the date of the sale has to be updated (measured in units of constant purchasing power) over time. The IASB, the FASB and PricewaterhouseCoopers still get this wrong.

Trade debtors and trade creditors are constant real value non-monetary items but are treated like monetary items under the current Historical Cost paradigm. If they were, in fact, monetary items they would behave like monetary items under inflation and deflation. They would always lose real value under inflation: however, Brazil measured trade debtors and trade creditors in units of constant purchasing power by updating them in terms of a daily index value during 30 years of very high inflation and hyperinflation. That is complete proof that trade debtors, trade creditors, all non-monetary payables and all non-monetary receivables are not monetary items, but, constant real value non-monetary items; namely, the fact that they can be updated (measured in units of constant purchasing power) during the current financial period because monetary items cannot be updated under any accounting or economic model during the current accounting period.

I updated all trade debtors in terms of the daily US Dollar parallel rate in Auto-Sueco (Angola) during 1996. All our trade debtors accepted that and paid the updated amount in Angolan Kwanzas. That is complete proof that trade debtors and trade creditors are constant item real value non-monetary items. If they were monetary items I would not have been able to update them and our trade debtors would not have accepted it.

Trade debtors and trade creditors are incorrectly treated as monetary items in terms of IAS 29 Financial Reporting in Hyperinflationary Economies. All calculations done since 1989 in terms of IAS 29 of monetary losses and gains as well as profit calculations are thus wrong.

Money is a monetary item that is generally accepted as a medium of exchange, store of value and unit of account within an economy or monetary union. Only an economic item that fulfils all three functions of money at the same time can be the monetary unit in a specific economy or monetary union. Fulfilling only two of the three functions does not qualify an item as the monetary unit. See Foreign Exchange.

A foreign currency is not the monetary unit in a non–dollarized economy since it is not the monetary unit of account.

Money held are bank notes and coins on hand and demand deposits in banks and financial institutions.


Nicolaas Smith

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