Valuing
the three basic economic items
Monetary items
(1)
The real value of the unstable monetary unit (money) and
all other unstable monetary items not inflation-adjusted daily in the unstable monetary
economy generally changes every day at all levels of inflation and deflation in
terms of a Daily Consumer Price Index or daily monetized unit of account, e.g.
the Unidad de Fomento in Chile, during
low inflation, high inflation and deflation and in terms of the daily US Dollar
or other relatively stable foreign currency parallel rate or a Brazilian-style
daily Unidade Real de Valor index during
hyperinflation.
Bank notes and coins
currently (2012) cannot be inflation-adjusted. Inflation and deflation always
affect the real value of bank notes and coins. All other monetary items can be
inflation-adjusted on a daily basis. 20 to 25 per cent of the broad M3 money
supply in Chile is inflation-adjusted daily in terms of the Unidad de Fomento according to the Banco Central de Chile. $ 2.89 trillion
of sovereign inflation-linked bonds are inflation-indexed daily worldwide in
terms of country specific Daily Consumer Price Indices. Inflation-adjusting the
total money supply (excluding bank notes and coins) would eliminate the entire
cost of inflation (not inflation) from the monetary economy. This would require
complete co-ordination (everyone doing it).
Months of zero annual inflation
are rare and generally not sustained for more than a month of two. During
hyperinflation the real value of the very unstable monetary unit and all other very
unstable monetary items often changes once per day, but, during severe hyperinflation
it can change every 8 hours or so. (Hanke – Cato Journal)
Variable items
(2)
The real values of variable real value non–monetary items
may change all the time, e.g. the price of foreign currencies, precious metals,
quoted shares, commodities, properties, finished goods, services, raw
materials, etc. Variable items are valued on a daily basis in terms of IFRS excluding
the stable measuring unit assumption and the cost model in the valuation of
property, plant, equipment and investment property after recognition under
capital maintenance in units of constant purchasing power (CIPPA). Their
historic prices (e.g., of the day before) are updated on a daily basis to the
current (today´s) rate in terms of a Daily CPI or daily rate when they are not
valued at the current date (today) in terms of IFRS as qualified.
Inflation and deflation have
no effect on the real value of non-monetary items. Historic variable items are
thus not inflation-adjusted or deflation-adjusted daily. They are updated daily
when they are not valued daily in terms of IFRS as qualified.
Constant items
(3)
Constant real value non-monetary items are always and
everywhere (historic and current period constant items) measured in units of
constant purchasing power in terms of the current (today´s) Daily CPI or other
daily rate.
Financial
reporting has to take all three scenarios – occurring simultaneously – into
account over time when an entity´s economic activities are accounted daily and financial
reports are prepared and presented periodically and accessed or viewed today at
the current Daily CPI or other daily rate.
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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