Measurement of variable items

Measurement of variable items

Measurement in the case of variable items is the process of determining the monetary amounts at which variable items are to be recognised, valued, carried and accounted on a daily basis in an economy under all levels of inflation and deflation. This involves the selection of particular bases of measurement.

Variable items are valued daily in terms of IFRS, excluding the stable measuring unit assumption, under financial capital maintenance in units of constant purchasing power (CIPPA). Variable item revaluation losses and gains are treated in terms of IFRS. Variable items, when not valued daily in terms of IFRS, would be updated in terms of a Daily CPI or a monetized daily indexed unit of account during low and high inflation and deflation and in terms of a daily hard currency parallel rate or Brazilian – style Unidade Real de Valor daily index rate during hyperinflation because there is no stable measuring unit assumption under financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation (CIPPA).

Variable items in the non–monetary or real economy are valued at, for example, fair value or the lower of cost and net realizable value or recoverable value or market value or present value, etc. in terms of IFRS excluding the stable measuring unit assumption.

The real values of variable items exist independently of being valued at their original nominal Historical Cost values in terms of IFRS. Valuing a variable item at its original Historical Cost in fixed nominal monetary units during its entire lifetime does not erode its real value because it would be valued at its current market value whenever it is finally exchanged or sold in the future. Any variable item valued at HC, when not being revalued, would be continuously updated in terms of a Daily Consumer Price Index or other daily index rate since the stable measuring unit assumption is not applied under financial capital maintenance in units of constant purchasing power (CIPPA).

Originally all items in financial statements – monetary, variable and constant real value non–monetary items – were valued at Historical Cost before there were any GAAP, IAS or IFRS, since money – the monetary unit of account – was generally assumed to be stable in real value over time: the infamous stable measuring unit assumption. Today, the traditional Historical Cost Accounting model maintains this very erosive and very economically destabilizing assumption for the valuation of all income statement items, all balance sheet constant items and certain variable items, e.g., inventories which are measured at the lower of cost and net realisable value. Under financial capital maintenance in units of constant purchasing power (CIPPA) any item originally valued at HC in terms of IFRS (e.g. an inventory item) is then updated daily in terms of the Daily CPI or other daily index rate while it is not valued daily thereafter.

The IASB only makes a distinction between monetary and non–monetary items. The stable measuring unit assumption allows the IASB to side–step the split between variable real value non–monetary items and constant real value non–monetary items in the practical application of IFRS under the HC paradigm. Both constant and variable real value non-monetary items are however inferred in IFRS under the Constant Item Purchasing Power paradigm. Financial capital maintenance in units of constant purchasing power (CIPPA) as authorized in the original Framework, Par. 104 (a) is implemented under the CIPP paradigm.

Variable items may hold their values in terms of purchasing power under HCA as a result of the ways in which they are valued in terms of IFRS in which their nominal values are adjusted at the time of exchange or disposal to allow for the many factors that determine their real values – including inflation, deflation and hyperinflation. For example: fair value, market value, net realizable value, present value and recoverable value all adjust for inflation, deflation and hyperinflation – in the real value of the monetary unit – as part of the specific valuation process.

Nicolaas Smith

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