Especially the IASB, FASB and PricewaterhouseCoopers get it wrong

The incorrect treatment of the constant items trade debtors and trade creditors and other non-monetary payables and receivables as monetary items is mainly due to the incorrect definition of monetary items in International Financial Reporting Standards.

South African accountants are taught that there are only two distinct economic items in the economy, namely, monetary and non-monetary items and that the economy is divided in the monetary and non-monetary or real economy.

Monetary items are defined by the International Accounting Standards Board in IAS 21 The Effects of Changes in Foreign Exchange Rates, Par 8 as follows:

“Monetary items are units of currency held and assets and liabilities to be

received or paid in a fixed or determinable number of units of currency.”

and in IAS 29 Financial Reporting in Hyperinflationary Economies, Par 12 as follows:

“Monetary items are money held and items to be received or paid in money.”

The US Financial Accounting Standards Board and PricewaterhouseCoopers also define trade debtors and trade creditors incorrectly as monetary items. PwC is simply following the IASB lead. Then these global audit firms charge their clients in hyperinflationary economies huge fees for giving them wrong advice when any street vendor in that hyperinflationary economy will be able to teach PwC, the IASB and the FASB that trade debtors are not monetary items. But, it is not wrong because it is in IFRS. Accountants are not generally encouraged to think independently of mainstream generally accepted accounting practices. Accountants are taught that if it is in IFRS it is acceptable and if it is not is not acceptable. The real effects of accounting entries are not always taken into account.
The second part of the IAS 29 definition is not correct. When a non-monetary item, e.g. raw material, is bought on credit, the trade debtor amount in the supplier’s accounts is not a monetary item just because it will be paid in money or because it will be paid in a fixed or determinable number of units of currency. It can be paid in strawberries or diamonds too, if the supplier will accept strawberries or diamonds as a medium of payment. That will not make the non-monetary raw material a strawberry item or diamond item, just like payment in money does not make non-monetary raw material a monetary item. Money or strawberries or diamonds are simply used as the mutually agreed medium of exchange. The constant real value non-monetary trade debtor amount relates to the sale of a non-monetary item, namely the non-monetary raw material. The buyer did not borrow money from the supplier. The supplier did not give the buyer a monetary loan. The trade debt relates to a non-monetary item: raw material.

The trade debt is thus a constant real value non-monetary item the moment it comes about. The underlying non-monetary nature of the debt (raw material, furniture, vehicle, etc.) results in it being a constant real value non-monetary item the moment the debt comes about which has to be inflation-adjusted during low, hyperinflation and deflation. Street vendors in hyperinflationary economies – some of whom have never been to school - know this instinctively. Some finance professors who learn what monetary and non-monetary items are from books and who have never lived and worked in a hyperinflationary economy, find it hard to grasp.

When inflation destroys the real value of the monetary medium of exchange at 15% per annum, 15% more money has to be paid over a year to pay off the constant real value non-monetary item, the trade debtor amount.

Inflation is always and everywhere a monetary phenomenon - as per Milton Friedman. Money is only the monetary medium of exchange used for payment. Inflation can only destroy the real value of money and other monetary items – nothing else. Inflation has no effect on the real value of non-monetary items. The debt is for the constant real non-monetary value of a non-monetary item mutually agreed and generally accepted to be paid in money - not for a monetary item. Money is simply the medium of exchange. No-one lent any money to anyone else. There is generally no money loans involved with trade creditors and trade debtors.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith