To be or not to be a monetary item, that is the question

Monetary items are incorrectly defined in IAS 21 The Effects of Changes in Foreign Exchange Rates, Par 8 too:

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.

Not all assets and liabilities to be received or paid in a fixed or determinable number of units of currency are monetary items – per se. Non-monetary items are often paid in a fixed or determinable number of units of currency. Fixed salary, wage and rentals payments do not transform these constant real value non-monetary items into monetary items. Salaries, wages, rentals, etc are constant real value non-monetary items. They are not monetary items. They are simply paid in money as the medium of exchange. They are sometimes paid in a fixed or determinable number of units of currency because they are measured in nominal monetary units under the current Historical Cost paradigm during low inflation and not in units of constant purchasing power. This does not make them into monetary items simply because they are paid in fixed historical cost values. They remain constant real value non-monetary items.
Definition of monetary items

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

Money is the functional currency; i.e., “the currency of the primary economic environment in which the entity operates.” IAS 21 Par 8

Fiat money cannot be declared by statute or by institutional definition to be a non-monetary item. To be money it has to fulfil the three functions of money in an economy: medium of exchange, store of value and unit of account. Trade debtors and trade creditors are defined incorrectly by the IASB, the FASB and PricewaterhousCoopers to be monetary items. They are constant real value non-monetary items. All street vendors in hyperinflationary economies know by experience that paying for a non-monetary item on credit means the value at the date of the sale has to be inflation-adjusted over time, even when they have never been to school. The IASB, the FASB and PricewaterhousCoopers still get this 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. Only an economic item that fulfils all three functions of money at the same time can be the functional currency in a specific economy or monetary union. Fulfilling only two of the three functions does not qualify an item as the functional currency. See Foreign Exchange.

A foreign currency is not the functional currency 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.
People often google "what is the real value of money" and then land up on my other blog. It seems to be not so well understood that inflation always destroys the real value of money over time.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

To be or not to be a constant item, that is the question

The specific choice of measuring financial capital maintenance in units of constant purchasing power (the Constant ITEM Purchasing Power Accounting model) at all levels of inflation and deflation as contained in the Framework for the Preparation and Presentation of Financial Statements Par 104 (a), was approved by the International Accounting Standards Board’s predecessor body, the International Accounting Standards Committee Board, in April 1989 for publication in July 1989 and adopted by the IASB in April 2001.

“In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework. This elevation of the importance of the Framework was added in the 2003 revisions to IAS 8."

IAS Plus, Deloitte. Date: 15 th January, 2010 http://www.iasplus.com/standard/framewk.htm

IAS 8 Par 11 states that managers, in exercising their judgement, have to first apply the rules and regulations in IFRS and interpretations by the International Financial Reporting Interpretations Committee which deal with similar and related items and, only secondly the measurement concepts, criteria for recognition and definitions for expenses, income, liabilities and assets as stated in the Framework.

There are no applicable IFRS or Interpretations regarding the valuation of the constant real value non-monetary items issued share capital, reported retained earnings, capital reserves, share premium account, share discount account, the concepts of capital, the capital maintenance concepts, the determination of profit/loss concept, etc. The measurement concepts and direct and indirect definitions in the Framework are thus applicable. There are Standards related to the constant items trade debtors, trade creditors, other non-monetary payables, other non-monetary receivables, deferred tax assets, deferred tax liabilities, taxes payable and taxes receivable. In terms of IAS 8.11 the Standards take precedence over the Framework in the case of these items.



Conflict

There is a conflict with the capital maintenance concept in the Framework where IFRS treat constant real value non-monetary items like monetary items or variable items. The only way the financial capital concept of continuously measuring financial capital maintenance in units of constant purchasing power in terms of the provisions in the Framework, Par 104 (a) can be correctly implemented, is with the correct treatment of all constant real value non-monetary items as constant items and not as monetary or variable items. The incorrect treatment of constant items as monetary or variable items may lead to the incorrect calculation of the Net Monetary Loss or Gain from holding monetary items as required when measuring financial capital maintenance in units of constant purchasing power in terms of the Framework, Par 104 (a) and as required in IAS 29.

Examples

Examples of constant real value non-monetary items in today’s economy are income statement constant items, e.g. salaries, wages, rentals, all other items in the income statement as well as balance sheet constant items, e.g. reported retained earnings, issued share capital, capital reserves, share issue premiums, share issue discounts, provisions, capital reserves, all other shareholder’s equity items, trade debtors, trade creditors, other non-monetary debtors and creditors, taxes payable and receivable, deferred tax assets and liabilities, dividends payable and receivable, royalties payable and receivable, all other non-monetary payables and receivables, etc.

Kindest regards,

Nicolaas Smith