The statement that "money is a store of value" is supposed to mean that money is a store of constant real value over time or a perfectly stable store of constant purchasing power over time.
However, the statement that "money is a store of value" is not entirely true and valid. In fact, it is a partly false, partly deceiving and partly misleading statement.
Money is not a store of perfectly stable real value during low and high inflation or hyperinflation.
The world money supply is mainly in a state of inflation.
Money is, on the other hand, a store of increasing real value during deflation. See the Japanese economy.
In principle, the generally accepted statement that "money is a store of value" is never completely true during inflation and deflation.
Why?
Because money is a decreasing store of real value during inflation and an increasing store of real value during deflation.
The CPI is not perfectly stable on a sustainable basis over time.
The longest period I have seen the CPI perfectly stable was during a period of two months. That certainly does not qualify as "perfectly sustainable over an indefinite period of time" or "perfectly stable over a sustainable period of time."
Money is only a perfect store of constant purchasing power (real value) over time when it is either inflation or deflation-indexed on at least a daily basis, i.e., when it is inflation or deflation-adjusted in terms of the change in the general price level - i.e., at least daily in terms of the Daily CPI.
Examples of money in a state of being "a store of real value" is when it is maintained in the form of government daily inflation-indexed bonds, e.g., US Treasury Inflation-Protected Securities (TIPS).
Money in the world economy is only a perfect store of constant purchasing power in the USD 3 trillion + maintained perfectly stable in real value in the global government daily inflation-indexed bond market plus the 25% + of the Chilean money supply that is inflation-indexed on a daily basis plus all mortgage bonds (monetary items) in Colombia which are inflation-adjusted on a daily basis in terms of their Daily Real Value Index.
Summary: Money is not a store of value.
Shares (a variable real value non-monetary item) are - generally - a store of increasing variable real non-monetary value over the long term.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday, 30 September 2014
Wednesday, 17 September 2014
Venezuela says: Help! The IASB says: Sorry. It's too much work for us!
An entity in Venezuela has asked the IASB for help.
The IASB, however, has again, in typical IASB fashion, refused to do anything about the effect of financial reporting in Venezuela.
The reasons for this are two-fold:
1. According to the IASB "financial reporting has no effect on the economy".
2. The IASB refuses to change IAS 29 Financial Reporting in Hyperinflationary Economies to require the implementation of the Daily CPI instead of the monthly published CPI as currently required in IAS 29.
The reason for this is the fact that the IASB does not understand the stabilizing effect of implementing Capital Maintenance in Units of Constant Purchasing Power (which is required in IAS 29) in terms of the Daily CPI.
Nicolaas Smith
See the copy of the IASB Staff paper below:
"IASB Agenda ref 12B STAFF PAPER 18–24 September 2014 IASB Meeting
Project IFRS Interpretations Committee issues
Paper topic IAS 21—Foreign exchange restrictions and hyperinflation
CONTACT(S) Hannah King hking@ifrs.org +44 (0) 20 7246 6961
This paper has been prepared by the staff of the IFRS Foundation for discussion at a public meeting of the IASB and does not represent the views of the IASB or any individual member of the IASB. Comments on the application of IFRSs do not purport to set out acceptable or unacceptable application of IFRSs. Technical decisions are made in public and reported in IASB Update. The IASB is the independent standard-setting body of the IFRS Foundation, a not-for-profit corporation promoting the adoption of IFRSs. For more information visit www.ifrs.org
Page 1 of 8
Introduction
1. The IFRS Interpretations Committee (the Interpretations Committee) received a submission requesting guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela when applying IAS 21 The Effects of Changes in Foreign Exchange Rates. The issue arises because of strict foreign exchange controls over the exchange of the Venezuelan Bolivar Fuerte (VEF) combined with Venezuela’s hyperinflationary economy.
2. The Interpretations Committee discussed the issue at its meeting in July 20141. It tentatively decided not to take the issue onto its agenda, as noted in the IFRIC Update reproduced in Appendix A. In addition, after acknowledging the concerns raised by the submitter, the Interpretations Committee specifically asked that the IASB be made aware of the issue.
3. Accordingly, this paper summarises the issue and tentative conclusions reached by the Interpretations Committee, as follows:
(a) Background, which summarises the foreign exchange restrictions in Venezuela, the submission and primary accounting issues identified.
(b) Tentative conclusions reached by the Interpretations Committee.
1 See http://www.ifrs.org/Meetings/MeetingDocs/Interpretations%20Committee/2014/July/AP16%20-
%20IAS%2021%20Foreign%20exchange%20restrictions%20and%20hyperinflation.pdf for agenda paper 16 of the July 2014 meeting of the Interpretations Committee.
Agenda ref 12B
IAS 21 │Foreign exchange restrictions and hyperinflation
Page 2 of 8
(c) Next steps.
4. This paper is for information only.
Background
Foreign exchange controls in Venezuela
5. There are strict Venezuelan government controls over exchanging VEF. The exact nature of these controls has changed, and continues to change, over time. We understand that there are currently three official exchange mechanisms in Venezuela. Each of these has different exchange rates, available to different entities for different types of transactions depending upon specific circumstances. Furthermore, there are restrictions on the amount of currency that can be exchanged though these exchange mechanisms.
6. Entities whose functional currency is that of a hyperinflationary economy are required under IAS 29 Financial Reporting in Hyperinflationary Economies to state their financial statements in terms of the measuring unit current at the end of the reporting period by applying a general price index. Groups consolidating such subsidiaries translate these inflation-adjusted subsidiary financial statements into the group’s presentation currency (for example US$) at the closing exchange rate
in accordance with IAS 21.
Summary of submission
7. The submitter has asked the Interpretations Committee to review the current approach for translating and consolidating foreign operations in Venezuela.
8. Below is a summary of the submitter’s observations based on the submission and our discussions with the submitter:
(a) Prevalent practice is to translate foreign operations into the group’s presentation currency using official exchange rates.
(b) For operations with a VEF functional currency the official CENCOX fixed exchange rate has typically been used as the closing rate when applying IAS 21 on the basis that it was the only official exchange mechanism available to a group.
(c) In the submitter’s experience, such a rate is only available for a relatively limited amount of currency in practice, with the result that a Venezuelan subsidiary may have more cash in VEF than it is able to convert into US$ (and hence repatriate) using the official exchange rate mechanisms.
(d) Because of foreign exchange controls, the official exchange rates for VEF (in particular the fixed CENCOX and variable SICAD I rates) do not, according to the submitter, reflect the local rate of hyperinflation. Hence, in the submitter’s view, a substantial devaluation of the VEF from the official fixed exchange rate in the future is almost certain.
9. As a consequence, the submitter is concerned that, from an economic perspective, the financial statements of group accounts appear not to appropriately reflect:
(a) the Venezuelan operation’s assets and liabilities (including local cash held in VEF);
(b) income from the Venezuelan operations (which is further compounded by the IAS 29 inflation adjustments); and
(c) foreign exchange losses (or gains) in profit or loss arising on US$ (or other non VEF) denominated balances in Venezuela.
Primary accounting issues
10. On the basis of the concerns raised, the accounting issue primarily stems from the closing rate used on the application of IAS 21 on translation of the net investment in the foreign operation, because there are (i) several different exchange rates and (ii) control restrictions over both the exchange rate and the amount of local cash that can be exchanged.
11. The primary issues identified by the Interpretations Committee are therefore:
(a) Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
(b) Issue 2: what rate should be used when there is a longer-term lack of exchangeability?
Tentative conclusions reached by the Interpretations Committee
12. When assessing the accounting issues identified above, the Interpretations Committee considered:
(a) the results of outreach from securities regulators, members of the International Forum of Accounting Standard Setters and the IFRS technical teams of the international networks of large accounting firms; and
(b) the agenda criteria of the Interpretations Committee described in paragraphs 5.16–5.17 of the IFRS Foundation Due Process Handbook.
Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
13. Issue 1 arises because there is no specific guidance in IAS 21 regarding which exchange rate, out of multiple rates, to select for the purposes of translating an entity’s net investment in the foreign operation. However paragraph 26 of IAS 21 does give guidance on which of multiple exchange rates to use when reporting foreign currency transactions in the functional currency in the local entity’s
financial statements.
14. The Interpretations Committee tentatively decided not to take Issue 1 onto its agenda, as outreach indicated little diversity in practice regarding the principle to use when determining which of multiple rates should be used to translate an entity’s net investment in a foreign operation. It observed that general practice is to use the exchange rate at which the entity will be able to remit funds from its foreign operations (ie the rate at which future cash flows could be settled when viewing the net investment as a whole), which is consistent with the principle in paragraph 26 of IAS 21.
Issue 2: what rate should be used when there is a longer-term lack of exchangeability?
15. Issue 2 arises because of the longer-term lack of exchangeability of the local currency, which the Interpretations Committee observed to be:
(a) widespread;
(b) leading to some diversity in practice; and
(c) not addressed by the requirements in IAS 21, so that it is not entirely clear how IAS 21 applies in such circumstances.
16. Outreach indicated that the concerns raised due to foreign exchange restrictions faced by foreign operations in Venezuela are valid. However, the Interpretations Committee noted that Issue 2 could not be addressed through an interpretation of the Standard or an Annual Improvement, as to do so would require an exception to the definition of ‘closing rate’ in IAS 21.
17. The Interpretations Committee considered whether to take the issue onto its agenda with a view to developing a recommendation for an amendment to IAS 21 for the IASB’s consideration, after consulting the IASB. Staff highlighted that developing such a solution might be difficult in practice because it would require a new or different principle from that currently in IAS 21 and could lead to
questions about the basis for all foreign currency translations under IAS 21. Furthermore, this issue cuts across other issues that have been raised to the IASB with respect to IAS 21, which potentially could impact the scope of any proposed solution to the issues raised.
18. Consequently, the Interpretations Committee tentatively decided not to take the issue onto its agenda, but to highlight the issue to the IASB. The IASB’s current agenda includes research projects on foreign currency translation and inflation, with the aim of considering whether there are issues that the IASB should address and, if so, what the scope of such a project should be. Therefore this issue might be more appropriately considered as part of that assessment.
19. The Interpretations Committee also decided to highlight in its tentative agenda decision that some of the existing disclosure requirements in IFRSs apply in such circumstances, as noted in the extract from the IFRIC Update for July 2014 in Appendix A.
Next steps
20. The Interpretations Committee will consider any comments received on its tentative agenda decision at its meeting in November 2014.
21. In addition, a preliminary paper on the IASB’s research project on foreign currency translation will be discussed by the IASB by the end of 2014.
Appendix A—Extract from IFRIC Update for July 2014
Interpretations Committee tentative agenda decisions
IAS 21 The Effect of Changes in Foreign Exchange Rates—Foreign exchange
restrictions and hyperinflation (Agenda Paper 16)
The Interpretations Committee received a request for guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela. The issue arises because of strict foreign exchange controls in Venezuela. This includes the existence of several official exchange rates that may not fully reflect the local rate of hyperinflation and of restrictions over the amount of local currency that can be exchanged. Concerns were raised that using an official exchange rate to translate an entity’s net investment in a foreign operation in Venezuela appeared not to appropriately reflect the financial performance and position of the foreign operation in the group’s consolidated financial statements.
The Interpretations Committee identified two primary accounting issues:
(a) which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
(b) what rate should be used when there is a longer-term lack of exchangeability?
With respect to the first issue, the Interpretations Committee observed very little diversity in practice regarding the principle to use when determining which of multiple rates should be used to translate an entity’s net investment in a foreign operation. The Interpretations Committee noted that predominant practice is to apply by extension the principle in paragraph 26 of IAS 21, which gives guidance on which exchange rate to use when reporting foreign currency transactions in the functional currency when several exchange rates are available.
Hence, despite the widespread applicability, the Interpretations Committee [decided] not to take the first issue onto its agenda.
With respect to the second issue, the Interpretations Committee observed that this issue is widespread and has led to some diversity in practice. A longer-term lack of exchangeability is not addressed by the requirements in IAS 21, and so it is not entirely clear how IAS 21 applies in such situations. However, the Interpretations Committee thought that addressing this issue is a broader-scope project than it could address (because of related cross-cutting issues). Accordingly the Interpretations Committee [decided] not to take this issue onto its agenda.
However, the Interpretations Committee noted that several existing disclosure requirements in IFRS would apply when the impact of foreign exchange controls is material to understanding the entity’s financial performance and position.
Relevant disclosure requirements in IFRS include:
(a) disclosure of significant accounting policies and significant judgements in applying those policies (paragraphs 117–124 of IAS 1);
(b) disclosure of sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, which may include a sensitivity analysis (paragraphs 125–133 of IAS 1); and
(c) disclosure about the nature and extent of significant restrictions on an entity’s ability to access or use assets and settle the liabilities of the group, or its joint ventures or associates (paragraphs 10, 13, 20 and 22 of IFRS 12)."
Copyright 2014 IFRS Foundation
The IFRS Foundation has copyright over the above IASB Staff paper.
The IASB, however, has again, in typical IASB fashion, refused to do anything about the effect of financial reporting in Venezuela.
The reasons for this are two-fold:
1. According to the IASB "financial reporting has no effect on the economy".
2. The IASB refuses to change IAS 29 Financial Reporting in Hyperinflationary Economies to require the implementation of the Daily CPI instead of the monthly published CPI as currently required in IAS 29.
The reason for this is the fact that the IASB does not understand the stabilizing effect of implementing Capital Maintenance in Units of Constant Purchasing Power (which is required in IAS 29) in terms of the Daily CPI.
Nicolaas Smith
See the copy of the IASB Staff paper below:
"IASB Agenda ref 12B STAFF PAPER 18–24 September 2014 IASB Meeting
Project IFRS Interpretations Committee issues
Paper topic IAS 21—Foreign exchange restrictions and hyperinflation
CONTACT(S) Hannah King hking@ifrs.org +44 (0) 20 7246 6961
This paper has been prepared by the staff of the IFRS Foundation for discussion at a public meeting of the IASB and does not represent the views of the IASB or any individual member of the IASB. Comments on the application of IFRSs do not purport to set out acceptable or unacceptable application of IFRSs. Technical decisions are made in public and reported in IASB Update. The IASB is the independent standard-setting body of the IFRS Foundation, a not-for-profit corporation promoting the adoption of IFRSs. For more information visit www.ifrs.org
Page 1 of 8
Introduction
1. The IFRS Interpretations Committee (the Interpretations Committee) received a submission requesting guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela when applying IAS 21 The Effects of Changes in Foreign Exchange Rates. The issue arises because of strict foreign exchange controls over the exchange of the Venezuelan Bolivar Fuerte (VEF) combined with Venezuela’s hyperinflationary economy.
2. The Interpretations Committee discussed the issue at its meeting in July 20141. It tentatively decided not to take the issue onto its agenda, as noted in the IFRIC Update reproduced in Appendix A. In addition, after acknowledging the concerns raised by the submitter, the Interpretations Committee specifically asked that the IASB be made aware of the issue.
3. Accordingly, this paper summarises the issue and tentative conclusions reached by the Interpretations Committee, as follows:
(a) Background, which summarises the foreign exchange restrictions in Venezuela, the submission and primary accounting issues identified.
(b) Tentative conclusions reached by the Interpretations Committee.
1 See http://www.ifrs.org/Meetings/MeetingDocs/Interpretations%20Committee/2014/July/AP16%20-
%20IAS%2021%20Foreign%20exchange%20restrictions%20and%20hyperinflation.pdf for agenda paper 16 of the July 2014 meeting of the Interpretations Committee.
Agenda ref 12B
IAS 21 │Foreign exchange restrictions and hyperinflation
Page 2 of 8
(c) Next steps.
4. This paper is for information only.
Background
Foreign exchange controls in Venezuela
5. There are strict Venezuelan government controls over exchanging VEF. The exact nature of these controls has changed, and continues to change, over time. We understand that there are currently three official exchange mechanisms in Venezuela. Each of these has different exchange rates, available to different entities for different types of transactions depending upon specific circumstances. Furthermore, there are restrictions on the amount of currency that can be exchanged though these exchange mechanisms.
6. Entities whose functional currency is that of a hyperinflationary economy are required under IAS 29 Financial Reporting in Hyperinflationary Economies to state their financial statements in terms of the measuring unit current at the end of the reporting period by applying a general price index. Groups consolidating such subsidiaries translate these inflation-adjusted subsidiary financial statements into the group’s presentation currency (for example US$) at the closing exchange rate
in accordance with IAS 21.
Summary of submission
7. The submitter has asked the Interpretations Committee to review the current approach for translating and consolidating foreign operations in Venezuela.
8. Below is a summary of the submitter’s observations based on the submission and our discussions with the submitter:
(a) Prevalent practice is to translate foreign operations into the group’s presentation currency using official exchange rates.
(b) For operations with a VEF functional currency the official CENCOX fixed exchange rate has typically been used as the closing rate when applying IAS 21 on the basis that it was the only official exchange mechanism available to a group.
(c) In the submitter’s experience, such a rate is only available for a relatively limited amount of currency in practice, with the result that a Venezuelan subsidiary may have more cash in VEF than it is able to convert into US$ (and hence repatriate) using the official exchange rate mechanisms.
(d) Because of foreign exchange controls, the official exchange rates for VEF (in particular the fixed CENCOX and variable SICAD I rates) do not, according to the submitter, reflect the local rate of hyperinflation. Hence, in the submitter’s view, a substantial devaluation of the VEF from the official fixed exchange rate in the future is almost certain.
9. As a consequence, the submitter is concerned that, from an economic perspective, the financial statements of group accounts appear not to appropriately reflect:
(a) the Venezuelan operation’s assets and liabilities (including local cash held in VEF);
(b) income from the Venezuelan operations (which is further compounded by the IAS 29 inflation adjustments); and
(c) foreign exchange losses (or gains) in profit or loss arising on US$ (or other non VEF) denominated balances in Venezuela.
Primary accounting issues
10. On the basis of the concerns raised, the accounting issue primarily stems from the closing rate used on the application of IAS 21 on translation of the net investment in the foreign operation, because there are (i) several different exchange rates and (ii) control restrictions over both the exchange rate and the amount of local cash that can be exchanged.
11. The primary issues identified by the Interpretations Committee are therefore:
(a) Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
(b) Issue 2: what rate should be used when there is a longer-term lack of exchangeability?
Tentative conclusions reached by the Interpretations Committee
12. When assessing the accounting issues identified above, the Interpretations Committee considered:
(a) the results of outreach from securities regulators, members of the International Forum of Accounting Standard Setters and the IFRS technical teams of the international networks of large accounting firms; and
(b) the agenda criteria of the Interpretations Committee described in paragraphs 5.16–5.17 of the IFRS Foundation Due Process Handbook.
Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
13. Issue 1 arises because there is no specific guidance in IAS 21 regarding which exchange rate, out of multiple rates, to select for the purposes of translating an entity’s net investment in the foreign operation. However paragraph 26 of IAS 21 does give guidance on which of multiple exchange rates to use when reporting foreign currency transactions in the functional currency in the local entity’s
financial statements.
14. The Interpretations Committee tentatively decided not to take Issue 1 onto its agenda, as outreach indicated little diversity in practice regarding the principle to use when determining which of multiple rates should be used to translate an entity’s net investment in a foreign operation. It observed that general practice is to use the exchange rate at which the entity will be able to remit funds from its foreign operations (ie the rate at which future cash flows could be settled when viewing the net investment as a whole), which is consistent with the principle in paragraph 26 of IAS 21.
Issue 2: what rate should be used when there is a longer-term lack of exchangeability?
15. Issue 2 arises because of the longer-term lack of exchangeability of the local currency, which the Interpretations Committee observed to be:
(a) widespread;
(b) leading to some diversity in practice; and
(c) not addressed by the requirements in IAS 21, so that it is not entirely clear how IAS 21 applies in such circumstances.
16. Outreach indicated that the concerns raised due to foreign exchange restrictions faced by foreign operations in Venezuela are valid. However, the Interpretations Committee noted that Issue 2 could not be addressed through an interpretation of the Standard or an Annual Improvement, as to do so would require an exception to the definition of ‘closing rate’ in IAS 21.
17. The Interpretations Committee considered whether to take the issue onto its agenda with a view to developing a recommendation for an amendment to IAS 21 for the IASB’s consideration, after consulting the IASB. Staff highlighted that developing such a solution might be difficult in practice because it would require a new or different principle from that currently in IAS 21 and could lead to
questions about the basis for all foreign currency translations under IAS 21. Furthermore, this issue cuts across other issues that have been raised to the IASB with respect to IAS 21, which potentially could impact the scope of any proposed solution to the issues raised.
18. Consequently, the Interpretations Committee tentatively decided not to take the issue onto its agenda, but to highlight the issue to the IASB. The IASB’s current agenda includes research projects on foreign currency translation and inflation, with the aim of considering whether there are issues that the IASB should address and, if so, what the scope of such a project should be. Therefore this issue might be more appropriately considered as part of that assessment.
19. The Interpretations Committee also decided to highlight in its tentative agenda decision that some of the existing disclosure requirements in IFRSs apply in such circumstances, as noted in the extract from the IFRIC Update for July 2014 in Appendix A.
Next steps
20. The Interpretations Committee will consider any comments received on its tentative agenda decision at its meeting in November 2014.
21. In addition, a preliminary paper on the IASB’s research project on foreign currency translation will be discussed by the IASB by the end of 2014.
Appendix A—Extract from IFRIC Update for July 2014
Interpretations Committee tentative agenda decisions
IAS 21 The Effect of Changes in Foreign Exchange Rates—Foreign exchange
restrictions and hyperinflation (Agenda Paper 16)
The Interpretations Committee received a request for guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela. The issue arises because of strict foreign exchange controls in Venezuela. This includes the existence of several official exchange rates that may not fully reflect the local rate of hyperinflation and of restrictions over the amount of local currency that can be exchanged. Concerns were raised that using an official exchange rate to translate an entity’s net investment in a foreign operation in Venezuela appeared not to appropriately reflect the financial performance and position of the foreign operation in the group’s consolidated financial statements.
The Interpretations Committee identified two primary accounting issues:
(a) which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
(b) what rate should be used when there is a longer-term lack of exchangeability?
With respect to the first issue, the Interpretations Committee observed very little diversity in practice regarding the principle to use when determining which of multiple rates should be used to translate an entity’s net investment in a foreign operation. The Interpretations Committee noted that predominant practice is to apply by extension the principle in paragraph 26 of IAS 21, which gives guidance on which exchange rate to use when reporting foreign currency transactions in the functional currency when several exchange rates are available.
Hence, despite the widespread applicability, the Interpretations Committee [decided] not to take the first issue onto its agenda.
With respect to the second issue, the Interpretations Committee observed that this issue is widespread and has led to some diversity in practice. A longer-term lack of exchangeability is not addressed by the requirements in IAS 21, and so it is not entirely clear how IAS 21 applies in such situations. However, the Interpretations Committee thought that addressing this issue is a broader-scope project than it could address (because of related cross-cutting issues). Accordingly the Interpretations Committee [decided] not to take this issue onto its agenda.
However, the Interpretations Committee noted that several existing disclosure requirements in IFRS would apply when the impact of foreign exchange controls is material to understanding the entity’s financial performance and position.
Relevant disclosure requirements in IFRS include:
(a) disclosure of significant accounting policies and significant judgements in applying those policies (paragraphs 117–124 of IAS 1);
(b) disclosure of sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year, which may include a sensitivity analysis (paragraphs 125–133 of IAS 1); and
(c) disclosure about the nature and extent of significant restrictions on an entity’s ability to access or use assets and settle the liabilities of the group, or its joint ventures or associates (paragraphs 10, 13, 20 and 22 of IFRS 12)."
Copyright 2014 IFRS Foundation
The IFRS Foundation has copyright over the above IASB Staff paper.
Tuesday, 2 September 2014
Two of the three parts of the post-HC economy would be stable in real value
Two of the three parts of the post-HC economy would be stable in real value
The economy consists of economic entities and economic items. There are three fundamentally different economic items in the economy:
1. Monetary items
2. Variable real value non-monetary items
3. Constant real value non-monetary items
1. MONETARY ITEMS
DEFINITION Monetary items constitute the money supply.
Only when an item is part of the money supply in a non-dollarized economy is it a monetary item within the economy where the units of money are created. Otherwise it is a non-monetary item.
Money, i.e., any item that is
(i) a medium of exchange (which eliminates the double coincidence of wants),
(ii) a relatively stable store of real value,
(iii) a relatively stable real value unit of measure (for accounting purposes) and
(iv) legal tender (for the settlements of debts)
is an essential component of a modern economy.
NON-MONETARY ITEMS
DEFINITION Non-monetary items are all items that are not monetary items.
Non-monetary items are subdivided in:
(a) Variable real value non-monetary items
(b) Constant real value non-monetary items
2. VARIABLE REAL VALUE NON-MONETARY ITEMS
Examples include property, plant, equipment, inventories, listed and unlisted shares, foreign exchange, raw materials, finished goods, patents, bitcoins, other crypto-currencies, etc. are generally not perfectly stable in real value in an open and free economy.
Measurement
Their variable non-monetary real values are generally determined by supply and demand in free and open markets in terms of fair value.
3. CONSTANT REAL VALUE NON-MONETARY ITEMS
Examples include issued share capital, all other items in shareholders´ equity, all items in the profit and loss account, provisions, salaries, wages, rents, taxes, pensions, interest received/paid, bank charges, trade debtors, trade creditors, all other non-monetary debtors, all other non-monetary creditors, etc.
Measurement
Constant real value non-monetary items are measured in units of constant purchasing power in terms of the Daily CPI under the Capital Maintenance in Units of Constant Purchasing Power accounting model.
TWO STABLE PARTS OF THE POST-HC ECONOMY
I. Constant real value non-monetary item economy
The constant real value non-monetary item economy is the first part of the economy that would be maintained stable in real value via measurement in units of constant purchasing power (under the UCPP paradigm) under CMUCPP in terms of the Daily CPI.
See examples above.
II. Monetary item economy
The second and final step is the daily inflation-indexing of all monetary items in terms of the Daily CPI with complete coordination. That would stabilize the real value of all monetary items thus inflation-indexed daily in terms of the Daily CPI.
This would do nothing to actual inflation or deflation. That depends on the actions of the central bank. Daily inflation- or deflation-indexing only eliminates the effect of inflation or deflation.
Current examples of perfectly stable in real value monetary item markets/areas
1. The global USD 3 Trillion plus market in government and commercial inflation-indexed bonds. Examples are US Treasury Inflation-Protected Securities (TIPS).
2. 25% plus of Chile´s money supply is inflation-indexed daily.
3. All mortgages in Colombia are inflation-indexed daily.
ONE UNSTABLE PART OF THE ECONOMY
Only the variable real value non-monetary item part of the economy would not be (is not) stable in real value because these values change and would normally change minute by minute in their respective markets, e.g., forex markets, stock exchanges, money markets, capital markets, commodity markets, etc. See examples above of variable real value non-monetary items.
Sine qua non
The above orchestrated/implemented stability in real value (purchasing power) is only possible with the implementation of daily updating (daily inflation-indexing in the case of monetary items) in terms of the Daily CPI: actually, in terms of all changes in the general price level which can change more than once per day during severe hyperinflation.
The CPI was institutionalized by the International Labour Organization in 1927.
In summary: The above stability in real value requires the rejection of the stable measuring unit assumption, i.e., the rejection of Historical Cost Accounting.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday, 31 August 2014
The post-Historical Cost economy
The post-Historical Cost economy
The post-HC economy would be an economy in which the stable measuring unit assumption would be replaced with the Units of Constant Purchasing Power (UCPP) paradigm. The HC paradigm would be abandoned and no-one would ever assume money is perfectly stable during low and high inflation and deflation for the purpose of valuing some (not all) items in the economy as all economists, accountants and business people do during non-hyperinflationary periods in the current HC era.
HCA would be replaced with the Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI model in the post-HC economy.
CMUCPP was authorized in IFRS as an alternative to HCA during all levels of inflation and deflation in the original Framework (1989), Par. 104 (a) which stated:
"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
The above wording is maintained intact in International Financial Reporting Standards in the current Conceptual Framework (2010), Par. 4.59 (a).
The accounting model for the post-HC economy was thus authorized in 1989 in IFRS. It was also authorized in US GAAP and other national accounting standards during that time.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The post-HC economy would be an economy in which the stable measuring unit assumption would be replaced with the Units of Constant Purchasing Power (UCPP) paradigm. The HC paradigm would be abandoned and no-one would ever assume money is perfectly stable during low and high inflation and deflation for the purpose of valuing some (not all) items in the economy as all economists, accountants and business people do during non-hyperinflationary periods in the current HC era.
HCA would be replaced with the Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI model in the post-HC economy.
CMUCPP was authorized in IFRS as an alternative to HCA during all levels of inflation and deflation in the original Framework (1989), Par. 104 (a) which stated:
"Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
The above wording is maintained intact in International Financial Reporting Standards in the current Conceptual Framework (2010), Par. 4.59 (a).
The accounting model for the post-HC economy was thus authorized in 1989 in IFRS. It was also authorized in US GAAP and other national accounting standards during that time.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday, 26 August 2014
Hayek: Stability in value would prove to be the decisive factor
On 11 August I blogged: Is Bitcoin fatally flawed? in which I stated:
"The fact that bitcoin has a fixed supply limit - 21 million - may mean it may be fatally flawed in its attempt to be money (a monetary item possessing the three attributes of money) because the limit in supply may result in it never being able to be relatively stable in real value: an essential requirement for money."
Friedrich Hayek had the same view regarding the fact that a relatively stable real value is essential for an item to be accepted as money.
"Hayek stated that “Stability in Value” would prove to be the decisive factor in assessing the level of acceptance" (of a currency).
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
"The fact that bitcoin has a fixed supply limit - 21 million - may mean it may be fatally flawed in its attempt to be money (a monetary item possessing the three attributes of money) because the limit in supply may result in it never being able to be relatively stable in real value: an essential requirement for money."
Friedrich Hayek had the same view regarding the fact that a relatively stable real value is essential for an item to be accepted as money.
"Hayek stated that “Stability in Value” would prove to be the decisive factor in assessing the level of acceptance" (of a currency).
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday, 24 August 2014
The value of money
Money is only a monetary item within an economy or monetary union.
The real value of money is determined by all underlying value systems in an economy or monetary union.
For example, sound monetary policies, sound governance, sound education, sound health policies, sound industrial policies, sound defence policies, sound judiciary, sound legal system, sound commercial policies, sound international relations, sound sustainable development, sound political system, etc, etc, etc.
The real value of money within an economy is indicated by the nominal interest rate less the inflation/hyperinflation or deflation rate.
Monday, 11 August 2014
Is Bitcoin fatally flawed?
The fact that bitcoin has a fixed supply limit - 21 million - may mean it may be fatally flawed in its attempt to be money (a monetary item possessing the three attributes of money) because the limit in supply may result in it never being able to be relatively stable in real value: an essential requirement for money.
Bitcoin may thus never be able to be used as a relatively stable unit of measure for accounting purposes. Bitcoin may thus never be able to replace fiat money.
However, bitcoin may come to dominate the market for a cheap, digital medium of exchange if its exchange technology could be improved to make it a very cheap, instantaneous, peer-to-peer, digital medium of exchange.
See: Hayek: Stability in value would prove to be the decisive factor
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Bitcoin may thus never be able to be used as a relatively stable unit of measure for accounting purposes. Bitcoin may thus never be able to replace fiat money.
However, bitcoin may come to dominate the market for a cheap, digital medium of exchange if its exchange technology could be improved to make it a very cheap, instantaneous, peer-to-peer, digital medium of exchange.
See: Hayek: Stability in value would prove to be the decisive factor
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday, 10 August 2014
Is bitcoin closing in on usurping the sovereign power of creating money?
Bitcoin is a very exciting and innovative technology.
Bitcoin has for the first time ever made all of us realize that anyone - not just sovereign states - can invent a monetized money-like crypto-medium-of-exchange that could become very popular very quickly and may result in improving the world in a very positive way.
The power to create money is a sovereign power. Sovereign powers (for example, to be a state, with a constitution, print fiat money, etc.) are the second highest level of power. Only judicial power is higher: the supreme court judges can remove the president.
The fact that bitcoin is almost (not actually yet) usurping a sovereign power - the power to create money to be used on a national and global scale (private money was created on a national scale in the past) - is an historic event. At the moment bitcoin is still not yet money: it is a monetized money-like crypto payment platform with a relatively unstable non-monetary real value , but it is getting closer to being money.
If bitcoin were ever to actually become money, i.e., a monetary item with a relatively stable real value that accountants can assume to be perfectly stable like they assume all fiat currencies are perfectly stable in real value during low and high inflation and deflation under the historical cost paradigm when they implement the traditional Historical Cost Accounting model, then it would create a legal storm because I think all countries´ legal systems state that only the sovereign state can create money: a monetary item which is subject to inflation and deflation when a central bank is involved.
The reason bitcoin is not banned outright globally is the fact that it is not money: it is a property (as ruled by the US, China and other countries): a variable real value non-monetary item. Sovereign states generally have no problems with newly invented assets/properties.
Sovereign states, however, guard their unique power to create money very jealously. The status quo may come under attack in the future depending on whether bitcoin - or maybe its successor - can actually be real money, i.e., a medium of exchange, a relatively stable store of real value and consequently a relatively stable unit of measure for accounting purposes.
I very much doubt that sovereign states would let the money supply be controlled by unknown people in a decentralized manner. The money supply is a matter of national importance for every nation.
Sovereign states, however, guard their unique power to create money very jealously. The status quo may come under attack in the future depending on whether bitcoin - or maybe its successor - can actually be real money, i.e., a medium of exchange, a relatively stable store of real value and consequently a relatively stable unit of measure for accounting purposes.
I very much doubt that sovereign states would let the money supply be controlled by unknown people in a decentralized manner. The money supply is a matter of national importance for every nation.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday, 7 August 2014
Money can be a monetary or a non-monetary item
Fiat money can be either a nominal monetary item or a variable real value non-monetary item depending on where it is being used: inside the economy where it was created or outside.
Fiat money is a monetary item only within the economy where it is created. In this case, fiat money´s real value is eroded by inflation (low, high and hyperinflation) and increased by deflation within the local economy.
The net monetary loss or gain in the real value of monetary items is not calculated and accounted under the historical cost paradigm during low and high inflation and deflation. It is calculated and accounted under the constant purchasing power paradigm required under IFRS in IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation.
Fiat money as a monetary item is generally never perfectly stable in real value over time during inflation and deflation. However, fiat money as a monetary item within the economy where it is created is assumed to be perfectly stable in real value by accountants, economists, business people and people in general for the measurement of many (not all) economic items under the historical cost paradigm, i.e., implementing the Historical Cost Accounting model during low and high inflation and deflation.
When a country´s currency is used outside the economy where it was created, i.e., when it is used as a foreign currency in another economy, then it is a variable real value non-monetary item. The real value of fiat money used as foreign currency is determined in terms of other currencies in the multitude of foreign exchange markets around the world. A foreign currency´s real value in terms of other currencies is not determined just by the inflation rate in the economy where it was created, although this is an important factor taken into account by buyers and sellers in the forex market. Many other factors besides inflation or deflation are taken into account by buyers and sellers of currencies in foreign exchange markets when they determine the exchange rate of a foreign currency in terms of their own currency.
An entity with its head-office in a particular economy values the local fiat currency as monetary items under the historical cost paradigm during low and high inflation and deflation. Local currencies are always assumed to be perfectly stable in real value over time under the historical cost paradigm.
An entity generally values foreign fiat currencies it holds as variable real value non-monetary items in terms of the constantly changing forex rates in the forex market.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Fiat money is a monetary item only within the economy where it is created. In this case, fiat money´s real value is eroded by inflation (low, high and hyperinflation) and increased by deflation within the local economy.
The net monetary loss or gain in the real value of monetary items is not calculated and accounted under the historical cost paradigm during low and high inflation and deflation. It is calculated and accounted under the constant purchasing power paradigm required under IFRS in IAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation.
Fiat money as a monetary item is generally never perfectly stable in real value over time during inflation and deflation. However, fiat money as a monetary item within the economy where it is created is assumed to be perfectly stable in real value by accountants, economists, business people and people in general for the measurement of many (not all) economic items under the historical cost paradigm, i.e., implementing the Historical Cost Accounting model during low and high inflation and deflation.
When a country´s currency is used outside the economy where it was created, i.e., when it is used as a foreign currency in another economy, then it is a variable real value non-monetary item. The real value of fiat money used as foreign currency is determined in terms of other currencies in the multitude of foreign exchange markets around the world. A foreign currency´s real value in terms of other currencies is not determined just by the inflation rate in the economy where it was created, although this is an important factor taken into account by buyers and sellers in the forex market. Many other factors besides inflation or deflation are taken into account by buyers and sellers of currencies in foreign exchange markets when they determine the exchange rate of a foreign currency in terms of their own currency.
An entity with its head-office in a particular economy values the local fiat currency as monetary items under the historical cost paradigm during low and high inflation and deflation. Local currencies are always assumed to be perfectly stable in real value over time under the historical cost paradigm.
An entity generally values foreign fiat currencies it holds as variable real value non-monetary items in terms of the constantly changing forex rates in the forex market.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday, 3 August 2014
All digital fiat currencies (92% of the global money supply) are digitally created in decentralized commercial banks
Ecuador will be the last (latest), not the first, country to create its own digital national currency. Ecuador does not currently have its own digital national currency because it currently does not have its own national currency. It is a dollarized economy. Ecuador uses the mainly digital US Dollar as mainly digital medium of exchange in the country. 92% of the US Dollar money supply inside the Ecuadorian economy is exchanged in a digital USD format daily.
All countries issuing fiat money have digital currencies for a long time already. 92% of the world´s money supply is in the form of digital fiat currencies. These digital fiat currencies were/are created in decentralized commercial banks via decentralized digital fractional reserve banking.
Sweden´s central bank does not require Swedish commercial banks to keep reserves with the Riksbank. It is the oldest central bank in the world.
Fiat digital currencies (all currencies in the world) are not centrally created. They are digitally created in a decentralized way in the various national commercial banks via decentralized digital fractional reserve banking.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
All countries issuing fiat money have digital currencies for a long time already. 92% of the world´s money supply is in the form of digital fiat currencies. These digital fiat currencies were/are created in decentralized commercial banks via decentralized digital fractional reserve banking.
Sweden´s central bank does not require Swedish commercial banks to keep reserves with the Riksbank. It is the oldest central bank in the world.
Fiat digital currencies (all currencies in the world) are not centrally created. They are digitally created in a decentralized way in the various national commercial banks via decentralized digital fractional reserve banking.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday, 1 August 2014
Ecuador cryptocurrency
Ecuador has banned bitcoin and announced that it is going to create its own cryptocurrency to be used alongside the US Dollar in the country.
Ecuador and all other countries have fiat virtual currencies. All countries transact their fiat virtual currencies 24/7, 365 days a year via the 70-year-old (or older) global fiat virtual currency very secure fiat virtual banking system. 92% of all the fiat money in the world is only transacted virtually. I think it most probably is done with values being sent encrypted. Thus 92% of all real money is transacted virtually and encrypted. The fiat virtual currencies are not virtual cryptocommodities (like bitcoin) created via blockchain technology: they are virtual representations of physical fiat currency banknotes and coins.
For Ecuador to create its own cryptocurrency it has to create a virtual currency fundamentally very different from the virtual cryptocommodity called bitcoin.
Ecuador does not have its own national fiat currency. It is a dollarized economy. It uses the US Dollar as its national currency for the sake of relative monetary stability. Thus, Ecuador is subject to inflation (erosion of the real value) in the USD as experienced in the US.
Ecuador is attempting something very unique. It has to create a cryptocurrency that is actually a monetary item or real money like the USD inside the US economy. Monetary items are all items in a country´s money supply. If an item appears on the list of items (cash, notes, coins, loans, bonds, etc.) in the central bank´s list of items that make up the money supply, then it is a monetary item. If not, it is a non-monetary item, like bitcoin. Monetary items are fiat money and subject to inflation and deflation. Money, i.e., a monetary item, is relatively stable in real value like the USD, Euro, Yuan, etc. Accountants actually assume money (all fiat currencies) is perfectly stable in real value for the valuation of many items in a business under the traditional Historical Cost Accounting model during low and high inflation and deflation. The items that accountants value in nominal assumed-to-be perfectly stable fiat value, include, but are not limited to capital, retained income, all profits, all losses, salaries, wages, rent, taxes, all expenses, trade debtors, trade creditors, all revenue, all income, all items in the income statement, cash, bank balances, money loan balances, etc.
Ecuador thus has to create a cryptocurrency with an assumed to be perfectly stable in real value per unit of cryptocurrency. That is not the case with bitcoin. Accountants in Ecuador are going to assume this new cryptocurrency (if they actually manage to create it) is perfectly stable in real value for the valuing/measurement of the above stated items in balance sheets and income statements of businesses in Ecuador. That is not the case with the crypto commodity bitcoin which is a variable real value non-monetary item, the real value of which changes minute by minute on the various bitcoin exchanges around the world. That is also the case with fiat currency when the fiat currency is transacted as foreign exchange, that is, outside the economy where the fiat currency is created. Inside the economy where the fiat currency is created, the fiat currency notes and coins maintain their nominal values fixed, but their real value is determined by the rate of inflation or deflation.
Bitcoin will never be assumed to be perfectly stable in real value (like all fiat currencies) for accounting purposes because it is not a monetary item.
Thus Ecuador is really trying something very special. Ecuador is going to try and do what bitcoin should have been, i.e., a monetary item or money. Bitcoin is a virtual cryptocommodity with a constantly changing real value.
I wish Ecuador good luck. If they succeed it will be something very special and may be a fundamental breakthrough that will have a fundamental impact on the bitcoin phenomenon.
Update: Ecuador´s (possibly [hyper]inflationary?) virtual IOU´sNicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday, 22 July 2014
Distinguishing the Unit of Account from the Unit of Measure
"Distinguishing the Unit of Account from the Unit of Measure
The term “unit of account” does not appear in the conceptual framework, although the term “unit of measure” does, and both terms appear in accounting standards.
However, because unit of measure and unit of account are sometimes treated as synonyms, we discuss the distinction between the two terms next.
The Unit of Measure in the FASB’s Conceptual Framework
The FASB Discussion Memorandum, An Analysis of Issues Related to Conceptual Framework for Financial Accounting and Reporting: Elements of Financial Statements and Their Measurement (1976), a publication that preceded the FASB’s Concepts Statements, describes the unit of measure in terms of the monetary unit to be used; that is, whether it should be nominal units of money as opposed to units that are adjusted for changes in purchasing power over time (paragraphs 384-7). FASB Concepts Statement No. 1, Objectives of Financial Reporting by Business Enterprises (1978), and Concepts Statement 6, mention unit of measure but do not define or describe it. FASB Concepts Statement 2, Qualitative Characteristics of Accounting Information (1980), uses the term without defining it but discusses it in the context of making comparisons based on units of money or units of invariant purchasing power (paragraph 114).
FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises (1984), describes the unit of measure in terms of nominal units of money or units of constant purchasing power, and then further describes it in terms of artificial monetary units 3 or units of a commodity, such as ounces of gold (paragraph 71).
In the FASB’s conceptual framework, therefore, unit of measure refers to the numerals used in accounting measurement, in conjunction with recognition in financial statements or with disclosure in the notes to the financial statements. More specifically, it refers to the measurement unit (such as nominal dollars or price-level adjusted dollars), as opposed to the measurement attribute (such as historical cost or fair value).
In contrast to the numerals that are used to measure an item, the unit of account refers to the words that are used to describe the item. That is, it relates to the specific assets and liabilities that are reported in financial statements rather than the units used to measure them. That is, unit of account refers to the object of recognition or display whereas unit of measure refers to the tool for measuring it.
The Unit of Measure in Accounting Standards
Unit of measure appears in several accounting standards. Those standards generally use the term in a manner that is consistent with its use in the Concepts Statements.
For example, FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies (1977), discusses converting oil and gas reserves and oil and gas produced to a common unit of measure based on their relative energy content (paragraph 38). FASB Statement No. 52, Foreign Currency Translation (1981), uses the term in its Basis for Conclusions and defines the term in its glossary as “the currency in which assets, liabilities, revenues, expenses, gains, and losses are measured.” These uses of the term are consistent with the general meaning of the term in the Concepts Statements."
Copyright (c) Johnson, L.T., The Unit of Account Issue, Financial Accounting Standards Research Initiative
________________________________________________________________________________
Unit of account and unit of measure are very often used as synonyms in economics and accounting. However, unit of account has a very specific definition in accounting in International Financial Reporting Standards and US GAAP that is not a nominal monetary unit of measure; not fiat money or a fiat currency. In IFRS and US GAAP, a unit of account are the words used to describe an asset unit or liability unit for accounting purposes.
Nicolaas Smith
The term “unit of account” does not appear in the conceptual framework, although the term “unit of measure” does, and both terms appear in accounting standards.
However, because unit of measure and unit of account are sometimes treated as synonyms, we discuss the distinction between the two terms next.
The Unit of Measure in the FASB’s Conceptual Framework
The FASB Discussion Memorandum, An Analysis of Issues Related to Conceptual Framework for Financial Accounting and Reporting: Elements of Financial Statements and Their Measurement (1976), a publication that preceded the FASB’s Concepts Statements, describes the unit of measure in terms of the monetary unit to be used; that is, whether it should be nominal units of money as opposed to units that are adjusted for changes in purchasing power over time (paragraphs 384-7). FASB Concepts Statement No. 1, Objectives of Financial Reporting by Business Enterprises (1978), and Concepts Statement 6, mention unit of measure but do not define or describe it. FASB Concepts Statement 2, Qualitative Characteristics of Accounting Information (1980), uses the term without defining it but discusses it in the context of making comparisons based on units of money or units of invariant purchasing power (paragraph 114).
FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises (1984), describes the unit of measure in terms of nominal units of money or units of constant purchasing power, and then further describes it in terms of artificial monetary units 3 or units of a commodity, such as ounces of gold (paragraph 71).
In the FASB’s conceptual framework, therefore, unit of measure refers to the numerals used in accounting measurement, in conjunction with recognition in financial statements or with disclosure in the notes to the financial statements. More specifically, it refers to the measurement unit (such as nominal dollars or price-level adjusted dollars), as opposed to the measurement attribute (such as historical cost or fair value).
In contrast to the numerals that are used to measure an item, the unit of account refers to the words that are used to describe the item. That is, it relates to the specific assets and liabilities that are reported in financial statements rather than the units used to measure them. That is, unit of account refers to the object of recognition or display whereas unit of measure refers to the tool for measuring it.
The Unit of Measure in Accounting Standards
Unit of measure appears in several accounting standards. Those standards generally use the term in a manner that is consistent with its use in the Concepts Statements.
For example, FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies (1977), discusses converting oil and gas reserves and oil and gas produced to a common unit of measure based on their relative energy content (paragraph 38). FASB Statement No. 52, Foreign Currency Translation (1981), uses the term in its Basis for Conclusions and defines the term in its glossary as “the currency in which assets, liabilities, revenues, expenses, gains, and losses are measured.” These uses of the term are consistent with the general meaning of the term in the Concepts Statements."
Copyright (c) Johnson, L.T., The Unit of Account Issue, Financial Accounting Standards Research Initiative
________________________________________________________________________________
Unit of account and unit of measure are very often used as synonyms in economics and accounting. However, unit of account has a very specific definition in accounting in International Financial Reporting Standards and US GAAP that is not a nominal monetary unit of measure; not fiat money or a fiat currency. In IFRS and US GAAP, a unit of account are the words used to describe an asset unit or liability unit for accounting purposes.
Nicolaas Smith
Tuesday, 15 July 2014
With Bitcoin, generally accepted terms trump economic science
With Bitcoin, generally accepted terms trump economic science
An American federal judge stated that bitcoin is a unit of account, meaning monetary unit of measure. Bitcoin is a very unstable variable real value non-monetary item, not a monetary unit of measure. Bitcoin can never be a monetary unit of measure because it is not a monetary item. All monetary units of measure are assumed to be perfectly stable in real value for accounting purposes during low and high inflation and deflation. Bitcoins are not perfectly stable in real value and will never be assumed to be perfectly stable in real value because a bitcoin is a variable real value non-monetary item. Monetary unit of measure only refers to a fiat currency unit of measure.
Bitcoin is universally referred to as a currency. It can never be a currency. It is not a monetary item. It is a variable real value non-monetary item similar to rare digital stamps. All fiat currencies are assumed to be perfectly stable in real value during low and high inflation and deflation for accounting purposes. Bitcoin will never be assumed to be perfectly stable in real value.
Everyone is 100% sure that bitcoin is a decentralized payment platform. In fact, all bitcoins only exist in the single, centralized Bitcoin Public Ledger or single bitcoin repository. All bitcoins are deposited in this single repository. However, everyone is 100% sure it is a decentralized system.
Mining, the creation of bitcoins, is assumed or supposed to be decentralized, but all bitcoins are then deposited in the single central repository called the Bitcoin Public Ledger where they stay centralized in one place forever. Currently the company GHash controls 51% of mining which is a very dangerous situation for the Bitcoin system.
Public opinion and public practice will always override science in matters like these.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
An American federal judge stated that bitcoin is a unit of account, meaning monetary unit of measure. Bitcoin is a very unstable variable real value non-monetary item, not a monetary unit of measure. Bitcoin can never be a monetary unit of measure because it is not a monetary item. All monetary units of measure are assumed to be perfectly stable in real value for accounting purposes during low and high inflation and deflation. Bitcoins are not perfectly stable in real value and will never be assumed to be perfectly stable in real value because a bitcoin is a variable real value non-monetary item. Monetary unit of measure only refers to a fiat currency unit of measure.
Bitcoin is universally referred to as a currency. It can never be a currency. It is not a monetary item. It is a variable real value non-monetary item similar to rare digital stamps. All fiat currencies are assumed to be perfectly stable in real value during low and high inflation and deflation for accounting purposes. Bitcoin will never be assumed to be perfectly stable in real value.
Everyone is 100% sure that bitcoin is a decentralized payment platform. In fact, all bitcoins only exist in the single, centralized Bitcoin Public Ledger or single bitcoin repository. All bitcoins are deposited in this single repository. However, everyone is 100% sure it is a decentralized system.
Mining, the creation of bitcoins, is assumed or supposed to be decentralized, but all bitcoins are then deposited in the single central repository called the Bitcoin Public Ledger where they stay centralized in one place forever. Currently the company GHash controls 51% of mining which is a very dangerous situation for the Bitcoin system.
Public opinion and public practice will always override science in matters like these.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday, 9 July 2014
Bitcoin is not a monetary unit of measure or unit of account
Bitcoin is not a monetary unit of measure or unit of account
A monetary unit of measure is often mistakenly called a unit of account by the man in the street and even by a US federal judge. See
Money is always a monetary unit of measure. The best known monetary units of measure are the best known fiat currencies in use today: US Dollar, Euro, Pound, Peso, Rouble, Yuan, Yen, Shilling, etc. All fiat currencies are monetary units of measure.
They are all monetary items when used inside the economy where they are created. They are variable real value non-monetary items when used as foreign exchange outside the economy where they are created.
Money (any fiat currency) as the monetary unit of measure is the only unit of measure that is not based on a constant value. It is thus assumed for accounting purposes only under Historical Cost Accounting and Current Cost Accounting (which implement the stable measuring unit assumption) that all monetary units of measure are perfectly stable in real value for the purpose of measuring monetary items not inflation-indexed and constant real value non-monetary items only during low and high inflation and deflation.
All other units of measure are based on constant values, e.g., inch, foot, yard, mile, kilometer, meter, pound, gram, ounce, watt, etc.
A monetary unit of measure is an assumed to be perfectly stable in real value, monetary item (fiat currency) - in the economy where it is created - used to account economic activity in terms of the double entry accounting model.
The best known double entry accounting model is the traditional, generally accepted, globally implemented Historical Cost Accounting model.
Other double entry accounting models are:
Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI.
Current Cost Accounting
Thus, bitcoin, the digital unit of the Bitcoin digital payment platform, is not a monetary unit of measure, because all units of measure are either based on a perfectly constant base unit (e.g., inch, centimeter, gallon, pint, watt, ohm, etc.) or - only in the case of monetary items - assumed to be perfectly stable in real value only during low and high inflation and deflation and only under the Historical Cost Accounting and Current Cost Accounting models.
A bitcoin is not a monetary unit of measure because economic items are not generally priced or measured in bitcoins. No financial reports are prepared in bitcoins. No set of accounts is prepared in bitcoins.
Monetary units of measure are all monetary items (currencies) assumed to be perfectly stable in real value only during low and high inflation and deflation only under HCA and CCA.
Bitcoins are not perfectly stable in real value and are not and cannot be assumed to be perfectly stable in real value because they are not monetary items.
Bitcoin is always a variable real value non-monetary item similar to a limited issue rare stamp in digital form.
Thus, bitcoin is not and cannot be a monetary unit of measure for accounting purposes. Bitcoin is not a monetary unit of measure because it is not perfectly stable in real value and it is not and it cannot be assumed to be perfectly stable in real value because a bitcoin is not a monetary item.
Bitcoin is a digital variable real value non-monetary item. The bitcoin digital units are numbered in terms of the normal numbering system: 1, 2, 3, .....
The fact that a US federal judge referred to bitcoin as a unit of account (mistakenly meaning monetary unit of measure) does not constitute a binding definition or description since it was made under US common law. Any other US common law judge can have a different opinion.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
A monetary unit of measure is often mistakenly called a unit of account by the man in the street and even by a US federal judge. See
Distinguishing the Unit of Account from the Unit of Measure
Money is always a monetary unit of measure. The best known monetary units of measure are the best known fiat currencies in use today: US Dollar, Euro, Pound, Peso, Rouble, Yuan, Yen, Shilling, etc. All fiat currencies are monetary units of measure.
They are all monetary items when used inside the economy where they are created. They are variable real value non-monetary items when used as foreign exchange outside the economy where they are created.
Money (any fiat currency) as the monetary unit of measure is the only unit of measure that is not based on a constant value. It is thus assumed for accounting purposes only under Historical Cost Accounting and Current Cost Accounting (which implement the stable measuring unit assumption) that all monetary units of measure are perfectly stable in real value for the purpose of measuring monetary items not inflation-indexed and constant real value non-monetary items only during low and high inflation and deflation.
All other units of measure are based on constant values, e.g., inch, foot, yard, mile, kilometer, meter, pound, gram, ounce, watt, etc.
A monetary unit of measure is an assumed to be perfectly stable in real value, monetary item (fiat currency) - in the economy where it is created - used to account economic activity in terms of the double entry accounting model.
The best known double entry accounting model is the traditional, generally accepted, globally implemented Historical Cost Accounting model.
Other double entry accounting models are:
Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI.
Current Cost Accounting
Thus, bitcoin, the digital unit of the Bitcoin digital payment platform, is not a monetary unit of measure, because all units of measure are either based on a perfectly constant base unit (e.g., inch, centimeter, gallon, pint, watt, ohm, etc.) or - only in the case of monetary items - assumed to be perfectly stable in real value only during low and high inflation and deflation and only under the Historical Cost Accounting and Current Cost Accounting models.
A bitcoin is not a monetary unit of measure because economic items are not generally priced or measured in bitcoins. No financial reports are prepared in bitcoins. No set of accounts is prepared in bitcoins.
Monetary units of measure are all monetary items (currencies) assumed to be perfectly stable in real value only during low and high inflation and deflation only under HCA and CCA.
Bitcoins are not perfectly stable in real value and are not and cannot be assumed to be perfectly stable in real value because they are not monetary items.
Bitcoin is always a variable real value non-monetary item similar to a limited issue rare stamp in digital form.
Thus, bitcoin is not and cannot be a monetary unit of measure for accounting purposes. Bitcoin is not a monetary unit of measure because it is not perfectly stable in real value and it is not and it cannot be assumed to be perfectly stable in real value because a bitcoin is not a monetary item.
Bitcoin is a digital variable real value non-monetary item. The bitcoin digital units are numbered in terms of the normal numbering system: 1, 2, 3, .....
The fact that a US federal judge referred to bitcoin as a unit of account (mistakenly meaning monetary unit of measure) does not constitute a binding definition or description since it was made under US common law. Any other US common law judge can have a different opinion.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday, 29 June 2014
Definition of hyperinflation
The generally accepted definition of hyperinflation in the world economy is 100% cumulative inflation over three years. It comes to 26% annual or 1.95% monthly inflation for three years in a row.
The above definition is currently being used by the 147 countries that implement International Financial Reporting Standards as issued by the International Accounting Standards Board. This definition has been used since April 1989 by the millions of accountants, business people, economists and all governments who implement IFRS.
This definition of hyperinflation is contained in IAS 29 Financial Reporting in Hyperinflationary Economies that was authorized by the IASB in April 1989.
"Par 3. This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgement when restatement of financial statements in accordance with this Standard becomes necessary. Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:
(a) the general population prefers to keep its wealth in non-monetary assets
or in a relatively stable foreign currency. Amounts of local currency held
are immediately invested to maintain purchasing power;
(b) the general population regards monetary amounts not in terms of the
local currency but in terms of a relatively stable foreign currency. Prices
may be quoted in that currency;
(c) sales and purchases on credit take place at prices that compensate for
the expected loss of purchasing power during the credit period, even if
the period is short;
(d) interest rates, wages and prices are linked to a price index; and
(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%."
There is today not one government in the world economy that uses any other definition of hyperinflation.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Saturday, 21 June 2014
High Frequency Traders make technology profits
High Frequency Traders make technology profits.
They make almost no profit per trade over almost no time with almost no risk millions of times.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
They make almost no profit per trade over almost no time with almost no risk millions of times.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday, 10 June 2014
Daily inflation-indexing of the entire money supply would remove the effect of inflation or deflation (not actual inflation or deflation)
Daily inflation-indexing of the entire money supply would remove the effect of inflation - low, high and hyperinflation - or deflation (not actual inflation or deflation).
This happens daily with the USD 3 trillion plus in global government inflation-indexed bonds.
Chile today inflation-indexes more than 25% of its entire money supply on a daily basis.
Why not 100%? What is wrong with doing away with the effect of inflation - low, high and hyperinflation - or deflation completely?
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
This happens daily with the USD 3 trillion plus in global government inflation-indexed bonds.
Chile today inflation-indexes more than 25% of its entire money supply on a daily basis.
Why not 100%? What is wrong with doing away with the effect of inflation - low, high and hyperinflation - or deflation completely?
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday, 6 June 2014
Capital Maintenance in Units of Constant Purchasing Power stops destruction of real value under HCA
IFRS and US GAAP authorised Capital Maintenance in Units of Constant Purchasing Power™ (CMUCPP™) maintains the constant purchasing power of constant real value non-monetary items (salaries, wages, pensions, taxes, trade debtors/creditors, equity) only in terms of a Daily CPI in entities that break even in real value in inflation and deflation - ceteris paribus.
It would stop the global destruction by the stable measuring unit assumption in constant items of hundreds of billions of USD p.a. now taking place under traditional Historical Cost Accounting.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
It would stop the global destruction by the stable measuring unit assumption in constant items of hundreds of billions of USD p.a. now taking place under traditional Historical Cost Accounting.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Monday, 2 June 2014
Difference between local currency and foreign currency
Foreign currency
Foreign currency is always created in a foreign economy. Foreign currency is always a variable real value non-monetary item like, for example, property, plant, equipment, listed and unlisted shares, etc. A foreign currency with a floating exchange rate´s continuously changing daily value is determined in foreign currency markets. Foreign currency gains or losses are recorded in the financial reports under all accounting models including traditional Historical Cost Accounting. Foreign currency is traded daily on many foreign currency exchange markets. A foreign currency with a floating exchange rate has a continuously changing price or real value. A foreign currency with a floating exchange rate can increase and decrease in price daily (minute by minute).
Local currency
Local currency is always fiat money created in the local economy. A local currency is always a monetary item with an assumed to be perfectly stable real value over time whereas a foreign currency is always a variable real value non-monetary item. However, a local currency´s daily changing real value is determined by the rate of inflation or deflation in the local economy as indicated by the Daily CPI during low inflation, high inflation and deflation and by the Daily US Dollar parallel rate during hyperinflation. Although a local currency is generally not stable in real value, it is assumed that the local currency is perfectly stable in real value over time for the purpose of being used as the "assumed-to-be" perfectly stable monetary unit of account in the local economy for accounting purposes under the Historical Cost and Current Cost Accounting models. Under the Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) accounting model monetary items are generally inflation-adjusted on a daily basis and constant real value non-monetary items are measured daily in units of constant purchasing power generally in terms of the Daily CPI.
Local currency net monetary gains and losses as a result of inflation and deflation are not recorded in the financial reports under HCA and CCA during low inflation, high inflation and deflation. They are calculated and accounted under Capital Maintenance in Units of Constant Purchasing Power during hyperinflation as required under IAS 29 Financial Reporting in Hyperinflationary Economies. During low inflation and deflation local currency is not traded in the local market because local currency is assumed to be perfectly stable in real value over time. Local currency´s real value is indicated by inflation and deflation. However, during high inflation and hyperinflation, local currency is traded in the local market. This market is called the parallel or black market as opposed to the normal foreign exchange market.
Local currency´s real value is determined by all the underlying value systems in the local economy, e.g., good or bad national governance, a good or bad economy, good or bad monetary policies, a good or bad legal system, a good or bad health system, a good or bad educational system, a good or bad police force, etc, etc. The daily change in local currency´s real value is indicated by the daily change in the Daily CPI during low and high inflation and deflation and by the daily US Dollar parallel rate during hyperinflation.
The total of local currency held locally plus held outside the local economy (as foreign currency by other countries) make up the money supply. Daily inflation-indexing the local money supply, i.e., all monetary items in the local economy, would eliminate only the effect of inflation or deflation in the local economy: it would leave local inflation or deflation intact. However, it would be as if there is no inflation or deflation in the local economy.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday, 1 June 2014
Generally accepted definition of hyperinflation
The generally accepted definition of hyperinflation in the world economy is 100% cumulative inflation over three years. It comes to 26% annual or 1.95% monthly inflation for three years in a row.
The above definition is currently being used by the 147 countries that implement International Financial Reporting Standards as issued by the International Accounting Standards Board. This definition has been used since April 1989 by the millions of accountants, business people, economists and all governments who implement IFRS.
This definition of hyperinflation is contained in IAS 29 Financial Reporting in Hyperinflationary Economies that was authorized by the IASB in April 1989.
"Par 3. This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgement when restatement of financial statements in accordance with this Standard becomes necessary. Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:
(a) the general population prefers to keep its wealth in non-monetary assets
or in a relatively stable foreign currency. Amounts of local currency held
are immediately invested to maintain purchasing power;
(b) the general population regards monetary amounts not in terms of the
local currency but in terms of a relatively stable foreign currency. Prices
may be quoted in that currency;
(c) sales and purchases on credit take place at prices that compensate for
the expected loss of purchasing power during the credit period, even if
the period is short;
(d) interest rates, wages and prices are linked to a price index; and
(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%."
There is today not one government in the world economy that uses any other definition of hyperinflation.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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