Monetary items
Money was invented over a long period of time. Eventually money came to fulfil the following three functions during inflation and deflation:
1) Unstable medium of exchange
2) Unstable store of value
3) Unstable unit of account
Non-monetary items were only defined in unstable monetary terms after the invention of unstable money. The economy came to be divided in the unstable monetary economy and the non-monetary or real economy. There were only unstable monetary items and variable real value non-monetary items. There were no constant real value non-monetary items yet. The non-monetary or real economy consisted of only variable items.
Monetary items are money held and items with an underlying monetary nature.
Examples of monetary items in today’s economy are bank notes and coins, bank loans, bank savings, other monetary savings, bank account balances, treasury bills, commercial bonds, government bonds, mortgage bonds, student loans, car loans, consumer loans, credit card loans, notes payable, notes receivable, all monetary loans, etc.
Unstable money and other monetary items´ real values are continuously being destroyed by inflation. Inflation only destroys the real value of unstable money and other monetary items. Inflation has no effect on the real value of non-monetary items.
Non-monetary items are all items that are not monetary items.
Non-monetary items in today’s economy are divided into two sub-groups:
a) Variable real value non-monetary items
b) Constant real value non-monetary items
There were still no units of constant purchasing power because there was still no CPI at that time. There were still no real value destroying Historical Cost Accounting model and very destructive stable measuring unit assumption accounting fallacy. There were still no price-level accounting, no Constant Purchasing Power inflation accounting model for hyperinflationary economies and no Constant ITEM Purchasing Power Accounting model for low inflationary and deflationary economies. There were still no financial reports. There were still no very popular accounting fallacies authorized by the IASB.
Inflation
Inflation is always and everywhere a monetary phenomenon: Milton Friedman.
Inflation is a sustained rise in the general price level of goods and services in an economy over a period of time. Prices are normally set in terms of the unstable money or unstable functional currency in an economy or economic region. Inflation always and everywhere destroys the real value of depreciating money and other depreciating monetary items over time. Inflation has no effect on the real value of non-monetary items. Disinflation is a decrease in the rate of increase of the general price level. Inflation still destroys the real value of depreciating money and other depreciating monetary items during disinflation; just at a slower rate than before.
Deflation is a sustained decrease in the general price level. Deflation creates real value in appreciating money and other appreciating monetary items over time, recently mainly seen in the Japanese economy.
Inflation reared its ugly head soon after the invention of money. It only destroyed the real value of depreciating money and other depreciating monetary items at that time as it does today. Inflation did not and can not destroy or erode (which is the same as destroy) the real value of non-monetary items – either variable or constant real value non-monetary items.
Inflation has no effect on the real value of non-monetary items.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.
Kindest regards,
Nicolaas Smith
Wednesday, 13 January 2010
Tuesday, 12 January 2010
Chávez is playing with fire
Venezuela is in hyperinflation since November 2009. PricewaterhouseCoopers published that on 17 December 2009. Everbody in Venezuela is still in denial about that.
Hugo Chávez is playing with fire when he thinks he can abuse sovereignty to create a fantasy economy where he can half his national debt overnight by presidential decree. Gideon Gono´s casino economy in Zimbabwe was also a fantasy economy created with the abuse of sovereignty. Then he single-handedly destroyed it by simply "printing money" continuously in 100 trillion Zimbabwe Dollar notes. There is no Zimbabwe Dollar today. Sovereignty in the wrong hands is like casting perls before swine.
Venezuealan companies now have to implement IAS 29. IAS 29 will make no difference and is not intended to make any difference to hyperinflation in a country. IAS 29 can be used to stabilize Venezuela´s entire non-monetary economy. Not by restating traditional Historical Cost year-end financial statements prepared in terms of the real value destroying HCA model at the end of 2010 applying the year-end CPI rate to make them "more useful", but, by updating all non-monetary items in the country daily at the daily parallel rate.
That would include trade debtors and trade creditors which the International Accounting Standards Board and PricewaterhouseCoopers mistakenly classify as monetary items. They are constant real value non-monetary items and have to be updated daily at the parallel rate in Venezuela.
Implementing IAS 29 by applying the daily parallel rate is, in principle, the same as Brazil´s daily indexation for 30 years from 1964 to 1994. They had a stable and sometimes growing non-monetary economy with up to 2700% annual hyperinflation in their monetary economy. This gave Gustavo Franco and his team a chance to work out a way of how to kill their hyperinflation. It took them 10 years, but, they had a more or less stable non-monetary economy because of daily updating of many if not all non-monetary items at daily rates supplied by the government. If Brazil could have done that for 30 year then Venezuela can do the same.
There is very little chance of this happening when Sir David Tweedie, the Chairman of the IASB, supports the two very popular accounting fallacies, namely the very destructive stable measuring unit assumption and financial capital maintenance in nominal monetary units (which is impossible per se during inflation) as authorized and approved by the IASB in the Framework, Par 104 (a) twenty years ago. The Framework, Par 104 (a) states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
The IASB thus authorized and approved the two very popular accounting fallacies and their only and perfect antidote in the exact same statement. The antidote is perfect during inflation, hyperinflation and deflation; the values may not be.
Kindest regards
Nicolaas Smith
PS And Julius Malema and his friends from the ANCYL want to visit Venezuela to see how to nationalize the mines??
Hugo Chávez is playing with fire when he thinks he can abuse sovereignty to create a fantasy economy where he can half his national debt overnight by presidential decree. Gideon Gono´s casino economy in Zimbabwe was also a fantasy economy created with the abuse of sovereignty. Then he single-handedly destroyed it by simply "printing money" continuously in 100 trillion Zimbabwe Dollar notes. There is no Zimbabwe Dollar today. Sovereignty in the wrong hands is like casting perls before swine.
Venezuealan companies now have to implement IAS 29. IAS 29 will make no difference and is not intended to make any difference to hyperinflation in a country. IAS 29 can be used to stabilize Venezuela´s entire non-monetary economy. Not by restating traditional Historical Cost year-end financial statements prepared in terms of the real value destroying HCA model at the end of 2010 applying the year-end CPI rate to make them "more useful", but, by updating all non-monetary items in the country daily at the daily parallel rate.
That would include trade debtors and trade creditors which the International Accounting Standards Board and PricewaterhouseCoopers mistakenly classify as monetary items. They are constant real value non-monetary items and have to be updated daily at the parallel rate in Venezuela.
Implementing IAS 29 by applying the daily parallel rate is, in principle, the same as Brazil´s daily indexation for 30 years from 1964 to 1994. They had a stable and sometimes growing non-monetary economy with up to 2700% annual hyperinflation in their monetary economy. This gave Gustavo Franco and his team a chance to work out a way of how to kill their hyperinflation. It took them 10 years, but, they had a more or less stable non-monetary economy because of daily updating of many if not all non-monetary items at daily rates supplied by the government. If Brazil could have done that for 30 year then Venezuela can do the same.
There is very little chance of this happening when Sir David Tweedie, the Chairman of the IASB, supports the two very popular accounting fallacies, namely the very destructive stable measuring unit assumption and financial capital maintenance in nominal monetary units (which is impossible per se during inflation) as authorized and approved by the IASB in the Framework, Par 104 (a) twenty years ago. The Framework, Par 104 (a) states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."
The IASB thus authorized and approved the two very popular accounting fallacies and their only and perfect antidote in the exact same statement. The antidote is perfect during inflation, hyperinflation and deflation; the values may not be.
Kindest regards
Nicolaas Smith
PS And Julius Malema and his friends from the ANCYL want to visit Venezuela to see how to nationalize the mines??
Variable items
Variable real value non-monetary items
Variable items are non-monetary items with variable real values over time.
Examples of variable items in today’s economy are property, plant, equipment, inventories, quoted and unquoted shares, raw material stock, finished goods stock, patents, trademarks, foreign exchange, etc: all economic items you see around you except monetary and constant items.
The first economic items were variable real value items. Their values were not yet expressed in terms of money because money was not yet invented at that time.
There was no inflation at that time because there was no money. There was no unstable monetary medium of exchange. There was no unstable monetary unit of account. There was no unstable monetary store of value.
There was no double entry accounting model at that time.
There were no historical cost items, no stable measuring unit assumption, no Historical Cost Accounting model and no financial capital maintenance in nominal monetary units; that is to say: there were no accounting fallacies.
There was no value based accounting.
There was also no Consumer Price Index at that time. Consequently there were no units of constant purchasing power and no price-level accounting.
There was no inflation accounting. There was no Constant Purchasing Power inflation accounting model under which all non-monetary items (variable and constant items) in Historical Cost and Current Cost financial statements are required to be restated by means of the year end CPI during hyperinflation.
There was also no continuous financial capital maintenance option under which only constant items are continuously measured in units of constant purchasing power by applying the monthly CPI during non-hyperinflationary periods in order to implement a continuous financial capital concept of invested purchasing power by continuously measuring financial capital maintenance in units of constant purchasing power and determining profit/loss in constant purchasing power units while variable items are continuously valued in terms of specific International Financial Reporting Standards or South African Generally Accepted Accounting Practice rules at, for example, market value, fair value, present value, recoverable value or net realizable value and monetary items are valued at their always current original nominal monetary values during the reporting period.
There were no financial reports: e.g. no income statements, no balance sheets, no cash flow statements, no statements of changes in Shareholders´ Equity, etc.
There were no monetary items and no constant items. There were only variable real value items not yet expressed in monetary terms.
Kindest regards,
Nicolaas Smith
Variable items are non-monetary items with variable real values over time.
Examples of variable items in today’s economy are property, plant, equipment, inventories, quoted and unquoted shares, raw material stock, finished goods stock, patents, trademarks, foreign exchange, etc: all economic items you see around you except monetary and constant items.
The first economic items were variable real value items. Their values were not yet expressed in terms of money because money was not yet invented at that time.
There was no inflation at that time because there was no money. There was no unstable monetary medium of exchange. There was no unstable monetary unit of account. There was no unstable monetary store of value.
There was no double entry accounting model at that time.
There were no historical cost items, no stable measuring unit assumption, no Historical Cost Accounting model and no financial capital maintenance in nominal monetary units; that is to say: there were no accounting fallacies.
There was no value based accounting.
There was also no Consumer Price Index at that time. Consequently there were no units of constant purchasing power and no price-level accounting.
There was no inflation accounting. There was no Constant Purchasing Power inflation accounting model under which all non-monetary items (variable and constant items) in Historical Cost and Current Cost financial statements are required to be restated by means of the year end CPI during hyperinflation.
There was also no continuous financial capital maintenance option under which only constant items are continuously measured in units of constant purchasing power by applying the monthly CPI during non-hyperinflationary periods in order to implement a continuous financial capital concept of invested purchasing power by continuously measuring financial capital maintenance in units of constant purchasing power and determining profit/loss in constant purchasing power units while variable items are continuously valued in terms of specific International Financial Reporting Standards or South African Generally Accepted Accounting Practice rules at, for example, market value, fair value, present value, recoverable value or net realizable value and monetary items are valued at their always current original nominal monetary values during the reporting period.
There were no financial reports: e.g. no income statements, no balance sheets, no cash flow statements, no statements of changes in Shareholders´ Equity, etc.
There were no monetary items and no constant items. There were only variable real value items not yet expressed in monetary terms.
Kindest regards,
Nicolaas Smith
Three economic items
Science is simply common sense at its best - that is, rigidly accurate in observation, and merciless to fallacy in logic. Thomas Huxley
The economy consists of economic items and economic entities. Economic items have economic value. Accountants value economic items when they account them. Utility, scarcity and exchangeability are the three basic attributes of an economic item which, in combination, give it economic value. The three fundamentally different basic economic items in the economy are
a) monetary items
b) variable real value non-monetary items
c) constant real value non-monetary items
The SA economy consequently consists of three parts:
1. Monetary economy
The SA monetary economy consists of the Rand money supply and other Rand monetary items, i.e. Rand money loans: e.g. bank loans, savings, credit card loans, car loans, home loans, student loans, consumer loans, etc.
2. Variable item non-monetary economy
Non-monetary items with variable real values over time; for example, cars, groceries, houses, factories, property, plant, equipment, inventory, mobile phones, quoted and unquoted shares, foreign exchange, finished goods products, etc. Variable items are all economic items you generally see around you except monetary and constant items.
3. Constant item non-monetary economy
Constant items are non-monetary items with constant real values over time: income statement items like salaries, wages, rentals, etc and balance sheet constant items like issued share capital, reported retained profits, all other items in shareholders´ equity, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary payables and receivables, etc.
The variable and constant item non-monetary economies in combination make up the non-monetary or real economy which together with the monetary economy constitute the SA economy.
Kindest regards,
Nicolaas Smith
The economy consists of economic items and economic entities. Economic items have economic value. Accountants value economic items when they account them. Utility, scarcity and exchangeability are the three basic attributes of an economic item which, in combination, give it economic value. The three fundamentally different basic economic items in the economy are
a) monetary items
b) variable real value non-monetary items
c) constant real value non-monetary items
The SA economy consequently consists of three parts:
1. Monetary economy
The SA monetary economy consists of the Rand money supply and other Rand monetary items, i.e. Rand money loans: e.g. bank loans, savings, credit card loans, car loans, home loans, student loans, consumer loans, etc.
2. Variable item non-monetary economy
Non-monetary items with variable real values over time; for example, cars, groceries, houses, factories, property, plant, equipment, inventory, mobile phones, quoted and unquoted shares, foreign exchange, finished goods products, etc. Variable items are all economic items you generally see around you except monetary and constant items.
3. Constant item non-monetary economy
Constant items are non-monetary items with constant real values over time: income statement items like salaries, wages, rentals, etc and balance sheet constant items like issued share capital, reported retained profits, all other items in shareholders´ equity, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary payables and receivables, etc.
The variable and constant item non-monetary economies in combination make up the non-monetary or real economy which together with the monetary economy constitute the SA economy.
Kindest regards,
Nicolaas Smith
Sunday, 10 January 2010
Objective of general purpose financial reporting
The objectives of general purpose financial reporting are:
1) Maintenance of the constant purchasing power of capital
2) Provision of continuously updated decision-useful financial information about the reporting entity to capital providers and other users. (IFRS)
Buy the ebook for $2.99 or £1.53 or €2.68.
Nicolaas Smith
Copyright (c) 2012 Nicolaas Smith
1) Maintenance of the constant purchasing power of capital
2) Provision of continuously updated decision-useful financial information about the reporting entity to capital providers and other users. (IFRS)
Buy the ebook for $2.99 or £1.53 or €2.68.
Nicolaas Smith
Copyright (c) 2012 Nicolaas Smith
Hyperinflation in Venezuela with the parallel rate on the internet
Hi,
Buy the ebook for $2.99 or £1.53 or €2.68
Venezuela is currently in hyperinflation (scooped on this blog - see two posts back) with cumulative inflation over three years of 105.0% as at Dec 2009.
Their parallel rate is freely available on the internet which could make implementing IAS 29 at the daily parallel rate very possible in that country for whoever wishes to save the real values of their company´s non-monetary items from being unknowingly destroyed by their accountants with Historical Cost Accounting during hyperinflation.
Jan 8 parallel rate 6.25 compared to newly announced official pegs: "Oil Dollar" 4.30 and subsidized peg 2.60.
Buy the ebook for $2.99 or £1.53 or €2.68
Kindest regards,
Nicolaas Smith
Buy the ebook for $2.99 or £1.53 or €2.68
Venezuela is currently in hyperinflation (scooped on this blog - see two posts back) with cumulative inflation over three years of 105.0% as at Dec 2009.
Their parallel rate is freely available on the internet which could make implementing IAS 29 at the daily parallel rate very possible in that country for whoever wishes to save the real values of their company´s non-monetary items from being unknowingly destroyed by their accountants with Historical Cost Accounting during hyperinflation.
Jan 8 parallel rate 6.25 compared to newly announced official pegs: "Oil Dollar" 4.30 and subsidized peg 2.60.
Buy the ebook for $2.99 or £1.53 or €2.68
Kindest regards,
Nicolaas Smith
Friday, 8 January 2010
Parallel rate
The parallel rate is an unofficial or black market rate of exchange between the US Dollar and the local currency in a high inflationary or hyperinflationary economy. It is also called the street rate because unlicensed dealers trade US Dollars in the busy market streets for the local currency. This parallel rate is established for all the relatively stable or hard currencies used in that hyperinflationary economy. In Zimbabwe they used the US Dollar, the British Pound, the SA Rand and the Botswana Pula. As an economy starts moving into a hyperinflationary mode the central bank generally sets a fixed rate of exchange for the US Dollar and changes it not on a daily basis in concordance with what is happening in the foreign exchange market, but only as and when the central bank decides.
Credit sales and purchases are done at prices that allow for the expected loss of purchasing power in the local currency during the credit period, even if the period is very short. People start to state the real values (prices) of items in terms of the US Dollar, but, they do not use the official government rate of exchange for the local currency updated now and then. They start using their own generally accepted rate to protect their own real value in the products or services: the parallel rate.
The parallel rate is problematic in the real world. In the case of Zimbabwe the government did not recognize the parallel rate for most of the period of hyperinflation. They only recognized it right at the end when no-one wanted to accept the ZimDollar as payment for anything. Companies in hyperinflationary economies would save themselves when they start applying the parallel rate to all their non-monetary items as soon as it appears – if they could: they are often not allowed to do that by government. Company directors and owners are often arrested for increasing prices in hyperinflationary economies in terms of the parallel rate.
It happened in Angola too. There was a price freeze in Luanda while I was away in Portugal. The MD of our company phoned me and asked what we should do. I told him to tell my staff to carry on applying the current daily parallel rate to our selling prices and to our trade debtors. We could not start making losses not updating our prices and debtors daily with the parallel rate. I was not arrested when I arrived back in Luanda. I assumed it was because we most probably were the only company in Angola updating our workers´ salaries monthly at the parallel rate. Everybody knew what was going on in other companies. I am sure the government knew what we were doing at Auto-Sueco (Angola). We were the official agents for Volvo in Angola, but, we were controlled from our parent company in Portugal.
I did, however, order a halt to using the new daily parallel rate when I saw that the Angolan government was very serious about that price freeze. As usual it only lasted about a week. Then everybody started using the current parallel rate again. So did we.
Using the parallel rate would not be compliant with current IFRS, but, managers and owners would save their companies from going under. When all entities in a hyperinflationary economy apply the parallel rate on a daily basis to all non-monetary items (constant and variable items) they would save their country’s real economy – in a hyperinflationary economy. They would do nothing to hyperinflation in their currency. That problem has to be solved by the monetary authorities and the government. See How Brazil beat hyperinflation: Gustavo Franco. http://www.econ.puc-rio.br/gfranco/How%20Brazil%20Beat%20Hyperinflation.htm
But, they will not destroy their real economy at all. The problem is to determine one single official parallel rate because there are normally a number of rates that apply in different parts of the country. When the hyperinflation is created by the government as in the case of Zimbabwe and the government does not recognize the parallel rate companies would have to run their businesses at the parallel rate to save their companies as well as the real economy and do their official accounts in terms of meaningless IAS 29 using the year end CPI to comply with IFRS. The government obviously would collect proper and sufficient taxes and secure economic stability in the real economy if they would allow continuous financial capital maintenance in units of constant purchasing power by allowing the application of the daily parallel rate based on the basic principles in IAS 29 excluding applying the CPI.
Kindest regards,
Nicolaas Smith
Credit sales and purchases are done at prices that allow for the expected loss of purchasing power in the local currency during the credit period, even if the period is very short. People start to state the real values (prices) of items in terms of the US Dollar, but, they do not use the official government rate of exchange for the local currency updated now and then. They start using their own generally accepted rate to protect their own real value in the products or services: the parallel rate.
The parallel rate is problematic in the real world. In the case of Zimbabwe the government did not recognize the parallel rate for most of the period of hyperinflation. They only recognized it right at the end when no-one wanted to accept the ZimDollar as payment for anything. Companies in hyperinflationary economies would save themselves when they start applying the parallel rate to all their non-monetary items as soon as it appears – if they could: they are often not allowed to do that by government. Company directors and owners are often arrested for increasing prices in hyperinflationary economies in terms of the parallel rate.
It happened in Angola too. There was a price freeze in Luanda while I was away in Portugal. The MD of our company phoned me and asked what we should do. I told him to tell my staff to carry on applying the current daily parallel rate to our selling prices and to our trade debtors. We could not start making losses not updating our prices and debtors daily with the parallel rate. I was not arrested when I arrived back in Luanda. I assumed it was because we most probably were the only company in Angola updating our workers´ salaries monthly at the parallel rate. Everybody knew what was going on in other companies. I am sure the government knew what we were doing at Auto-Sueco (Angola). We were the official agents for Volvo in Angola, but, we were controlled from our parent company in Portugal.
I did, however, order a halt to using the new daily parallel rate when I saw that the Angolan government was very serious about that price freeze. As usual it only lasted about a week. Then everybody started using the current parallel rate again. So did we.
Using the parallel rate would not be compliant with current IFRS, but, managers and owners would save their companies from going under. When all entities in a hyperinflationary economy apply the parallel rate on a daily basis to all non-monetary items (constant and variable items) they would save their country’s real economy – in a hyperinflationary economy. They would do nothing to hyperinflation in their currency. That problem has to be solved by the monetary authorities and the government. See How Brazil beat hyperinflation: Gustavo Franco. http://www.econ.puc-rio.br/gfranco/How%20Brazil%20Beat%20Hyperinflation.htm
But, they will not destroy their real economy at all. The problem is to determine one single official parallel rate because there are normally a number of rates that apply in different parts of the country. When the hyperinflation is created by the government as in the case of Zimbabwe and the government does not recognize the parallel rate companies would have to run their businesses at the parallel rate to save their companies as well as the real economy and do their official accounts in terms of meaningless IAS 29 using the year end CPI to comply with IFRS. The government obviously would collect proper and sufficient taxes and secure economic stability in the real economy if they would allow continuous financial capital maintenance in units of constant purchasing power by allowing the application of the daily parallel rate based on the basic principles in IAS 29 excluding applying the CPI.
Kindest regards,
Nicolaas Smith
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