Daily valuation required

Daily valuation required

Constant items’ real values are maintained constant over time under CIPPA by means of measurement of financial capital maintenance in units of constant purchasing power in terms of a Daily CPI or monetized daily indexed unit of account during low inflation, high inflation and deflation and in terms of a relatively stable foreign currency daily parallel rate (normally the US Dollar daily parallel rate) or a daily Brazilian-style Unidade Real de Valor index during hyperinflation. Daily measurement of constant items is essential in the case of trade debtors, trade creditors and all other non-monetary payables and receivables which can be paid on any day of the month.

When it is intended to maintain the real value of a monetary item, for example, a government inflation-indexed bond during inflation, it is immediately realized that a Daily Consumer Price Index is required since these bonds trade on a daily basis. Many countries use Daily CPIs to value these bonds on a daily basis.

A daily US Dollar (or other relatively stable foreign currency) parallel rate is generally spontaneously used by the population and in the consumer markets to value variable real value non-monetary items on a daily basis during hyperinflation.

Brazil, for example, used government supplied daily indices from 1964 to 1994 to index most non-monetary items on a daily basis in the entire economy during 30 years of very high inflation and hyperinflation of up to 2000 per cent per annum.

‘Não temos como fornecer, conforme solicitado, os detalhes exatos do indexador utilizado durante o período de alta inflação no Brasil. Vale esclarecer que, desde 1964, quando foi implementado o Programa de Ação Econômica do Governo – PAEG, vários mecanismos de indexação foram introduzidos na economia brasileira objetivando reduzir os efeitos da inflação não antecipada sobre o lado real da economia. Podemos destacar os mecanismos destinados à taxa de câmbio, aos salários e e à correção monetária de ativos financeiros. Ao longo da existência das ORTNs e de seus sucedâneos, por exemplo, os governos mudaram em diversas oportunidades as fórmulas de cálculo da correção monetária e trocaram várias vezes os índices de preços que eram utilizados no cálculo da mesma.

Assim sendo, sugerimos uma consulta ao Ministério da Fazenda, que talvez possa fornecer o histórico dos indexadores utilizados no País.’

(Central Bank of Brazil, 2010)

Chile has been using a monetized daily indexed unit of account, the Unidad de Fomento, to inflation index a part of its money supply since 1977. The UF´s value is calculated and published daily by the Banco Central de Chile since 1990.

Prof. Robert Shiller stated:

‘Another coordination problem is that we must decide, and agree, on a way to smooth the CPI. We should not define prices just in terms of the latest CPI because the CPI is vulnerable to sudden jumps from month to month. This is particularly true when we are talking about indexing financial contracts to the CPI. A unit of account like the UF would smooth out the CPI movements, otherwise there would be important jumps in deposit balances on the dates of new announcements of the CPI. Thus, the smoothing of the CPI in producing the UF has also been a fundamental part of the functioning of the UF as an analogue of money.’

Shiller, R.J. (1998). Indexed Units of Account: Theory and Assessment of Historical Experience. Cowles Foundation Discussion Paper, No 1171, p. 13.

A Daily CPI is thus a fundamental requirement when implementing financial capital maintenance in units of constant purchasing power (CIPPA).


Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Constant real value non–monetary items

Constant real value non–monetary items

The double entry accounting model was first comprehensively codified by the Italian Franciscan monk, Luca Pacioli in his book Summa de arithmetica, geometria, proportioni et proportionalita, published in Venice in 1494.

Pacioli did not invent the double entry accounting model. He wrote the first book about the practice of double entry accounting in 1494.

Definition

A constant real value non-monetary item is a non-monetary item with a constant real value over time whose real value within an entity is not generally determined in a market on a daily basis.

Examples include borrowing costs, comprehensive income, interest paid, interest received, bank charges, royalties, fees, short term employee benefits, pensions, salaries, wages, rentals, all other income statement items, issued share capital, share premium accounts, share discount accounts, retained earnings, retained losses, capital reserves, revaluation surpluses, all accounted profits and losses, all other items in owners´ equity, trade debtors, trade creditors, dividends payable, dividends receivable, deferred tax assets, deferred tax liabilities, all taxes payable, all taxes receivable, all other non-monetary payables, all other non-monetary receivables, provisions, etc.

Constant items are fixed in terms of real value while their nominal values change daily in terms of a daily rate under financial capital maintenance in units of constant purchasing power (CIPPA).

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Inflation-adjusting monetary items

Inflation-adjusting monetary items

 Only unstable money and other unstable monetary items´ real values are continuously being eroded by low inflation, high inflation and hyperinflation over time. Inflation has no effect on the real value of non–monetary items.

‘Inflation is always and everywhere a monetary phenomenon,’ per Milton Friedman.

‘Purchasing power of non monetary items does not change in spite of variation in national currency value.’

Gucenme, U. and Arsoy, A. P. (2005). Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 – 2005. Special Issue Accounting for the Global and the Local: The Case of Turkey. Critical Perspectives on Accounting, Volume 20, Issue 5, July 2009, p. 568–590.

Deflation increases the real value of only unstable money and other unstable monetary items over time. Deflation has no effect on the real value of non–monetary items.

The entire money supply can be inflation–adjusted or deflation-adjusted on a daily basis in terms of a Daily Consumer Price Index or a monetized daily indexed unit of account during low and high inflation and deflation. This would be done in terms of a relatively stable foreign currency (normally the US Dollar) daily parallel rate or a daily Brazilian-style Unidade Real de Valor (URV) index during hyperinflation. Inflation-adjusting the entire money supply on a daily basis would remove the entire cost of inflation - not actual inflation - from the total money supply in the case of complete co-ordination (everybody doing it). According to the Banco Central de Chile 20 to 25 per cent of Chile´s broad M3 money supply is inflation–indexed daily (2011) in terms of the Unidad de Fomento which is a monetized daily indexed unit of account.

‘A more extended measure of money, as M2 or M3, includes inflation indexed assets, but they are expressed in Chilean pesos. In M3, those assets are roughly 20 to 25% of total.’ (Banco Central de Chile, 2011)

 Net monetary losses and gains are not calculated and accounted during low inflation in Chile.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Monetary nature of monetary items that are not units of internal currency held

Monetary nature of monetary items that are not units of internal currency held

 All items in the economy – monetary items, variable real value non-monetary items and constant real value non-monetary items – are normally received or paid in money. That obviously does not mean they are all monetary items. Money is simply used as the generally accepted medium of exchange. Non-monetary items remain non-monetary items even when they are always paid and received in money, e.g., borrowing costs paid and finance charges received. This is also true even when they are mostly paid / collected immediately they become due; e.g. bank interest and bank charges. Banks immediately collecting bank charges and bank interest by charging these items to a bank account immediately they become due create the impression that they are monetary items. However, they are all constant real value non-monetary items always paid or received in money as the generally accepted medium of exchange.

 Monetary items that are not units of internal currency held (e.g. money loans) have the exact same attributes as money held except that they are not present as bank notes and coins. A bank loan is a monetary item that is not always money held. It can be received or paid in actual bank notes and coins or as an electronic transfer into a bank account. A bank loan that is not money held is an example of an item with an underlying monetary nature. An item with an underlying monetary nature is, in principle, a substitute for money held.

 A building is a non-monetary item. It is not a substitute for money held. It is normally paid for in money. The owner normally receives money for selling it, and the buyer normally pays for it in money, but that is simply the medium of exchange. The owner can also receive the payment for the building in diamonds. The building is a variable real value non-monetary item irrespective of how it is exchanged between two entities.

 The capital amounts of commercial bonds, government bonds, inflation-indexed government bonds, money market items, debt items, capital market items, bank loans, credit card loans, car loans, housing loans, student loans, consumer loans, etc. are all, in principle, substitutes for units of internal currency held. They are all items with an underlying monetary nature.

 Interest, borrowing costs, bank charges, pensions, salaries, wages, rentals, etc. are generally paid and received in money, but they are not monetary items. They are not substitutes for units of internal currency held. They are all constant real value non-monetary items.

 They are not, in principle, substitutes for money held. Money is simply the generally accepted medium of exchange in the settlement of these items.

 A salary payable is an obligation to deliver compensation for the work done in terms of the employment contract by the salary earner in the form of payment in a mutually agreed generally accepted medium of exchange. The generally accepted mutually agreed form of payment is money. Payment can be in any mutually agreed form. A salary is not, in principle, a substitute for money held. A salary is not an item with an underlying monetary nature. The work to be done by the worker in terms of the employment contract is not an item with an underlying monetary nature.

 A rental payment is not a substitute for money held. A rental payment is a substitute for the right to occupy a particular space in terms of the rental contract. Money is simply the generally accepted medium of exchange. Payment can be in any mutually agreed form of payment. Payment can be in big Macs or cases of beer too.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Monetary nature of a monetary item
A monetary item is an economic item very different from the other two basic economic items because of its monetary nature; namely, the unique combination of its attributes during inflation and deflation, some of which are listed below.

A monetary item is an item the change in real value of which is indicated by internal inflation and deflation.

A monetary item´s attributes in combination determine its monetary nature during inflation and deflation.

Attributes of a monetary item during inflation and deflation

(i)                 It is an unstable medium of exchange.

(ii)               It is an unstable store of value.

(iii)             It is an unstable unit of account

(iv)             It is easily portable or transferable.

(v)               It is generally available in small change.

(vi)             It is only a monetary item within an economy.

(vii)           It is legal tender.

(viii)         The change in its real value is indicated by internal inflation and deflation.

(ix)             Monetary items are generally affected evenly within an economy by inflation and deflation.

(x)               It loses its monetary nature when it´s physical representation (bank note or coin) only has value as a collector´s item; i.e., when it becomes a variable real value non-monetary item.

(xi)             As a bank note or coin, the internal unit of currency has its denomination permanently printed or moulded on it.

(xii)           In modern economies it is created by government fiat in the banking system.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Concept of a constant real value non–monetary item derived in IFRS

Concept of a constant real value non–monetary item derived in IFRS

Owners´ equity (capital) is defined as a non-monetary item in IAS 29, Financial Reporting in Hyperinflationary Economies in various paragraphs including paragraphs 24 and 25. All items in owners´ equity are thus non-monetary items.

In the original Framework for the Preparation and Presentation of Financial Statements (1989), Par. 104 (a) [now the Conceptual Framework for Financial Reporting (2010), Par. 4.59 (a)] it is stated:

‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

 Financial capital maintenance can thus be measured in units of constant purchasing power over time in terms of IFRS under the Constant Item Purchasing Power (CIPP) paradigm. The original Framework (1989), Par. 104 (a) authorized the constant item purchasing power principle on which the CIPP paradigm is based. The CIPP paradigm is fundamentally different from the Historical Cost (HC) paradigm. The stable measuring unit assumption is applied in the valuation of, for example, owners´ equity and other items measured in nominal monetary units under the HC paradigm. The stable measuring unit assumption is never applied under financial capital maintenance in units of constant purchasing power; i.e., under the Constant Item Purchasing Power paradigm. Financial capital maintenance in units of constant purchasing power (Constant Item Purchasing Power Accounting) is fundamentally different from financial capital maintenance in nominal monetary units (Historical Cost Accounting).

 The real value of financial capital can thus be maintained constant in units of constant purchasing power by measuring financial capital maintenance in units of constant purchasing power over time. The constant real non-monetary values of all items in owners´ equity would be maintained constant when financial capital is maintained in units of constant purchasing power over time.

 Issued share capital and all other items in owners´ equity are thus constant real value non-monetary items. The concept of a constant real value non–monetary item is thus derived in IFRS which are principles-based standards.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Split of non-monetary items derived in IFRS

Split of non-monetary items derived in IFRS

It is generally accepted that there are only two basic, fundamentally different economic items in the economy; namely, monetary and non–monetary items and that the economy is divided in the monetary and non–monetary or real economy. However, non–monetary items are not all fundamentally the same. The split of non-monetary items is implied in IFRS.

Owners´ equity (capital) is defined as a non-monetary item in IAS 29, Financial Reporting in Hyperinflationary Economies in various paragraphs including paragraphs 24 and 25. All items in owners´ equity are thus non-monetary items.

The original Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010), Par. 4.59 (a)] furthermore states: ‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

Financial capital maintenance can thus be measured in units of constant purchasing power over time in terms of IFRS under the Constant Item Purchasing Power (CIPP) paradigm. The original Framework (1989), Par. 104 (a) authorized the principle on which the CIPP paradigm is based. The CIPP paradigm is fundamentally different from the Historical Cost (HC) paradigm. The stable measuring unit assumption is applied in the valuation of, for example, owners´ equity and other items measured in nominal monetary units under the HC paradigm. The stable measuring unit assumption is never applied under financial capital maintenance in units of constant purchasing power; i.e., under the Constant Item Purchasing Power paradigm. Financial capital maintenance in units of constant purchasing power is fundamentally different from financial capital maintenance in nominal monetary units (Historical Cost Accounting).

The real value of financial capital can thus be maintained in units of constant purchasing power by measuring capital maintenance in units of constant purchasing power over time. The real non-monetary values of all items in owners´ equity would be maintained constant when financial capital is maintained in units of constant purchasing power over time.

Capital and all other items in owners´ equity are thus constant real value non-monetary items. The concept of a constant real value non–monetary item is thus implied in IFRSs, which is logical since IFRSs are principles-based standards.

Measurement in units of constant purchasing power is not simply the restatement of items in the statement of financial position and the statement of comprehensive income from financial reports produced under whatever capital maintenance model as stated by Gamble. There are actually economic items with constant real values over time; namely, constant real value non-monetary items. Examples include all items in owners´ equity, all income statement items, salaries, wages, pensions, borrowing costs, interest, bank charges, fees, rentals, trade debtors, trade creditors, all other non-monetary payables and receivables, provisions, etc.

However, not all non-monetary items are measured in units of constant purchasing power in terms of Par. 104 (a).

Non–monetary items which are not constant real value non–monetary items are thus variable real value non–monetary items valued in terms of IFRS, e.g. property, plant, equipment, inventory, shares, etc. Their real values vary over time. They are valued at net realizable value, fair value, present value, recoverable value, etc. in terms of IFRS – excluding the stable measuring unit assumption – because the stable measuring unit is never applied under financial capital maintenance in units of constant purchasing power.

Conclusion: The split of non-monetary items in variable and constant real value non-monetary items is derived in IFRS.

There are thus three fundamentally different, basic economic items in the economy:

(a)               Monetary items

(b)               Variable real value non–monetary items

(c)               Constant real value non–monetary items

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Definition of monetary items

DEFINITION

Monetary items are all items in the money supply.

Updated on 17 Jan 2014

Elaboration on the definition of monetary items

Monetary items are thus units of currency held the change in the real value of which is indicated by internal inflation and deflation and other items with an underlying monetary nature, the latter being substitutes for said units of currency held.

Examples of units of currency held which are only affected by internal inflation and deflation are internal bank notes and coins.

Examples of items with an underlying monetary nature which are substitutes for said units of currency held include the capital amount of bank loans, bank savings, credit card loans, car loans, home loans, student loans, consumer loans, commercial and government bonds, Treasury Bills, all capital and money market investments, notes payable, notes receivable, etc. when these items are not in the form of internal units of currency held.

Inflation and deflation have no effect on the real value of non-monetary items.

Examples of constant real value non-monetary items treated as monetary items under the Historical Cost paradigm in IFRS which implements the stable measuring unit assumption in the valuation of these items:

Pensions, salaries, wages, borrowing costs, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary payables and receivables, interest (paid and received), bank charges, fees,
etc.

The stable measuring unit assumption is never applied under financial Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) as authorized in the original Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010), Par. 4.59 (a)] as follows:






‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Two paradigms in IFRS

Two paradigms in IFRS

 IFRS are almost 100 per cent issued for the only accounting paradigm the world has ever known, namely, the Historical Cost paradigm. The stable measuring unit assumption is applied under the HC paradigm. In terms of the stable measuring unit assumption it is assumed that changes in the purchasing power of money are not sufficiently important to require capital maintenance in units of constant purchasing power during inflation. It is basically assumed that there is no such thing as inflation. It is assumed that there has never been inflation in the past, there is no inflation now and there will never be inflation in the future.

This assumption is mainly applied to the valuation of shareholder´s equity items, all items in the income statement, trade debtors, trade creditors and other non-monetary item payables and receivables under the HC paradigm. These items are thus simply treated as the same as monetary items.

IFRS also authorized a second paradigm, namely the Constant Item Purchasing Power paradigm in the original Framework (1989), Par. 104 (a) [now Conceptual Framework (2010), Par. 4.59 (a)] as follows:

‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

There is no stable measuring unit assumption under the CIPP paradigm.  The six words ‘or units of constant purchasing power’ are the only part of IFRS directed at the second paradigm, i.e. the CIPP paradigm.

IFRS are principles-based standards. The CIPP paradigm is truly principle based: only the principle is stated for financial capital maintenance in units of constant purchasing power – nothing else.

Almost 100 per cent of IFRS are thus directed at the HC paradigm.

For example, the two definitions of monetary items:

In IAS 21, Par 8

‘Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency’

 and in IAS 29, Par. 12

‘Monetary items are money held and items to be received or paid in money.’

The above two definitions are obviously directed at the HC paradigm and not at the CIPP paradigm.

Under the CIPP paradigm monetary items are defined as follows:

‘Monetary items are units of internally created currency held and other items with an underlying monetary nature, the latter being substitutes for units of internally created currency held.’

The IFRS treatment of borrowing costs and the cost model for property, plant and equipment are some of the numerous items (basically 100% of IFRS)  that are only directed to the HC model.

There is nothing in IFRS besides the six words ‘or units of constant purchasing power’ directed to the second paradigm authorized in IFRS, namely the Constant Item Purchasing Power paradigm.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Argentina can single-handedly solve its "high inflation" problem

Argentina can single-handedly solve its "high inflation" problem

The Federación Argentina de Consejos Profesionales de Ciencias Económicas (FACPCE) can by itself solve the problem of the erosion of Argentinean companies´ shareholders´ equity by the stable measuring unit assumption (mistakenly generally still seen as caused by inflation).

Capital Maintenance in Units of Constant Purchasing Power was authorized 23 years ago during low inflation, high inflation and deflation in the International Accounting Standards Board´s original Framework (1989), Par. 104 (a) [now Conceptual Framework (2010), Par. 4.59 (a)] as follows:

 ‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

This means that all Argentinean companies can right now freely choose to implement it immediately instead of traditional Historical Cost Accounting (financial capital maintenance in nominal monetary units) in the whole Argentinean economy since it is compliant with current International Financial Reporting Standards during low and high inflation and deflation. Implementation is compliant with current IFRS. Unfortunately it is not required: it is optional.

Fortunately, it is possible for the FACPCE to authorize an Argentinean national accounting standard requiring Capital Maintenance in Units of Constant Purchasing Power (which is compliant with current IFRS) at annual inflation greater than 10 per cent and cumulative inflation greater than 26 per cent over three years based on the amended version of the FACPCE´s original proposal in this regard to the IASB in 2010.

The FACPCE thus has the authority to single-handedly solve the problem of the erosion of Argentinean companies´ capital and retained profits by the stable measuring unit assumption (still mistakenly seen as caused by inflation) immediately while the FACPCE is, at the same time, encouraging the IASB to solve the problem worldwide by authorizing its proposal as amended.

Such an Argentinean accounting standard would be early implementation normally encouraged by the IASB in the case of a soon to be authorized IFRS if the FACPCE´s proposal is currently accepted as an IASB project.

If the FACPCE´s proposal is not accepted right now by the IASB, then such an Argentinean national accounting standard would be a precursor to an IASB project in the not immediate future.

Capital Maintenance in Units of Constant Purchasing Power is optional during low and high inflation under current IFRS. Not a single Argentinean company has adopted it over the last 23 years since authorization in 1989. Neither would they adopt it of their own free will now. Only requirement by the FACPCE would succeed in solving the problem immediately in Argentina – independent from any standard setting activity by the IASB. No company worldwide has adopted it since 1989 except Auto Sueco (Angola) where I implemented it in the form of accounting-dollarization during hyperinflation in 1996.

Capital Maintenance in Units of Constant Purchasing Power would automatically maintain the constant purchasing power of shareholders´ equity constant for an indefinite period of time in all Argentinean companies that at least break even in real value during low and high inflation and deflation – ceteris paribus – whether they own any revaluable fixed assets or not.

In my opinion the FACPCE should immediately issue such an Argentinean national accounting standard, the implementation of which is fully compliant with current IFRS.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Valuation of monetary items

Valuation of monetary items

         Accounting values and accounts unstable monetary items on recognition at their nominal values in nominal monetary units under all accounting models – including CIPPA. Monetary items not inflation-adjusted daily over time (this currently – in 2012 – always includes all bank notes and coins) are then valued daily in fixed nominal monetary units (unstable in real value) only during the current financial period. The net monetary loss or gain is, logically and necessarily, calculated and accounted under CIPPA which implements financial capital maintenance in units of constant purchasing power. The net monetary loss or gain is also calculated and accounted as required in IAS 29 Financial Reporting in Hyperinflationary Economies. IAS 29 is not a departure from, but an extension to Historical Cost Accounting. All historical monetary items are inflation-adjusted daily in terms of the current (today´s) Daily CPI thereafter, i.e. once they are reported in historical financial reports, whether for comparison purposes or not. The historical net monetary loss or gain (a constant real value non-monetary item once accounted) is thereafter measured in units of constant purchasing power in terms of the current (today´s) Daily CPI or daily rate.

Low inflation, high inflation, deflation and hyperinflation determine the always current unstable real value of the unstable monetary unit (US Dollar, Euro, British Pound, Bolívar, Yen, Yuan, etc.) and other unstable monetary items within the monetary economy. This is because of the monetary nature of money.

The real value of money held and other unstable monetary items changes equally (all unstable monetary units are affected evenly) on a daily basis at all levels of inflation and deflation. The change is quantified with the daily publication of the Daily CPI or monetized daily indexed unit of account value during low inflation, high inflation and deflation and the daily US Dollar or other hard currency parallel rate or Brazilian-style daily Unidade Real de Valor during hyperinflation. The daily black market or parallel US Dollar exchange rate or street rate is generally constantly (24/7, 365 days a year) available in a hyperinflationary economy.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

The monetary nature of a monetary item

The monetary nature of a monetary item

A monetary item is an economic item very different from the other two basic economic items (variable and constant real value non-monetary items) because of its monetary nature, namely the unique combination of its attributes during inflation and deflation - some of which are listed below.

Monetary items are money held and items with an underlying monetary nature that are substitutes for money held. Bank notes and coins are examples of money held.

Attributes:

its three functions, namely

medium of exchange,

store of value and

unit of account,

portability,

it is generally available in small change,

it is only a monetary item within (not outside) an economy (foreign exchange is a non–monetary item),

it is legal tender,

it is always affected by inflation and deflation,

which affect all monetary items evenly,

when it has no exchangeability with foreign exchange currencies it is worthless.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

All monetary items are always affected by inflation and deflation.

All monetary items are always affected by inflation and deflation

A monetary item should always be inflation-adjusted daily in terms of the Daily CPI or other daily rate. This has never been and is currently (2012) still not possible with physical bank notes and coins. The net monetary loss or gain thus needs to be calculated and accounted during the current financial period under financial capital maintenance in units of constant purchasing power (CIPPA). This is also true for other monetary items not inflation-adjusted daily. All monetary items are always affected by inflation and deflation.

Under the stable measuring unit assumption it is assumed that changes in the purchasing power of money are not sufficiently important to require capital maintenance in units of constant purchasing power on a daily basis. Another way to state the stable measuring unit assumption is to state that it is assumed that the real value of money is perfectly stable over time. The stable measuring unit assumption is applied to the measurement of certain non-monetary items and all monetary items under HCA. It is not applied under CIPPA.

 It is not assumed that bank notes and coins have nominal values over time: it is a fact, not an assumption. It is a fact (2012) that the nominal value of a bank note or coin is perfectly stable over time.

The real values of monetary items inflation-adjusted daily are still affected by inflation and deflation, but, by inflation-adjusting or deflation-adjusting them their real values are maintained constant by contract. They have constant real values over time, e.g. capital inflation-indexed government bonds. They are, however, not constant real value monetary items. That would only be the case at permanently sustainable zero inflation. Inflation and deflation thus always affect the real values of all monetary items within an economy. The real values of monetary items inflation-adjusted daily are maintained constant by contract. The entire cost of inflation (not actual inflation) in all monetary items (excluding bank notes and coins) would be eliminated when the total money supply (as qualified) is inflation-adjusted daily.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Valuing the three basic economic items

Valuing the three basic economic items

Monetary items

(1)                    The real value of the unstable monetary unit (money) and all other unstable monetary items not inflation-adjusted daily in the unstable monetary economy generally changes every day at all levels of inflation and deflation in terms of a Daily Consumer Price Index or daily monetized unit of account, e.g. the Unidad de Fomento in Chile, during low inflation, high inflation and deflation and in terms of the daily US Dollar or other relatively stable foreign currency parallel rate or a Brazilian-style daily Unidade Real de Valor index during hyperinflation.

Bank notes and coins currently (2012) cannot be inflation-adjusted. Inflation and deflation always affect the real value of bank notes and coins. All other monetary items can be inflation-adjusted on a daily basis. 20 to 25 per cent of the broad M3 money supply in Chile is inflation-adjusted daily in terms of the Unidad de Fomento according to the Banco Central de Chile. $ 2.89 trillion of sovereign inflation-linked bonds are inflation-indexed daily worldwide in terms of country specific Daily Consumer Price Indices. Inflation-adjusting the total money supply (excluding bank notes and coins) would eliminate the entire cost of inflation (not inflation) from the monetary economy. This would require complete co-ordination (everyone doing it).

Months of zero annual inflation are rare and generally not sustained for more than a month of two. During hyperinflation the real value of the very unstable monetary unit and all other very unstable monetary items often changes once per day, but, during severe hyperinflation it can change every 8 hours or so. (Hanke – Cato Journal)

Variable items

(2)                    The real values of variable real value non–monetary items may change all the time, e.g. the price of foreign currencies, precious metals, quoted shares, commodities, properties, finished goods, services, raw materials, etc. Variable items are valued on a daily basis in terms of IFRS excluding the stable measuring unit assumption and the cost model in the valuation of property, plant, equipment and investment property after recognition under capital maintenance in units of constant purchasing power (CIPPA). Their historic prices (e.g., of the day before) are updated on a daily basis to the current (today´s) rate in terms of a Daily CPI or daily rate when they are not valued at the current date (today) in terms of IFRS as qualified.

Inflation and deflation have no effect on the real value of non-monetary items. Historic variable items are thus not inflation-adjusted or deflation-adjusted daily. They are updated daily when they are not valued daily in terms of IFRS as qualified.

Constant items

(3)                    Constant real value non-monetary items are always and everywhere (historic and current period constant items) measured in units of constant purchasing power in terms of the current (today´s) Daily CPI or other daily rate.

Financial reporting has to take all three scenarios – occurring simultaneously – into account over time when an entity´s economic activities are accounted daily and financial reports are prepared and presented periodically and accessed or viewed today at the current Daily CPI or other daily rate.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.