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Friday, 12 June 2015

Indexation IFRS

International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom


Dear Sirs,


Re: Request for comment on the Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting
Thank you for the opportunity to comment on the above Exposure Draft.


I would add the Units of Constant Purchasing Power measurement basis as required in IAS 29 Financial Reporting in Hyperinflationary Economies to the Conceptual Framework.
My detailed answers and suggestions are contained in the attached appendix.


Yours sincerely,


Nicolaas Smith

This comment letter is published by the IFRS Foundation HERE under the name Nicolaas Smith. The letter is ID number 1 and appears on page 1 of the table if it is sorted by ID number, or page 4 if it is sorted alphabetically by organisation.
Nicolaas Smith Comment Letter                                 ED/2015/3 Conceptual Framework
Appendix – Response to the Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting
Question 8—Measurement bases
Has the IASB:
(a) correctly identified the measurement bases that should be described in the Conceptual Framework? If not, which measurement bases would you include and why?
No, the IASB has not identified all the measurement bases that should be described in the Conceptual Framework.
I would include the following improved Units of Constant Purchasing Power measurement bases as required in IAS 29 Financial Reporting in Hyperinflationary Economies in the Measurement Chapter.


Units of Constant Purchasing Power Measurement Bases


  1. Historical Cost plus associated net monetary or constant purchasing power gains or losses.
Nominal HC is used only during the current financial period for the measurement of:


(i) Monetary items1 not inflation-indexed daily2 and


(ii) Constant real value non-monetary items3 treated as nominal monetary items.
Examples of constant items treated as monetary items: trade debtors, trade creditors, taxes payable, taxes receivable, other non-monetary payables and receivables, etc.


  1. Current Value
                    (i) Fair value for the measurement of variable real value non-monetary items3 updated daily; and
                    (ii) Value in use for the measurement of variable item assets and fulfilment value for variable item liabilities, updated daily.
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Current value is used for the measurement of variable items and then updated daily to the current (today´s) Daily CPI when the current value measurement is not made on the current (today’s) date.
  1. Units of constant purchasing power3 for the measurement of constant real value non-monetary items updated daily.
Net monetary and constant purchasing power gains and losses are constant items.


Daily updated variable and constant items and daily inflation-indexed monetary items are indexed in terms of all changes in the general price level (generally at least daily) in terms of the Daily CPI (the latter always known in advance) or a proxy, normally the daily US Dollar parallel rate or another relatively stable hard currency daily parallel rate, when the general price level is not available, until the current (today's) Daily CPI/parallel rate.


Electronic, automatically updated financial reports is best practice.
Elaboration on the UCPP Measurement Bases
There are two accounting paradigms authorised in IFRS:


1. The Historical Cost paradigm is used (optional) in all IFRSs - except  in IAS 29 and IFRIC 7 - during low inflation, high inflation and deflation.


2. The UCPP paradigm is required during hyperinflation in terms of IAS 29 Financial Reporting in Hyperinflationary Economies and the related IFRIC 7.
Constant items first recognised during UCPP measurement in terms of the Daily CPI are always updated daily - never subject to net constant purchasing power losses or gains since the stable measuring unit assumption4 is never implemented under the UCPP paradigm.


Monetary items inflation-indexed daily in government inflation-linked bonds in terms of the Daily CPI are - generally - not  subject to net monetary gains or losses depending on the terms of the contract.
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The combined effect of nominal HC measurement and the associated net monetary and constant purchasing power losses or gains under the UCPP paradigm is not nominal.
Net monetary and constant purchasing power gains and losses are constant items updated daily in terms of the Daily CPI to the current (today’s) date once they are accounted.
There is no nominal historical cost concept under the UCPP paradigm since the stable measuring unit assumption is never implemented.
Reasons for inclusion
  1. UCPP measurement bases are required and implemented in IAS 29 Financial Reporting in Hyperinflationary Economies and thus have to be dealt with in the measurement chapter.


  1. A number of countries, e.g., Zimbabwe, Turkey, Russia, etc.  implemented UCPP measurement bases as required in IAS 29 over the last 26 years since the standard’s authorization. UCPP measurement bases are currently being implemented in Venezuela and Belarus by entities implementing IAS 29. UCPP measurement bases will be implemented in hyperinflationary economies in the future in terms of IAS 29.
Question 8 Measurement bases
Has the IASB:
(b) properly described the information provided by each of the measurement bases, and their advantages and disadvantages? If not, how would you describe the information provided by each measurement basis, and its advantages and disadvantages?
No, since the IASB has not yet identified the measurement bases under the UCPP paradigm required in IAS 29, the Board consequently also has not yet supplied a description of the information provided by each UCPP measurement basis nor its advantages and disadvantages.


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Information provided by each UCPP Measurement Basis
The information provided by each of the UCPP measurement bases is generally similar to the information described in paragraph 6.47 in the draft CF.


Additionally, UCPP measurement in terms of the Daily CPI provides information


(i) at the current (today´s) general price level;


(i) that presents the real position of an entity's operations: e.g., net monetary losses and gains are not calculated and accounted under the HC paradigm and


(iii) that results in relative stability in the non-monetary economy.
Period-end measuring unit requirement in IAS 29
The requirement in IAS 29, paragraph 8 that  “financial statements … shall be stated in terms of the measuring unit current at the end of the reporting period” is complied with as follows under the UCPP paradigm in terms of the Daily CPI:


The period-end financial reports are prepared at the period-end Daily CPI and thereafter all items are updated to the Daily CPI at the current (today’s) date.


IAS 29 does not require the use of the monthly published CPI. The Daily CPI is also a “measuring unit current at the end of the reporting period.” The Daily CPI is based on the monthly published CPI. IAS 29 can thus be implemented in terms of the Daily CPI and that complies with what is required in IAS 29.
Example: Zimbabwe December 2007 year-end financial reports
The monthly inflation rate for January 2008 was 120.83%.


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The Financial Reports prepared at the measuring unit current at 31 December 2007 and then published on, for example, 31 January 2008, were completely meaningless since the general price level was not 20.83%, but 120.83% higher. A value of ZimDollars 100 in the financial reports should have been Zim$ 220.83 at 31 January 2008. A value of 100 Zim$ appeared to be equal to Zim$ 45 to whoever read those reports in Zimbabwe on 31 January 2008.


Financial reports prepared in terms of IAS 29 implementing the monthly published CPI are more and more meaningless the higher and higher the rate of hyperinflation. The South African Institute of Chartered Accountants pointed out that financial reports prepared in terms of IAS 29 during hyperinflation in Zimbabwe were quickly out of date.


Under the UCPP paradigm in terms of the Daily CPI, the 2007 financial reports prepared in terms of the Daily CPI (representing the general price level) at 31 December 2007 would have been published with all items updated by 120.83%: i.e., they would have been updated to the Daily CPI (the general price level) on 31 March 2008, valid only for that day. The next day the values would have been different since the Daily CPI (the general price level) was different.


Those values on 31 March 2008 would have been the real values of all items - at 31 December 2007 stated at the 31 March 2008 general price level - if Zimbabwe were to have implemented IAS 29 in terms of the Daily CPI and their economy would not have imploded on 20 November 2008.


Zimbabwe would have had a relatively stable non-monetary economy under the UCPP paradigm in terms of the Daily CPI during hyperinflation (with no effect of hyperinflation in the non-monetary economy and in all monetary items inflation-indexed daily) similar to what Brazil had during the last 17 weeks till 30 June 1994 (URV from 1 March 1994 to 30 June 1994) in terms of the Unidade Real de Valor daily index and during all the months before (URV from January 1993 to June 1994) when the URV was implemented on a daily basis during hyperinflation in Brazil.


Nicolaas Smith Comment Letter                                 ED/2015/3 Conceptual Framework
The Daily CPI is generally known from 15 to 30 days in advance. There are no surprises. The URV was supplied by the Brazilian Central Bank on a daily basis. It was based on the daily USD rate plus three other non-monetary indices were taken into account in the URV’s formulation. It was not a lagged Daily CPI. It was a proxy for the Daily CPI. It was not known in advance. The Daily CPI, on the other hand, is generally a one-to-four-month lagged, daily interpolated, non-monetary index based on the monthly published CPI and is always known in advance because of its lagged nature.
Everybody in a hyperinflationary economy knows the daily parallel rate every day. Street vendors, some of whom have never been to school - know that the general price level changes every day: they all adjust their local currency prices daily. It is common knowledge in a hyperinflationary economy that the general price level (the parallel rate in the absense of a URV or a Daily CPI) changes every day.


All countries issuing government inflation-linked bonds already calculate and publish a Daily CPI which each country uses to value these sovereign inflation-linked bonds on a daily basis since they trade on a daily basis. The formula to calculate a Daily CPI from monthly published CPI data is freely available on the internet.
The formula is based on the one used to calculate Chile’s Unidad de Fomento daily index.
‘The formula for computation of the UF on day t is:
UF t = UF t–1 × (1+ ᷾∏) 1/d
where ∏ is the inflation rate for the calendar month preceding the calendar month in which t falls if t is between day ten and the last day of the month (and d is the number of days in the calendar month in which t falls), and ∏ is the inflation rate for the second calendar month before the calendar month in which t falls if t is between day one and day nine of the month (and d is the number of days in the calendar month before the calendar month in which t falls).’
Nicolaas Smith Comment Letter                                 ED/2015/3 Conceptual Framework
The above formula applied to the UF in Chile where the CPI for the current calendar month used to be available on the tenth of the next calendar month. The general case formula for a UF–based Daily CPI is stated as follows:
On day t
DI t = DI t–1 X (1 + ∏) 1/d
where ∏ is the monthly inflation rate for the second calendar month before the calendar month in which t falls if t is on or between day one and the day of publication of the CPI of the previous calendar month (and d is the number of days in the calendar month before the calendar month in which t falls), and ∏ is the inflation rate for the calendar month preceding the calendar month in which t falls if t is on or between the day the CPI for the previous calendar month is published and the last day of the month (and d is the number of days in the calendar month in which t falls).
The Daily CPI within a given calendar month depends on the CPI for each of the three preceding months. For example, the July Daily CPI depends before the day the June monthly published CPI is available on the monthly published CPIs for April and May, and starting with the day the June monthly published CPI is available on the monthly published CPIs for May and June.
Some countries issuing government inflation-linked bonds
  1. Argentina
  2. Australia
  3. Brazil
  4. Canada
  5. Chile
  6. Colombia
  7. Finland
  8. France
  9. Germany
  10. Greece
  11. Holland
  12. Hong Kong
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  1. Iceland
  2. India
  3. Israel
  4. Italy
  5. Japan
  6. Kuwait
  7. Mexico
  8. New Zealand
  9. Portugal
  10. Qatar
  11. Saudi Arabia
  12. South Africa
  13. South Korea
  14. Spain
  15. Sweden
  16. Turkey
  17. United Arab Emirates
  18. United Kingdom
  19. United States
Information provided under the UCPP paradigm in terms of the Daily CPI
  1. Historical cost plus associated net monetary and constant purchasing power losses or gains.
Information provided in financial reports
(a) Prior period comparative items
(i) Nominal monetary items inflation-indexed daily and associated net monetary losses or gains updated daily to the Daily CPI at the current (today’s) date;
                             
(ii) Constant items treated as nominal items and the associated net constant purchasing power losses or gains updated daily to the Daily CPI at the current (today’s) date.
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(b) During the current financial period


(i) Nominal HC measurement applied to nominal monetary items. The associated net monetary losses or gains are updated daily to the Daily CPI at the current (today’s) date;


(ii) Nominal HC measurement applied to constant items treated as nominal items. The associated net constant purchasing power losses or gains updated daily to the Daily CPI at the current (today’s) date;
(c) Financial period´s financial reports published/accessed after the period-end date:


(i) Nominal monetary items,
(ii) net monetary losses and gains,
(iii) constant items treated as nominal monetary items and
(iv) net constant purchasing power losses and gains


(all items) updated daily from the period-end date to the Daily CPI at the current (today’s) date.


  1. Current Value
Information provided
  1. Prior period comparative items


Variable real value non-monetary items updated daily to the Daily CPI at the current (today's) date.
  1. During current financial period


Variable items measured at current value and then updated daily to the Daily CPI at the current (today’s) date.
  1. Last financial period´s financial reports published after the period-end date
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Variable items updated daily from the period-end date to the Daily CPI at the current (today’s) date.
         
  1. Units of Constant Purchasing Power


Information provided
  1. Prior period comparative items


(i) Constant real value non-monetary items updated daily to the Daily CPI at the current (today’s) date;


(ii) Inflation-indexed monetary items inflation-indexed daily to the Daily CPI at the current (today’s) date.
  1. During current financial period


(i) Constant items updated daily to the Daily CPI at the current (today’s) date;


(ii) Inflation-indexed monetary items  measured at their inflation-indexed values at the current (today’s) date.
  1. Last financial period´s financial reports published/accessed after the period-end date


(i) Constant items updated daily to the Daily CPI at the current (today’s) date;


(ii) Inflation-indexed monetary items inflation-indexed daily to the Daily CPI at the current (today’s) date.


  1. Historical Cost under the UCPP paradigm in terms of the Daily CPI
Advantages


  1. The loss or gain in the constant purchasing power of (i) nominal monetary items and (ii) constant items treated as monetary items is accounted as net monetary or constant item losses or gains. The  
Nicolaas Smith Comment Letter                                 ED/2015/3 Conceptual Framework
loss or gain is recognised and accounted resulting in the financial reports presenting the real position of the entity. That is not the case under the HC paradigm.
  1. Daily updating of associated constant items (associated net monetary and constant purchasing power losses and gains) to the current (today’s) Daily CPI means that the constant purchasing power (real value) of losses and gains are correctly calculated which is not the case when the monthly published CPI is used in terms of IAS 29. See example below.
Disadvantages
  1. There are no disadvantages.
II. Current Value
Advantages
  1. The advantages are generally the same as already stated in the CF for current values under the HC paradigm.
  2. Daily updating in terms of the Daily CPI of current values of variable items from the date of measurement to the current (today’s) date keeps these values always updated at the current (today’s) general price level during hyperinflation.
  3. Daily updating of variable items secures economic stability in the non-monetary economy during hyperinflation
  4. Daily updating of variable items removes distortions in the non-monetary economy during hyperinflation.
  5. Daily updating of variable items removes many opportunities for corruption in the non-monetary economy during hyperinflation.
  6. Daily updating of variable items prevents local-production -destroying price freezes during hyperinflation.
  7. Daily updating of variable items promotes local production during hyperinflation.   
Disadvantages
  1. There are no disadvantages.
Nicolaas Smith Comment Letter                                 ED/2015/3 Conceptual Framework
III. Units of Constant Purchasing Power in terms of the Daily CPI
Advantages
There are a great number of advantages when an entity and especially an entire economy change over from the HC paradigm implementing the stable measuring unit assumption to implementing the real value (constant purchasing power) preserving UCPP paradigm in terms of the Daily CPI under which the stable measuring unit assumption is never implemented.
Difference between Zimbabwe and Brazil during hyperinflation


The difference is like night and day - like Zimbabwe and Brazil during hyperinflation. Zimbabwean accountants implemented IAS 29 in terms of the monthly published CPI from 2000 to March 2008 while Brazilian accountants applied the very successful Unidade Real de Valor daily index from 1992 (or before: I do not know the start date of the URV) to June 1994. The great number of advantages from using a daily index is undeniable: Brazilian accountants used the URV daily index and the country had a relatively stable non-monetary economy during hyperinflation and also used it as the critical part of their Plano Real to stop hyperinflation overnight at no cost on 1 July 1994. In stark contrast, the Zimbabwean economy imploded on 20 November 2008 with the full implementation of IAS 29 in terms of the monthly published CPI by Zimbabwean accountants for 8 years till March 2008, the last month for which the Zimbabwean government published the monthly CPI. IAS 29 in terms of the monthly published CPI had no positive effect in Zimbabwe and Zimbabwean accountants and business people could not stop the economy (the Zimbabwean people) from dollarizing spontaneously while Brazilian accountants kept the Brazilian non-monetary economy relatively stable by using the URV daily index during hyperinflation. The URV daily index also was the pivotal element in Brazil's Plano Real used to stop hyperinflation from one day to the next at no cost on 1 July 1994.  
The difference between Zimbabwe and Brazil was the result of one fundamental concept: daily indexing instead of applying the monthly CPI. Both economies used the UCPP paradigm during hyperinflation. Only Brazil had a relatively stable non-monetary economy because it used a daily index. Zimbabwe imploded and was forced into spontaneous
Nicolaas Smith Comment Letter                                 ED/2015/3 Conceptual Framework
dollarization while Brazil stopped hyperinflation from the one day to the next - from 30 June 1994 to 1 July 1994 - at no cost (Brazil avoided
costly and stagnation-inducing dollarization) with the help of the URV daily index.


The higher the rate of hyperinflation, the greater the real value of the advantages of UCPP in terms of the Daily CPI.
These many advantages of daily indexing under the UCPP paradigm during hyperinflation, however, only materialise when the UCPP paradigm is implemented in terms of the Daily CPI - more correctly, in terms of all changes in the general price level. The general price level can change more than once per day during hyperinflation.


The URV was used like a Daily CPI in Brazil in 1994. Brazil did not see its use as the implementation of an accounting model under the UCPP paradigm in terms of a Daily Index. Brazil called it “correcção monetária “, a monetary correction procedure that became the central part of their Plano Real monetary reform plan. In fact, it was the implementation of the UCPP paradigm in terms of a Daily Index (the URV) in an entire economy.


Example
Monthly inflation was 240.06% in December 2007 in Zimbabwe.


01.12.07  10 481.17
31.12.07  33 080.55  Note the difference in the index in the same month.
Zim$/USD rate based on derived CPI
                                                                      Zim$
01.12.07 104.8114   $100 worth of sales         10 481.14
31.12.07 330.8055   $100 worth of sales         33 080.55
Total sales in December 2007 under IAS 29     43 561.69
in terms of the monthly published CPI
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Total sales in terms of UCPP in terms of the Daily CPI
                                                                  Zim$
$100 * 104.8114 *(330.8055/104.8114) = 33 080.55
$100 * 330.8055                                   = 33 080.55
                                                    Total   66 161.10
The same applies to trade debtors, trade creditors, taxes payable, salaries, wages and all constant items.
The monthly inflation rates in Zimbabwe in 2008 were as follows:
Jan                   120.83%
Feb                   125.86%
Mar                   281.29%
Apr                    212.54%
May                   433.40%
Jun                    839.30%
Jul                  2 600.04%
Aug                 3 190.00%
Sep               12 400.00%
Oct        690 000 000.00%
Nov   79 600 000 000.00%


It is very easy to see why IAS 29 in terms of the monthly published CPI had no stabilising effect in Zimbabwe and why applying a Daily Index easily and always stabilises the non-monetary economy like the use of the URV daily index in Brazil did.
Here follow the advantages of the UCPP paradigm in terms of the Daily CPI in an entire hyperinflationary economy:
Advantages
  1. All constant real value non-monetary items are always and everywhere updated in terms of the Daily CPI from the general price level on the day - not simply the month - they are recognised in the entity to the current (today’s) date. Their constant purchasing power thus stays constant: no net constant purchasing power losses or gains. This is not the case when the UCPP paradigm is implemented in terms of the monthly published CPI as IAS 29 has
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been implemented over the last 26 years including for 8 years in Zimbabwe where it had no positive effect during hyperinflation.
  1. Stable labour relations/market: salaries and wages updated daily in terms of the Daily CPI: no stable measuring unit assumption.
  2. Rents, pensions, transport fees, utilities, fees, etc. updated daily in terms of the Daily CPI.
  3. Trade debtors, trade creditors, all other non-monetary payables and all other non-monetary receivables updated daily. The daily
updating of trade debtors, for example, ensures that the constant purchasing power (real value) of these items stay constant over time and the constant purchasing power of profit margins are fully recovered by entities. This has never happened under IAS 29 in terms of the monthly published CPI to date. It is impossible under IAS 29 in terms of the monthly published CPI during hyperinflation.
  1. Very improved fiscal situation: taxes, taxes payable and taxes receivable updated daily in terms of the Daily CPI.
  2. Capital and all other items in shareholders’ equity updated daily in terms of the Daily CPI.
General economic advantages using the UCPP paradigm in terms of the Daily CPI
  1. Eliminates corruption via unfair, incredibly lucrative arbitrage opportunities for corrupt government officials, their families and friends which often happen during hyperinflation.
  2. Eliminates general arbitrage distortions in the economy: See Venezuela and Zimbabwe for examples where it did not happen and it is not happening today because of the use of the monthly publised CPI under IAS 29.
  3. Eliminates “money burning” as implemented in Zimbabwe.
  4. Maintains local manufacturing and industrial production.
  5. Reduces imports.
  6. Strengthens the local currency.
  7. Eliminates price freezes.
  8. Promotes economic and financial stability.
  9. Results in zero effect of hyperinflation during hyperinflation when all monetary items in the banking system are inflation-indexed daily.
  10. Eliminates hoarding during hyperinflation.
  11. Promotes social stability.
  12. Reduces actual hyperinflation over time.
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  1. Promotes the creation of new employment opportunities.
  2. Promotes economic growth via economic stability in all sectors except the money supply with the hyperinflationary effect being eliminated with daily inflation-indexing of all monetary items.
  3. UCPP in terms of the Daily CPI will always stabilise a  hyperinflationary economy - with an IFRS (IAS 29 implemented in terms of the Daily CPI, the use of which is inferred in the standard) - at no cost over a short period of time similar to the use of the very successful URV daily index in Brazil from 1992 to 1994.
Disadvantages
There are no disadvantages.
Hurdles (not disadvantages) for UCPP measurement in terms of the Daily CPI during hyperinflation
  1. A number of different exchange rates for the US Dollar can be used by the government: see Venezuela today.
  2. No CPI published (as happened in Zimbabwe - resulted in a change to IFRS 1). Entities have to use the parallel rate instead, thus not a real hurdle.
  3. A problem everywhere during hyperinflation: the USD parallel rate is often declared illegal by the government and using it can even result in prison sentences for CFOs and owners: see Angola, Zimbabwe and Venezuela.
  4. The CPI can fall too far behind the parallel rate during severe hyperinflation: see Zimbabwe. The solution is to change over from a Daily CPI based on the monthly published CPI to a URV-based daily index based primarily on the USD parallel rate or simply use the parallel rate.
Basis


Authorization for daily indexing is derived from the requirement of UCPP measurement bases in IAS 29 and the fact that constant purchasing power in all measured items (including Profit & Loss and Other Comprehensive Income items) can only be achieved when all changes in the general price level are followed, i.e., at least daily.


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The UCPP accounting paradigm is optional during low inflation, high inflation and deflation in terms of the CF (2010), paragraph 4.59 (a) [originally the Framework (1989), paragraph 104 (a)] which states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.” The UCPP paradigm is required during hyperinflation in terms of IAS 29.
The UCPP paradigm is optional during low inflation, high inflation, hyperinflation and deflation in terms of particular countries´ national accounting standards, e.g. in Portugal - originally in the Plano Oficial de Contabilidade (1989).
The UCPP paradigm is optional during hyperinflation under US GAAP.
The UCPP paradigm is a departure from Historical Cost Accounting (the use of the stable measuring unit assumption).


The calculation and accounting of net constant purchasing power gains or losses result from the acceptance of HC contracts under the UCPP paradigm. There will be no net constant purchasing power gains or losses once there are no more HC contracts under the UCPP paradigm.
The stable measuring unit assumption is never implemented under the UCPP paradigm since net monetary gains and losses and net constant item gains or losses are always calculated and accounted.   
The restatement approach or method as set out in IAS 29, Daily CPI indexation, constant dollar, price-level accounting, price-level adjustment, monetary correction, inflation-adjustment, inflation-indexing, dollar indexing, “correcção monetária”, the use of the Unidad de Fomento Daily CPI in Chile since 1967, the use of the Real Value Daily CPI in Colombia, the use of the very successful Unidade Real de Valor daily index in Brazil, the daily measurement of more than $3 Trillion in government inflation-indexed bonds in terms of the Daily CPI in many countries worldwide, etc. were/are all implementations under the UCPP paradigm although not all nations realized they were implementing an accounting model, namely the UCPP model. It was mostly seen as simply monetary correction implemented by the monetary authorities at the central bank instead of UCPP, an accounting model.


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Notes
1 The definition of monetary items is critical under the UCPP paradigm since  non-monetary items are defined as all items that are not monetary items.


Definition of monetary items: Monetary items constitute the money supply.


When an item is included in the Central Bank´s aggregate of the money supply, then it is a monetary item. Otherwise it is a non-monetary item.


Trade debtors, trade creditors, salaries, wages, pensions, taxes, taxes payable, taxes receivable, etc. are not included in the money supply. They
are not monetary items. They are constant real value non-monetary items. The implementation of the stable measuring unit assumption under the HC paradigm allows these items to be treated as if they were monetary items under that paradigm.
2 Monetary items are generally stated in nominal value. However, many countries´ governments issue sovereign inflation-indexed bonds. The world market in these bonds amounts to more than USD 3 trillion. Chile  has been inflation-indexing more than 25% of its money supply for a number of years. All these countries already have Daily CPIs that they use to inflation-index these bonds on a daily bases since they trade on a daily basis.
3 There are three basic, fundamentally different economic items under the UCPP paradigm:
  1. Monetary items
  1. Variable real value non-monetary items
  1. Constant real value non-monetary items
Monetary items
Definition Monetary items constitute the money supply.
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Examples
Bank notes and coins
Bank current accounts
The capital amounts of:
Inflation-linked bonds
Money loans
Mortgage bonds
Government Bonds
Commercial Bonds
Treasury Bills
Consumer loans
Bank loans
Car loans
Student loans
Credit card loans
All capital and money market items
Variable real value non-monetary items
Definition Variable items are non-monetary items with variable real values over time.
Examples
Property
Freehold land
Buildings
Plant
Equipment
Investment property
Other intangible assets
Patents
Trademarks
Licences
Investments in associates
Joint ventures
Available–for–sale investments
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Quoted and unquoted shares
Inventories
Raw materials
Work–in–progress
Finished goods
Foreign exchange
Commodities
Precious metals
Constant real value non-monetary items
Definition Constant items are non-monetary items with constant real values over time.
Examples
All Profit and Loss and Other Comprehensive Income statement items
Revenue
Cost of sales
Gross Profit
Investment revenues
Other gains and losses
Salaries
Wages
Rentals
Net monetary loss
Net monetary gain
Net constant item loss
Net constant item gain
Share of profits of associates
Changes in inventories of finished goods and work in progress
Raw materials and consumables used
Depreciation and amortisation expenses
Employee benefits expenses
Distribution expenses
Marketing expenses
Occupancy expenses
Administration expenses
Finance costs
Bank Charges
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Borrowing costs
Consulting expenses
Royalties
Other expenses
Profit before tax
Income tax expenses
Profit for the year from continuing operations
Profit for the year from discontinued operations
Net profit for the year
Comprehensive income
Deferred tax assets
Finance lease receivables
Trade and other non–monetary debtors
Provision for doubtful debts
Current tax assets
Issued share capital
Share premiums
Share discounts
Capital reserves
General reserves
Properties revaluation reserve
Investments revaluation reserve
Equity–settled employee benefits reserve
Hedging reserve
Foreign currency translation reserve
Retained earnings
Retained losses
Retirement benefit obligation
Deferred tax liabilities
Provisions
Employee benefits provision
Provision for rectification work
Provision for warranties
Onerous lease contract provision
Restructuring and termination costs provision
Decommissioning costs provision
Deferred Revenue
Trade and other non–monetary creditors
Current tax liabilities
Interest paid
Nicolaas Smith Comment Letter                                 ED/2015/3 Conceptual Framework
Interest received
Royalties
Fees
Short term employee benefits
Pensions
Dividends payable
Dividends receivable
Taxes payable
Taxes receivable
4  ‘The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general
purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.’
Walgenbach P H Dittrich N E and Hanson E I 1973 Financial Accounting 429

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This comment letter is published by the IFRS Foundation HERE under the name Nicolaas Smith. The letter is ID number 1 and appears on page 1 of the table if it is sorted by ID number, or page 4 if it is sorted alphabetically by organisation.

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