Non-monetary Items

The proposals put forward by the Sandilands Committee show the change in the value of proprietorship interest in a company, but fail to show how that change in value is to be compared to the general rate of inflation. The CCAB illustrated this point in its memorandum by the following example.


At 1 January 19X0, the capital invested in a business was £200, represented by non-monetary (fixed assets) valued at £100 and monetary assets (cash at bank) amounting to £100.

At 31 December 19X0, the business held the same fixed assets, but on the basis of CCA these had been revalued at £115. The business still held £100 at the bank.

The general price level increased by 25 per cent during the year 19X0.

Ignoring the results of trading operations and the effect of taxation, the effect of CCA would be as follows:

(a) there would be a holding gain of £15 on non-monetary assets calculated by reference either to the Index of Asset Values proposed by Sandilands or their realizable value;

(b) there would be no gain or loss in respect of monetary assets;

(c) there would be an increase in the value of capital invested from £200 to £215.

However, given that the general price level increased by 25 per cent during the year, the value of the capital invested should have risen to £250 in order that its value be maintained at the end of the year to its level at the beginning of the year. In fact, under CCA, it is only £215, which is £35 less than its value under CPP. This difference of £35 consists of:

(a) a loss on monetary assets (reflecting the whole of the fall in the value of money) £25

(b) a loss on non-monetary assets (because the money value of these assets has not increased at the same rate as the general increase in the price level) £10

This example highlights that the holding gain of £15 measured under CCA does not reflect the decrease in the purchasing power of the capital invested in the business (50). Accordingly, the CCAB argued that 'the full extent of the fall in the purchasing power of the capital invested should be recognized in accounts which purport to show the effects of inflation'.

The foregoing example does not discredit CCA in those cases where the replacement cost of non-monetary assets is higher than its value under CPP. In such a case, CPP accounting will not maintain the firm's operating structure. As we have mentioned in the previous webpage, the concept of capital maintenance is more relevant to the operations of a business enterprise than the general purchasing power concept. Therefore, if a choice has to be made between CCA and CPP, CCA should be adopted. If the proprietors wish to know the impact of general inflation on the company's assets and income, it is better that such information be disclosed in supplementary statements than be incorporated in the basic financial reports.

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Read on: Monetary Items

In the CCAB memorandum a simple example was given of the problems which would be created by the Sandilands Report proposal in the case of monetary items.


A company has £100 in the bank at the beginning of the year. During that year, no transactions were conducted and the closing balance at the bank at the end of the year remains £100.

The application of the proposals of the Sandilands Report would result in the firm showing neither a profit nor a loss. Given that the rate of inflation is 20 per cent a year, however, it is true of course that the... see: Monetary Items