Adjusting financial statements to show a firm's real financial position in inflationary times. It aims to indicate how risingprices and lower purchasing power of the currency affect a firm's cost of refinancing its productive assets, and of itsability to maintain an adequate level of profit on the capital employed. One method is to adjust every figure in thebalance sheet on the basis of a price index (such asconsumer price index) which reflects the current purchasing power of the currency. Another method suggests to revalue tangible assets at their replacement cost. Invaluation of an inventory, inflation accounting treatment can effect the firm's taxable income, cash position, and reported earnings, depending on whether the firm usesFIFO or LIFO methods. FIFO method, shows a higher profit, therefore higher tax burden and a decrease in net cash flow. LIFO method lowers the profit and tax burden and increases the net cash flow.
Inflation accounting is a term describing a range of accounting systems designed to correct problems arising from historical cost accounting in the presence of inflation. Inflation accounting is used in countries experiencing high inflation or hyperinflation. For example, in countries experiencing hyperinflation the International Accounting Standards Board requires corporate financial statements to be adjusted for changes in purchasing power using a price index. Inflation accounting models
Inflation accounting is not fair value accounting. Inflation accounting, also called price level accounting, is similar to converting financial statements into another currency using an exchange rate. Under some (not all) inflation accounting models, historical costs are converted to price-level adjusted costs using general or specific price indexes. Income statement general price-level adjustment example On the income statement, depreciation is adjusted for changes in general price levels based on a general price index. 2001 2002 2003 Total
33,000 36,302 39,931 109,233
100%. it is a complex of financial reporting procedures. based on the axiom that the currency. There are no holding gains or losses recognized in converting values.500 (b) 30.000 x 105/100) .302
1.000 (b) 6.931 10. is stable.   The restatement of historical cost financial statements in terms of IAS 29 does not signify the abolishment of the historical cost model. On one hand.000 x 105/100 = 31. referred to in accounting statements.000 = 3.Depreciation
3. This is similar to a currency conversion from old dollars to new dollars.000 (c) (30.500 (c) 3. International standard for hyperinflationary accounting
The International Accounting Standards Board defines hyperinflation in IAS 29 as:"the cumulative inflation rate over three years is approaching. This is confirmed by PricewaterhouseCoopers: "Inflationadjusted financial statements are an extension to. major tasks and problems of inflation accounting
Inflation accounting mostly deals with 2 principal issues.30. historical cost accounting.000 3. Monetary items are not adjusted.500
Purchasing power loss Net income 3. These financial
33. so they gain or lose purchasing power.931 14.500 (a) 3.000 31. or exceeds.000 = 1. used for recording the results of inflation in this or that commercial structure.000 4.000 (d)
4.500 (d) (63.000 x 110/100 = 33."  Companies are required to restate their historical cost financial reports in terms of the period end hyperinflation rate in order to make these financial reports more meaningful. not a departure from.000 Constant dollar accounting Constant dollar accounting is an accounting model that converts nonmonetary assets and equities from historical dollars to current dollars using a general price index.000 x 110/105) ."  Inflation Accounting in the System of Modern Accounting
statements are prepared and published by the company at the end of the financial year. The procedure also can be known under the term of price level accounting. when doing inflation accounting statements for the reviewer to see which index was used in this or that report. instead of cost-based financial statements.
Main principles of inflation accounting
The main principle of the inflation accounting can be described as follows. A great number of companies started to create and publish price-level adjusted statements.
The beginning of inflation accounting goes back to the early 20th century. the accountant should include all the math and calculations. starting from the times of the Great Depression. inflation accounting offers a range of arrangements. inflation accounting adjustments mostly depend on the purchasing power of the consumers. All the methods. On the other hand. when accountants of the USA and UK for the first time started to observe and discuss the effects inflation produces on financial statements. and introduced the theory of index number and the notion of purchasing power. In many countries the principles of inflation accounting are very popular nowadays. are developed and released by state agencies. Since in quite a significant number of countries hyperinflation prevents from using this scheme. apart from just recording and observing inflation dependant problems. arising from hyperinflation and its results. Further on. Thus.
. in many countries the inflation accounting principles were used in financial reports to reflect the inflation in them. designed to solve the issues. with the help of which the adjustments for inflation are done (such as consumer prices index). An accountant takes the current value and adjusts it for inflation. used earlier.
The theoretical and practical aspects of each method are discussed. USA and elsewhere
. in order to give the reader the framework within which he can evaluate the relative merits of the various practical solutions to the inflation accounting problem which are now being implemented in the UK.Inflation accounting:
an introduction to the debate
Geoffrey Whittington 0 Reviews Cambridge University Press.Business & Economics . It describes all of the main alternative methods of inflation accounting and illustrates them. using simple numerical examples.243 pages This book provides a clear and concise summary of the present state of the theory of inflation accounting for students and practitioners. 1983 .