inflation session 1

8/7/2019 inflation session 1

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Inflation: DefinitionsInflation: Definitions Decrease in purchasing power of money due to an

increase in the general price level

³A process of steadily rising prices resulting in

diminishing purchasing power of a given nominal

sum of money´

The Penguin Dictionary of Economics

³Rise in prices brought about by the expansion of

the supply of bank money, credit, etc.´Ox ford Advanced Learner¶s Dictionary of Current

English



Inflation

Monetary inflation occurs when the money

supply of a country is increased over and above

the demand and need for currency (³too muchmoney chasing too few goods´). This results in

depreciation in the value of currency.

The impact of monetary inflation on prices is

usually not evenly distributed across all goodsand services within an economy.



Financial accounting Financial statement are prepared on GAAP and

historical cost basis. we use Money

measurement concept which ignores price level

changes .criticism of historical accounting-

1. Understated assets

2. Overstated profit

3. Comparison not valid4. Provision for replacement of asset

5. Strain on liquid funds

6. Ignores unrealized gains



Inflation

Inflation distorts, or eradicates, the

meaning of financial statement numbers.

As such, when inflation is a substantial

problem, its effects need to be

removed/adjusted so that financial reports

remain useful.



Some Aspects on Inflation

AccountingProblems:

Subjectivity

Often complicated calculations

Ignores cost concept

Gain or loss because of price level change to

be shown where?

Benefits:

maintaining production capacity

shows the internal logic of accounting



Inflation Accounting -- Methods

General Purchasing Power (GPP) Accounting

Updates historical cost accounting for changes in the

general purchasing power of the monetary unit. Also referred to as General Price-Level-Adjusted

Historical Cost Accounting (GPLAHC).

Nonmonetary assets and liabilities, stockholders¶ equity

and income statement items are restated using theGeneral Price Index (GPI).

Requires purchasing power gains and losses to be

included in net income.

Learning Objective 1



Inflation Accounting -- Methods

Current Cost (CC) Accounting

Updates historical cost of assets to the current cost to

replace those assets. Also referred to as Current Replacement Cost

Accounting.

Nonmonetary assets are restated to current replacement

costs and expense items are based on these restatedcosts.

Holding gains and losses included in equity.




Inflation Accounting Internationally

International Financial Reporting Standards

IAS 15, I nformation Reflecting the Effects of Changing

Prices was issued in 1981. This standard has been withdrawn due to lack of

support.

The relevant standard now is IAS 29, F inancial

Reporting in Hyperinflationary Economies. IAS 29 is required for some companies located in

environments experiencing very high levels of inflation.




Inflation Accounting Internationally

International Financial Reporting Standards

IAS 29 includes guidelines for determining the

environments where it must be used. Nonmonetary assets and liabilities and stockholders¶

equity are restated using a general price index.

Income statement items are restated using a general

price index from the time of the transaction. Purchasing power gains and losses are included in net

income.


inflation session 1

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