Accounting 4570/5570 Chapter 11 - International Accounting for Price Changes

Impact of Inflation Generally a loss of purchasing power Financial assets versus liabilities –Assets - inflation bad –Liabilities - inflation good but interest rate often higher Inflated profits –Demands for higher dividends –Higher wages

General Purchasing Power Accounting (GPP) Changes in general level of prices Entire value of money has gone down Determine which accounts to adjust –Financial versus nonfinancial Nonfinancial items - inventory, PP& E restated to general price level Financial assets and liabilities - not restated since their amounts are already fixed –Current versus long-term

GPP Accounting Determine index to use Determine where the adjustment will be reflected -- income stmt or balance sheet A firm that has increased its net asset position will have purchasing power losses A firm that has increased its net liability position will have purchasing power gains. Purchasing power gains and losses are separate monetary item adjustments

Current Value Accounting Cost of specific assets and liabilities have changed Replacement value, current cost, current exit price accounting is used If current value has increased (decreased), one has a holding gain (loss). Holding gains/losses recorded in either income or stockholder’s equity

Accounting Measurements Current Value: GPP Accounting –Combination of GPP and current value –Real value accounting system –Total holding gains and losses Total holding gain (gain due to change in fair market value of asset) Real holding gain (gain net of the impact of inflation)

Comparative National Practices IASB –IAS 16 - current value permitted as an alternative for property, plant & equipment –IAS 29 - hyperinflationary economies Defined as 100% over a 3 year cumulative period Use General Purchasing Power index adjustments

Comparative National Practices U.K. - current cost allowed along with historical cost U.S. - allows replacement value disclosures; purchasing power gain or loss on net monetary items along with historical cost in financial statements E. U. - Fourth Directive –Historical cost required –Current cost/ GPP accounting allowed

Comparative National Practices South America –Inflation accounting was required GPP index used Net effect of adjustment included in income Supplementary GPP statements –No longer required but can be provided voluntarily.

Cases BP on website