Accounting 4570/5570

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

2. 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

3. 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

4. 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

5. 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

6. 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)

7. 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

8. 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

9. 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.

10. Cases • BP on website