What Is Inflation Accounting?

Inflation accounting is a special technique used to factor in the impact that soaring or plummeting costs of goods in some regions of the world have on the reported figures of international companies. Financial statements are adjusted according to price indexes, rather than relying solely on a 澳洲幸运5官方开奖结果体彩网:cost accounting basis, to paint a clearer picture of a firm’s financial position in 澳洲幸运5官方开奖结果体彩网:inflationary environments. This method is also sometimes referred to as 澳洲幸运5官方开奖结果体彩网:price level accounting.

How Inflation Accounting Works

When a company operates in a country where there is a significant amount of price inflation or 澳洲幸运5官方开奖结果体彩网:deflation, historical information on financial statements is no longer relevant. To counter this issue, in certain cases, companies are permitted to use inflation-adjusted figures, 澳洲幸运5官方开奖结果体彩网:restating numbers to reflect current 澳洲幸运5官方开奖结果体彩网:economic values.

International Accounting Standard (IAS) 29 adopted by the International Financial R😼eporting Standards (IFRS) is the guide for entities whose 澳洲幸运5官方开奖结果体彩网:functional currency is the currency of a 澳洲幸运5官方开奖结果体彩网:hyperinflationary economy. IFRS defines hyperinflation as prices, interest, and wages linked to a price index rising 100% or more cumulatively over three years.

Companies that fall under this category may be required to update their statements periodically in order to make them relevant to current economic and financial conditions, supplementing cost-based 澳洲幸运5官方开奖结果体彩网:financial statements with regular priceཧ-level adjuste⛄d statements. 

Inflation Accounting Methods

There are two m🌞ain methods used in inflation accounting—current purchasing powe🐈r (CPP) and current cost accounting (CCA).

Current Purchasing Power (CPP)

Under the CPP method, 澳洲幸运5官方开奖结果体彩网:monetary items and nonmonetary items are separated. The accounting adjustment for monetary items is subject to the recording of a net gain or loss. Nonmonetary items (those that do not carry a fixed value) are updated into figures with an inflation conversion factor equivalent to the consumer price index (CPI) at the end of the period divid𝔉ed by CPI at the date of transaction.

Current Cost Accounting (CCA)

The CCA approach values assets at their 澳洲幸运5官方开奖结果体彩网:fair market value (FMV) rather than 澳洲幸运5官方开奖结果体彩网:historical cost, the price incurred during the purchase of the fixed asset. Under the CCA method, bo💦th monetary and nonmonetary items are restated to current values.

Special Considerations

Requirements for inflation accounting differ between IFRS and U.S. 澳洲幸运5官方开奖结果体彩网:Generally Accepted Accounting Principleꦦs (GAAP). Both IFRS and GAAP have been treating Argentina as “hyperinflationary” since 2018 because cumulative inflation there over the prior three years has exceeded 100%. However, the requirements they impose on companies operat💫ing in the country vary.

IFRS permitted international businesses with subsidiaries in Argentina to continue using the peso for their accounts, provided they restate them to adjust for inflation. In contrast, U.S. firms with activities in Argentina are being forced to use the dollar as their functional currency, costing them in 澳洲幸运5官方开奖结果体彩网:foreign exchange losses.

Insurance company Assurant Inc. warned in its 2021 annual report that “management has classified Argentina’s economy as highly inflationary in accordance with GAAP accounting requirements and, as a result, the functional currency of our Argentina subsidiaries was changed from the local currency to U.S. dollars and their non-U.S. dollar denominated monetary assets and liabilities were subject to 澳洲幸运5官方开奖结果体彩网:remeasurement resulting in losses.”

Adva🤡ntages and Disadvantages of Inflation Accounting

Inflation accounting comes with many benefits. Chief among them, matching current reveღnues with current costs provides a much more realistic breakdown of profitability.

On the flip side, providing adjusted figures can confuse investors and give companies the opportunity to flag numbers that shine it in a better light. The process of adjustingꦏ accounts to factor in price changes can result in financial statements being constꩵantly restated and altered.