2020 Price Level and Inflation Accounting

Financial Reporting in Hyperinflationary Economies
 Very high levels of inflation present a variety of challenges to an economy one of which
is the comparability of financial information over time.
 Changing price levels distort historical cost values and various approaches have been
suggested to deal with this issue
 A company’s impressive sales growth may be due to changes in the general price level
rather than any real increase in the volume of goods and services supplied
IAS 29 outlines the characteristics of an economy which is indicative of hyperinflation:

 The general population prefers to keep its wealth in non-monetary assets(e.g property) or
in a stable foreign currency
 The general population regards monetary amounts (e.g trade receivables) in terms of a
stable foreign currency. Prices may be quoted in that currency
 Sales and purchases on credit are made in prices that compensate for the expected loss of
purchasing power during the credit period.
 Interest rates, wages and prices are linked to a price level
 The cumulative inflation rates over three years is approaching or exceed 100
Accounting for Price Level Changes

 Changes in price levels can lead to both profit and asset valuation figures being far from
reality if the original historical cost figures are used for the statement of financial position
 The deficiency of the historical cost accounting is noticeable when the inflation rate is
high
Problems during a period of changing price levels

 Fixing selling prices: It is not easy to fix prices because they likely to change over a
short period of time.
 Financial planning- planning for the firm is difficult because one does not know how
things are going to turn out.
 Paying tax and replacing assets- during a period of high inflation, historical cost tend to
overstate profits and such artificial profits are then taxed leading to excessive tax charges.
This could lead to companies running short of cash and when assets have to replaced,
adequate finance may not be available.
 Monetary assets. If inventory of goods are held, they will tend to rise in money terms
during a period of inflation. The same applies to cash, bank and receivable s because their
value in real terms will have been reduced.
 Dividend distribution. It is difficult to decide how much to pay as dividends when one
does not know the efficiency and operating capability of the company. At the same time
the shareholders will be looking to payment of adequate dividends.
IAS 29 (Financial Reporting in Hyperinflationary Economies)
1
 This standard indicates that current cost accounting may be used by entities operating in
hyperinflationary economies.
Under historical cost accounting, assets and liabilities are recorded at their actual cost at the date
of transaction.
Current Cost Financial Statements
In order to prepare current cost financial statements, a number of adjustments to the historical
cost figures must be made: adjustment needed relate to:
 Non-current assets
 Depreciation
 Inventory
 Cost of sales
 Monetary working capital
 Gearing
Typical conversion to be made to historical cost accounts
1. Current value of assets
The revaluation of assets will yield current cost reserves
2. Cost of sales adjustment
This means adjusting: a) opening inventory
b) Purchases
c) Closing stock
3. Depreciation adjustment
The depreciation as shown in the historical profit and loss has to be adjusted.
4. Monetary working capital
This means effecting changes to current assets and current liabilities especially trade
receivables and trade payables.
5. Gearing adjustment
This is adjustment relating to the capitalisation of the company especially the debt.
These adjustments are made based on indices that represent price changes. The prices change
indices applied will depend on the date of acquisition of a particular item and the type of item.
For example the price index of inventory might be different from those of fixed assets
The formula for converting historical figures to current cost value is:
Current cost value= historical cost value × index at balance sheet date
Index at purchase date

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2020 Price Level and Inflation Accounting

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Financial Reporting in Hyperinflationary Economies

IAS 29 outlines the characteristics of an economy which is indicative of hyperinflation:

Accounting for Price Level Changes

Problems during a period of changing price levels

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