Abstract
This paper explores the significance of inflation accounting in adjusting financial statements to account for the impact of inflation on the economy. It examines the restatement of balance sheets and income statements, and it discusses the limitations of historical cost using price indices to reflect changes in the value of monetary and non-monetary assets and liabilities. By considering the erosion of the purchasing power of money and the appreciation of non-monetary assets, inflation accounting provides a more precise illustration of a company’s financial position, performance, and cash flows. The constant purchasing power Accounting (CPPA) method is highlighted as a useful technique to address the limitations of historical cost accounting in inflationary environments. However, the application of inflation accounting varies across countries and depends on economic and regulatory factors. The paper suggests the need for further research to investigate the implications of inflation accounting on different industries, economies, and financial reporting frameworks. It emphasizes the ongoing relevance and discussion surrounding inflation accounting methods and their implementation in practice, aiming to provide stakeholders with a better understanding of financial performance in inflationary contexts.
Keywords: Inflation accounting, constant purchasing power accounting, financial statements, price index
*This paper is presented at the 4th International Conference on Multidisciplinary Industry and Academic Research (ICMIAR) 2023
References
Binz, O., Graham, J., Kubic, M. (2023). Does inflation affect value relevance? A Century-Long Analysis
Bulow, J. I., & Shoven, J. B. (1982). Inflation, Corporate Profits, and the Rate of Return to Capital. In: Hall, R. W. (1982). Inflation: Causes and Effects. Chicago: University of Chicago Press, 233 – 259
Javed, R. 2019. Merits and demerits of inflation accounting. Inflation accounting. Available: https://www.playaccounting.com (Accessed 03 May,2023).
Humphrey, T. M. (1981). Keynes on Inflation. Economic Review January/February, Federal Reserve Bank of Richmond Muhamad Ali KW, Saleh SM, van Paridon K (2020) The impact of changes in accounting standards on earnings management: applied research from 2003–2014. Koya Univ J Hum Soc Sci 2(2):166–175. https://doi.org/10.14500/kujhss.v2n2y2019
Royal Dutch Airlines. Financial Statements 2019. from: IAG Annual report and accounts 2019.pdf (iairgroup.com)
Peavler, R. 2019. What are the limitations of ratio analysis? Advantages and disadvantages of ratio analysis for businesses. Available: www.balancesmb.com (Accessed 29 April 2023).
Samuelson, P. A., & Nordhaus, W. D. (2009). Economics. 19th edition, New York: McGraw Hill
Sulucay, I.H. (1992). Inflation accounting methods and their effectiveness. Calhoun:TheNPS InstitutionalArchive. Available: http://hdl.handle.net/10945/23927 (Accessed 20 May 2023).
Smith, J. I., & Johnson, J. B. (2018). Inflation, Corporate Profits, and the Rate of Return to Capital. In: Hall, R. W. (1982). Inflation: Causes and Effects. Chicago: University of Chicago Press, 233 – 259
Trivedi, G. (2018). Inflating equity: inflation’s impact on financial statements and ROE.
Economics, equity investments, financial statement analysis, portfolio management. Available: https://blogs.cfainstitute.org/investor/2018/06/04/inflating-equity-inflations- impact-on-financial-statements-and-roe (Accessed 26 May, 2023).
Wali, K. (2017). The influence of Dutch firm’s performance on discretionary Accrual Models: Evidence from the Netherlands. Zanco J Hum Sci 21(2):374401 http://doi.org/https://doi.org/10.21271/zjhs
Wali, K. (2021). The value relevance of accounting information based on IFRS in the Netherlands and the UK. Eurasian Journal of management & Social Sciences. http://dx.doi.org/10.23918/ejmss.V2i3p31
Wali, K. (2021). The detection of earnings management through a decrease of corporate income tax. Futur Bus J 7, 36 (2021). https://doi.org/10.1186/s43093-021-00083-8
Wali K, Saleh S, Van Paridon K (2019). The causes and effects of earnings management on stock prices. J Econ Admin Sci. https://doi.org/10.33095/jeas.v25i116.1789
Wali, K., Darwish, Karim, B., Abdul-Jabbar Abdulfattah (2022). Security and confidentiality of information under the application of cloud accounting compared to traditional accounting. https://doi.org/10.33095%2Fjeas.v25i116.1789
Whittington, G., Saporta, V., & Singh, A. (1992). The Effects of Hyper-Inflation on Accounting Ratios: Financing Corporate Growth in Industrializing Economies. IFC Technical Paper Number 3, Washington: The World Bank.
