Inflation Accounting. Advanced Financial Accounting

Transcription

1 Inflaion Accouning Advanced Financial Accouning

2 Inflaion: Definiions Decrease in purchasing power of money due o an increase in he general price level A process of seadily rising prices resuling in diminishing purchasing power of a given nominal sum of money The Penguin Dicionary of Economics Rise in prices brough abou by he expansion of he supply of bank money, credi, ec. Oxford Advanced Learner s Dicionary of Curren English

3 Accouning heory and valuaion A cenral issue in accouning is he valuaion of accouns appearing in he balance shee and income saemen Measuremen is an inegral par of accouning heory Accouning is concerned wih wha informaion is needed by users, whereas measuremen is involved wih wha is measured and how i is being measured There are ofen rade-offs beween verifiabiliy and usefulness of he numbers generaed

4 Problem wih addiiviy and economic relevance of accouning numbers an example Assume ha he asses of a company consis of wo iems Land acquired in 1955 for cash Toal asses for he company according o he convenional hisoric cos approach is hus = There are several quesions o hink over, e.g. Wha is he informaion conen of number ? Can we wih he cash acquire a similar piece of land we already own?

5 Valuaion approaches o accouning Hisorical cos accouning e.g. FAS accouns (wih some excepions) Curren value sysems/fair value accouning IFRS General price-level adjusmen/inflaion accouning Discouned cash flows

6 Inflaion accouning A range of accouning mehods designed o correc problems arising from hisorical cos accouning in he presence of high inflaion and hyperinflaion Also called price level accouning Similar o convering financial saemens ino oher currency using an exchange rae IAS 29 requires implemenaion of inflaion accouning for corporaions in counries experiencing hyperinflaion

7 Change in he price level is described by indexes General indexes Price Index of Gross Domesic Produc Cos-of-living Index Consumer Price Index Wholesale Price Index Producion Price Index Special indexes Indusry indexes Commodiy group indexes Commodiy indexes

8 The Finnish Wholesale Price Index Source: Saisical Yearbook of Finland 2011

9 Yearly Change (%) in he Finnish Wholesale Price Index Source: Saisical Yearbook of Finland 2011

10 Inflaion, consumer prices (annual %) in Europe 2015 Source:

11 Inflaion, consumer prices (annual %) Source:

12 Index daa Index daa is produced by naional saisical offices In Finland Saisics Finland (Saisikcenralen/ Tilasokeskus) Inernaional daa sored by heme can be found in several websies. A useful websie is Index Mundi: hp:// The websie has, for example, an ineresing comparison plaform for Consumer Price indexes: hp:// L/compare

13 IAS 29: Financial Reporing in Hyperinflaionary Economies Effecive dae: Annual periods beginning on or afer January 2005 The financial saemens in a currency of a hyperinflaionary economy are saed in he end-of-period measuring uni curren Comparaive figure for prior periods are resaed ino he same curren measuring uni

14 IAS 29: Financial Reporing in Hyperinflaionary Economies The gain or loss on he moneary posiion is included in profi and loss An economy is hyperinflaionary if he cumulaive inflaion rae over hree years exceeds 100% (one of he necessary condiions) When an economy ceases o be hyperinflaionary, he balance a he end of he previous reporing period become he basis for he carrying amouns in subsequen financial saemens

15 Some aspecs on inflaion accouning Problems: Subjeciviy Ofen complicaed calculaions Benefis: Mainaining producion capaciy Shows he inernal logic of accouning

16 Inflaion accouning mehods CPP Curren Purchasing Power CCA Curren Cos Accouning The Finnish -mehod (Akivoiujen Hankinamenojen Indeksoinisovellus)

17 Curren Purchasing Power (CPP) Reains hisoric cos accouning convenions In U.S. General Purchasing Power (GPP) Expresses accouns in erms of purchasing unis The purchase power of money a he end of he accouning period as he base Mainains he general purchasing power of he invesed capial The original purchasing coss are correced by correcion coefficiens applying some general index, for example Reail Price Index or Consumer Price Index

18 Curren Purchasing Power (CPP)... Moneary iems financial asses and liabiliies remain unchanged Invenories: FIFO purchase cos is correced by a suiable correcion coefficien o correspond he purchase power of he end of accouning period Fixed asses: The purchase cos is correced o correspond he purchase power of he end of he accouning period The balance value of he fixed asses is he same percenage of he correced purchase cos as he book value is of he original purchase cos

19 Curren Purchasing Power (CPP)... Equiy is defined as Asses Liabiliies Shareholders poin of view Unsuiable for financing decisions Work inensive mehod

20 Nominal Saemen of Income TO -VC = GP - FC = OP - IC - D = NP TO = Turnover VC = Variable Coss GP = Gross Profi FC = Fixed Coss OP = Operaing Profi IC = Ineres Coss D = Depreciaion NP = Ne Profi Below we also need: ( NG = Ne Gain from Liabiliies TP = Toal Profi )

21 Nominal Balance Shee FixAss Inv FA Asses Eq Deb FixAss = Fixed Asses Inv = Invenories FA = Financial Asses Asses = Toal Asses Eq = Owners Equiy Deb = Liabiliies

22 CPP Saemen of Income TO CPP -VC CPP = GP CPP - FC CPP = OP CPP - IC CPP - D CPP = NP CPP +/- NG = TP CPP TO TO VC CPP CPP Inv * CPP 1,12 K k1 FC FC CPP IC IC CPP Purch * *,12,6,k,12,6,12,6 *,12,k Inv CPP,12

23 CPP Adjusmens o he Saemen of Income TO CPP -VC CPP = GP CPP - FC CPP = OP CPP - IC CPP - D CPP = NP CPP +/- NG = TP CPP D CPP NG N i1 Liab FA ΔFA D,i FixAss 1,12 ΔLiab 1,12, i FA ΔFA * FixAss * * 1,12,12,6 1,12,12 CPP,i Liab ΔLiab *,12 *,6 1,12,12 1,12

24 CPP Balance Shee FixAss CPP Inv CPP FA CPP Asses CPP FixAss Inv FA CPP CPP CPP K k1 FA N i1 Purch FixAss k * i, *,12 k,12 p Eq CPP Deb CPP Eq Asses CPP Deb CPP CPP Deb -Deb CPP

25 Curren Cos Accouning (CCA) Mainaining he producion level of he company Main focus on replacemen of producion capaciy Money is reained as he uni of measuremen Differen special indexes are applied o differen iems Work inensive

26 The Finnish -mehod A combinaion of he CPP and CCA-mehods Specially developed for firm analysis Calculaions simple Lile exra informaion needed Change in he general price level is described by he Wholesale Price Index WPI Adjusmens are made on a yearly basis The price level a he middle of he accouning period as he base

27 Saemen of Income Adjusmens on Variable Coss Depreciaion Oher iems remain unchanged Adjusmen on variable coss is compued by muliplying he opening invenory value by he relaive change in he index Adjusmen on depreciaion is he difference beween -depreciaion and he depreciaion in he nominal income saemen

28 Saemen of Income TO -VC = GP - FC = OP - IC - D = NP TO VC FC IC D TO WPI VC WPI FC IC N i1 D i, -1 WPI Di, * FixAss WPIp p purchase dae, i asse i * Inv i,p -1 Inv -1 EconLife i

29 Adjusmens o he Balance Shee Asses Financial Asses and Invenories (FIFO) remain unchanged Fixed Asses firs -year The original purchase cos is revaluaed o he price level of he curren year Depreciaion/year is compued according o he economic lifeime of he asse The depreciaions up o he curren year are subraced from he revaluaed purchase cos Fixed Asses afer he firs year The -balance value of he previous year is revaluaed o he curren year New depreciaion is compued based on he remaining economic lifeime

30 Adjusmens o he Balance Shee Equiy and Liabiliies Equiy The accouning resul is replaced by he -resul Liabiliies Liabiliies remain unchanged Inflaion Reserves Correspond o he adjusmens made in he Saemen of Income and he Balance Shee

31 Balance Shee FixAss Inv FA Asses FixAss Inv FA N i1 Inv FA FixAss i,p * WPI WPI p - ( - p 1) * D i, Eq Deb InflRes Eq Deb Eq -1 NP Deb

32 Balance Shee Inflaion Reserves FA Inv FixAss Asses Deb Eq InflRes IflRes InvRes FixAssRes InvRes InvRes -1 FixAssRes (VC - VC ) (Dj -D j) (FixAss -FixAss ) j1

33 A Numerical Example Correcing he annual repors for a company over years using he mehod. A period of high inflaion rae. The Finnish Wholesale Price Index

34 The Finnish Wholesale Price Index and is Relaive Change

35 References Wolk, Harry I., James L. Dodd and John J. Rozycki: Accouning Theory Concepual issues in a poliical and economic environmen, Sage Publicaions, 2008 Yriysukimusneuvoelukuna: Inflaaion huomioon oaminen yriysukimuksessa, Oy Gaudeamus Ab, Helsinki IAS 29 amended for Annual Improvemens o he IFRS sandards 2007