FINANCIAL REPORTING AND PRICE CHANGES
PUTRI AYU PUSPA RENGGANIS
20208970
4EB11
why the financial report has the potential to mislead during the period of price changes
This measurement inaccuracies distort:
financial projections based on historical time series of data
budget is the basis of performance measurement
performance data can not isolate the effect of inflation that can not be controlled
Earnings are valued more in turn will lead to:
- An increase in the proportion of tax
- Request for more dividends of shareholders
- Request for salaries and wages that are higher than the workers
- Adverse action of the host country (such as the taxation of a huge advantage).
A. Effect of inflation on the Company
Inflation affects the financial position and performance of a company, for example, managers can make decisions that are not operating efficiently if he does not understand pegaruh inflation. In regard to the financial position, financial assets will decrease in value during inflation due to reduced purchasing power. Therefore, an alternative system of inflation accounting is introduced, the general purchasing power accounting and current value accounting.
B. Alternative Accounting Measurements
General Purchasing Power (General Accounting Purchasing Power)
General purchasing power accounting includes all systems designed to maintain the real purchasing power of capital owners to accounting for changes in price levels. The main philosophy is to report the assets, liabilities, income and expense in the monetary unit and the same purchasing power. According to the non-financial GPP in the financial statements be reassessed to reflect the purchasing power of a similarity or a common purchasing power generally at the end of the balance sheet date. As for the financial statements of assets and liabilities in the form of liquid assets typically are not adjusted for purchasing power stable in the period December 31, but other assets, revenues and expenses should be adjusted.
Current Value Accounting (Accounting Flows Current Value)
CVA covers all of the system to calculate the present value or change in the current special price includes cost accounting, accounting and the current replacement price accounting exit / selling price accounting. CVA associated with the rise and fall of the value of certain assets is not diminished purchasing power now, are not considered income.
There are two main approaches in the CVA. First, the current cost / replacement cost (replacement cost) is widely used in non-monetary assets valued asset that is what is sacrificed in his place. Second, the current exit price / selling price / net realiable value (Cost of Sales) assess the asset at the selling price less cost of sales complementary. CVA resulted in the holding gains and losses as non-financial asset be reassessed and more complex management.
Current Value: Accounting GPP
GPP and CVA are combined in the real value system.
IASB on Accounting for Changes in Rates and Inflation.
The first thing shown IASC, or now called IASB regarding inflation accounting that emerged in 1977 in IAS 6, accounting responses to changes the price. At that point, there is no definitive standard both in the United States or in England, and there is uncertainty as to how inflation accounting problem can be solved in two states.
More definitive standard of inflation which does not appear, until in 1981 with the release of IAS 15, the Reflection Effect of Change in Price Information, which supersedes IAS 6. At that time, the FASB issued SFAS 33 on Financial Reporting and Changing Prices.
The main types following information reflects the impacts of price changes that are recommended for disclosure by IAS 15 as follows:
The number of adjustments to depreciation adjustments or amount of property, plant and equipment.
The number or amount of adjustment for the adjustment of cost of goods sold.
Adjustment relating to financial items, the impact of borrowing, or ownership interest when the adjustment has been incorporated into account in determining income under the accounting method adopted.
The overall impact of the results or earnings of adjustment as the other items that reflect the impact of price changes are reported under the accounting method adopted.
When the cost method now adopted, the current cost for property, plant and equipment and supplies.
The method adopted to calculate the information referred to in previous posts, including the nature of the index used.
It is important to make IAS 15 IAS 15 to recognize is that information needs to be disclosed, the impact of price changes and inflation, as well as provide specific guidelines to be followed by various companies to improve the quality of disclosure. The fact that the basic information from one country to another can be different, of course this is a problem, but obviously the accounting profession can not be adapted to the solution of the world.
inflation accounting terms and understand the effect of price adjustments to financial statements
The method used in inflation accounting is similar to the method of determination of the profits, the emphasis adalahpada more value relevant earnings are described by the financial statements, Whereas, the inflation value of all items contained in the financial statements. The method of measuring assets and liabilities can be divided as follows:
The entry value of the common price system consisting of:
a. Historical cost;
b. General price level;
c. Replacement cost;
d. Reproduction cost
The exit value or current market pricing system that consists of market value:
a. Net realizable value;
b. Selling price;
c. Expexted value.
General Price Level
The advantages of using the General Price Level Adjustment (GPLA) is as follows:
a. Explain the effect of inflation on the company;
b. Improve the usefulness of comparative reports between periods;
c. Help users assess the statement of cash flows in the future better;
d. Improve the confidence level of financial statement ratios are calculated from the figures that have been customized reports.
In addition to the advantage or the advantage of course, a method also has drawbacks. As for the weaknesses of the GPLA is as follows:
a. Inflation occurs on different goods and different companies;
b. GPLA not significant for the company;
c. Figures are not adjusted to describe the cash flow;
d. The ratio is a crude indicator.
Current Cost Accounting
In this measuring method assumes that what is needed by managers is how they allocate economic resources that exist to maximize profit. Therefore we need answers to three questions:
a. How many assets that must be owned at a specific date
b. How should the form of assets;
c. How the assets financed.
To make decisions about the three questions above, then the managers need to formulate expectations about the future events. Managers often face the problem of whether to retain an asset or debt or sell or pay for it and how to use or fund company. To answer this it is proposed the calculation of profit business that has two components:
a. Current operating profit
Where income in excess of this component is the present value of the goods or services sold at a price substantially.
b. Realizable cost saving (holding gain)
Profit in this component is the increase in the cost of an asset is still owned today.
Current cost five forms, namely:a. Replacement cost
Ie the measured current value to obtain new assets or replace it with the same production capacity. This method has been criticized in terms of:
1. Subjectivity of judgment or estimate of the price
2. In terms of decreasing the price of an asset's decline will lead to the imposition of income is lower than the load on the historical cost;\
3. General price changes are not reflected in the replacement cost method, as it was for certain assets;
4. Difficult to make comparisons between companies that differ from each other.
b. Reproduction Cost
This method is similar to the replacement cost
c. Net realizable value
Which is a method in which the selling price less the costs of sale. NRV during inflation is greater than replacement cost because management may not sell the goods without expecting profit margins general price level. The method of depreciation is calculated based on the difference in sale price of assets at the beginning of the period compared to the end of the period.
d. Selling Price
In this method the values used are the selling price less cost of sales so that no financial statements prepared according to the selling price will be greater than the net value reliazable and other methods.
e. Expected value
This method is highly dependent on the hope that someone can be larger or smaller than the other methods. This is because these values represent the expected present value of cash in the future.
B. Non-Monetary Items Monetary
Monetary items are assets or liabilities assessed or presented in a fixed unit. This value is the historical value and net value reliazable later value will be realized. Because it describes the current value, for this type of assets do not need to be adjusted except to know the present value of expected values collected in the future.
Non-monetary amount is the value at which the money is not determined by contract. Described as a cost rather than the current old.
C. Accounting Model
There are three accounting models are discussed, namely:
Historical cost accounting;
Replacement cost accounting
Net accounting value reliazable
But actually there are eight models of accounting in determining the valuation of assets and earnings, namely:
1. Measurement unit according to money:
a. Historical cost accounting;
b. Replacement cost accounting
c. Net accounting value reliazable
d. Present value accounting
2. Measurements according to purchasing power uniot (General Price Level)
a. Historical cost accounting GPL
b. Replacement cost accounting GPL
c. Net GPL reliazable value accounting
d. Present value accounting GPL.
This difference arises because of the following items:
1. Attributes are considered:
a. Focus judgment can be any of the past (Historical cost), the present (reliazable Net replacement cost and value) and the future (present value);
b. Types of transactions that can be either transaction cost or debt load (historical cost and replacement cost) or asset sales and debt payments (net reliazable value and present value)
c. Nature of the incident in which historical cost was originally based on actual events, based on the present value of expected events, and replacement cost and net reliazable value is based on hypothetical events.
2. Unit of Measure
There are two types of measures are used, as follows:
a. Monetary unit
The measuring unit is the unit of money;
b. The unit's purchasing power
In this model the gauge is the purchasing power of money is certainly different when the time is different.
D. Assessment and Comparison Against the Model Accounting
In assessing and comparing the accounting valuation models, present value models are not included because it has the following disadvantages:
Difficulty of estimating cash receipts in the future.
The selection of the discount rate is highly variable;
Arbitrary allocation of the estimated cash flows in assessing the asset;
Arbitrary allocation and estimated cash flows from each of the individual assets.
On which the assessment is as follows:
1. Timbuk mistakes due to timing issues
Timing error arising as a result of the change in value occurring in a given period, but noted, counted, and reported in another period.
2. Errors due to measuring instruments
Occur if financial statements are not presented with and consider purchasing power of currency
3. Difficulties in the interpretation
The financial statements must be understood with no misunderstanding.
4. Relevance
This means that should be useful for the users, especially for use in decision-making process.
E. Measurement methods Reasonable Price
This method has been in force in accordance with Statement No. America. 157 of the Fair Value Measurement. The reason is due to the issuance of this statement is a fair value measurement method is considered more relevant than other methods.
Concerning the definition of fair value fixed exchange rates or exchange price. With the ever intended The exchange price is the price of a normal transaction between market participants to report transactions involving assets and debt in the most favorable conditions. This Statement emphasizes that fair value is market-based measurement, rather than entity-specific measurement. Therefore it should be determined based on the assumptions market participants in measuring fair value. Statement establishes fair value hierarchy are distinguished, namely:
Assumptions market participants built on market data obtained from sources independent of the reporting entity;
The assumption of an entity that reports about the assumptions market participants built on the best information available in that situation, the intention is to allow for situations where there is little market activity of the assets and liabilities at the date of measurement.
This statement explains that the assumptions market participants, including assumptions about risk. Fair value measurement should include adjustment for risk adjustment. Therefore the measurement does not include risk adjustment does not reflect fair value measurements. Measurement of fair value for certain assets, should consider the effect of the restriction if market participants consider the effect of restrictions in penilaan asset. These guidelines apply to the sale of stock dibatas ended in a one year period is measured based on fair value under FASB Statement No. And No. 115. 124 who explains that the fair value measurement of liabilities for nonperformance risk describes the risk that an obligation is not fulfilled because the nonperformance including credit risk reporting entities reporting entity must consider the effect of credit risk in fair value of liability in all periods in which the liability is measured based on fair value according to applicable accounting standards, including FASB Statement No. 133. FASB Statement approved the need for another statement stating that from a position of a financial instrument, including a block that are actively traded in the market should be measured by the value of products with prices listed from inividu instrument multiplied by the number owned. Prices used to be adjusted for size relative position on the volume of trade. This Statement expands on the needs of broker dealers and investment companies in the scope of the AICPA Audit and Accounting Guides for these companies. This Statement expands disclosures about the use of fair value to measure the size of assets and liabilities of the interim and annual periods following the previous recognition. The guidelines in this statement applies to the measurement instruments and other financial derivates according to fair value.
Expansion of disclosure about fair value to measure assets and liabilities should provide better information for the users of the report on the extent that fair value is used to measure assets and liabilities recognized. The purpose of the changes made by the council is to expand its initiative to simplify and modify the accounting literature and eliminate the differences that add to the complexity in GAAP.The advantage in using this statement is the increased comparability of fair value measurement method and the extent of disclosure of the measurement will continue to be useful.
Statement is effective for financial statements issued in the fiscal year that begins after 15 November 2007, and the period in the fiscal year. The application of this statement should apply prospectively from the beginning of the fiscal year in which this statement was implemented. But there are two exceptions where the application of this statement should be retrospective.The two exceptions are as follows:
a. Financial instruments are measured at fair value are recognized early statements that use the 133 transaction price before the start of the application of this statement;
b. Hybrid financial instruments that have been using the fair value on initial recognition under Statement 133 before starting to apply this statement.
differences in current cost accounting model and the conventional
In general, the conventional accounting, financial statements are presented based on the historical value that assumes that hargaharga (monetary unit) is stable. Conventional accounting does not recognize the changes in general price levels or changes in the level of rates. As a consequence, if there is a change in purchasing power as inflation period, the historical financial statements is economically irrelevant. In this period generally scored higher revenues while fixed assets valued lower. Actually, there are several methods of accounting on the effect of price changes, such as accounting fixed price, current value accounting, and general price level accounting. General price level accounting restatement will hold the components of financial statements into dollars at the same level of purchasing power, but did not change the accounting principles used in accounting based on the value historis.Pada practice, the controversy concerning the relevance of the use of price level accounting public still continues to this day. Some of the arguments that support or reject the application of the general price level accounting will be presented in this article. Similarly, the results of two studies on the effects of application of the general price level accounting on the financial statements will be compared to see whether the accounting adjustments based on the general price level is required.
Historical Cost Financial Statements of Financial Position
Amount in the statement of financial position are not expressed in the units of measurement are now at the end of the reporting period, are restated by applying a general price index.
Items of monetary restated because they are expressed in monetary units is now at the end of the reporting period. Monetary posts are owned and the money to be received or paid in cash.
Assets and liabilities, with the agreement, which is connected with changes in prices such as index linked bonds and loans, adjusted in accordance with the agreement to ensure the balance at the end of the reporting period. The posts are recorded at amounts have been adjusted in the statement of financial position are restated.
All assets and other liabilities are nonmonetary. Some noted the number of non-monetary post is now at the end of the reporting period, such as net realizable value and fair value, then the post is not restated. All assets and liabilities to other non-monetary restated.
Most of the non-monetary items carried at cost or cost less depreciation. Therefore, these items are stated at the amount present on the date of acquisition. Acquisition cost, or cost less depreciation, which are presented back to each item is determined by applying the change in the general price index from the date of acquisition until the end of the reporting period on a historical cost and accumulated depreciation. For example, fixed assets, inventories of raw materials and merchandise, goodwill, patents, trademarks and similar assets are restated from the date of purchase. Supply of intermediate goods and finished goods are restated from the date of the purchase cost and conversion costs.
Detailed record of the date of acquisition of units of fixed assets may not be available or can not be estimated. In rare circumstances, it may be necessary, in the first period to implement this statement, to use an independent professional assessment of the value of such units as the basis for the presentation of the return.
General price index may not be available for a period of time restate fixed assets required by this Statement. Under these circumstances, an entity may need to use the basic estimates, for example, the transfer rate between the functional currency and foreign currencies are relatively stable.
Some noted the number of non-monetary post is now on a date other than the date of acquisition or date of statement of financial position, for example, fixed assets have been revalued in the previous date. In this case, the carrying amount restated from the date of revaluation.
Restated amounts of non-monetary items is reduced, in accordance with relevant GAAP, when the amount exceeds the recoverable amount. For example, the amount of fixed assets, goodwill, patents and trademarks presented again reduced to recoverable amount and restated amount of inventory reduced to net realizable value.
Investee is recorded using the equity method may make a report in the currency hyperinflation economy. Statement of financial position and reports comprehensive income of the investee are restated in accordance with this Statement for the investor counting on net assets and profit and loss. When the financial statements of the investee are restated denominated in foreign currencies, the financial statements are translated at the closing exchange rate.
Effect of inflation is usually recognized in borrowing costs. It is not appropriate to restate the capital expenditure financed by borrowing and to capitalize the borrowing costs to compensate for inflation over the same period. Part of this borrowing costs are recognized as an expense in the period when the cost occurs.
An entity may acquire assets in a deal that allows entities to defer payment without incurring an explicit interest charge. When an entity is not practical to determine the amount of interest, then such assets are restated from the date of payment and not the date of purchase.
At the beginning of the first period of application of this, a component of equity, except retained earnings and revaluation surplus, are restated using general price index from the date of the equity component is contributed or appear. Revaluation surplus that arose in previous periods is eliminated. Balance restated earnings from all other amounts in the statement of financial position
At the end of the first period and subsequent periods, all components of equity are restated by applying a general price index from the beginning of the period or the date of contribution, if more recent. Shift in owners' equity during the period disclosed in accordance with IAS 1 (revised 2009):
Presentation of Financial Statements. Comprehensive Income Statement
This statement requires that all items in comprehensive income statement are expressed in units of measurement are now at the end of the reporting period. Therefore, the entire amount necessary to implement the changes and display it in the general price index from the date income and expenses were initially recorded in the financial statements.
Gain or Loss on Net Monetary Position
In an inflationary period, if the entity has a monetary assets exceed monetary liabilities, the entity's purchasing power decreases, and if the entity has a monetary liabilities exceed monetary assets, then the purchasing power is increasing all the entities connected to a price level. Monetary position gain or loss is the difference in net non-monetary assets, and equity items in the comprehensive income statement are restated and the adjustment of index linked assets and liabilities. Gains or losses can be estimated using changes in the general price index to the weighted average over the period of the difference between monetary assets and monetary liabilities.
Gains or losses net monetary position is included in the income statement. Adjustments to assets and liabilities linked to price changes in the agreement) in accordance with paragraph 13, with the offsetting gain or loss on net monetary position. Income and other expenses, such as income and interest expense and foreign exchange differences related to investments or loans, are also associated with the net monetary position. Although the post is separately disclosed, it can be helpful if the post is presented along with the gain or loss on net monetary position in the comprehensive income statement.
Now the Cost of Financial Statements Statements of Financial Position
Items that are presented at current cost are not restated because they are expressed in units of measurement are now at the end of the reporting period. Elsewhere in the restated statement of financial position in accordance with paragraphs 11 to 24.
Comprehensive Income Statement
Gains or losses Net Monetary Position
Gains or losses are recorded net monetary position in accordance with paragraphs 26 and 27. Statement of Cash Flows
This statement requires that all items in the cash flow statement are expressed in units of measurement are now at the end of the reporting period.
19. Comprehensive income statement using the current cost, before restatement, generally reports costs are now at the time of the underlying transactions or events. Therefore, the entire amount is to be presented again in the unit of measurement is now at the end of the reporting period by using a general price index.
Related Figures
Corresponding number in the previous reporting period, whether based on a historical cost approach or a current cost approach, are restated using general price index, so the comparative financial statements are presented in units of measurement are now at the end of the reporting period. Information disclosed in connection with previous periods is also expressed in units of measurement are now at the end of the reporting period. For the purpose of presenting comparative amounts in the presentation of foreign currency, applied IAS 10 (revised 2010): Effects of Changes in Foreign Exchange Rates paragraph 42 (b) and 43.
Consolidated Financial Statements
The parent entity financial reports in the currency hyperinflation economy may have subsidiaries that also make a report in the currency hyperinflation economy. Entity's financial statements are restated the child's needs by using the general price index of the country whose currency is reported prior to inclusion in the consolidated financial statements issued by the parent entity. When a foreign subsidiary is an entity, then the restated financial statements are translated at the closing exchange rate. Entity's financial statements were reported in children who are not hyper-inflation economy currencies are treated according to Foreign Exchange.
If financial statements with a different end of the reporting period are consolidated, all monetary and nonmonetary post need to be restated in the unit of measurement is now on the consolidated financial statements.
differences in inflation accounting in the U.S., Britain, and Brazil
In the U.S., the advantages and disadvantages of monetary items are determined by me restate, in constant dollars, from the beginning and ending balances, or transactions in, all assets and liabilities (including long-term debt). The results are intended to provide a useful basis for assessing the performance of companies in maintaining the general purchasing power of investors (FAS No. 89, paragraphs 65-66). Gains or losses are not included in profit but are disclosed in a separate stand-alone item. This treatment implies that the FASB looked at the advantages and disadvantages in the IEM-monetary item is different in nature with other spiders.
In the UK, gains and losses on monetary items are separated into monetary working capital adjustment and geraing. The second number is associated with the following changes in the price level is given (SSAP NO. 16 paragraphs 11-13) / when sales on credit, working capital tied sebebnarnya company (in a sense, corporate finance financial changes in the replacement cost of inventory) to accounts receivable associated billed. Conversely, when stocks and other supplies purchased on credit, the specific price changes related to these items are basically financed by the supplier during the crediting period. So that the working capital of the buyers are free to use for other purposes. Because these phenomena are the same and is seen as an extension of adjusting the running costs of sales to generate operating profit has been adjusted.
In Brazil, do not adjust the current assets and current liabilities are explicitly because the amounts are expressed in the running. Adjustments arising from calculating the net value of assets and capital that have been permanently adjusted to price levels represent a gain or loss in the general purchasing power of working capital financing with debt or equity. Adjustment of permanent assets in excess of capital adjustment to reflect the portion of assets financed with debt permanently, resulting in a gain purchasing power. Instead, the adjustment of capital assets is greater than the permanent adjustment shows the portion of working capital financed by capital. For the capital portion is recognized the loss of purchasing power during inflationary periods.
financial reporting in hyperinflation economy
FINANCIAL REPORTING IN ECONOMIC hyperinflation Statement of Financial Accounting Standard 63: Financial Reporting in Hyperinflation Economic consists of paragraphs 1-40. The entire paragraph has the power to set the same. Paragraphs which are printed in bold and italics to set the main principles. IAS 63 should be read in the context of goal setting and the Framework of the Preparation and Presentation of Financial Statements. IAS 25 (revised 2009) Accounting Policies, Changes in Accounting Estimates and Errors provides a basis to select and apply accounting policies when no explicit guidance. This statement is not intended to apply to elements that are not material
This statement is applicable to the financial statements, including the consolidated financial statements of each entity that functional currency is the currency of an economy experiencing hyperinflation (hereinafter referred to as hyper-inflation economies).
Hyperinflation in the economy, reporting of operating results and financial position in the local currency without restatement is not useful. Money loses purchasing power such that the ratio of the amounts of transactions and other events from time to time, even within the same accounting period, be misleading.
This statement does not set at a certain level of inflation is considered hyperinflation. Consideration is required in determining when restatement of financial statements need to be done in accordance with this statement. Characteristics of the economic environment of a country which is an indication that the country is experiencing hyperinflation, among others: (a) inhabitants prefer to store their wealth in the form of non-monetary assets or in a foreign currency is relatively stable. Amount of local currency held immediately invested to maintain purchasing power; (b) the population consider the monetary amount is not in the local currency but in foreign currencies are relatively stable. The prices may dikuotasikan in foreign currency; (c) the prevailing price in the sales and purchases on credit is determined by inserting a factor expected loss of purchasing power during the credit period, even if the short loan period, (d) interest rates, wages and prices associated with the price index, and (e) the cumulative inflation rate over three years approaches or exceeds 100%.
All entities that prepare financial statements in the currency of the same hyper-inflation economies are encouraged to apply this statement from the same date. However, this statement is applied to the financial statements of each entity since the beginning of the reporting period when the entity identifies the existence of hyperinflation in the country whose currency is used by such entities to prepare financial statements.
Price change from time to time as a result of political influence, economic, social and general or specific. Specific influences such as changes in supply and demand and technological changes may cause individual prices increase or decrease significantly and independently from one another. In addition, the general effects can cause changes in general price levels and purchasing power of money.
Entities that prepare financial statements on the basis of historical cost accounting do so without considering changes in general price level or a specific price increase of a recognized asset or liability. An exception to this principle is applied to the assets and liabilities as required, or elected, to be measured at fair value. For example, fixed assets are revalued at fair value. However, some entities present the financial statements based on current cost approach that reflects the impact of changes in specific prices of assets.
Hyperinflation in the economy, financial statements, either prepared on the historical cost approach and cost approach now, it will only work if it is expressed in units of measurement that applies at the end of the reporting period. Therefore, this statement is applied to entities that provide financial statements denominated in hyperinflation economy. Entities are not allowed to present separate financial statements are not restated, although attaching the information required by this Statement.
Entity's financial statements that functional currency is the currency hyperinflation economy, based on historical cost approach or a current cost approach, are presented in units of measurement that applies at the end of the reporting period. Corresponding figures for the previous period required by IAS 1 (revised 2009) Presentation of Financial Statements and any information in the previous period are also presented in the unit of measurement is now at the end of the reporting period. For the purpose of presenting comparative amounts in a different presentation currency, applied IAS 10 (revised 2010): Effects of Changes
whether the constant dollar or current cost is better to measure the effects of inflation
Changes the definition of price
Typically occurs when the price changes in the average price of all goods and services in an economy subject to change. Monetary units gain or a loss of purchasing power. Price increases are collectively known as inflation. While the price reductions referred to as deplasi.
Specific price changes refers to changes in the price of goods or services which are caused by changes in demand and supply.
Why have the potential for misleading financial statements during the period of price changes?
During periods of inflation, asset values go down by the cost of initial acquisition reflects its current value (which is more Cleaner). Diyatakan asset values lower yield lower rated load and rated higher profits. From the management point of view, this inaccuracy distorts, (1) financial projections based on historical time data, (2) the budget is the basis of performance measurement, and (3) performance data can not isolate the effect of inflation that can not be controlled. It creates a profit:
* An increase in the proportion of tax
* Request for more dividends of shareholders
* Request for salaries and wages that are higher than the workers
* Actions that harm from the host country
And if the company has distributed its profits then most likely the company can not do the replacement of certain assets has increased the price because they lack resources.
Financial statements are not adjusted to purchasing power will also affect the readers of financial statements in interpreting and comparing the operating performance of the company. If revenues are recorded in accordance with the present value of purchasing power, while the cost of purchasing power are recorded at historical earnings will make measurements inaccurate. Konvensioanal accounting procedures also ignore the purchasing power gains and losses arising from cash holdings during the period of inflation.
Types of inflation adjustment
Statistical series that measure changes in both general and specific price rates generally do not move in parallel. Any type of price changes have different effects on measures of financial position and operating performance of a company and caused by the presence of different-sized ukuan hidden.
General price level adjustment
Currency amount to be adjusted to changes in the general price level (referred to as purchasing power constant currency historical cost or equivalent general purchasing power). Amount of currency that have not been adjusted in such a manner is referred to as the nominal amount.
Object of the general price level adjustment
Now look again briefly the conventional terms of profit. Traditionally, profit (ie wealth that can be used) is part of the company's assets (ie net assets) that can be withdrawn by the company during the accounting period without reducing the wealth to be under the starting position.
Thus, the conventional accounting measure of profit as the maximum amount that can be drawn from the company without reducing the amount of money into capital initially. Capital cost of constant purchasing power historical considers this difference by measuring the difference in earnings that the company is able to pay all its earnings as dividends while the purchasing power at the end of the period equal to the initial period.
Adjustment costs
Current cost of capital with that of conventional accounting in two major aspects. First, assets are valued based on current cost rather than historical cost. Second, profit is the amount of resources that can be distributed by the Company during the period regardless of konponen taxes), but still able to maintain the productive capacity of the company. One cata to maintain the capital is to adjust the initial net asset position of the company (which uses the exact price index specific or direct pricing) to reflect changes in current cost equivalent assets during the period.
Current cost profit for the amount that can be used by the company without compromising its business operations. Thus, the cost model is now trying menpertahankan physical models or productive capacity of the company. Examples that show the current cost reporting presented by a Swedish manufacturing company:
supply items are judged by the end of the last entry method, the first exit and re-presented using the method of replacement cost or manufacturing. Repeated presentation of such does not exceed market value.
repeated presentation of cost of goods sold account is assessed based on the restated value of inventories
Property and equipment are recorded po-mail based on the cost of acquisition and are presented using the inflation factor derived from the NCPI.
Depreciation. This post re-calculated based on the presentation of fixed assets is considered as a basis, the useful life of thought is determined by an independent appraiser.
Repeated presentation of shareholders' equity. This account is presented again by using an inflation factor derived from the NCPI, according to the age or date of contribution). Effect of repeated presentation of these financial statements are presented in the consolidation, in each of the accounts that give rise to an increase of this post.
Which method is best
Proponents of historical cost model constantly argued that the cost model is now considered the cost of the historical cost karane not based on acquisition cost initially and the model is based on the estimated cost of the hypothesis and therefore too difficult sebyektif and implemented in practice. Ignoring changes in general purchasing power of the money market, causing inter-period comparisons difficult to interpret and did not consider keunatungan and losses from holdings of monetary items such as debt.
Model of constant purchasing power of current cost buy cost model combines the characteristics of historical cost in cash and current cost models. The basic framework of the mixture increases recognize the present value of assets as a gain of wealth, and thus allow for comparisons between income earnings now prior periods. Diangggap company would be better only if the asset increases greater than inflation.
Definition of a double dip (double dip) and explains how to handle.
At the time of her restate estimates beyond horrified to take into account foreign inflation, caution must be maintained to prevent the phenomenon of "double-dip". This problem arises from the fact that the local inflation impact directly on the exchange rate used in the translation process. Although economists generally assume an inverse relationship between a country's internal inflation rate with the external value of its currency, the evidence shows that such relationships are rare, at least in the short term. Therefore the magnitude of adjustments made to eliminate the phenomenon of double counting will vary depending on the level of negative correlation between the difference in inflation rates.
Inflation adjustment to the cost of goods sold and depreciation expense are designed to suppress earnings "as reported" in order not so, due to the negative relationship between local inflation and currency values, changes in exchange rates between the financial statements of the other sequence, which in general attributable to inflation (at least for a certain period), will lead the company at least partly reflect the impact of inflation (ie the currency translation adjustment), the profits. So to avoid double counting inflation, loss of translation that has been reflected in earnings "as reported" a company should be counted as part of the inflation adjustment.
Over the relevant adjustment for multinational companies based in the U.S. for adopting the dollar as the functional currency of foreign operations FA translate SB 52 and the stock at the exchange rate goes. As for companies based in the European tendency toward the use of foreign exchange translation method runs. So that without it could result in an adjustment of profit is too low or too high profits due to inflation abroad be counted twice.
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