International accounting

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yrkvrrrr15

Business Finance

Description

As more and more companies span the globe in terms of their operating, financing, and investing activities, they will increasingly turn to international financial reporting standards when communicating with domes- tic and non-domestic financial statement readers. What approaches to inflation accounting does IAS 29 sanction when a firm is domiciled or has major operations in a hyperinflationary environment? Why should analysts understand the requirements of this pronouncement?

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Explanation & Answer

With inflation abating in the UK and US and accountants engaging in technical dead-end debates, use of CPI-adjusted numbers was abondoned. Self-evidently, inflation adjustments that apply accounting standard IAS 29 are essential in hyperinflationary environments, in which historic numbers are meaningless. Even then, the adjusted figures have little meaning, since by the time they see the light of day they are already out of touch with reality.

"In most countries, primary financial statements are prepared on the historical cost basis of accounting without regard either to changes in the general level of prices or to increases in specific prices of assets held, except to the extent that property, plant and equipment and investments may be re-valued. Some entities, however, present financial statements that are based on a current cost approach that reflects the effects of changes in the specific prices of assets held."

"Constant Purchasing Power Accounting (CPP) is a consistent method of indexing accounts by means of a general index which reflects changes in the purchasing power of money. It therefore attempts to deal with the inflation problem in the sense in which this is popularly understood, as a decline in the value of the currency. It attempts to deal with this problem by convertingall of the currency unit measurement in accounts into units at a common date by means of the index. The international accounting profession has been in agreement regarding the use of financial capital maintenance in units of CPP during low inflation, high inflation, hyperinflation and deflation since 1989. IAS 29 requires the restatement of Historical Cost or Current Cost period-end financial statements in terms of the period-end monthly published Consumer Price Index during hyperinflation. IAS 29 must be implemented in terms of daily valuation of all non-monetary items in units of CPP and in terms of Daily CPP which would maintain 100% of current period profits constant in real value.IAS 29 thus requires implementation of financial CMUCPP.



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