Inflation Accounting
Candlefocus EditorInflation accounting is most frequently used to adjust asset values, liabilities and expenses to current values. The primary objective of inflation accounting is to recognize changes in prices in financial statements so that costs, revenue, and other information is presented in a consistent standardized format. For example, a company may restate past purchases of a product to be more in keeping with current day prices of the same product. This inflation accounting is used to account for the “loss of purchasing power” over time.
U.S. GAAP and IFRS have different approaches when it comes to inflation accounting. Both systems don’t always agree on how to best adjust financial statements, so companies must take measures to ensure accuracy. U.S. GAAP normally includes general price level accounting using historical-cost methods as the base or benchmark. IFRS allows companies to use current-value accounting for non-monetary assets and liabilities and fair-value through profit or loss for non-current assets.
Though inflation accounting is necessary for businesses with operations in certain countries, it can be difficult to undertake and costly. Companies are often required to invest in technology to report their financials accurately. Also, differences between IFRS and U.S. GAAP measures can make it difficult for companies to continue to adhere to both standards. Companies should consult a qualified professional to ensure compliance with best-practice standards and to maximize accuracy.
Overall, inflation accounting is an important tool to help organizations in hyperinflationary business environments accurately restate financials and stay in compliance with relevant standards. It is essential that companies make sure that they are properly adjusting their financial statements to reflect changing values in the market. Inflation accounting can be challenging, but is necessary to maintain accuracy and ensure that financials give a true portrait of a company’s current financial health.