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I NFLATION A DJUSTMENT By R.Sivanesh Blog:

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1 I NFLATION A DJUSTMENT By R.Sivanesh Blog:

2 I NTRODUCTION : Inflation is considered to be a rise in the general level of prices of goods and services in an economy over a period of time. Inflation and Monetary unit / Currency are inseparable Inflation is a depreciation in the purchasing power of any given currency As inflation increases, money buys less and less goods and services.

3 I S I NFLATION ALWAYS HARMFUL ? Inflation though is a measure of price rise is not always harmful. Inflations is not only unavoidable but also essential. Economists favour a low but steady rate of inflation. Inflation is very harmful when income levels don’t increase with Inflation

4 L IMITATION OF PURPOSE OF F INANCIAL S TATEMENTS : Basic purpose of Financial Statements of any entity is to portray true and fair view of the operations and affairs of the entity. Purpose not solved where the reporting currency is subject to hyperinflation.

5 A CCOUNTING FOR I NFLATION : No Standard to account for inflation in India IAS 29 Financial Reporting in Hyperinflationary Economies ICAI has brought out Exposure Draft of AS- 34 which deals with this aspect Inflation Accounting is Mandatory and not supplementary to regular accounting

6 W HEN SHOULD WE ADJUST FOR I NFLATION When people prefer to keep their wealth in non- monetary assets or in a relatively stable foreign currency. When start to transact not in terms of the local currency but in terms of a relatively stable foreign currency. When credit sales and purchases take place at prices that compensate for the expected loss of purchasing power When the interest rates, wages and prices are linked to a price index ; and When the cumulative inflation rate over three years is approaching, or exceeds 100%

7 M ETHOD OF A DJUSTING FOR I NFLATION : IAS 29 recognises the restatement approach for inflation adjustment. the financial statements are required to be restated in terms of the measuring unit current at the end of the reporting period.

8 MEASURING UNIT CURRENT Measuring unit current means the adjusted value of the reporting currency using a price index (PI). E.g. purchase value of asset = ` 1,00,000/- PI on date of purchase = 250. PI on reporting date = 350. Value of asset as per measuring unit current = 1,00,000 X 350 = ` 1,40,000/- 250

9 I TEMS NOT REQUIRING A DJUSTMENT Monetary items Items linked to price index under an agreement Items carried at fair value

10 O THER NON - MONETARY ITEMS : To be adjusted using change in price index during initial recording and at the reporting date If a price index not available, a rough estimate of a probable price index may be considered. Revalued items should be adjusted from date of revaluation Inflation Adjusted amount should not exceed Net Realisable Value

11 G AIN OR L OSS ON I NFLATION A DJUSTMENT : If entity has more non-monetary assets there will a net loss. If there are more liabilities there will be net gain. The net gain or loss arising from the restatement of non-monetary items need to be charged to the statement of Profit or Loss. When the currency ceases to be hyperinflationary, the inflation adjusted carrying amounts need to be carried forward thereafter. Historical figures should not be reverted one again

12 C OMPONENTS OF P ROFIT OR L OSS A/ C : All items of profit and loss also need to be adjusted Change in price index from date of initial recording and the reporting date need to be considered

13 D ISCLOSURE R EQUIREMENTS : The fact that the financial statements and the corresponding figures have been adjusted for inflation The identity and level of the price index at the end of the reporting period and the movement in the index during the current and the previous reporting period. To be given in Noted to Accounts

14 By R.Sivanesh Blog:


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