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Inflation Adjustment. By R.Sivanesh Email: [email protected] Blog: http://www.sivanesh.com. Introduction:. 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

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Inflation adjustment l.jpg

Inflation Adjustment

By R.Sivanesh

Email: [email protected]

Blog: http://www.sivanesh.com


Introduction l.jpg
Introduction:

  • 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.


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Is Inflation 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


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Limitation of purpose of Financial Statements:

  • 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.


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Accounting for Inflation:

  • 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


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When should we adjust for Inflation

  • 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%


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Method of Adjusting for Inflation:

  • 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.


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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


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Items not requiring Adjustment

  • Monetary items

  • Items linked to price index under an agreement

  • Items carried at fair value


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Other 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


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Gain or Loss on Inflation Adjustment:

  • 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


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Components of Profit or Loss 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


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Disclosure Requirements:

  • 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


By r sivanesh email sivanesh@sivanesh com blog http www sivanesh com l.jpg

By R.Sivanesh

Email: [email protected]

Blog: http://www.sivanesh.com


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