Chapter 9 - BACC7117, Fall 2011-10-23 Murtuza CHAPTER 9...

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BACC7117, Fall 2011-10-23 Murtuza CHAPTER 9 ADDITIONAL FINANCIAL REPORTING ISSUES Chapter Outline I. In addition to issues involving the accounting for foreign currency, three financial reporting issues of international importance are: (a) accounting for changing prices (inflation accounting), (b) accounting for business combinations and consolidated financial statements, and (c) segment reporting. II. Historical cost accounting in a period of inflation understates asset values (and related expenses) and overstates income. Historical cost accounting also ignores the gains and losses in purchasing power caused by inflation that arise from holding monetary assets and liabilities. III. Two methods of accounting for inflation have been used in different countries – general purchasing power (GPP) accounting and current cost (CC) accounting. A. Under GPP accounting, nonmonetary assets and stockholders’ equity accounts are restated for changes in the general price level. Cost of goods sold and depreciation/amortization are based on restated asset values and the net purchasing power gain/loss on the net monetary liability/asset position is included in income. GPP income is the amount that can be paid as a dividend while maintaining the purchasing power of capital. B. Under CC accounting, nonmonetary assets are revalued to current cost, and cost of goods sold and depreciation/amortization are based on revalued amounts. CC income is the amount that can be paid as a dividend while maintaining physical capital. IV. IAS 29 requires the use of GPP accounting by firms that report in the currency of a hyperinflationary economy. IAS 21 requires the financial statements of a foreign operation located in a hyperinflationary economy to first be adjusted for inflation in accordance with IAS 29 before translation into the parent company’s reporting currency. V.
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This note was uploaded on 03/21/2012 for the course BACC 102 taught by Professor A during the Spring '11 term at Andhra University.

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Chapter 9 - BACC7117, Fall 2011-10-23 Murtuza CHAPTER 9...

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