Methods of Accounting for Changing Prices Two solutions to deal with the distortions caused by historical cost (HC) accounting in a period of changing prices. • General Purchasing Power (GPP) Accounting Updates historical cost accounting for changes in the general purchasing power of the monetary unit. Non-monetary assets and liabilities, stockholders’ equity and income statement items are restated using the General Price Index (GPI). Requires purchasing power gains Example: When the general price level index is 120, $120 in cash can purchase one whole basket of goods and services. One year later, when the general price level index stands at 132 (10% inflation), the same $120 in cash can now purchase only 90,9% of a basket. It now takes $132 to purchase the same amount as at the beginning of the years. The difference between the $132 needed to maintain purchasing power and the $120 in cash actually held results in a $12 purchasing power loss. This can be computed by multiplying the amount of cash at the beginning of the year by the inflation rate of 10% ($120 x 10% = $12). Example: Assume a company expects to receive $120 cash in cash at the end of the current year. If it waits until the cash is received, it will be able to acquire 90,9% of the market basket at that time when the general price level index is 132. Instead, if the company borrows $120 at the beginning of the year and repays that amount with the cash received at the end of the year, it will be able to acquire 100% of the basket at the beginning of the year when the price level is 120. Holding a $120 liability during a period of 10% inflation results in a purchasing power gain of $12 ($120 x 10%). Verspreiden niet toegestaan | Gedownload door Sybe klaas Kappe ([email protected]) lOMoARcPSD|105219
and losses (resulting for monetary assets and liabilities) to be included in net income. • Current Cost (CC) Accounting Updates historical cost of assets to the current cost to replace those assets. Also referred to as Current Replacement Cost (CRC) Accounting. Non-monetary assets are restated to current replacement costs (market costs) and expense items are based on these restated costs. Holding gains and losses are included in equity. Verspreiden niet toegestaan | Gedownload door Sybe klaas Kappe ([email protected]) lOMoARcPSD|105219
Financial Reporting in Hyperinflationary Economies (IAS 29) This applies to the primary financial statements of any company that reports in a currency of a hyperinflation economy. The standard provides a list of characteristics indicative of hyperinflation: 1. The general population keeps its wealth in nonmonetary assets or in a stable foreign currency; receipts of local currency are immediately invested to maintain purchasing power. 2. The general population thinks about prices in terms of a stable foreign currency and prices may actually be quoted in that currency.
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