CHAPTER VI: FINANCIAL REPORTING AND PRICE CHANGES
ASEP SURYADI
20208200
4EB11
1. Financial statements have the potential to mislead during the period of price changes
During a period of inflation, asset values ??go down by the cost of initial acquisition reflects its current value (which is more Cleaner). Diyatakan asset values ??lower yield lower rated load and rated higher profits. From the management point of view, this inaccuracy distorts, (1) financial projections based on historical time data, (2) the budget is the basis of performance measurement, and (3) performance data can not isolate the effect of inflation that can not be controlled. It creates a profit:
a. The increase in the proportion of tax
b. Demand more dividends than shareholders
c. Salaries and demand higher wages than workers
d. Adverse action of the host country
And if the company has distributed its profits then most likely the company can not do the replacement of certain assets has increased the price because they lack resources.
Financial statements are not adjusted to purchasing power will also affect the readers of financial statements in interpreting and comparing the operating performance of the company. If revenues are recorded in accordance with the present value of purchasing power, while the cost of purchasing power are recorded at historical earnings will make measurements inaccurate. Konvensioanal accounting procedures also ignore the purchasing power gains and losses arising from cash holdings during the period of inflation.
2. Inflation accounting terms and understand the effect of price adjustments to financial statements
Inflation is a process of rising prices in general and persistent (continuous) associated with the market mechanism can be caused by various factors, among others, increased consumption or a lack of launch distribution of goods. In other words, inflation is also a process of declining currency value continuously. Inflation is the process of an event, rather than the high-low price levels. That is, the higher the price level that is considered not necessarily indicate inflation. Inflation is assumed to occur if the price increase takes place continuously and mutually interact. Inflation term is also used to mean an increase in money supply which is sometimes seen as the cause of rising prices.
Accounting methods used in the method of determination of inflation = profits. The emphasis is on the determination of the profits return more relevant is illustrated by the financial statements, while the inflation value of all items contained in the financial statements. To prepare financial statements in the period of inflation to be more relevant to use several methods. Prior to that, to first discuss the method of measurement. According to Johnson, the 1977 method of measurement of assets and liabilities can be divided as follows:
1. The entry value of the common price system consisting of:
a. Historical cost
b. General price level
c. Replacement cost
d. Reproduction cost
2. The exit value or current market pricing system that consists of market value:
a. Net realizable value
b. Selling price
c. Expected value
From the point of accounting for inflation, is beyond the historical cost method of preparing the financial statements to conform with the effects of inflation.
GENERAL PRICE LEVEL
In the method for example GPL historical cost method adjusted for changes in price levels during inflation so that the GPL is greater than the value of historical cost.
GPLA advantages are:
a. May explain the effect of inflation on the company.
b. Improve the usefulness of comparative reports between periods.
c. Help users assess the statement of cash flows to be dating ddimasa better.
d. Improve the confidence level of financial statement ratios are calculated from the figures that have been customized financial reports.
The disadvantage is:
a. Inflation was terrjadi on different goods and different companies, so it can not be generalized.
b. GPLA not significant for the company.
c. Figures are not adjusted to describe the cash flow.
d. It is a crude indicator ratios.
CURRENT COST ACCOUNTING
Phillip Edgar Edwards and Bell (1961) is the figure most heavily promoting the concept of this CCA. According to those who needed their managers is how to allocate economic resources that exist to maximize profit.
Edward and Bell have calculated profit business that has two components, namely:
a. Current Operating Profit
b. Realizable Cost Saving (holding gain)
Current operating profit is the excess value of the goods or services sold at a price substantially. While the realizable cost saving is the increase in the cost of an asset is still owned today (with current prices). This is the profit (or loss bias only) that have not direalisasidari an asset whose price rise / fall due to changes in prices, but the goods are not realized, then this is called saving which will be realized.
CURRENT COST forms include:
a. Replacement Cost
Is the value measured at this time to get new assets or replace it with the same production capacity. Depreciation is calculated based on the value of changing it. On the value of the replacement value of inflation is greater than the general price level. This method is widely criticized, but some people think that this method is the easiest method is applied in accounting for inflation.
b. Reproduction Cost
Is another term that is almost equal to the replacement cost. Here the price is measured based on the current price if the asset was created or published as what belongs to it without looking at the technological changes that made it possible affect the assets.
c. Net realizable value
Current market price is the price or the cash obtained if assets are sold now. But the price is based on the principle of liquidation is not the principle of going concern so that violate generally accepted accounting principles.
NRV is the estimated selling price less selling costs. Depreciation is calculated on the difference between the asset's sale price at the beginning than at the end of the period.
d. Selling Price
Values ??used here is the selling price less cost of sales so that no financial statements prepared according to the selling price will be greater than the net realizable value and the other methods mentioned earlier.
e. Expected Value
This method is highly dependent on one's expectations can be larger or smaller than other methods because the expected value is an overview of the present value of cash in the future.
3. Differences in current cost accounting model and the conventional
In general, in conventional accounting, financial statements are presented based on the historical value that assumes that hargaharga (monetary unit) is stable. Conventional accounting does not recognize the changes in general price levels or changes in the level of rates. As a consequence, if there is a change in purchasing power as inflation period, the historical financial statements is economically irrelevant. In this period generally scored higher revenues while fixed assets valued lower. Actually, there are several methods of accounting on the effect of price changes, such as accounting fixed price, current value accounting, and general price level accounting. General price level accounting restatement will hold the components of financial statements into dollars at the same level of purchasing power, but did not change the accounting principles used in accounting based on the value historis.Pada practice, the controversy concerning the relevance of the use of price level accounting public still continues to this day. Some of the arguments that support or reject the application of the general price level accounting will be presented in this article. Similarly, the results of two studies on the effects of application of the general price level accounting on the financial statements will be compared to see whether the accounting adjustments based on the general price level is required.
Historical Cost Financial Statements of Financial Position
1. Amount in the statement of financial position are not expressed in the units of measurement are now at the end of the reporting period, are restated by applying a general price index.
2. Items of monetary restated because they are expressed in monetary units is now at the end of the reporting period. Monetary posts are owned and the money to be received or paid in cash.
3. Assets and liabilities, with the agreement, which is connected with changes in prices such as index linked bonds and loans, adjusted in accordance with the agreement to ensure the balance at the end of the reporting period. The posts are recorded at amounts have been adjusted in the statement of financial position are restated.
4. All assets and other liabilities are nonmonetary. Some noted the number of non-monetary post is now at the end of the reporting period, such as net realizable value and fair value, then the post is not restated. All assets and liabilities to other non-monetary restated.
5. Most of the non-monetary items carried at cost or cost less depreciation. Therefore, these items are stated at the amount present on the date of acquisition. Acquisition cost, or cost less depreciation, which are presented back to each item is determined by applying the change in the general price index from the date of acquisition until the end of the reporting period on a historical cost and accumulated depreciation. For example, fixed assets, inventories of raw materials and merchandise, goodwill, patents, trademarks and similar assets are restated from the date of purchase. Supply of intermediate goods and finished goods are restated from the date of the purchase cost and conversion costs.
6. Detailed record of the date of acquisition of units of fixed assets may not be available or can not be estimated. In rare circumstances, it may be necessary, in the first period to implement this statement, to use an independent professional assessment of the value of such units as the basis for the presentation of the return.
7. General price index may not be available for a period of time restate fixed assets required by this Statement. Under these circumstances, an entity may need to use the basic estimates, for example, the transfer rate between the functional currency and foreign currencies are relatively stable.
8. Some noted the number of non-monetary post is now on a date other than the date of acquisition or date of statement of financial position, for example, fixed assets have been revalued in the previous date. In this case, the carrying amount restated from the date of revaluation.
9. Restated amounts of non-monetary items is reduced, in accordance with relevant GAAP, when the amount exceeds the recoverable amount. For example, the amount of fixed assets, goodwill, patents and trademarks presented again reduced to recoverable amount and restated amount of inventory reduced to net realizable value.
10. Investee is recorded using the equity method may make a report in the currency hyperinflation economy. Statement of financial position and reports comprehensive income of the investee are restated in accordance with this Statement for the investor counting on net assets and profit and loss. When the financial statements of the investee are restated denominated in foreign currencies, the financial statements are translated at the closing exchange rate.
11. Effect of inflation is usually recognized in borrowing costs. It is not appropriate to restate the capital expenditure financed by borrowing and to capitalize the borrowing costs to compensate for inflation over the same period. Part of this borrowing costs are recognized as an expense in the period when the cost occurs.
12. An entity may acquire assets in a deal that allows entities to defer payment without incurring an explicit interest charge. When an entity is not practical to determine the amount of interest, then such assets are restated from the date of payment and not the date of purchase.
13. At the beginning of the first period of application of this, a component of equity, except retained earnings and revaluation surplus, are restated using general price index from the date of the equity component is contributed or appear. Revaluation surplus that arose in previous periods is eliminated. Balance restated earnings from all other amounts in the statement of financial position
14. At the end of the first period and subsequent periods, all components of equity are restated by applying a general price index from the beginning of the period or the date of contribution, if more recent. Shift in owners' equity during the period disclosed in accordance with IAS 1 (revised 2009):
Presentation of Financial Statements. Comprehensive Income Statement
15. This statement requires that all items in comprehensive income statement are expressed in units of measurement are now at the end of the reporting period. Therefore, the entire amount necessary to implement the changes and display it in the general price index from the date income and expenses were initially recorded in the financial statements.
Gain or Loss on Net Monetary Position
16. In an inflationary period, if the entity has a monetary assets exceed monetary liabilities, the entity's purchasing power decreases, and if the entity has a monetary liabilities exceed monetary assets, then the purchasing power is increasing all the entities connected to a price level. Monetary position gain or loss is the difference in net non-monetary assets, and equity items in the comprehensive income statement are restated and the adjustment of index linked assets and liabilities. Gains or losses can be estimated using changes in the general price index to the weighted average over the period of the difference between monetary assets and monetary liabilities.
17. Gains or losses net monetary position is included in the income statement. Adjustments to assets and liabilities linked to price changes in the agreement) in accordance with paragraph 13, with the offsetting gain or loss on net monetary position. Income and other expenses, such as income and interest expense and foreign exchange differences related to investments or loans, are also associated with the net monetary position. Although the post is separately disclosed, it can be helpful if the post is presented along with the gain or loss on net monetary position in the comprehensive income statement.
Now the Cost of Financial Statements Statements of Financial Position
18. Items that are presented at current cost are not restated because they are expressed in units of measurement are now at the end of the reporting period. Elsewhere in the restated statement of financial position in accordance with paragraphs 11 to 24.
Comprehensive Income Statement
19. Comprehensive income statement using the current cost, before restatement, generally reports costs are now at the time of the underlying transactions or events. Therefore, the entire amount is to be presented again in the unit of measurement is now at the end of the reporting period by using a general price index.
Gains or losses Net Monetary Position
20. Gains or losses are recorded net monetary position in accordance with paragraphs 26 and 27. Statement of Cash Flows
21. This statement requires that all items in the cash flow statement are expressed in units of measurement are now at the end of the reporting period.
Related Figures
22. Corresponding number in the previous reporting period, whether based on a historical cost approach or a current cost approach, are restated using general price index, so the comparative financial statements are presented in units of measurement are now at the end of the reporting period. Information disclosed in connection with previous periods is also expressed in units of measurement are now at the end of the reporting period. For the purpose of presenting comparative amounts in the presentation of foreign currency, applied IAS 10 (revised 2010): Effects of Changes in Foreign Exchange Rates paragraph 42 (b) and 43.
Consolidated Financial Statements
23. The parent entity financial reports in the currency hyperinflation economy may have subsidiaries that also make a report in the currency hyperinflation economy. Entity's financial statements are restated the child's needs by using the general price index of the country whose currency is reported prior to inclusion in the consolidated financial statements issued by the parent entity. When a foreign subsidiary is an entity, then the restated financial statements are translated at the closing exchange rate. Entity's financial statements were reported in children who are not hyper-inflation economy currencies are treated according to Foreign Exchange.
24. If financial statements with a different end of the reporting period are consolidated, all monetary and nonmonetary post need to be restated in the unit of measurement is now on the consolidated financial statements.
4. Differences in inflation accounting in the U.S., Britain, and Brazil
Treatment of gains and losses of monetary items is different in each respective country.
a. United States
Re presenting in constant dollars, the balance of the final l awa, and transactions in, all assets and liabilities (including long-term debt gains and losses are disclosed in a separate post.
b. Britain
Separated into monetary working capital adjustment mechanism and the second figure is determined by changes in rates. There the term "current cost of teratribusi earnings to shareholders".
c. Brazil
Not adjust assets and liabilities are aksplisit now because this amount is expressed in realizable value.
5. Financial reporting in hyperinflation economy
FINANCIAL REPORTING IN ECONOMIC hyperinflation Statement of Financial Accounting Standard 63: Financial Reporting in Hyperinflation Economic consists of paragraphs 1-40. The entire paragraph has the power to set the same. Paragraphs which are printed in bold and italics to set the main principles. IAS 63 should be read in the context of goal setting and the Framework of the Preparation and Presentation of Financial Statements. IAS 25 (revised 2009) Accounting Policies, Changes in Accounting Estimates and Errors provides a basis to select and apply accounting policies when no explicit guidance. This statement is not intended to apply to elements that are not material
a. This statement is applicable to the financial statements, including the consolidated financial statements of each entity that functional currency is the currency of an economy experiencing hyperinflation (hereinafter referred to as hyper-inflation economies).
b. In a hyperinflation economy, reporting of operating results and financial position in the local currency without restatement is not useful. Money loses purchasing power such that the ratio of the amounts of transactions and other events from time to time, even within the same accounting period, be misleading.
c. This statement does not set at a certain level of inflation is considered hyperinflation. Consideration is required in determining when restatement of financial statements need to be done in accordance with this statement. Characteristics of the economic environment of a country which is an indication that the country is experiencing hyperinflation, among others: (a) inhabitants prefer to store their wealth in the form of non-monetary assets or in a foreign currency is relatively stable. Amount of local currency held immediately invested to maintain purchasing power; (b) the population consider the monetary amount is not in the local currency but in foreign currencies are relatively stable. The prices may dikuotasikan in foreign currency; (c) the prevailing price in the sales and purchases on credit is determined by inserting a factor expected loss of purchasing power during the credit period, even if the short loan period, (d) interest rates, wages and prices associated with the price index, and (e) the cumulative inflation rate over three years approaches or exceeds 100%.
d. All entities that prepare financial statements in the currency of the same hyper-inflation economies are encouraged to apply this statement from the same date. However, this statement is applied to the financial statements of each entity since the beginning of the reporting period when the entity identifies the existence of hyperinflation in the country whose currency is used by such entities to prepare financial statements.
e. Price change from time to time as a result of political influence, economic, social and general or specific. Specific influences such as changes in supply and demand and technological changes may cause individual prices increase or decrease significantly and independently from one another. In addition, the general effects can cause changes in general price levels and purchasing power of money.
f. Entities that prepare financial statements on the basis of historical cost accounting do so without considering changes in general price level or a specific price increase of a recognized asset or liability. An exception to this principle is applied to the assets and liabilities as required, or elected, to be measured at fair value. For example, fixed assets are revalued at fair value. However, some entities present the financial statements based on current cost approach that reflects the impact of changes in specific prices of assets.
g. Hyperinflation in the economy, financial statements, either prepared on the historical cost approach and cost approach now, it will only work if it is expressed in units of measurement that applies at the end of the reporting period. Therefore, this statement is applied to entities that provide financial statements denominated in hyperinflation economy. Entities are not allowed to present separate financial statements are not restated, although attaching the information required by this Statement.
h. Entity's financial statements that functional currency is the currency hyperinflation economy, based on historical cost approach or a current cost approach, are presented in units of measurement that applies at the end of the reporting period. Corresponding figures for the previous period required by IAS 1 (revised 2009) Presentation of Financial Statements and any information in the previous period are also presented in the unit of measurement is now at the end of the reporting period. For the purpose of presenting comparative amounts in a different presentation currency, applied IAS 10 (revised 2010): Effects of Changes
6. Constant dollar or current cost is better to measure the effects of inflation
Current cost of capital with that of conventional accounting in two major aspects. First, assets are valued based on current cost rather than historical cost. Second, profit is the amount of resources that can be distributed by the Company during the period regardless of konponen taxes), but still able to maintain the productive capacity of the company. One cata to maintain the capital is to adjust the initial net asset position of the company (which uses the exact price index specific or direct pricing) to reflect changes in current cost equivalent assets during the period.
Current cost profit for the amount that can be used by the company without compromising its business operations. Thus, the cost model is now trying menpertahankan physical models or productive capacity of the company. Examples that show the current cost reporting presented by a Swedish manufacturing company:
1. supply items are judged by the end of the last entry method, the first exit and re-presented using the method of replacement cost or manufacturing. Repeated presentation of such does not exceed market value.
2. repeated presentation of cost of goods sold account is assessed based on the restated value of inventories
3. Property and equipment are recorded po-mail based on the cost of acquisition and are presented using the inflation factor derived from the NCPI.
4. Depreciation. This post re-calculated based on the presentation of fixed assets is considered as a basis, the useful life of thought is determined by an independent appraiser.
5. Repeated presentation of shareholders' equity. This account is presented again by using an inflation factor derived from the NCPI, according to the age or date of contribution). Effect of repeated presentation of these financial statements are presented in the consolidation, in each of the accounts that give rise to an increase of this post.
7. Definition of a double dip (double dip) and describes how handling
At the time of her restate estimates beyond horrified to take into account foreign inflation, caution must be maintained to prevent the phenomenon of "double-dip". This problem arises from the fact that the local inflation impact directly on the exchange rate used in the translation process. Although economists generally assume an inverse relationship between a country's internal inflation rate with the external value of its currency, the evidence shows that such relationships are rare, at least in the short term. Therefore the magnitude of adjustments made to eliminate the phenomenon of double counting will vary depending on the level of negative correlation between the difference in inflation rates.
Inflation adjustment to the cost of goods sold and depreciation expense are designed to suppress earnings "as reported" in order not terjadioverstate ment laba.meskipun so, due to the negative relationship between local inflation and currency values, changes in exchange rates between the financial statements of the other sequence, which in general attributable to inflation (at least for a certain period), will lead the company at least partly reflect the impact of inflation (ie the currency translation adjustment), the profits "as dilaporkanya". So to avoid double counting inflation, loss of translation that has been reflected in earnings "as reported" a company should be counted as part of the inflation adjustment.
Over the relevant adjustment for multinational companies based in the U.S. for adopting the dollar as the functional currency of foreign operations berdasarkanFA translate SB 52 and the stock at the exchange rate goes. As for companies based in the European tendency toward the use of foreign exchange translation method runs. So that without it could result in an adjustment of profit is too low or too high profits due to inflation abroad be counted twice.
