FINANCIAL REPORTING AND PRICE CHANGES
DEFINITION OF PRICE CHANGES:
There are two terms in the price changes that must be understood as follows:
(1) the general price changes occur when the average price of all goods and services in an economy subject to change. Monetary units gain or a loss of purchasing power. Price increases are collectively known as inflation (inflation), while the price declines known as deflation (deflation).
(2) the specific price changes refers to changes in the price of goods or services which are caused by changes in demand and supply. So the rate of inflation per year in one country may range from about 5%, while the price of one unit with one bedroom apartments may be increased by 50% over the same period.
Why Has Potential Financial Statements For the Period Price Changes Over Misleading?
During periods of inflation, asset values are recorded at acquisition cost less initially reflect its current value (the higher). Values of the assets yield lower assessed expenses lower and profits are valued more highly.
From the management point of view, this inaccuracy distorts:
(1) financial projections didsarkan on historical time series of data
(2) the budget is the basis for performance measurement
(3) performance data can not isolate the effect of inflation that can not be controlled.
It creates a profit:
• An increase in the proportion of tax
• Request for more dividends of shareholders
• Request and pay higher wages than workers
• Actions that harm the host country (such as taxation of profits is very large)
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 due to lack of resources.
Financial statements are not adjusted to purchasing power will also affect the reader in interpreting the report and compare the performance of the company oprerasi. 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. Conventional accounting procedures also ignore the purchasing power gains and losses arising from the ownership of cash (or equivalent) during the period of inflation.
Explicit recognition of the effects of inflation needs to be done because:
1. The effect of price changes in part depend on the transaction and the circumstances facing the company. The user does not have complete information on these factors.
2. Manage the problems caused by price changes depend on an accurate pamahaman over the issue. Requires an accurate understanding of business performance reported in conditions that take into account the effect of price changes.
3. Reports from the manager about the problems caused by price changes labih easy to believe when businesses publish financial information that addresses these problems.
Inflation Adjustment Types
Statistical series that measure changes in both general and specific price rates generally do not move in parallel. Any type of price changes have different effects on measures of financial position and operating performance of a company and caused by the different goals that are hidden.
General Price Level Adjustment
Currency amount to be adjusted to changes in the general price level constant currency historical cost or equivalent general purchasing power. Amount of currency that has not been adjusted in such a manner is referred to as the nominal amount. For example, during periods of rising prices, long-lived assets reported in the balance sheet at acquisition cost initially expressed in nominal currency. If historical cost is allocated to the present period profit, revenue, which reflects the purchasing power now, matched with a cost that reflects the purchasing power (higher) than the previous period when the asset is purchased.
Inflation is a worldwide phenomenon that occurs in many developing countries, but trends in developed countries to adopt “inflation accounting” to correct the deviation from the conventional historical cost accounting that incorporates elements of price changes and inflation on income and assets.
A. Effect of inflation on the Company
Inflation affects the financial position and performance of a company, for example, managers can make decisions that are not operating efficiently if he does not understand pegaruh inflation. In regard to the financial position, financial assets will decrease in value during inflation due to reduced purchasing power. Therefore, an alternative system of inflation accounting is introduced, the general purchasing power accounting and current value accounting.
B. Alternative Accounting Measurements
1. General Purchasing Power (General Accounting Purchasing Power)
General purchasing power accounting includes all systems designed to maintain the real purchasing power of capital owners to accounting for changes in price levels. The main philosophy is to report the assets, liabilities, income and expense in the monetary unit and the same purchasing power. According to the non-financial GPP in the financial statements be reassessed to reflect the purchasing power of a similarity or a common purchasing power generally at the end of the balance sheet date. As for the financial statements of assets and liabilities in the form of liquid assets typically are not adjusted for purchasing power stable in the period December 31, but other assets, revenues and expenses should be adjusted.
2. Current Value Accounting (Accounting Flows Current Value)
CVA covers all of the system to calculate the present value or change in the current special price includes cost accounting, accounting and the current replacement price accounting exit / selling price accounting. CVA associated with the rise and fall of the value of certain assets is not diminished purchasing power now, are not considered income.
There are two main approaches in the CVA. First, the current cost / replacement cost (replacement cost) is widely used in non-monetary assets valued asset that is what is sacrificed in his place. Second, the current exit price / selling price / net realiable value (Cost of Sales) assess the asset at the selling price less cost of sales complementary. CVA resulted in the holding gains and losses as non-financial asset be reassessed and more complex management.
3. Current Value: Accounting GPP
GPP and CVA are combined in the real value system.
C. IASB on Accounting for Changes in Rates and Inflation.
The first thing shown IASC, or now called IASB regarding inflation accounting that emerged in 1977 in IAS 6, accounting responses to changes the price. At that point, there is no definitive standard both in the United States or in England, and there is uncertainty as to how inflation accounting problem can be solved in two states.
More definitive standard of inflation which does not appear, until in 1981 with the release of IAS 15, the Reflection Effect of Change in Price Information, which supersedes IAS 6. At that time, the FASB issued SFAS 33 on Financial Reporting and Changing Prices.
The main types following information reflects the impacts of price changes that are recommended for disclosure by IAS 15 as follows:
1) The number of adjustments to depreciation adjustments or amount of property, plant and equipment.
2) The number or amount of adjustment for the adjustment of cost of goods sold.
3) Adjustment relating to financial items, the impact of borrowing, or ownership interest when the adjustment has been incorporated into account in determining income under the accounting method adopted.
4) The overall impact of the results or earnings of adjustment as the other items that reflect the impact of price changes are reported under the accounting method adopted.
5) When the cost method now adopted, the current cost for property, plant and equipment and supplies.
6) The method adopted to calculate the information referred to in previous posts, including the nature of the index used.
It is important to make IAS 15 IAS 15 to recognize is that information needs to be disclosed, the impact of price changes and inflation, as well as provide specific guidelines to be followed by various companies to improve the quality of disclosure. The fact that the basic information from one country to another can be different, of course this is a problem, but obviously the accounting profession can not be adapted to the solution of the world.
D. Accounting Systems for the development of inflation in Britain, the United States and Continental Europe
Accounting profession introduced SSAP 16 (Statement of Standard Accounting Practice – 16), “Accounting for Costs Now” in 1980, which needs the financial statements present the cost accounting as well as additional reports and the main report. Provided that the historical cost reports must be provided. However, SSAP 16 was officially withdrawn in 1988 following the rejection rate of inflation and criticism of the business. At the same time, many companies to reevaluate periodically the land and buildings at their market value (estimated output or sales price).
2. United States
Regulations were first introduced to the legal prescribed by the SEC in 1976 (Accounting Series Release 1990) to reveal information replacement costs associated with depreciation, cost of goods sold, fixed assets and inventory. Furthermore, in 1979, the FASB issued SFAS No. 33 (Statement of Financial Accounting Standard – 33), entitled “Financial Reporting and Changing Prices”.
3. Continental Europe
There is less enthusiasm for the introduction of accounting system for inflation, despite the official recommendations on the subject, for example, in France and Germany. In France in late 1970 when the re-evaluation is done using the government indexes are needed for all long-term assets and fixed assets. This re-evaluation has no impact on taxable income, such as the additional depreciation. In Sweden, there are no needs for accounting for inflation, but some special voluntary disclosure has been made.
E. Development of accounting systems in South America
In Brazil, accounting for inflation used in the early 1950s, but the new corporate law in 1976 to make adjustments, the company presents a re-account – an account of fixed assets and shareholders’ equity by using a price index which is recognized by the government to measure the local currency devaluation.
In Argentina, accounting for inflation was introduced primarily through the initiative and the involvement of the accounting profession. 1972, issued a statement that recommends the publication of financial statements Additional GPP.
F. Current Value Accounting (Accounting Present Value) in the Netherlands
In the Netherlands, people have been aware of the current accounting value (current value accounting) since long. Extensive education for accountants in business economics generate accounting philosophy that is focused to the value and costs now and with the principles and practices of business economics. Even though it is not necessary to use the accounting requirements of the current value (current value accounting), as primary or supplementary information, However there are several contributing factors to use.
There are two reasons why the focus on the Netherlands, although there is no requirement for current expenses or accounting GPP are:
1. Professor Theodore Limperg involving theory, which is often referred to as the father of the theory of exchange value because of the pioneering work in the Netherlands in 1920 and 1930. He focused on the strong relationship between economics and accounting, and trust that can not be searched without a revenue source to maintain the business income of a business continuity or continuous angle. Therefore, income is a function of income and the replacement value rather than historical cost. In addition, the Limperg maintain that the current information will be used by all management decision-makers as a shareholder.
2. Netherlands to learn from experience in large multinational companies, namely Philips, which was the forerunner of the financial statements present value. In fact, Philips first time using this approach in 1936 for the purpose of internal cost accounting in 1952 and introduced it into the main report for financial reporting purposes. But in 1992, the company decided to return to historical cost accounting and will improve communications to shareholders, with a simple accounting system and procedures used, and closer to international accounting practices.
Even so, Philips is an interesting and valuable examples of practical applications in current value accounting. In the financial statements present value, using a Philips replacement value now along with the correlation process to reflect the degree to which there are additional advantages of financial assets from loans rather than equity capital. Under the accounting system of the present value, be it a trial balance and income statement be adjusted in certain circumstances lower business value (or values that can be achieved) is taken as the present value. For stock, the default value is determined at the beginning of the year. For changes in prices, the index developed by the purchase of assets for which a homogenous group and applied to the standard cost to produce a present value. Index-index prepared by three months or two months in a situation where inflation is more extreme.
Present values are determined by the purchasing department for machining of fixed assets by department for the design specifications for specialized equipment, and the design of buildings and machinery for the building department bangunan.Pada inventory case, the index is typically used to update the current value of a group of similar assets. The addition (or subtraction) in value of inventories and fixed assets for a given price change is credited (debited) to the revaluation surplus account on the balance sheet compared to the income statement. Due to changes in current value is shown in the income statement as cost of goods sold is higher or lower (as a result of the addition or reduction in stock prices) and higher depreciation costs or lower.
As shown Brink (1992), Philips tends to several years to implement the replacement value accounting in a way that is far from conservative and design to enhance profits. Treatment on the reduction of inventories and the value of the correlation process in countries experiencing hyperinflation, as a particularly controversial example is quite separate from the accounting policy relating to foreign currency, goodwill and intangible assets in common.
G. Problems and Prospects
Existence of a significant level of inflation and price changes in many countries affect the need and usefulness of inflation accounting system that may remain will be the subject of much controversy in predicting the future.
Although the General Purchasing Power accounting (general purchasing power) has been used in several Latin American countries that berinflasi high, there are no examples of current cost accounting standards or regulations in the United Kingdom and the United States at the national level of the survivors of inflation accounting in mid-1989. Even so, some European companies to make voluntary disclosure of current value.
Controversy, it is still surrounds many aspects of current cost accounting, particularly with changes in the acquisition and maintenance of equipment and items of monetary damages. Other problems include the use of indexes, in particular additional abroad, and verification costs are now experiencing industrial companies with rapid technological change.
Provide a new interest in the Current Value Accounting or fair, it is expected there will be some further experiments on the variation of the type of accounting system changes in the price. And there is also the growth of the environmental assessment of alternative approaches which may or may not be done in the measurement of income and assets. Usefulness of the output or the selling price in the context of price changes, particularly with the value or property and investment, can also be assessed better. And there are also opportunities to use relevant information sources such as the cash flow.
Sumber : pksm.mercubuana.ac.id