Currency exchange rate fluctuations and changes in the price of money for goods and services is a characteristic inherent in international business. To understand the notion of price changes (changing prices), we must distinguish between the general price movements and specific price movements, which are both included in the terms of the price changes. A general price changes occur when the average price of all goods and services in an economy subject to change. Price increases are collectively known as inflation (inflation), while the price declines known as deflation (deflation).
According to John F. Boschen and Charles L. Weise in the Journal of Money, Credit, and Banking (June 2003) The evidence shows that monetary and fiscal policies designed to achieve the aggressive targets of high economic growth, excessive spending due to national elections, and the effect of international inflation is an explanation for the cause of inflation. However, the problem is not that simple. Specific price changes refers to changes in the price of goods or services which are caused by changes in demand and supply. Political and social destruction caused by a series of hyper-inflation period (when the inflation rate increased by more than 50% each month) are well documented and this explains why a stable price level becomes a national priority for many countries in the world, businesses are also feeling the effects of inflation on factor prices as production increases. Although the price changes occur throughout the world, the influence of business and financial reporting varies from one country to another.
II. FINANCIAL STATEMENTS HAVE THE POTENTIAL FOR MISLEADING PRICES DURING THE PERIOD OF CHANGE
During periods of inflation, asset values are carried at acquisition cost less initially reflect its current value (the higher). This distorts the measurement inaccuracies (1) financial projections based on historical time series of 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. Earnings are valued more in turn will lead to:
1. The increase in the proportion of tax
2. Demand more dividends than shareholders
3. Salaries and demand higher wages than workers
4. Adverse action of the host country (such as the taxation of a huge advantage).
Failure to adjust the company’s financial data to changes in the monetary unit’s purchasing power also creates difficulties for the reader to interpret financial statements and compare the operating performance of companies that reported. In periods of inflation, revenues are generally denominated in the general purchasing power is lower (ie the purchasing power of the present period), which is then applied against the related expenses. Conventional accounting procedures also ignore the purchasing power gains and losses arising from the ownership of cash (equivalent) during the period of inflation.
Therefore, to explicitly recognize the effect of inflation is useful to do because:
1. The effect of price changes in part depend on the transaction and the circumstances facing the company.
2. Manage the problems caused by price changes depend on an accurate understanding of the problem.
3. Reports from managers about the problems caused by price changes much easier to believe when businesses publish financial information that addresses these problems.
Although the rate of inflation slowed, accounting for price changes remain useful because of the cumulative effects of low inflation in recent times can be significant.
III. INFLATION ADJUSTMENT TYPE
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.
1. General Price Level Adjustment
Currency amount to be adjusted to changes in the general price level (purchasing power) is called a constant currency historical cost or equivalent general purchasing power. Amount of currency that have not been adjusted in such a manner is referred to as the nominal amount. For example, during periods of rising prices, long-lived assets are reported in the balance sheet at acquisition cost initially expressed in nominal currency. Where 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 was purchased.
2. Adjustment Costs Now
Cost model is now different from the conventional accounting in two major aspects. First, fixed assets are now valued at cost rather than historical cost. Second, profit is the amount of resources that can be distributed by the Company during the period (regardless of the tax component), but still able to maintain the productive capacity or physical capital firm. One way to preserve capital is to adjust the initial net asset position of the company (which uses a specific price index is right or direct pricing) to reflect changes in the equivalent current cost of assets during the period.
IV. INTERNATIONAL PERSPECTIVE ON ACCOUNTING FOR INFLATION
Some countries have tried to inflation accounting is different. Also reflects the actual practice considerations such as severity pragmitis national inflation rate and the view that the parties directly affected by inflation accounting figures. Observe several different methods of inflation accounting is very useful when assessing the current condition of most muktahir.
1. 1. Country United States
In 1979, the FASB issued Statement of Financial Accounting Standards / SFAS No.33, entitled “Financial Reporting and Changing Values” statement requires U.S. companies that have supply and aktifa still worth more than $ 125 million or assets of more than $ 1 billion, for the past 5 years trying to make disclosure of constant purchasing power as the basic framework of the historical cost basis of measurement for the primary financial statements.
Many users and compilers of financial information in accordance with SFAS No.33 found that:
1. Double that required disclosure of FASB confusing.
2. Double the cost of preparation of disclosure is too large.
3. Disclosure of purchasing power historical cost is not too useful when compared to the current cost. Finally issued SFAS N0.88 to help companies that reported the effect of statements on the price change and become the starting point of future inflation accounting standards.
Reporting company is encouraged to disclose the following information for each of the last 5 years:
1. Net sales and other operating income.
2. Profit from opersi running on current cost basis.
3. Increases or decreases in current cost or recoverable amount.
4. Each agregrat foreign currency translation adjustments based on current cost, arising from the consolidation process.
5. Net assets at year end decreased current cost basis.
6. Earnings per share on the basis of current cost
7. Dividend per common share
8. Year-end market price of common stock perlembar
9. Level of consumer price index used to measure the return of opersi running.
SFAS No.88 disclosure guidelines also include overseas operations included in the consolidated statements of U.S. companies holding company which, engadopsi dollar as the functional currency for its foreign operations measure looked at the operations of the parent’s point of view perusahaan.Akibatnya currency accounts operations must be translated into dollars, adjusted for U.S. inflation. Multinational companies are adopting local currency as the functional currency for most of its foreign operations in light of the local currency. FASB is allowing companies to use the present re-translation method or adjust to the foreign inflation and then do a translation into U.S. dollars. Thus, the adjustment of the data to reflect the current cost inflation index can be based on the general price level of the U.S. or abroad.
1. 2. The UK
UK Accounting Standards Committee / ACS issued a “Statement of Standard Accounting Practice 16 / SSAP,” Accounting for Costs Now “for a trial period of 3 years in March 1980. Although SSAP 16 was canceled in 1988, the methodology is recommended for companies that voluntarily report accounts-their account adjusted for inflation. Differences SSAP 16 with SFAS 33 are:
1. If the U.S. standard requires constant cost accounting and now, SSAP 16 only adopt the current cost for external reporting.
2. If the adjustment of U.S. inflation based on the income statement, expense report in the UK now mengwajibkan both income statements and balance sheets are now charged, along with explanatory notes.
3 British Standards allow reporting options:
1. Presenting the accounts as a current cost basis financial statements with supplementary accounts of historical cost.
2. Presenting the accounts of historical cost as the basis of financial statements with supplementary accounts of current cost.
3. Presents the current cost accounts as the accounts satuny dilengkanpi with enough historical cost information.
With treatment of gains and losses relating to monetary items, FAS 33 menharuskan separate disclosure for each digit. SSAP 16 mengaharuskan two numbers that both reflect the influence of specific price changes, ie, a. Monetary working capital adjustment (Monetary Working Capital Adjustment) / MWCA Acknowledging the influence of price changes specific to the total amount of working capital used by the company in its operations. b. The adjustment mechanism allows the effect of price changes specific to non-monetary assets of the company.
1. 3. Brazilian state
Although no longer required the recommended inflation accounting in Brazil today reflects two groups of reporting options, the Brazilian Corporate Law and Capital Market Supervisory Commission of Brazil. Inflation adjustment in accordance with the law firm presenting the accounts re-permanent assets and shareholders’ equity by using a price index which is recognized by the federal government to measure the local currency devaluation.
Inflation adjustment to permanent assets and shareholders’ equity are presented net of the amount over that disclosed separately in the profit gain or loss is now as monetary correction. Price-level adjustments to equity shareholders are shareholders in the amount of investment which should grow to awalperiode not tertingla with inflation. Adjustments to assets permanently smaller than equity adjustments cause loss of purchasing power that reflects the risk faced by the company on the net monetary assets.
V. INTERNATIONAL ACCOUNTING STANDARDS BOARD
In particular the financial statements of a company that does the reporting currency hyperinflation economy, based on a framework for assessing whether historical cost or current cost, must be presented again in accordance with constant purchasing power on the balance sheet date. This rule also applies to the corresponding number in the previous period. Purchasing power gains or losses associated with the position of net monetary liabilities or assets put into profits now. Companies that do the reporting must also disclose:
1. The fact that the presentation again to a change in the purchasing power of the unit of measurement has been performed.
2. The basic framework used in the valuation of the assets which are the main financial statements of historical cost assessment or fee now.
3. Identity and the price index at the balance sheet date, together with the changes during the reporting period.
4. Net monetary gains or losses during the period.
VI. ISSUES OF INFLATION
There are four issues of inflation accounting are:
1. Is the constant dollar or current cost better measure the effects of inflation.
2. Accounting treatment of gains and losses of inflation.
3. Accounting for inflation abroad.
4. Avoid the phenomenon of double fall.
VII. PROFIT AND LOSS INFLATION
Treatment of gains and losses of monetary items (eg cash, receivables, and debt) considered controversial. Our study of the practices in various countries reveal important differences in this respect. In America, the gain or loss on monetary items is determined by presenting again in constant dollars, the beginning balance and ending balance. And transactions in, all assets and liabilities (including long-term debt), the resulting number is expressed as a separate balance. This treatment was looking at the advantages and disadvantages of monetary items as being different from other types of income.
VIII. PROFIT AND LOSS OF TITLE
Now accounting for the cost of dividing the total income into 2 parts:
1. Operating profit (the difference between revenues and expenses are now present resources consumed).
2. Unrealized gains are imbul of ownership of non-monetary assets with a replacement value that increases with inflation.
The increase in operating assets replacement cost which is a projected outflow higher to replace the equipment, not a good profit is realized or not. If the current cost-based profit measure estimates the company’s assets that could be used, then the change in current cost of inventory, fixed assets and other operating assets are revalued equity owners of which are part of the profits to be retained by the company to maintain its physical capital.
IX. BEYOND ACCOUNTING FOR DOMESTIC INFLATION
Investors pay attention to the company’s potential to produce dividends, because the value of their investment depends on future dividends. Potential of a company to produce dividends directly related to its capacity to produce goods and services. If a firm to maintain its production capacity, there is a new future dividends that may be considered. Re presenting the accounts of foreign companies and domestic prices would now be equivalent yield information relevant to a decision. This information provides the opportunity for investors to obtain as much information as possible regarding future dividends. Much easier to compare and evaluate the results of consolidation throughout the firms than do today.
X. FALL AVOID DOUBLE
The size of the adjustment that occurs to eliminate double fall depending on the exchange rate and inflation differences and negatively related. Inflation adjustment to the cost of goods sold or depreciation are intended to reduce the magnitude of earnings to avoid a further assessment of net income. Due to the influence of an inverse relationship between local inflation and currency values, changes in foreign exchange rates between successive financial statements are generally caused by inflation led to some inflationary impact on the company’s operations. To avoid the influence of the inflation adjustment process twice, the inflation adjustment must take into account the loss of translation that has been reflected in the results of a company.