2. WHAT IS INFLATION
ACCOUNTING???
Inflation accounting is used during times of increasing or plummeting
prices in certain areas of the world, usually with respect
to multinational corporations and their financial reporting. Most often,
it is seen in countries with high inflation. As a result, some accounting
standards boards and countries permit or require the companies to
restate their financial statements. Inflation accounting is used directly
to compensate for the effects of inflation or deflation.
Also called price level accounting.
Similar to converting financial statements into other currency using
an exchange rate.
IAS 29 requires implementation of inflation accounting for
corporations in countries experiencing hyperinflation.
3. Objectives
1.Exhibits true position: Inflation accounting exhibits true financial status of
company by reflecting all books of accounts at current price. It adjusts all record in
accordance with current price index for determining real profitability.
2.Avoids profit overstatement: This branch of accounting keeps a check on financial
statements of companies for avoiding any overstatements of profits. All expenses and
income are mentioned at current values which prevents overstatement of business
income.
3.Calculate right depreciation: Inflation accounting charges correct amount of
depreciation by calculating it on present value instead of historical value. Charging
right depreciation facilitates business in easy replacement of assets.
4.Easy profit comparison: It enables firms in easy comparison of their inter-periods
performance for determining their profitability. Inflation accounting adjust effects of
prices changes on all expenses and incomes listed in financial statements that avoids
distortion of historical data.
5.Provides correct information: Inflation accounting provides correct information
to shareholders and workers based on present price level. There may be a chance of
higher dividend and higher wages being demanded by these
people in absence of such information.
4. Methods
Generally, there are 4 methods that are used in Inflation accounting which are as given
below: –
1.Current Purchasing Power (CPP)
2.Current Value Accounting (CVA)
3.Current Cost Accounting (CCA)
4.Replacement Cost Accounting (RCA)
5. Current Purchasing Power(CPP)
It is an accounting technique under which companies are required to
record and present their financial statements on historical figures.
However, supplementary financial statements need to be prepared by the
company that is adjusted with the current purchasing power of currency
at end of the accounting period. A general price index is used for
conversion of various figures of financial statements of company.
Purchasing power of money is given due importance under this method
whereas rise or fall in item prices are ignored. Historical figures of
statements are multiplied by conversion factor for adjusting them in
accordance with current purchasing power.
6. Current Value Accounting(CVA)
Current value accounting is a method of inflation accounting under which all
assets and liabilities are shown at their current value in the balance sheet.
Net assets value at the beginning and at the end of the accounting period is
determined and the difference among both these values is termed as profit or
loss as case may be. However, under this accounting, it is quite difficult to
determine the relevant price index for each asset.
7. Current Cost Accounting(CCA)
Under the current cost accounting technique, assets are shown in financial
statements i.e. balance sheet and profit & loss account at their current cost
instead of recording them at historical cost or original value. Ascertainment
of profit is made on the basis of asset cost at the date of sale rather than the
actual cost. Depreciation is also charged on current values which prevent
any overstatement of profits which keeps capital intact. It is a complete
system of inflation accounting as it gives more realistic view about business
by efficiently considering all changes in price level.
8. Replacement Cost Accounting(RCA)
Replacement cost accounting technique of price level accounting is one in
which all assets and liabilities are recorded at their replacement cost in
the balance sheet. It is considered as an improvement over the Current
purchasing power method as it considers the individual price index
relevant to a specific asset of the business. Index that are directly related
to particular assets of the company is used for converting them instead of
a general price index. However, this accounting technique involves several
difficulties as many relevant price indexes need to be determined and
used during the conversion of financial statements.
9. WHAT IS ENVIRONMENT
ACCOUNTING ??
Environmental accounting, also called green accounting, as
defined in these guidelines, aims at achieving sustainable
development, maintaining a favorable relationship with the
community, and pursuing effective and efficient
environmental conservation activities. These accounting
procedures allow a company to identify the cost of
environmental conservation during the normal course of
business, identify benefit gained from such activities, provide
the best possible means of quantitative measurement (in
monetary value or physical units) and support the
communication of its results.
10. Functions and Roles of Environmental
Accounting
1) Internal Functions :As one step of a company’s environmental information
system, internal function makes it possible to manage environmental
conservation cost and analyze the cost of environmental conservation
activities versus the benefit obtained, and promotes effective and efficient
environmental conservation activities through suitable decision-making.
2)External Functions :By disclosing the quantitatively measured results of its
environmental conservation activities, external functions allow a company to
influence the decision-making of stakeholders, such as consumers, investors,
and local residents.
