Nokia

Ankur Kohli, MBA-IB, PRN 10020241063

Ankur Kohli, MBA-IB, PRN 10020241063

Inflation Accounting

Inflation Accounting

InfLation AccOunTing

Inflation accounting is an accounting practice in which values are adjusted for inflation. This is done to provide a more accurate picture of a financial situation. In some nations, this type of accounting is required for companies which make public financial reports if they are above a certain size and smaller companies may utilize inflation accounting as well. This technique requires some careful accounting work because it is possible to muddy the financial picture with inflation accounting.

Over time, currencies experience inflation in value. A set amount in a given currency in 1990, for example, has a different value in 2000. Inflation occurs over the course of a given year, and can wax and wane depending on a number of economic factors. If financial reporting was provided in the actual values at the time, it might provide in accurate picture. For example, a company could say that it earned one million currency units in 2003 and two million currency units in 2013. On the surface, it might look like the company's income had doubled, but because of inflation, this might not actually be the case.

With inflation accounting, the accountant takes the actual value and adjusts it for inflation. This practice may also be known as price level accounting, and it can be very revealing. For example, an accountant preparing statements in 2008 which showed that a company earned $100,000 United States Dollars (USD) in a particular division in 1990 could use inflation accounting to show that this would be $162,727 USD in 2008 dollars. If that division is still earning $100,000 USD in 2008, it would suggest that it is not doing very well.

Adjustments for inflation are done with the assistance of tools like the consumer price index and other indicators which are released by...