EVOLUTION OF INFLATION ACCOUNTING

https://corporatefinanceinstitute.com/resources/knowledge/accounting/inflation-accounting/

The soaring prices of goods and services is not a new topic of discussion for the modern society. We
all pay 100 times or more of what we used to pay for each and every single item available in the
economy today. Inflation accounting is used at times when the prices start soaring high or the prices
start falling leading and leads hyperinflation or stagflation. The Indian govt. plans to keep the
inflation rate between 2-6% till 2025-26. It is when the prices start rising above this limit that
companies will start looking at various measures of inflation accounting. But these price fluctuations
happen on a daily basis in the markets so why should anyone or how is it possible for anyone to
account for these in an accounting period? Is this what you are thinking?

When an economy goes through hyperinflation, historical figures will o longer be the only relevant
information. In such cases the companies use inflation accounting methods to change the prices
according to the changing prices. Inflation distorts the reported earnings figure and can overstate
the true economic earnings leading to a drop in the price-to-earnings (P/E) ratio. And to answer the
latter there are many methods to account for inflation in an economy. But it generally depends on
many other factors like the country the business functions in, the accounting standards used, the
type of business they are involved in etc. in inflationary accounting, companies use price indexes to
better understand the performance of the company in an economy going through the situation. The
most commonly used method includes current purchasing power (CPP) and current cost accounting
(CCA).

https://nipfp.org.in/media/pdf/books/BK_15/Chapters/3.%20Inflation%20Accounting.pdf

Although this may be new term for many, the concept of inflation accounting has been under
evolution for over 60 years. The earliest references of inflation accounting were in the 40s in
Germany, at the time of runaway inflation. But during this time no important discoveries or theories
were developed and the discussions died down as soon as the economy started to stabilize from the
effects of the inflations.

It was very soon after that countries like Chile, Argentina, Brazil, Netherlands, UK and USA started
discussing and researching the issue as inflation started coming up in many countries around the
world. One of the main historical events that gave prominence to the thoughts of inflation
accounting was the Great Depression.

1963 was the year when the topic inflation accounting was seriously discussed in the USA. The study
entitled Reporting the 'Financial Effects of Price Level Changes’ by the American Institute of Certified
Public Accountants (AICPA) talked about the topic, followed by the Accounting Principles Board
about six years later to it. Even the Securities and Exchange Board (SEC) looked into the matter but
none of it was able to create a huge impact on the whole topic or find methods to calculate the
values.

In UK the govt. appointed the Inflation Accounting Committee to discuss and report on the topic of
inflation accounting and how companies and other organizations should account for it. The exposure
draft (ED) 18 by the inflation accounting steering group said that companies had to adjust for the
inflation in the primary financial statements, which was contrary to many other theories proposed
till then. But when many accountants went against it in a formal vote, the whole theory was let gone
and then came the Hyde Guidelines (1978). In 1979, the Hyde guidelines was made mandatory.
The 1980, Statement of Standard Accounting Practice (SSAP) 16 by the Accounting Standards
Committee (ASC)made it mandatory for large companies to present financial statements adjusted
for inflation.it was a group under tom Neville that pointed out the limitations of SSAP 16, but by then
the inflation rates in the country started to fall where by further discussions on the topic also
decreased.

Latin American countries like Chile, Argentina that has/ have been (check the current status)
following inflation account ting practices due to the situation there. (maybe try to elaborate)

Countries like India and Australia have appointed committees to study the issue and make
themselves aware about the situations. Many companies in India like Bharat Heavy Electricals
Limited (BHEL) and Hindustan Machine Tools Limited (HMT) have been accountitng for inflation for
quite some years. (pls check the facts)