What Is Inflation Accounting?

Inflation accounting is also called "accounting for price changes." Broadly refers to the accounting methods and procedures adopted to eliminate the effects of inflation or to accurately reflect the effects of inflation. It is a modification of the traditional accounting measurement model, especially the reform of the entire accounting model (including financial statements) or financial statements. Traditional accounting does not consider currency changes, that is, it assumes that the currency value itself does not change. Inflation created the need to revise and reform the historical cost principle. [1]

Inflation accounting

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Inflation accounting is also called "accounting for price changes." Broadly refers to the accounting methods and procedures adopted to eliminate the effects of inflation or to accurately reflect the effects of inflation. It is a modification of the traditional accounting measurement model, especially the reform of the entire accounting model (including financial statements) or financial statements. Traditional accounting does not consider currency changes, that is, it assumes that the currency value itself does not change. Inflation created the need to revise and reform the historical cost principle. [1]
Inflation accounting is a new field of western financial accounting, and its emergence and development have a profound historical background. With the transition from free competition to monopoly capitalist economy, a cyclical economic crisis has occurred, especially after the First World War. Inflation has occurred in Western countries, commodity prices have soared, workers have been unemployed, and economic operations have progressed. The balance and stability in China have been broken. Inflation, along with unemployment and the serious imbalance of resource allocation, has become a reflection of the deepening and complication of the economic crisis in capitalist countries and hindered the development of capitalist economies. In order to control the outbreak of severe inflation, the western economics community has made unremitting exploration and research for a long time, but it has not been able to fundamentally eliminate the phenomenon of inflation.
It is precisely because of the emergence of inflation that it has brought various shocks to the financial accounting information of the business community. The application of traditional accounting assumptions and
At present, due to various factors, although inflation accounting has not yet formed a complete system in the western accounting world, its content is quite rich and has different characteristics from traditional accounting methods. So far, dozens of countries have adopted measures appropriate to the country's national conditions and tried inflation accounting to varying degrees in accordance with the characteristics and conditions of the country's inflation. In the case of continuous inflation, people have responded to the different effects of price changes on financial accounting data, resulting in three models of inflation accounting: constant currency accounting, current (replacement) cost accounting,
traditional
In the western developed countries, such as the United States, the United Kingdom, Canada, and Australia, in the case of severe inflation, in order to overcome the negative effects of inflation, reflect and eliminate the negative impact of inflation on traditional financial accounting information, more fair, more Full disclosure of corporate financial status and operating results, reflecting changes in corporate asset prices, maintaining corporate assets, and providing investors, creditors, and government agencies with useful accounting information related to economic policy formulation, and various accounting professional groups have continuously published research on inflation accounting For the report, the government has also set up a specialized research institution and continuously issued corresponding accounting announcements or reports, formulated corresponding accounting standards, put forward specific targets for inflation accounting and specific accounting data, asset valuation, and requirements for preparing accounting statements; at the same time, continuously exchanged experiences By drawing on the regulations of other countries, improving the country s inflation accounting system, proposing new inflation accounting models, and improving accounting procedures and methods, it has achieved significant results in establishing and developing inflation accounting. It made a significant contribution in addition to the effect of inflation on traditional financial accounting report data, to promote market economy development.
In particular, the United States is the country that raised and studied the subject of inflation accounting earlier. In the United States, the main institutions affecting the development of inflation accounting are the Securities and Exchange Commission and the Financial Accounting Standards Board. The Securities and Exchange Commission in its "Accounting Announcements" requires large companies with stock listings to disclose replacement cost information in their annual reports, but does not require this content to be disclosed in annual reports to shareholders. The Financial Accounting Standards Board requires major US companies to compile and publish supplementary financial statements based on general currency purchasing power or current cost principles. At the same time, for companies that adopt the current cost of currency, they also need to provide a report on asset holding gains and losses after deducting inflation and the current asset cost at the end of the year.
There are also some western developed countries, such as Germany and France, that are not actively studying and practicing inflation accounting. Both of these countries are typical of the legislative accounting where the government directly develops the accounting system. They both pay attention to protecting the country's taxation and require that corporate income statements and tax returns be consistent. Therefore, the main goal of their accounting system is to provide the government with accounting data for macroeconomic control in order to facilitate economic planning and tax policy implementation. Especially in Germany, due to the low inflation rate, although the German Institute of Certified Public Accountants proposed a method of inflation accounting, the German government does not attach importance to the research and implementation of inflation accounting.

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