Exploring the Risk of Overstatements and Understatements in Financial Reporting Due to Inflation and Devaluation Gaps

Abstract

This article explores the effects of gaps between inflation and devaluation on financial statements in economies. A model company, an assumed subsidiary of a US parent, is used for reporting to the parent based on current International Financial Reporting Standards (IFRS). The model company reported to its parent on different assumed inflation and devaluation rates, and the results are discussed and discrepancies explained. The article suggests that financial statements are distorted in an economy as the current IAS 29 does not require any restatement of the financial statements until the cumulative inflation rate for the last three years is around 100%. The paper explores the premise that restatement of financial statements on local currencies based on IAS 29 at lower inflation rates before conversion to the reporting currency should be considered as a solution to solve the distortions in financial reporting for multinational companies.