Inflation Accounting: More Questions than Answers

Abstract

The sole responsibility of accounting is to present what has transpired within a given period through reporting not what should have occurred or will occur. Despite fitting correctly into the definition of reporting business event, historical cost accounting in recent times has come under heavy criticism of lacking behind economic trends due to the use of original cost. Historical cost accounting has been challenge on principles of uniform monetary measure and matching concepts. These growing dissatisfaction with historical cost accounting as a method of reporting financial statements has made it necessary to consider alternative method which is accounting for price level changes. Unfortunately, this alternative has not been put to practice due to its unattractiveness. It is against this background that this paper attempts to discuss some novel questions with recommendations about the existing inflation accounting methods. Aside the traditional disadvantages of inflation accounting, this article have critically examine the restatement of items under inflation accounting against basic accounting, economics and finance principles. In addition the novel questions have been raised on the consistency and rationale behind the treatment of certain items under price level changes accounting. The article argues that, inflation accounting is not only inconsistent with accounting principles but also with related subjects such as economics and finance. In practice inflation accounting creates illusionary or imaginary profit which does not exist, thus capital maintenance concept is just a paper theory because much of the profit under inflation accounting is unrealised or holding gain Inflation accounting distorts the basic objective of reporting what happen within a period or at specific time. The greatest deterrent to adoption of price level changes accounting is what it is not: inflation accounting is not present value, net realizable value, or current market values or fair value and therein lies much of the opposition to its use. In line with these questions, the article recommends that, inflation accounting can only be meaningful with new accounting system since the existing system is based on historical cost accounting.