Chapter 25: Inflation and Hyperinflation

Perspective and Issues

The historical cost based accounting model has been employed almost universally for the past seventy years, largely as a result of the accounting profession's embracing of the concepts of conservatism (or prudence) and realization, and the convention of the stable measuring unit. These achieved prominence after the US stock market crash of 1929 and the worldwide depression that followed it. Despite the obvious attractiveness of historical cost as a basis for financial reporting, principally due to the fact that it is objectively measurable, periodically there have been efforts to promote adoption of an accounting model that would be more consistent with economic reality. These efforts usually have been spurred on by periods of price instability. Most recently, this occurred in the period of the mid-1970s through the early 1980s when in many developed nations there was severe price inflation, leaving traditional financial statements with diminished usefulness.

Popular interest in techniques of inflation accounting (as the various methods are all called) has diminished markedly since price stability has been largely restored over the past decades. Most of the financial reporting standards adopted (including those in the US, the UK, and under IAS) have either been revoked, made optional, or fallen into disuse during this time. However, if history is a guide, recurring bouts of inflation are to be expected, and interest in inflation accounting methodologies will once again rise.

The IASB has recently (in mid-2002, as part of its Improvements Project) proposed to withdraw its standard on inflation accounting, IAS 15, compliance with which was made voluntary over a decade earlier. Since this has yet to be enacted, and since, as noted, a renewal of interest in this subject is at some point in time a likelihood, this chapter will set forth the requirements under IAS 15.

IAS 29 addresses financial reporting in hyperinflationary economies. While, in general, this applies the same principles as are employed in general price level accounting, the objective is to convert the financial statements of entities operating under conditions which render unadjusted financial statement of little or no value into meaningful measures of position and performance. Fortunately, over recent years there have been very few nations suffering from hyperinflation (certain South American nations are the major exception), but as with more moderate inflationary cycles, these have hardly disappeared from the economic horizon. Since there is some current need for this guidance, and the possibility of more need over time, this will also be explained in some detail in the present chapter,

It should be noted that the proposed withdrawal of IAS 15 would have no bearing on the status of IAS 29.

Sources of IAS

IAS 15, 29