FINANCIAL REPORTING AND PRICE CHANGES

FINANCIAL REPORTING AND PRICE CHANGES

a. Why Has Potential Financial Statements For the Period Price Changes Over Misleading?

During periods of inflation, asset values ​​are recorded at acquisition cost less initially reflect its current value (the higher). Values ​​of the assets yield lower assessed expenses lower and profits are valued more highly.

From the management point of view, this inaccuracy distorts:

·        financial projections based on historical time series of data

·        the budget is the basis of performance measurement

·        performance data can not isolate the effect of inflation that can not be controlled.

It creates a profit:

·        An increase in the proportion of tax

·        Request for more dividends of shareholders

·        Request and pay higher wages than workers

·        Actions that harm the host country (such as taxation of profits is very large)

And if the company has distributed its profits then most likely the company can not do the replacement of certain assets has increased the price due to lack of resources.
Financial statements are not adjusted to purchasing power will also affect the reader in interpreting the report and compare the performance of the company operation. If revenues are recorded in accordance with the present value of purchasing power, while the cost of purchasing power are recorded at historical earnings will make measurements inaccurate. Conventional accounting procedures also ignore the purchasing power gains and losses arising from the ownership of cash (or equivalent) during the period of inflation

b. Effect Of Price Adjustment of Financial Statements Changes in Price

Currency exchange rate fluctuations and changes in the price of money for goods and services is an integral characteristic in international business. To understand the notion of price changes (changing prices), we must distinguish between the general price movements and specific price movements, which are both included in the terms of the price changes. A general price changes occur when the average price of all goods and services in an economy subject to change. Price increases are collectively known as inflation (inflation), while the price declines known as deflation (deflation).

 Specific price changes refers to changes in the price of goods or services which are caused by changes in demand and supply. Political and social destruction caused by a series of hyper-inflation period (when the inflation rate increased by more than 50% each month) are well documented and this explains why a stable price level becomes a national priority for many countries in the world, businesses are also feeling the effects of inflation on factor prices as production increases. Although the price changes occur throughout the world, the influence of business and financial reporting varies from one country to another.

c. Difference Current Cost Accounting Model and Conventional

In general, the conventional accounting, financial statements are presented based on the historical value that assumes that price (monetary unit) is stable. Conventional accounting does not recognize the changes in general price levels or changes in the level of rates. As a consequence, if there is a change in purchasing power as inflation period, the historical financial statements is economically irrelevant. In this period generally scored higher revenues while fixed assets valued lower. Actually, there are several methods of accounting on the effect of price changes, such as accounting fixed price, current value accounting, and general price level accounting. General price level accounting restatement will hold the components of financial statements into dollars at the same level of purchasing power, but did not change the accounting principles used in accounting at historical value. In practice, the controversy concerning the relevance of accounting using the general price level still continues to this day. Some of the arguments that support or reject the application of the general price level accounting will be presented in this article. Similarly, the results of two studies on the effects of application of the general price level accounting on the financial statements will be compared to see whether the accounting adjustments based on the general price level is required.

d. Accounting for differences in inflation in the U.S.A, UK, and Brazil

The United States

In 1979, the FASB issued Statement of Financial Accounting Standards / SFAS No.33, entitled "Financial Reporting and Changing Values" statement requires U.S. companies that have supply and assets still worth more than $ 125 million or assets of more than $ 1 billion, for the past 5 years trying to make disclosure of constant purchasing power as the basic framework of the historical cost basis of measurement for the primary financial statements.
Many users and compilers of financial information in accordance with SFAS No.33 found that:

·         The disclosure required by FASB confusing double.

·         The cost of preparation of double disclosure is too large.

·         Disclosure of the purchasing power of the historical cost is not too useful when compared

to the current cost. Finally issued SFAS N0.88 to help companies that reported the effect of statements on the price change and become the starting point of future inflation accounting standards.
Reporting company is encouraged to disclose the following information for each of the last 5 years:

·         Net sales and other operating income.

·         Profit from operations That runs on the basis of current cost.

·         Increase or Decrease the current cost or recoverable amount.

·         Each aggregate foreign currency translation adjustments based on current costs, arising from the net at the end of the year of consolidation. Decreased current cost basis of assets.

·         Earnings per share on the basis of current cost

·         Dividend per common share

·         year-end market price of ordinary shares per share

·               The Consumer Price Index used to measure the return of the operation running.

 The UK

UK Accounting Standards Committee / ACS issued a "Statement of Standard Accounting Practice 16 / SSAP," Accounting for Costs Now "for a trial period of 3 years in March 1980. Although SSAP 16 was canceled in 1988, the methodology is recommended for companies that voluntarily report accounts-their account adjusted for inflation.

Differences SSAP 16 with SFAS 33 is

·         If the U.S. standard requires constant cost accounting, and now, SSAP 16 only adopt the current cost for external reporting.

·         If the adjustment of U.S. inflation based on the income statement, expense report in the UK now require both income statements and balance sheets are now charged, along with explanatory notes.
3 British Standards allow reporting options:

-          Presenting the accounts as a current cost basis financial statements with supplementary accounts of historical cost.

-          Presenting the accounts of historical cost as the basis of financial statements with supplementary accounts of current cost

-          Presenting the accounts as a current cost only complete account with enough historical cost information.

With treatment of gains and losses Relating to monetary items, FAS 33 requires separate disclosure for each digit. SSAP 16 requires two numbers That Reflect both the influence of specific price changes

-          Adjusters monetary working capital (Monetary Working Capital Adjustment) / MWCA
Acknowledging the influence of price changes specific to the total amount of working capital used by the company in its operations.

-          Adjustment Mechanism

Allows the effect of price changes specific to non-monetary assets of the company.

Brazilian state

Although no longer required the recommended inflation accounting in Brazil today reflects two groups of reporting options, namely the Brazilian Corporate Law and Capital Market Supervisory Commission of Brazil. Inflation adjustment in accordance with the law firm presenting the accounts re-permanent assets and shareholders' equity by using a price index which is recognized by the federal government to measure the local currency devaluation.
Inflation adjustment to permanent assets and shareholders' equity are presented net of the amount over that disclosed separately in the profit gain or loss is now as monetary correction.
Price-level adjustments to equity shareholders are shareholders in the amount of investment which should grow to beginning of period not left behind with inflation. Adjustments to assets permanently smaller than equity adjustments cause loss of purchasing power that reflects the risk faced by the company to net monetary assets.

e. Financial Reporting in Hyperinflation Economy

FINANCIAL REPORTING IN ECONOMIC hyperinflation Statement of Financial Accounting Standard 63: Financial Reporting in Hyperinflation Economic consists of paragraphs 1-40. The entire paragraph has the power to set the same. Paragraphs which are printed in bold and italics to set the main principles. IAS 63 should be read in the context of goal setting and the Framework of the Preparation and Presentation of Financial Statements. IAS 25 (revised 2009) Accounting Policies, Changes in Accounting Estimates and Errors provides a basis to select and apply accounting policies when no explicit guidance. This statement is not intended to apply to elements that are not material

-        Statement applies to financial statements.

-        In a hyperinflation economy, reporting of operating results and financial position in the local currency without restatement is not useful.

-        This statement does not set at a certain level of inflation is considered hyperinflation

-        All entities that prepare financial statements in the currency of the same hyper-inflation economies are encouraged to apply this statement from the same date.

-        Price change from time to time as a result of political influence, economic, social and general or specific.

-        Entities that prepare financial statements on the basis of historical cost accounting do so without considering changes in general price levels or price increases of certain of the assets or liabilities are recognized

-        In a hyperinflation economy, it will only work if it is expressed in units of measurement that applies at the end of the reporting period.

-        The financial statements entities functional currency is the currency hyperinflation economy, based on historical cost approach or a current cost approach, are presented in units of measurement that applies at the end of the reporting period

f. whether the constant dollar or current cost is better to measure the effects of inflation

constant dollar or current cost better measure the effects of inflation, (2) the accounting treatment of gains and losses of inflation, (3) foreign inflation accounting, and (4) avoid the phenomenon of double fall.  Profit or loss on monetary items is determined by the present United States again in constant dollars, beginning and ending balances, and transactions in, all monetary assets and liabilities. Numbers generated as a separate heading.

In the UK, Profit and loss items are separated into monetary and monetary working capital adjustment mechanism. Both numbers are determined by changes in rates. Adjustment mechanism to indicate the benefits to shareholders yang become from debt financing over a period of price changes. The figures are placed on the current cost operating profit to generate a measure of prosperity can be eliminated, the so-called litterateur attribution current cost earnings to shareholders.

Brazil's approach is no longer required, do not adjust assets and liabilities are now explicitly, Karenna amounts are expressed in terms of realizable value. Adjustment of the presentation of net assets and owner's equity permanent tailored to the level of prices show gains or losses on the general purchasing power of working capital financing from debt or obligation.

Accounting to divide the total current cost profit into two parts: (1) operating profit and (2) the benefits are not in the realization of the monetary assets arising from the ownership of the replacement value of which increases with inflation. Although measurements made directly profit ownership, the accounting treatment is not so.

Accounting for inflation abroad, the investor give attention to the potential of the company to produce dividends, because they are investing their value is dependent on dividends in the future. Potential to result in a company's dividend directly related to the surety to produce goods and services. Only if a company maintains its production capacity, then any future dividends that may be considered

g. Definition of a double dip (double dip) and explains how to handle

The definition of a double dip (double dip) and describes how handling. The Generally Accepted definition of a "recession" is (at least) two straight quarters of negative GDP (Gross Domestic Product) growth. A "double-dip recession" Occurs when you have, in this order:

-        A recession.

-        A short period of growth.

-        Another recession.

A "double-dip recession" is also Referred to as a "W-shaped" recession.
"Double-dip recessions" are extremely damaging, not only to the economy, but also to the morale of the citizens of a country. Recessions are hard enough. Imagine believing That the economy is starting to recover, only to be met with news That the country has slipped into yet another recession.

The second recession in a "double-dip" recession is usually worse than the first, due to the fact That so many people are incredibly disheartened and pessimistic.

The United States (and the rest of the world) will be desperately Trying to avoid a "double-dip" recession in the months and years ahead.

FOREIGN CURRENCY TRANSLATION

FOREIGN CURRENCY TRANSLATION

1)      Difference between the translation and conversion of foreign currency

Foreign currency translation The process is repeated presentation of financial information from one currency to another currency. While foreign currency conversion between the exchange of one currency to another currency physically.

The difference is that translation is simply a change of monetary units, such as on a balance sheet that is expressed in British pounds are presented again to the U.S. dollar equivalent value. There is no physical exchange that occurred, and no relevant transaction occurs. While the conversion, allowing the physical exchanges that occur and there is a related transaction occurring.

2)      In terms of foreign currency translation

              I.      Conversion, an exchange of one currency into another currency.

            II.      Exchange rate now, the exchange rate prevailing on the date of the relevant financial reporting.

          III.      Net asset position at risk, the excess assets are measured or denominated in foreign currency and in translation at the exchange rate of duty is now measured or denominated in foreign currencies and translated at the exchange rate now.

          IV.      Exchange forward contracts, an agreement to exchange currencies of different countries by using a specific rate (forward rate) at a given date in the future.

            V.      Functional currency, is the main currency used by a company in the conduct of business activities. Usually such currency is the currency of the State where the company is located

          VI.       Historical exchange rate, the exchange value of foreign currency that is used when an asset or liability denominated in foreign currencies bought or going.

        VII.      Reporting currency, the currency used in preparing the company financial statements.

      VIII.      Spot exchange rate, the exchange rate for currency exchange in the time immediately.

          IX.       Translation adjustments, the adjustments arising from the translation of financial statements of a company's functional currency into the reporting currency.

        Glossary of foreign currency translation, adapted from GAAP (SFAS) No.52, 1981

-          Attributes, quantitative characteristics of an item being measured for accounting purposes. Example, historical cost and replacement cost which is an attribute of an asset.

-          Conversion, exchange a currency into another currency.

-           Present exchange rate, exchange rate prevailing on the date of the relevant financial statements.

-          Discount, while the subsequent exchange rate lower than current levels.

-           Net asset position at risk, as measured in excess of assets or denominated in foreign currencies and translated at the exchange rate of duty is now measured or denominated in foreign currencies and translated at the exchange rate now.

-          Foreign currency, a currency other than the currency used by a State, a currency other than the reporting currency used by the company.

-          Financial statements in foreign currencies, the financial statements using foreign currency as the unit of measurement.

-          Foreign currency transactions, the transaction (ie sale or purchase of goods or services, or debt loans or accounts receivable) under the conditions stated in currencies other than the functional currency of the company.

-          Foreign currency translation, the process to declare the amounts denominated or measured in one currency into another currency using the exchange rate between two currencies.

-          Foreign operation, an operation that produces financial statements that (1) combined or consolidated or accounted for under the equity method in reporting the company's financial statements and (2) arranged in foreign currencies other than the reporting currency of the reporting enterprise.

-          Forward exchange contacts, an agreement to exchange currencies of different countries by using a specific rate (forward rate) at a given date in the future.

-          Functional currency, the currency used by major companies in the course of business, and in generating or using cash.

-          Historical exchange rate, exchange rate of foreign currency that is used when an asset or liability denominated in foreign currencies bought or going.

-          Local currency, the currency of a State that is used; the reporting currency used by a domestic or foreign operations.

-          Items of monetary policy, the obligation to pay or the right to receive a unit of currency in a fixed value in the future.

-          Reporting currency, the currency used in preparing the company financial statements.

-          Completion date, the date when the debt is paid by an uncollectible receivables.

-          Spot exchange rate, exchange rate for currency exchange in the time immediately.

-          Date of the transaction, the date when a transaction is recorded in the accounting records of the reporting company.

-          Translation adjustments, adjustments arising from the translation of financial statements of a company's functional currency into the reporting currency.

-          Unit of measurement, the currency used to measure the assets, liabilities, revenues and expenses

3)      Differences in gains and losses of foreign currency translation

If the point of view of local currency to be used (local companies viewpoint), the entry of the translation adjustment in current earnings do not need to be done. Enter translation gains and losses in earnings will distort the real financial relationships and can mislead the users of such information. Translation gains or losses should be treated from the standpoint of local currency as an adjustment to equity owners.

If the parent company's reporting currency is the unit of measurement of the financial statements are translated (the parent company's point of view), it is advisable to recognize gain or loss on translation of profit as soon as possible. Point of view of the parent company saw overseas subsidiaries as an extension of its parent company. Translation gains and losses reflect the increase or decrease in equity of foreign investment in domestic currency and should be recognized

4)      Advantages and disadvantages of foreign currency translation

·         Suspension

·         suspension and Amortization

·         Partial Suspension

·         No deferred

Translation gains and losses reflect the increase or decrease in equity investments in domestic currency and should be recognized.

5)      Effect of foreign currency translation method to the Financial Statements

Translation methods can be classified into two types of methods that use a single exchange rate for the present re-translation of foreign currency balances to the equivalent value in domestic currency or a method that uses a variety of rates.

a.      Methods Single Currency

b.      Multiple methods of exchange rate

c.       Now the present method and Non

d.      Monetary-non monetary method

e.      Temporal method

6)      Evaluation and selection of foreign currency translation method

Under the temporal method, monetary items such as cash, receivables, and liabilities are translated based on the exchange now. Such items are translated at the exchange rate of monetary base that maintains in the first measurement. In particular, the value of assets in foreign currencies are reported at historical cost, are translated based on the historical exchange rate. Why is that? This is because historical cost in foreign currencies are translated at the exchange rate exchange rate historically produces historical cost in domestic currency.

7)      Foreign currency translation relationship with inflation

The use of the exchange rate is now to translate the cost of non-monetary assets are located in inflation environment will ultimately lead to an equivalent value in domestic currency is much lower than the initial baseline measurement. At the same time, earnings will be much larger translated with respect to load depreciation which is also lower. The translation as it can be more easily mislead readers as to give information to the reader. Assessment of the lower dollar typically lower earnings power actual of foreign assets which are supported by local inflation and the ratio of return on investment that affected inflation in a foreign operation may create false expectations on future profits.

FASB rejected before the inflation adjustment process of translation, because the adjustment is not inconsistent with the historical cost basis of the assessment framework used in the basic financial statements in the U.S.. As a solution FASB No. 52 requires the use of the U.S. dollar as the functional currency for those residing overseas operations with hyperinflation environment. This procedure will maintain a constant value of the dollar equivalent of foreign currency assets, because these assets will be translated according to the historical rate. The imposition of losses on fixed assets in the translation of foreign currency to equity shareholders will cause a significant effect on financial ratios. Foreign currency translation problem can not be separated from the problem of accounting for foreign inflation.