The addition to the Revaluation surplus realized because of financing with Share-
holder’s interests. This relates to the part of the revaluation realized on fixed assets and
stocks considered to be financed with Shareholder’s interests.^21Assets in Exhibit 20.8 are shown at their current value, as described in the footnotes
to the financial statement. The relevant portion of the footnotes is reproduced as Ex-
hibit 20.9. The deferred gearing adjustment is a significant figure in the capital and li-
abilities section of the balance sheet. It is explained in the footnotes, as follows: “The
Deferred gearing adjustment relates to the revaluation not yet realized on the fixed as-
sets and stocks that has arisen from changes in the price level, in so far as these assets
are considered not to be financed with Shareholder’s interests the adjustment is shown
net of Deferred tax and the amount applicable to Minority interests.”
20.9 BRAZILIAN EXAMPLE OF INFLATION ADJUSTMENTS. In the past, Brazil was
subject to many years of hyperinflation. Recommended inflation accounting in Brazil is
covered by two sets of reporting options, one from Brazilian Corporate Law and the
other from the Brazilian Securities Exchange Commission. Permanent assets and stock-
holder’s equity are to be restated using a price index supplied by the federal government.
The net difference between the adjustments to permanent assets and to stock-
holder’s equity accounts is reported in current income as a monetary gain or loss.
This can be illustrated by looking at an example from Choi, Frost, and Meek,^22 given
in Exhibit 20.10.
20 • 18 ACCOUNTING FOR THE EFFECTS OF INFLATION(^21) Enthoven, 1982, p. 103.
(^22) Choi, Frost and Meek, 2002, p. 266.
Current Value
The valuation of the fixed assets, that is, property, plant, and equipment, and stocks, as
well as the depreciation and consumption respectively thereof, is based on current value.
Within the context of the aim of achieving continuity, this is, in principle, the replacement
value and in certain cases, the lower net realizable value.
The replacement value is determined with due regard to the function of the relevant as-
sets and the place where they are employed, taking technological developments into account.
For calculating the replacement value, the current prices of specific assets are used, or, if this
is not possible, use is made of indices for groups of assets, the price level development of
which is determined by similar influences.
Insofar as fixed assets and stocks are considered to be financed with shareholders’ inter-
ests, changes occurring in the replacement value as a result of fluctuations in the local price
level (revaluation) are credited or debited directly to revaluation surplus. Where fixed assets
and stocks are considered not to be financed with shareholders’ interests, the change in the
replacement value is included as a deferred gearing adjustment. This is transferred to the
profit-and-loss account in proportion to the depreciation of the fixed assets and the con-
sumption of the stocks concerned.
The deferred taxation on the total revaluation is shown as deferred tax liabilities due to
revaluation and is temporarily deducted from the revaluation surplus and the deferred gearing
adjustment. The amounts thus deducted from these accounts are added to revaluation surplus
or the deferred gearing adjustment again when the fixed assets are depreciated and stocks are
consumed and these taxes are simultaneously accounted for in the profit-and-loss account.
Exhibit 20.9. Principles of Valuation.