20.7 U.S. INFLATION ADJUSTMENTS. The U.S. method of adjusting for inflation
started in 1979 with the issuance of FAS No. 33.^17 Over the years, eight additional
standards were issued, covering special industries and special problems. The infor-
mation required by FAS No. 33 was mandatory, effective for fiscal years ending on
or after December 25, 1979. Mandatory reporting ended with FAS No. 89 for finan-
cial statements issued after December 2, 1986, which said, “A business enterprise
that prepares its financial statements in U.S. dollars and in accordance with U.S. gen-
erally accepted accounting principles is encouraged, but not required, to disclose sup-
plementary information on the effects of changing prices.”^18 In all cases, whether re-
quired or encouraged, the reporting was always in supplementary statements.
Samples of the format for U.S. supplementary disclosures appear in Exhibits 20.4
and 20.5. Notice that in Exhibit 20.4 the major adjustments to income from continu-
ing operations are for cost of goods sold (inventory) and depreciation, and that cur-
rent cost is the basis for reporting income. The gain or loss on monetary assets is a
gain from being in a net monetary liability position. Also, the inventory, property,
plant, and equipment increased more on a specific price basis than if their increase
had been measured by the general price level.
A foreign currency translation adjustment is shown as a loss due to a decline in the
value of the foreign currency investment in an overseas subsidiary. The foreign cur-
rency declined against the dollar during the year, causing a translation loss. The his-
torical translation loss was remeasured in units of constant purchasing power to ar-
rive at the figure reported in Exhibit 20.4.
Four separate items are reported in Exhibit 20.4: income from continuing opera-
tions, gain from purchasing power on net amounts owed, the effect of increases in
specific prices over the general price level, and the foreign currency translation ad-
justment. The FASB does not provide guidance on what is commonly called the “bot-
tom line.” In effect, the user must decide which of the three items additional to in-
come should be considered income. A strong case could be made for considering the
gain on net monetary liabilities as an income item, because the interest expense paid
to achieve this gain has been deducted to calculate net income. The other two items
could be considered as equity adjustments, but this is for the user to decide.
An alternative recommended presentation of the same data given in Exhibit 20.4
is shown in Exhibit 20.5. The figures reported are much the same, but Exhibit 20.5
gives more information, because the user can see directly which items have been ad-
justed and by how much without having to refer back to the primary statements.
Three different methods of showing a five-year analysis, required in the past under
FAS No. 33 and encouraged under FAS No. 89, are permitted. In all three the past
current-cost information has been adjusted for changes in purchasing power so that
everything is expressed in the average purchasing power of the dollar in the most re-
cent statement year. A better method for countries with high inflation would be to ex-
press the financial data in terms of end-of-year purchasing power, since it would be
the most recent data and would match the purchasing power of the measurements in
the balance sheet at that date.
In terms of user ease, the format in Exhibit 20.6 would be preferable, since it pres-
ents both reported data and adjusted data. It shows the before-adjustment and after-
20 • 12 ACCOUNTING FOR THE EFFECTS OF INFLATION(^17) FAS No. 33, FASB, 1979.
(^18) FAS No. 89, FASB 1986, paragraph 3.