Unless translation rates adjust to reflect the specific price inflation or the general
price level shifts (purchasing power parity), the assets value is misstated, even though
the historic rate was used. Thus, the translation method for hyperinflationary economies
presented in FAS No. 52 is a translation device, but it does not adjust for inflation.
20.12 ISSUES IN IMPLEMENTATION AND INTERPRETATION. This chapter has
shown a variety of approaches to inflation accounting. The two major themes are con-
stant dollar reporting and current cost. Yet we have seen some differences between
how the two methods were implemented. Any method that concentrates on current
cost exclusively is taking an entity viewpoint; that is, it is important to measure the
situation of the reporting entity. Unless these results are adjusted for changes in gen-
eral price level, the shareholders’ viewpoint is ignored.
An entity could be successful with an operating profit after applying current cost
adjustments, but its capacity to pay a dividend could be far less than needed to pay
the investors a dividend which would permit them to maintain their purchasing
power. Put simply, one would be interested to know that the current cost of one’s
home had gone up 10% but disappointed if the cost of living had gone up 20%. Many
current cost applications ignore this point.
Another issue has been the interpretation of the gain or loss on net monetary as-
sets. This was described for the United States, and gearing adjustments for Dutch and
U.K. companies were discussed. One can go through the calculations of the gearing
adjustment, but an alternative is to consider the gain or loss on the net monetary po-
sition as an offset to interest income and expense. Simply put, if you gain in pur-
chasing power from borrowing, you are paying for that in a higher interest cost, due
to the inflation component. Therefore, it would make sense to deduct the purchasing
power gain from the interest cost.
References to purchasing power parity have been made earlier and in reference to
assumptions in FAS No. 52. Even if purchasing power parity held in the long run, there
would be short-run adjustments to reach parity that would influence translated state-
ments. If one chose to ignore this, there would still be the problem that purchasing
power parity was the exchange rate which equated purchasing power in two economies.
Returning to the example of the Latin-American investment, if purchasing power
parity held at the beginning of the year for the 33,000 rate, then a rate of 62,857
would be needed to maintain purchasing power parity. The calculation is as follows:
Purchasing power beginning 33,000Fc $1
Inflation 100% 5%
Purchasing equivalent end 66,000Fc $1.05
66,000Fc ÷ $1.05 = 62,857Fc—the purchasing power parity rateNotice that a purchasing power parity rate would translate the restated foreign cur-
rency assets into restated U.S. assets correctly. To argue that using the historic rate
adjusts for inflation because of purchasing power parity ignores the fact that the basic
U.S. historical cost was not adjusted for inflation. Thus, FAS No. 52 for hyperinfla-
tionary economies ignores inflation.
20.13 THE FUTURE OF ACCOUNTING FOR INFLATION. Countries containing the
major financial accounting standard setters in the world have not had high inflation
rates recently. Thus, the United States and the United Kingdom could drop their in-
20 • 24 ACCOUNTING FOR THE EFFECTS OF INFLATION