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INFLATION REPORTING

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the [APB] agreed that the assumption in accounting that fluctuations in the value of the dollar may be ignored is unrealistic . . . (APB meeting, 1961)

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10-year summary of sales revenues covering a period when the purchasing power of the monetary unit has been declining may convey an exaggerated picture of growth . . . (FASB, 1980b, pars 114, 121)

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 To

the extent that growth of the corporation is overstated because it is reported in dollars without measurement of their decline in value, then society, corporate management, and all the stakeholder are misguided. (Bevis, 1965, 40)
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 Many

think that inflation reporting might be a good thing when there is high inflation but it is not needed when inflation is low or even moderatefor example, the FASB:

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 Income

should be defined according to the perspective of the users of the financial statements. People are interested in consumption. ultimate objective of all investment activities is consumption of goods by people.
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The

CRITICISM
The

sweeping rise in price levels that characterized the 1920s . . . The collapse of prices late in 1929 [followed by] a severe depression . . . during most of the 1930s . . . these two decades showed how little real usefulness would appear if accountants tried to make their accounts keep pace with changing conditions outside the enterprise concerned . . . The data would lose their prior significance every few days. 5/22/12

CRITICISM
Several

surveys, including those by Backer, Estes, Dyckman, and Barker, have suggested that users do not believe . . . information [from inflation reporting] would be more helpful. . . users might be confused as to the meaning of the adjusted statements. An educational program could help. (Stickney and Green, 1974)
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SEE WITH YOUR EYES

The

FASB conducted an experiment in its SFAS No. 33 (FASB, 1979b) in which certain companies were required to present supplementary information stated in a unit of measure defined in terms of the general purchasing power of the dollar. The FASB thought that Supplementary financial statements, complete or partial, may be useful, especially to introduce and to gain experience with 5/22/12 new kinds of

 People

said they didnt know what to do with the information, so the FASB terminated the experiment. An unfortunate effect of the failure of SFAS No. 33 is that interest in reflecting changing prices in financial statements in the periods in which they change has, at least temporarily, diminished since then.
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DEBATING POINTS
Only

kooks believe financial statements should reflect inflation or deflation. failure of SFAS No. 33 shows that price changes shouldnt be reflected in financial statements before they are realized.

The

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