Bridge over ocean
1 September 1978 Financial Analysts Journal Volume 34, Issue 5

Inflation Accounting and Public Policy around the World—Part One: Inflation Accounting in the 1970s

  1. David Hale

The current inflation is a worldwide problem, and accountants in a number of countries, including England, have been struggling with its consequences: Phase One in their response to the inflation of 1973-74 was general price level accounting. Because GPLA merely converted historical cost financial statements to a current dollar unit of measurement, however, it failed to come to grips with the effects of inflation on specific corporate assets.

The publication of Britain’s Sandilands Report in September 1975 started English-speaking countries down the road toward current value accounting—Phase Two of inflation accounting history. In recommending current value accounting without monetary adjustments, however, the Sandilands Report failed to recognize the transfer of real purchasing power between lenders and borrowers caused by inflation. Banks in particular objected to this feature of the report; if adopted for taxes as well as reporting purposes, it would have shifted the tax burden from manufacturing companies to financial companies. The Morpeth Report provided a special inflation accounting system for financial companies, while permitting non-financial companies to show a monetary adjustment outside the formal balance sheet and income statement.

English-speaking countries now seem to be entering Phase Three—a retreat away from full current value financial statements and toward limited supplementary disclosure. In Britain, the Hyde Committee has recommended income statements that charge depreciation and cost of sales on a current value basis, but contain a monetary adjustment by which companies can add back to current value profits purchasing power gains on their borrowings. In the United States, the SEC has restricted its current value requirements to supplementary reporting of replacement costs by companies with more than $100 million of fixed assets and inventory.

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