Inflation Accounting Models
Inflation accounting is not fair value accounting. Inflation accounting, also called price level accounting, is similar to converting financial statements into another currency using an exchange rate. Under some (not all) inflation accounting models, historical costs are converted to price-level adjusted costs using general or specific price indexes.
Income statement general price-level adjustment example
- On the income statement, depreciation is adjusted for changes in general price levels based on a general price index.
| 2001 | 2002 | 2003 | Total | |
|---|---|---|---|---|
| Revenue | 33,000 | 36,302 | 39,931 | 109,233 |
| Depreciation | 30,000 | 31,500 (a) | 33,000 (b) | 94,500 |
| Operating income | 3,000 | 4,802 | 6,931 | 14,733 |
| Purchasing power loss | - | 1,500 (c) | 3,000 (d) | 4,500 |
| Net income | 3,000 | 3,302 | 3,931 | 10,233 |
- (a) 30,000 x 105/100 = 31,500
- (b) 30,000 x 110/100 = 33,000
- (c) (30,000 x 105/100) - 30,000 = 1,500
- (d) (63,000 x 110/105) - 63,000 = 3,000
Read more about this topic: Inflation Accounting
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