Accountants take lead on inflation accounts

Press, Volume CXV, Issue 33815, 11 April 1975, Page 12

Accountants take lead on inflation accounts

yew Zealand Press Association) WELLINGTON. Accountants are to be asked for suggestions on methods of inflation accounting. In a statement the president of the New Zealand Society of Accountants (Mr I. G. Lythgoe) announced that the society had released an exposure draft of a Statement of Standard Accounting entitled “Accounting for changes in the purchasing power of money.”

“The issue of this exposure draft is seen by the society as the first step towards providing a solution to the problems in accounting arising from price and price level changes which become very obvious during periods of marked inflation. “In recent months there has been extensive discussion in the financial press about the need to find a method of accounting which will more fairly reflect the effects of inflation on the financial results of business enterprises,” said Mr Lythgoe. Leadership needed “Techniques of inflation accounting have long been available for adoption, and during the last 20 years there has been a considerable volume of literature in the accounting profession supporting the introduction of bases of accounting other than historical cost accounting. However, in most countries. including New Zealand, there has been very little change in practice.” Repercussions “The society recognises the responsibility it has to exercise leadership in this field,” continued Mr Lythgoe, “and in common with most overseas accounting bodies is seeking to establish standards, or at least guidelines, for use by its members. "However, the complexities of the issues involved render it unlikely that we could advocate the exclusive use of any one of the several metehods available as an alternative to historical cost accounting. Furthermore it must be recognised that the adoption of any bases of accounting other than historical cost would have significant repercussions in several areas, notably taxation, price and profit control.”

“But there is now general recognition that financial

statements adjusted for the effects of inflation are essential for efficient management, and that it is in the interest of shareholders that they should be provided with that information by the directors.” said Mr Lythgoe.

“The purpose of the exposure draft now issued is limited to establishing a standard practice for demonstrating the effect of changes in the purchasing power of money on accounts prepared on the historical cost accountling basis.

“The statement does not suggest the abandoning of the historical cost accounting method, but simply that historical costs should be converted into approximate ■ figures of current purchasing power, and that this information should be given in a supplement to the basic accounts prepared on the historical cost basis.”

Additional statement

“The society has invited I comments on the exposure draft no later than September 30. When the comments . received have been duly con-| sidered. and anv necessary I amendments made. the society will then issue a statement of standard accounting practice. “If the final statement reflects the views set out in the present exposure draft, then the accounting standard would require that all accounts of public companies laid before the members in general meeting should be supported by a supplementary statement showing in terms of dollars of purchasing power at the end of the year to which the accounts relate the financial position at that date and the results for the year.

“The supplementary statement would be prepared by converting the basic accounts by applying the consumers price index. Auditors would be expected to report on the supplementary statement.

“It is not suggested that the current purchasing power method of adjustment advocated in this exposure draft is the ideal solution to this complex problem. “However, its adoption, even if only as an interim measure, will provide more relevant J information for many users! of financial statements,” said! Mr Lythgoe. I