FINANCIAL REPORTING AND PRICE CHANGES

1. Understand why the financial report has the potential to mislead during the period of price changes.

Currency exchange rate fluctuations and changes in the price of money for goods and services is an integral characteristic in international business. To understand the notion of price changes (changing prices), we must distinguish between the general price movements and specific price movements, which are both included in the terms of the price changes. A general price changes occur when the average price of all goods and services in an economy subject to change. Price increases are collectively known as inflation (inflation), while the price declines known as deflation (deflation).

Specific price changes refers to changes in the price of goods or services which are caused by changes in demand and supply. Political and social destruction caused by a series of hyper-inflation period (when the inflation rate increased by more than 50% each month) are well documented and this explains why a stable price level becomes a national priority for many countries in the world, businesses are also feeling the effects of inflation on factor prices as production increases. Although the price changes occur throughout the world, the influence of business and financial reporting varies from one country to another.

This measurement inaccuracies

distort:

1. financial projections based on historical time series of data

2. budget is the basis of performance measurement

3. performance data can not isolate the effect of inflation that can not be controlled

A. Effect of inflation on the Company

Inflation affects the financial position and performance of a company, for example, managers can make decisions that are not operating efficiently if he does not understand inflation. In regard to the financial position, financial assets will decrease in value during inflation due to reduced purchasing power. Therefore, an alternative system of inflation accounting is introduced, the general purchasing power accounting and current value accounting.

B. Alternative Accounting Measurements

1. General Purchasing Power (General Accounting Purchasing Power)

General purchasing power accounting includes all systems designed to maintain the real purchasing power of capital owners to accounting for changes in price levels. The main philosophy is to report the assets, liabilities, income and expense in the monetary unit and the same purchasing power. According to the non-financial GPP in the financial statements be reassessed to reflect the purchasing power of a similarity or a common purchasing power generally at the end of the balance sheet date. As for the financial statements of assets and liabilities in the form of liquid assets typically are not adjusted for purchasing power stable in the period December 31, but other assets, revenues and expenses should be adjusted.

2. Current Value Accounting (Accounting Flows Current Value)

CVA covers all of the system to calculate the present value or change in the current special price includes cost accounting, accounting and the current replacement price accounting exit / selling price accounting. CVA associated with the rise and fall of the value of certain assets is not diminished purchasing power now, are not considered income.

There are two main approaches in the CVA. First, the current cost / replacement cost (replacement cost) is widely used in non-monetary assets valued asset that is what is sacrificed in his place. Second, the current exit price / selling price / net realiable value (Cost of Sales) assess the asset at the selling price less cost of sales complementary. CVA resulted in the holding gains and losses as non-financial asset be reassessed and more complex management.

3. Current Value: Accounting GPP

GPP and CVA are combined in the real value system.

C. IASB on Accounting for Changes in Rates and Inflation.

The first thing shown IASC, or now called IASB regarding inflation accounting that emerged in 1977 in IAS 6, accounting responses to changes the price. At that point, there is no definitive standard both in the United States or in England, and there is uncertainty as to how inflation accounting problem can be solved in the two countries are more definitive.  inflation does not appear, until in 1981 with the release of IAS 15, Reflections on the Impact of Changes in Price Information, which supersedes IAS 6. At that time, the FASB issued SFAS 33 regarding reporting

Finance and Price Changes.

The main types following information reflects the impacts of price changes that are recommended for disclosure by IAS 15 as follows:

1) The number of adjustments to depreciation adjustments or amount of property, plant and equipment.
2) The number or amount of adjustment for the adjustment of cost of goods sold.
3) Adjustment relating to financial items, the impact of borrowing, or ownership interest when the adjustment has been incorporated into account in determining income under the accounting method adopted.

4) The overall impact of the results or earnings of adjustment as the other items that reflect the impact of price changes are reported under the accounting method adopted.
5) When the cost method now adopted, the current cost for property, plant and equipment and supplies.
6) The method adopted to calculate the information referred to in previous posts, including the nature of the index used.

2. Knowing inflation accounting terms and understand the influence of price adjustments on the financial statements.

A. Objectives and Principles of Accounting

Financial accounting is an information media prepared by management as a business manager for the public especially investors and creditors. Accounting information that happened in the financial statements of companies that provide a picture of a company's financial condition at any given moment (balance sheet) as well as the results of his efforts in a particular period (the bottom). Research in the USA, UK, and NZ (Harahap, 1996) shows that the financial statements are The first source of information in investment decisions, predict potential cash flows to be received and associated with uncertainty, assessing the company's ability to earn income, to assess the ability of management to achieve the company's main objectives, and provide actual and interpretative information about the transactions and other events.

Purpose financial statements under Statement No. APB. 4 (AICPA, 1973) can be divided into two general categories:

a. The general objective of financial statements is to present the statement of financial position, results of operations, and changes in financial position reasonably fit accepted accounting principles;

b. The specific objective of financial statements is to provide information about the property, liabilities, net worth, projected earnings, changes in property and liability, as well as other relevant information.

Many studies and discussions conducted by academics and professional organizations to make improvements in increasing the value, quality, and relevance of financial statements. The constraints faced to achieve this goal are:

a. Conflicts contained in itself the quality objectives;

b. Environmental influences;

c. Lack of complete understanding of the purpose.

Historical cost is the basis for assessing the right to record the acquisition of goods, services, cost, cost, and equity. In each of the estimated historical cost system assessed based on exchange rates at date of acquisition, the profit realized by the difference between the income realized by the realized cost, where cost is a sacrifice that is expected not to benefit in the future. The advantages of this system are as follows:

a. Recording the results can be traced, identified as necessary.

b. The data provided is less disputed than other proposed methods.

c. Does not present holding gains and losses.

d. The data provided is useful for decision making by managers and investors
e. This method is less visible than the cost of recording, cost reporting, auditing, and dispute resolution.

2. Valuation Method Book Value vs. Market Value

The book value of an enterprise is the concept of conventional accounting that can simply be counted as a whole or per share. Can be calculated by the formula:

BV per share = Total assets, total liabilities

Number of shares outstanding

Analysts often use the book value instead of the value of liquidity, for example, to estimate the lower limit of the stock price is tolerable, because the basic value of this book as a safe limit or safety measures in an investment plan. To measure the value of current assets is considered easy to use book value, but if it is used to measure the value of fixed assets will become more difficult because the book is always very different from its market price.
According to White et al (2003), the relationship between the book value to market value may be influenced by the nature of assets, accounting reporting method, profitability and general economic conditions. The book value is the preferred method of reporting results to management reporting financial position, revenue, and expense at a time and during certain periods. Often in choosing the method of reporting, management is always an emphasis on its importance and consequently can lead to differences between the book value to market value.

Despite this historical cost method still practiced in many countries in the assessment and measurement of the transaction. Here are the reasons that support the historical cost accounting:

a. Relevant historical cost in economic decision-making process, because the necessary data from the past.

b. Based on transactions that are uncertain and actual events, so that it can be accounted for.
c. Required throughout the history of this system is still useful.

d. The concept is most easily understood.

e. It is believed to minimize subjectivity and reduce the possibility of a change by a certain party.
f. CCA is still questionable.

g. Matter of price changes can be reported through the presentation of data or supplement the report.

h. Still not enough evidence and data to reject the historical accounting.

Changes of Stable Monetary Unit Concept

One of the basic principles of accounting is considered stable monetary unit, but this is irrelevant because in any exchange never took place there that has a stable value. This suggests that stable monetary unit assumption is only present in but not in reality. Hence the suggestion to use other accounting model, one of which is inflation accounting in. Accounting attempt to prepare financial statements that include the effects of inflation or a decline in purchasing value of money in the financial statements, so that financial statements show the currency at the prevailing price level.

3. Determine differences in current cost accounting model and the conventional.

In general, the conventional accounting, financial statements are presented based on the historical value that assumes that price (monetary unit) is stable. Conventional accounting does not recognize the changes in general price levels or changes in the level of rates. As a consequence, if there is a change in purchasing power as inflation period, the historical financial statements is economically irrelevant. In this period generally scored higher revenues while fixed assets valued lower. Actually, there are several methods of accounting on the effect of price changes, such as accounting fixed price, current value accounting, and general price level accounting. General price level accounting restatement will hold the components of financial statements into dollars at the same level of purchasing power, but did not change the accounting principles used in accounting based on the value. Practice, the controversy concerning the relevance of the use of price level accounting public still continues to this day. Some of the arguments that support or reject the application of the general price level accounting will be presented in this article. Similarly, the results of two studies on the effects of application of the general price level accounting on the financial statements will be compared to see whether the accounting adjustments based on the general price level is required.

Historical Cost Financial Statements of Financial Position

1. Amount in the statement of financial position are not expressed in the units of measurement are now at the end of the reporting period, are restated by applying a general price index.

2. Items of monetary restated because they are expressed in monetary units is now at the end of the reporting period. Monetary posts are owned and the money to be received or paid in cash.

3. Assets and liabilities, with the agreement, which is connected with changes in prices such as index linked bonds and loans, adjusted in accordance with the agreement to ensure the balance at the end of the reporting period. The posts are recorded at amounts have been adjusted in the statement of financial position are restated.

4. All assets and other liabilities are nonmonetary. Some noted the number of non-monetary post is now at the end of the reporting period, such as net realizable value and fair value, then the post is not restated. All assets and liabilities to other non-monetary restated.

5. Most of the non-monetary items carried at cost or cost less depreciation. Therefore, these items are stated at the amount present on the date of acquisition. Acquisition cost, or cost less depreciation, which are presented back to each item is determined by applying the change in the general price index from the date of acquisition until the end of the reporting period on a historical cost and accumulated depreciation. For example, fixed assets, inventories of raw materials and merchandise, goodwill, patents, trademarks and similar assets are restated from the date of purchase. Supply of intermediate goods and finished goods are restated from the date of the purchase cost and conversion costs.

6. Detailed record of the date of acquisition of units of fixed assets may not be available or can not be estimated. In rare circumstances, it may be necessary, in the first period to implement this statement, to use an independent professional assessment of the value of such units as the basis for the presentation of the return.

7. General price index may not be available for a period of time restate fixed assets required by this Statement. Under these circumstances, an entity may need to use the basic estimates, for example, the transfer rate between the functional currency and foreign currencies are relatively stable.

8. Some noted the number of non-monetary post is now on a date other than the date of acquisition or date of statement of financial position, for example, fixed assets have been revalued in the previous date. In this case, the carrying amount restated from the date of revaluation.

9. Restated amounts of non-monetary items is reduced, in accordance with relevant GAAP, when the amount exceeds the recoverable amount. For example, the amount of fixed assets, goodwill, patents and trademarks presented again reduced to recoverable amount and restated amount of inventory reduced to net realizable value.

10. Investee is recorded using the equity method may make a report in the currency hyperinflation economy. Statement of financial position and reports comprehensive income of the investee are restated in accordance with this Statement for the investor counting on net assets and profit and loss. When the financial statements of the investee are restated denominated in foreign currencies, the financial statements are translated at the closing exchange rate.

Now the Cost of Financial Statements Statements of Financial Position

Items that are presented at current cost are not restated because they are expressed in units of measurement are now at the end of the reporting period. Elsewhere in the restated statement of financial position in accordance with paragraphs 11 to 24.

Comprehensive Income Statement

Comprehensive income statement using the current cost, before restatement, generally reports costs are now at the time of the underlying transactions or events. Therefore, the entire amount is to be presented again in the unit of measurement is now at the end of the reporting period by using a general price index.

Consolidated Financial Statements

The parent entity financial reports in the currency hyperinflation economy may have subsidiaries that also make a report in the currency hyperinflation economy. Entity's financial statements are restated the child's needs by using the general price index of the country whose currency is reported prior to inclusion in the consolidated financial statements issued by the parent entity. When a foreign subsidiary is an entity, then the restated financial statements are translated at the closing exchange rate. Entity's financial statements were reported in children who are not hyper-inflation economy currencies Exchange. If treated in accordance with the final financial statements of the different reporting periods are consolidated, all monetary and nonmonetary post need to be restated in the unit of measurement is now on the consolidated financial statements.

4. Explain the differences of inflation accounting in the U.S., Britain, and Brazil.

In the U.S., the advantages and disadvantages of monetary items are determined by me restate, in constant dollars, from the beginning and ending balances, or transactions in, all assets and liabilities (including long-term debt). The results are intended to provide a useful basis for assessing the performance of companies in maintaining the general purchasing power of investors (FAS No. 89, paragraphs 65-66). Gains or losses are not included in profit but are disclosed in a separate stand-alone item. This treatment implies that the FASB looked at the advantages and disadvantages in the IEM-monetary item is different in nature with other spiders. In 1979, the FASB issued Statement of Financial Accounting Standards / SFAS No.33, entitled "Financial Reporting and Changing Values" statement requires U.S. companies that have supply and  still worth more than $ 125 million or assets of more than $ 1 billion, for the past 5 years trying to make disclosure of constant purchasing power as the basic framework of the historical cost basis of measurement for the primary financial statements.

In the UK, gains and losses on monetary items are separated into monetary working capital adjustment. The second number is associated with the following changes in the price level is given (SSAP NO. 16 paragraphs 11-13) / when sales on credit, working capital tied company (in a sense, corporate finance financial changes in the replacement cost of inventory) to accounts receivable associated billed. Conversely, when stocks and other supplies purchased on credit, the specific price changes related to these items are basically financed by the supplier during the crediting period. So that the working capital of the buyers are free to use for other purposes. Because these phenomena are the same and is seen as an extension of adjusting the running costs of sales to generate operating profit has been adjusted. 3 British Standards allow reporting options:

a. Presenting the accounts as a current cost basis financial statements with supplementary accounts of historical cost.

b. Presenting the accounts of historical cost as the basis of financial statements with supplementary accounts of current cost.

c. Presents the current cost accounts as the accounts with enough historical cost information.

In Brazil, do not adjust the current assets and current liabilities are explicitly because the amounts are expressed in the running. Adjustments arising from calculating the net value of assets and capital that have been permanently adjusted to price levels represent a gain or loss in the general purchasing power of working capital financing with debt or equity. Adjustment of permanent assets in excess of capital adjustment to reflect the portion of assets financed with debt permanently, resulting in a gain purchasing power. Instead, the adjustment of capital assets is greater than the permanent adjustment shows the portion of working capital financed by capital. For the capital portion is recognized the loss of purchasing power during inflationary periods. Although no longer required the recommended inflation accounting in Brazil today reflects two groups of reporting options, the Brazilian Corporate Law and Capital Market Supervisory Commission of Brazil. Inflation adjustment in accordance with the law firm presenting the accounts re-permanent assets and shareholders' equity by using a price index which is recognized by the federal government to measure the local currency devaluation.

5. Understanding of financial reporting in hyperinflation economy.

Hyperinflation, in economics, is a runaway inflation, a condition when prices are rising so rapidly and drastically decreases the value of money. Formally, hyperinflation occurs when the inflation rate of more than 50% in one month. As a rule of thumb, inflation is usually reported once a year, but in conditions of hyperinflation, the inflation rate reported in a shorter interval, usually once a month. Hyperinflation usually arises when an increase in money supply are not known or changes in the currency system drastically. Hyperinflation is usually associated with war, economic depression, and simmering political or social conditions of a country.

FINANCIAL REPORTING IN THE ECONOMY

1.      This statement is applicable to the financial statements, including the consolidated financial statements of each entity that functional currency is the currency of an economy experiencing hyperinflation (hereinafter referred to as hyper-inflation economies).

2.      Hyperinflation in the economy, reporting of operating results and financial position in the local currency without restatement is not useful. Money loses purchasing power such that the ratio of the amounts of transactions and other events from time to time, even within the same accounting period, be misleading.

3.      This statement does not set at a certain level of inflation is considered hyperinflation. Consideration is required in determining when restatement of financial statements need to be done in accordance with this statement.

4.      All entities that prepare financial statements in the currency of the same hyper-inflation economies are encouraged to apply this statement from the same date. However, this statement is applied to the financial statements of each entity since the beginning of the reporting period when the entity identifies the existence of hyperinflation in the country whose currency is used by such entities to prepare financial statements.

5.      Price change from time to time as a result of political influence, economic, social and general or specific. Specific influences such as changes in supply and demand and technological changes may cause individual prices increase or decrease significantly and independently from one another. In addition, the general effects can cause changes in general price levels and purchasing power of money.

6. Knowing whether a constant dollar or current cost is better to measure the effects of inflation.

In whose name is known economics of inflation, where inflation is a process of rising prices in general and persistent (continuous), associated with the market mechanism that can be caused by various factors, among others, private consumption increased, excess liquidity on the market that trigger consumption or even speculation, to include also due to the lack of a launch distribution product. With other words, inflation is also a process of declining currency value continuously. Inflation is the process of an event, rather than the high-low a price level. That is, the higher the price level that is considered not necessarily indicate inflation.

Inflation is an indicator to see a rate change that is thought to occur when the price increase takes place continuously and mutually interact. Inflation term is also used to mean an increase in money supply which is sometimes seen as the cause of rising prices. There are many ways to measure the rate of inflation, which are common and frequently used is the CPI and GDP Deflator. Inflation can be classified into four groups, namely inflation is mild, moderate, severe, and hyperinflation. Mild inflation occurs when prices are below the 10% in a year. Inflation is between 10% - 30% in a year. weight between 30% - 100% in a year. and hyperinflation or uncontrollable inflation occurs when prices are at levels above 100% in a year.

Where there are indicators that are often used to measure the rate of inflation is the Consumer Price Index (CPI). CPI changes over time can indicate the price movement of a package of goods and services consumed by the public. Since July 2008, the package of goods and services in the CPI basket has been done on the basis of Cost of Living Survey (SBH), 2007 conducted by the Central Statistics Agency (BPS). Then, the BPS will monitor the price movement of goods and services on a monthly basis in several cities, the traditional and the modern market for some types of goods / services in each of the city.

Other inflation indicators based on international best practice include:

1. Wholesale Price Index (WPI)

Wholesale prices of a commodity is the price of a transaction that occurs between the dealer / wholesaler first with buyers / wholesalers in large numbers next to the first of a commodity market.

2. Gross Domestic Product Deflator (GDP)

Describe the measurement of the final goods price level (final goods) and services produced within an economy (country). Generated by dividing the GDP deflator of GDP on the basis of nominal prices to GDP at constant prices.

Grouping of Inflation

Inflation as measured by the CPI in Indonesia are grouped into 7 groups of expenditure (based on the Classification of individual consumption by purpose - COICOP), namely:
1. Food group

2. Group Food, Beverage, and Tobacco

3. Housing Group

4. Clothing Group

5. Health groups

6. Group Education and Sports

7. Transport and Communications group.

Impact of Inflation

Inflation has both positive and negative effects, depending on whether or not inflation worse  himself. If inflation is mild, it has a positive influence in the sense of pushing the economy to make it better, namely to increase the national income and make people eager to work, save and invest.

Conversely, in times of severe inflation, which in the event of uncontrolled inflation (hyperinflation), the state of the economy into chaos and felt sluggish economy. People become excited about working, saving, or investments and production because prices are rising rapidly. The recipients of fixed incomes such as public servants or private employees and the workers will be overwhelmed to bear and keep their prices so that life becomes increasingly degenerate and collapsed from time to time.

For all the people who have a fixed income, inflation is very detrimental. Take for example a retired civil servant in 1990. In 1990, enough retirement money to make ends meet, but in the year 2003-or thirteen years later, the purchasing power of money may be only a half. That is, the pension is no longer sufficient to meet the needs of everyday life. Conversely, people who rely on income based benefits, such as employers, are not harmed by inflation. So it is with employees who work in the company with the following salary inflation. Inflation levels can also cause people are reluctant to save because of the currency goes down. Where savings can earn interest, but if the interest rate above inflation, the money still. General, inflation can result in reduced investment activity in a country, pushing up interest rates, encouraging speculative investments, the failure of the implementation of development, instability economy, balance of payments deficit, and declining living standards and welfare of the community.

7. Definition of a double dip (double dip) and explains how to handle.

"The world economy is almost recession," said Morgan Stanley on August 17, 2011. London stock market analysts Edwards called it the "Ice Age" for the global economy, he said, "financial crisis since 2008 in fact, continues today into a debt crisis, is a" double dip ".
Though the handling of the crisis of capitalism economic system seemed to have a recipe tough, and seem able to give citizens of the world situation better life and well-established. Even when there is economic growth, Marx denounced, but in times of economic crisis, he kept out of the closet: Karl Marx was a 19th century philosopher, economist, and pioneers of the communist movement. In 1989 Berlin publisher to reprint the complete works of Marx and Engels for the first time. And, since then many politicians and economists to analyze the crisis from year to year by using the "Das Kapital" by Karl Marx who hated it. Supposing the current economic situation a crisis, Karl Marx again besieged the city.

Over-production crisis since 1973

Of course we still remember and experience, the 1973 economic crisis of capitalist overproduction due to the discovery of structural technology gap 80s was found to delay the crisis, the resumption of large-scale restructuring in the steel industry, mining, industrial glass, textiles and shipbuilding. Production continued to increase consumption of artificially high as a global community of cultural consumption. At that time the U.S. President Reagan and Prime Minister Thatcher in the UK carried out the attack against the union, given the high tax breaks for the wealthy class, so they can spend more money and deregulation of financial markets on a world scale.

Capital have been looking for a way out by flowing capital into the financial sector. Then the BNP (Gross National Product) reached five times larger, while the results in the financial sector fifteen times greater on a global level. With such speculation in the financial sector soaring capital, so that a crisis of overproduction through the agenda to increase investment in the real economy not benefit the poor in 2000 in the U.S. triggered a "borrowing money" to become a consumer bank with no mechanism of control over their salary income in sector and 6 million home buyers otherwise have no credit score requirements of the standard, and 3 million people have lost their home.