Evolution of financial statement indexation in Brazil

              The Accounting Historians Journal Vol. 13, No. 1 Spring 1986
Timothy S. Doupnik UNIVERSITY OF SOUTH CAROLINA
THE EVOLUTION OF FINANCIAL STATEMENT INDEXATION IN BRAZIL
Abstract: Accounting for inflation is one of the more controversial topics in finan-cial reporting. This paper traces the evolution of the system of inflation account-ing used in one of the most highly inflationary economies in the world—Brazil. The history of inflation accounting in Brazil (known as monetary correction) is divided into three time periods: pre-1964, 1964 to 1976, and 1976 to the present. The events pertinent to the system of monetary correction in each of these periods are first discussed and then evaluated. It is shown that the system of monetary correction has been subject to massive political pressures since its inception, but gradual improvements have taken place over the years.
INTRODUCTION
Few countries have mandated procedures for the adjustment of historical cost financial statements for the effects of changing prices, and in those that have, inflation-adjusted data are typically required only as supplements to historical cost data1,2. Brazil has experimented with inflation accounting since 1951. Inflation-adjusted financial statements have served as the primary state-ments in annual reports, and inflation-adjusted income has served as the basis for corporate taxation, since 1964. The objective of this paper is to trace the evolution of inflation accounting in Brazil.
This study divides the evolution of inflation accounting in Brazil (known as "monetary correction") into three time periods: prior to 1964, 1964 to 1976, and since 1976. Prior to 1964, inflation ad-justments were made informally, but since 1964 all companies have been required to prepare inflation-adjusted financial statements annually, with a major revision in the system in 1976. The evolution of the system of monetary correction will be traced through each of these time periods, and the events of each period evaluated from conceptual and practical viewpoints.
Acknowledgment: The author wishes to thank Professor Eliseu Martins of the Uni-versity of São Paulo for his help in this study and the Arthur Andersen & Co. Foundation for providing financial assistance,