ACCOUNTING FOR INFLATION IN OTHER COUNTRIES
P. Howard Lyons
Partner, Deloitte, Haskins & Sells
Canadian Head Office, Toronto
Presented before the Toronto Society of Financial Analysts-October 1974
Recently the Canadian Institute of Chartered Accountants announced that it will shortly be issuing guidelines for the preparation of financial data restated to isolate the effects of general inflation. It is likely to make these guidelines mandatory during 1975, and perhaps later it will require that these adjusted amounts be disclosed in annual reports.
In this connection it may be interesting to look back at an International Congress of Accountants held in New York City in the middle of September 1929 to ponder the pressing problems of the day. At that Congress papers were given with titles that sound familiar today—for example, "Historical Versus Present-day Costs Including Post-war Revaluation and Exchange and Currency Problems." Another paper by a German author dealt with kinds of value: "purchasing-day cost value," "present-day cost value," "re-stocking value of the re-stocking day." Nowadays we have replaced those terms with others such as "past entry values" and "present entry values" and added others like "exit values" and so on. The paper referred to "apparent profits," stating that they are "made if in the income account and the cost accounting the costs are stated at a value lower than the value of selling day. Then the difference between the actual cost value and the value of today appears as a profit, although it would be needed for maintaining the substance of the assets." These apparent profits are now called phantom profits or inventory profits, and they are getting into the news these days. The SEC said this year that it would like to see them disclosed.
Another 1929 paper, also by a German, made the distinction between cost accounting adjusted "in conformity with the fluctuations of monetary values," i.e., a form of general-index adjustment, and values "established in conformity with present market prices," i.e., replacement values. This is an essential distinction, and at this point we will make a rough attempt to clarify it.
The kind of adjustment that applies a general price index to the accounts is designed to do only one thing: change the unit of measure from a dollar,