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What is inflation accounting?

What is the effect of inflation on the financial statements? What is the current purchasing power method of inflation accounting? Is it true that actually assets are valued at a much lower cost compared to their replacement value? And without inflation accounting in case of a takeover existing share holders would not get a fair value of their stock.

Accounting Finance Sector Banking Operations Banking Finance
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Question added by Subhranshu Ganguly , Quality Analyst. , WIPRO
Date Posted: 2014/01/04
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mohamed sabeen
by mohamed sabeen , QHSE Manager , Novus catering service

Inflation accounting is a term describing a range of accounting systems designed to correct problems arising from historical cost accounting in the presence of inflation.   Criticisms of the historical cost method Historical cost method, over a period of time has been subject to many criticisms, especially as it considers the acquisition cost of an asset and does not recognise the current market value. Historical costs is only interested in cost allocations and not in the value of an asset. While it tells the user the acquisition cost of an asset and its depreciation in the following years, it ignores the possibility that the current market value of that asset may be higher or lower than it suggests.

Berhan Sisay
by Berhan Sisay , Senior Project Manager , Bamacon Engineering plc

Inflation accounting is a term describing a range of accounting systems designed to correct problems arising from historical cost accounting in the presence of inflation.   it considers time value of money and inflation should be considered during the planning stage of the market to check and forecast the value of the organization resource and at least protect from loss of value of resource in the future

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