Álit: tímarit löggiltra endurskoðenda - 01.01.1988, Page 33

if there is no inflation. But the people in Argentina,
Mexico and Israel told us (and I have been told here)
that it is meaningless if there is hyperinflation because
the yardstick is constantly changing. Money is not what
it was so we cannot compare what we paid for some-
thing four or five years ago with what we get for it to-
day. Hence, in our accounts we need to restate the
costs by bringing them up to date so that they can be
compared to selling prices in the same money.
That is the approach adopted in E31, Financial Re-
porting in Hyperinflationary Economies. E31 requires
that the primary financial statements of any enterprise
reporting in the currency of a hyperinflationary econo-
my should be expressed in terms of the measuring unit
at the balance sheet date. In other words, everything is
expressed in the same measuring unit.
E31 requires that the primary financial statements
should be presented in this way. It is not asking for an
additional set of financial statements; any unadjusted
financial statements would be totally meaningless with-
out restatement. It is the primary financial statements -
the only financial statements - that should be expressed
in todayá money.
The proposals in E31 are very similar to what you
have done in Iceland - first in the Taxes Act and sub-
sequently in an opinion issued by the accountants.
They are also similar to what has been done in Brazil,
Argentina, Mexico, Israel and a number of other coun-
tries that are faced with exactly the same problem.
In many countries, it is also true that these sorts of
proposals also form the basis for taxation. That is not
necessary to make good accounting but it is certainly
something which is desirable in itself otherwise enter-
prises are paying taxes on profits that do not exist.
In Iceland, your accounting is good because you have
financial statements that only show profits if you have
beaten inflation. Furthermore, these financial state-
ments are used as the basis for taxation.
What do Restated Financial Statements Mean?
In the profit and loss statement, or income state-
ment, the amounts that have been received for sales
and the amounts that have been incurred in costs are
expressed in the same money. In the balance sheet, all
assets are measured in terms of what was paid for them
- but expressed in todayá money. Any benefits from
borrowing in times of high inflation is reflected in the
profit and loss statement; benefits do not arise, of
course, when the borrowing is subject to a linkage
agreement.
Profit is a real increase. It measures the extent to
which the enterprise has beaten inflation. It has not
made a profit in a hyperinflationary economy, indeed
any economy, unless it has beaten inflation.
The proposals in E31 are very simple; they are practi-
cal; They are being used in a number of countries
around the world. In practice, it is perhaps a little more
complicated than I have explained and there are a
number of practicai difficulties which crop up; we can
leave these to the accountants.
I understand that you have problems over the in-
terpretation of your figures. Sometimes the restate-
ment is seen as accountants mumbo jumbo which is un-
intelligible to the real world. The best way of over-
coming problems of interpretation is to focus on the
end numbers rather than the adjustments and book-
keeping entries. In other words, look at the fact that
the balance sheet is now expressed in what things cost
expressed in todayá money. Note that the profit and
loss account shows a profit only if inflation has been
beaten. Donf try and interpret the adjustments or ex-
plain what a particular adjustment means; The adjust-
ments are only the means to the end and not the end it-
self. Interpret the end results; you will find it a lot eas-
ier.
E31 and Iceland
IASC has received a response to E31 from your ac-
counting body which is extremely helpful and interest-
ing. It also reveals one of the practical problems that
IASC has found with this project; there are small dif-
ferences between what is done between the countries
that are faced with the same problem. They are all go-
ing in roughly the same direction but there are little dif-
ferences between say, Brazil, Argentina, Mexico, Is-
rael and Iceland.
There are two important messages or conclusions
that can be drawn from your submission. First there is
a comment that if the revered cost principle was still in
use, financial statements would be absolutely meaning-
less. This is a view that we in IASC share with you. The
second message from your submission is that the differ-
ence between your approach and IASCá approach are
small. Some of them, however, are worth exploring in
a little more detail.
The first is the difference between tax rules and ac-
counting rules. IASC has always believed that account-
ing rules must be determined in order to provide rele-
vant and reliable information that is useful to the users
of those financial statements. This sort of information
is not necessarily provided by following tax rules. You
have to use tax rules to work out tax liabilities but
when it comes to presenting financial statements you
may have to do something differently. This is a fact
that is recognised in many countries around the world.
The next issue is the choice of the most appropriate
price index. E31 calls for the use of an index that re-
flects changes in general price level. It goes on to say
that it is preferable that all enterprises in the same
economy use the same index; in other words, in an Ice-
33