What is inflation accounting?
Inflation accounting is the process of re-calculating the non-monetary items in the financial statements by multiplying the relevant amounts to be taken into account in the inflation adjustment by the adjustment factor in order to reflect their purchasing power at the date of the financial statements.
What is the importance of inflation accounting?
Inflation accounting ensures that companies in hyperinflationary environments can calculate the extents to which their financial statements reflect the gains or losses due to current economic conditions.
It particularly leads to more accurate information to be provided to the readers of the financial statements by ensuring that the assets of the companies, which have moved away from their fair values due to hyperinflation, are included in the financial statements at their realistic values.