Financial Reporting

The inflation that has occurred in many Western countries in recent years has been the primary motivating force which has encouraged accountants to consider the effects of changing prices on accounting measurement. However, inflation does not create fundamental accounting problems. As discussed in Chapter 3, inflation affects the stability of the unit of measurement normally used by accountants, but this instability can be removed by adjustments for changes in the purchasing power of money. None the less, the inflationary conditions have led to discussions of some fundamental accounting issues; in particular, the use of historical cost has been questioned. Some accountants have suggested that current values should replace historical costs in reports of financial position and performance.