Exploring the Risk of Overstatements and Understatement in Financial Reporting Due to Inflation and Devaluation Gaps

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Cenap Ilter

Abstract

This study explores the effects of gaps between inflation and devaluation on financial statements. A model company, which is an assumed subsidiary of a US parent, is used to report to the parent based on the current International Financial Reporting Standards (IFRS). The model company reports to its parent the different assumed inflation and devaluation rates. The ensuing results and discrepancies are discussed and explained. It is suggested that the financial statements are distorted in an economy as the current IAS 29 does not require any restatement of the financial statements until the cumulative inflation rate for the last three years is around 100%. It is also suggested that the restatement of the financial statements in local currencies to account for inflation rates prior to the conversion to the reporting currency will help solve the distortions in financial reporting for multinational companies.
Key words: Inflation, devaluation, financial statement presentation

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How to Cite
ILTER, Cenap. Exploring the Risk of Overstatements and Understatement in Financial Reporting Due to Inflation and Devaluation Gaps. Management & Accounting Review (MAR), [S.l.], v. 10, n. 2, p. 55-71, dec. 2011. ISSN 2550-1895. Available at: <http://arionline.uitm.edu.my/ojs/index.php/MAR/article/view/223>. Date accessed: 23 june 2018.
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