Annals of the Social Science Academy of Nigeria 1(1) 1994 DOI: 10.36108/ssan/4991.06.0180
INFLATION ACCOUNTING: ADOPTING CURRENT COST ACCOUNTING IN NIGERIA
Jane OM. Ande
ABSTRACT
The conventional or historical accounting statement is not of much benefit during periods of changing prices. Many problems begin to emerge when prices move up or down. For instance, the disparate monetary values in terms of which costs and revenues are expressed help to distort the net profit. The resultant net profit would be quite unreliable as a measure • of the firm’s efficiency or for predicting the firms economic value. It would also mislead an unwary management to distribute, in dividend, cash levels which could deplete capital and jeopardize the firm’s stability and future profitability. In order to test the effects of inflation on accounts, one live company was chosen and all the analysis proved that not accounting for inflation in the financial reports led to misinformation about the financial position. Assets were grossly undervalued and tax and dividend overpaid. Despite the tested methods of inflation accounting in the United Kingdom and United States of America, adopting them wholesale will not work in Nigeria. Historical cost financial reporting should still be encouraged by all companies mandated by the 1990 Companies and Allied Matters Decree to report to the public. Inflation Accounting should be made optional for companies whose activities are not adversely affected by inflation. Companies that are not adversely affected by inflation are companies that are not capital intensive. The use of official indices will not work as they are either not realistic or usually not available when needed. Companies should be allowed to quote their sources of price increases in their financial reports as part of notes to the accounts. Also, auditors are to confirm the prices quoted from their sources.