In the world in which we live, in which monetary values are continually subject to fluctuations as a consequence of wars and political and social factors, it is almost impossible to claim that the financial situation coincides with the real or economic situation of the company.
The currency, which is an instrument for measuring accounting, lacks stability, since its purchasing power changes constantly; therefore, the figures contained in the financial statements do not represent absolute values and the information they present is not the exact one of their situation or their productivity.
During the development of this will be known, the inflationary problem, effects of inflation on companies, methods to update the financial statements for inflation and the process of preparing the statement of changes in the financial situation, in order to learn and develop the ability to prepare, update and restate financial information due to inflation, for the achievement of good decision making.
UNIT I. INFLATIONARY PROBLEMS
1.1. Financial information and its objectives
Financial information is information that produces the accounting essential for the administration and development of companies and therefore is processed and concentrated for use by management and people who work in the company.
The need for this information causes the financial statements to be produced. The financial information has become an integrated set of financial statements and notes, to express what is the financial situation, the result of operations and changes in the financial situation of a company.
The importance of the financial information that will be presented to the users serves to formulate their conclusions on the financial performance of the entity. Through this information and other elements of judgment, the general user will be able to evaluate the future of the company and make economic decisions about it.
1.2. Objectives of financial information.
The basic financial statements must meet the objective of reporting on the financial situation of the company on a certain date and the results of its operations and changes in its financial situation for the accounting period ended on a certain date.
EFs are a means of communicating the financial situation and an end because they do not try to convince the reader of a certain point of view or position. The capacity of the EF is to transmit information that satisfies the user, and since the users of this information are diverse, this should serve them to:
• Make investment and credit decisions, the main stakeholders of this information are those who can provide financing or grant a credit, to know how stable and the growth of the company and thus know the performance or recovery of the investment.
• Assess the solvency and liquidity of the company, as well as its ability to generate resources, here the stakeholders will be the different creditors or owners to measure the flow of money and its performance.
• Evaluate the origin and characteristics of the financial resources of the business, as well as its performance, this area is of general interest to know the use of these resources.
• Lastly, form a judgment of how the business has been managed and evaluate the administration's management, how the company's profitability, solvency and capacity for growth are managed.
When financial information satisfies the general user, it is because a person with some technical knowledge can form a judgment about:
• The level of profitability
• The financial position, which includes your solvency and liquidity
• The financial capacity for growth
• The flow of funds
1.3. Characteristics of financial information.
The characteristics of the financial statements should be based on the characteristics of the accounting information indicated in bulletin A-1 of the generally accepted accounting principles, which are:
• Utility.- Its informative content must be significant, relevant, truthful, comparable and timely.
• Reliability.- They must be stable (consistent), objective and verifiable.
• Provisionality.- Contains estimates to determine the information, which corresponds to each accounting period.
The essential characteristic of the financial statements will be to contain the information that allows reaching a trial. For this, it must be characterized by being impartial and objective, in order not to influence the reader to a certain point of view, thus responding to the characteristics of reliability and truthfulness.
Within the context of generally accepted accounting principles, the basic financial statements are historical, because they report events that have occurred and are part of the frame of reference so that the general user can weigh the future.
The basic financial statements are:
• The balance sheet, which shows the assets, liabilities and stockholders' equity as of a given date.
• The income statement, which shows the income, costs and expenses and the resulting profit or loss in the period.
• The statement of changes in stockholders 'equity, which shows changes in owners' investment during the period.
• The statement of changes in the financial situation, which indicates how the resources and obligations of the company were modified in the period.
The notes to the financial statements are an integral part of them, and their objective is to complement the statements with relevant information.
1.4. Limitations on the use of financial statements.
Users of financial information should take into account the following concepts:
• Transactions and economic events are quantified with particular rules depending on the personal criteria of the person carrying them out.
• Since the financial statements are expressed in currency as their form of measurement, it should be considered that they have a value that changes according to economic events.
• The financial statements, especially the balance sheet, are not intended to present the value of the business, but to present the value, for the business, of its resources and quantifiable obligations. EFs do not quantify other essential elements of the company such as human resources, product, brand, market, etc.
1.5. Effects of inflation on companies and especially on financial information
The financial statements are limited to providing information obtained from the record of the operations of the company under personal judgments and accounting principles, even when it is generally a situation different from the real situation of the value of the company.
When talking about value, we think of an estimate subject to multiple economic factors that are not governed by accounting principles.
In the world in which we live, in which values are continually subject to fluctuations as a consequence of wars and political and social factors, it is almost impossible to claim that the financial situation coincides with the real or economic situation of the company.
The currency, which is an instrument for measuring accounting, lacks stability, since its purchasing power changes constantly; therefore, the figures contained in the financial statements do not represent absolute values and the information they present is not the exact one of their situation or their productivity.
The differences between the figures presented in the financial statements based on historical costs and the real value are caused by at least the following factors:
a).- Loss of the purchasing power of the currency.
b).- Supply and demand.
c).- capital gain
d).- Defective estimate of the probable life of the assets (Fixed assets).
The loss of the purchasing power of the currency is caused by inflation, which is the sustained and general increase in the price level.
The registration of operations is made in monetary units with the purchasing power that the moment the goods and services are acquired; that is, transactions are recorded at cost in accordance with accounting principles.
This has the consequence, in an inflationary economy, that said operations over time are expressed at costs of previous years, even when their equivalent value in current monetary units is higher, in such a way that the financial statements prepared based on the cost do not represent their current value.
The information presented in the statement of financial position is fundamentally distorted in the investments presented by goods, which were recorded at their acquisition cost and whose price has varied over time.
Inventories generally show differences of relative importance due to the rotation they have and their valuation is more or less up-to-date. Permanent investments, such as land, buildings, machinery and equipment in general, whose acquisition price has remained static over time, generally show significant differences in relation to their current value.
On the other hand, the capital of the companies loses its purchasing power over time due to the gradual loss of the purchasing power of the currency.
From the point of view of the information on the results of operations of the company, we have deficiencies caused mainly by the lack of updating of the value of inventories and the intervention of a real depreciation.
All this gives rise to uncertainty for decision-making because there is a lack of updated information and, if there is no policy of separating from profits at least an amount that added to capital, results in at least purchasing power. As in the previous year, the consequence will be the decapitalization of the company and, over time, its disappearance.
Hence the importance of restating financial statements, the restatement of financial information is to present the financial statements of a company in figures or weights of purchasing power as of the closing date of the last fiscal year.
Differences between financial and economic, financial refers to the values expressed in monetary units, strictly referring to costs and prices on the dates on which the operations were carried out. The economic refers to current values related to the purchasing power of the currency at a certain time.
Since the financial statements are formulated in accordance with the principle of base or historical value, in which it is established that the value is equal to the cost, the operations are recorded in monetary units on the dates on which they are carried out and, therefore,, we are adding currencies with different purchasing power.
Thus, the financial statements show a financial but not an economic situation.
In addition to the above, the financial statements do not normally consider certain factors that influence the economy of the company and that add real value to the strictly financial one, such as customer portfolio, image, experience, concessions, efficient organization, accredited products, good location for the supply of raw materials, etc.
From the above, it follows that the main phenomena caused by inflation, which affect the company directly are: scarcity, shortage of work, high production costs and financing.
UNIT II. REEXPRESSION AND UPDATING OF FINANCIAL INFORMATION
2.1. Concept
Inflation is commonly defined as the general and constant increase in the prices of goods and services in an economy.
Obviously it causes the loss of the purchasing power of money and has important economic consequences, because wealth is distributed among individuals unfairly.
Inflation according to its intensity and permanence deteriorates the degree of utility that a country's financial information should have, as a strategic instrument in its economic development.
Traditional accounting and Financial Reporting Standards in general terms were established and developed under the assumption that the monetary unit used in accounting measurements is established and, therefore, the information is valid. However, in the economic reality of some countries, significant economic inflation exists and, therefore, financial information is of little value.
Fortunately, the countries that have suffered the inflationary phenomenon have invented and implemented mechanisms to measure it, which offers the opportunity to correct the errors in the accounting reports and rescue the value of it.
The currency has two basic functions and two derived functions.
As basic functions:
• Unit of measurement of the value of things.
• Be a means of exchanging goods.
As derived functions:
• Be a deferred payment unit.
• Be a carrier of value.
In a monetary economy, goods and services are exchanged for currencies in the short and long term, and these currencies are, in turn, exchanged for other goods and services.
Price is the exchange ratio of a commodity for money. Thus, a merchandise that can be sold in the market in two pesos has a monetary value of two pesos.
Obviously, a peso is always worth a peso, but it is idle to value money by itself. The value of money is understood as the value of money, that is, the capacity of each monetary unit to be exchanged for goods and services.
The value of money is therefore clearly related to the price level; it comes to be in a reciprocal relationship to the general level of prices. When the price level is high, the value of the net - that is, its purchasing power - is low. And when the price level is low, the value of money is high.
Logically, if the value of goods is measured in terms of monetary units, the purchasing power of monetary units and their changes can be estimated from the price of a set of goods and services at one date relative to another.
Thus, the change in the purchasing power of money according to this basket of goods, between two dates is $ 200 or 16.7% (200 / 1,200 x 100).
We say that $ 1,200 on date 1 has the same purchasing power as $ 1,400 on date 2, and that inflation for product prices in the period amounted to 16.7%.
Obviously, the constitution of a general price index depends directly on the objective, that is, what the index will be used for. There are indices of prices of products at wholesale, retail, consumer prices, etc., and logically the products and the quantities of products in the basket must be related to their objective. The quantities and products of a basket of goods to the consumer, must list products and services in the quantities consumed proportionally by the consumer. The elaboration of price indices is complex, particularly to adequately evaluate the changes in prices of consumer goods derived from changes in the quality of products.
In Mexico, for the effects of accounting adjustments for inflation in the figures of the financial statements, the National Consumer Price Index is used, the purpose of which is to measure the impact of prices on the economy of consumers, that is, the loss of purchasing power of individuals in a society as consumers. Supposedly, it is the most appropriate index to measure the loss of purchasing power of a currency in a country, in consequence of which all the individuals of the same are consumers, in such a way that in one way or another, consumer inflation should impact or be Reflection of price changes in all goods, even if they are not consumer goods, or are not used in the content of the consumer goods basket.
In effect, in an economy, goods change prices due to inflation and other specific economic reasons, for example, the changes between the supply and demand of goods.
The validity of the INPC or the mechanics to do it and its effectiveness as an indicative number of inflation has been strongly criticized, nevertheless it is the reference point of innumerable commercial transactions, in such a way that it works as a reference point for all. If so, it is finally valid enough.
2.2. objective
The objective of the method of re-expression of financial information based on the INPC is to restore the information content of the same to the requirement of relevance to users interested in it, which deteriorates due to the effects of economic inflation.
Traditional financial accounting is based on the assumption that the unit of measure or currency used as the basis of the quantifications is stable. Some countries where inflationary effects are considered of minor relative importance, incidental or temporary, are ignored in the preparation and presentation of financial statements.
However, in countries where economic inflation arises with significant rates and with a relative tendency to its permanence, they opt for accounting with INPC, because traditional financial accounting, then:
a) It provides an accounting profit for the incorrect period, which does not include the loss or gain from holding monetary assets. That is, it ignores the maintenance of capital of the entity in the course of time, whose purchasing power deteriorates.
b) The investor lacks the correct information to calculate the return on capital and, therefore, cannot make adequate forecasts, nor confirm the correction or incorrectness of previous decisions.
c) The comparative information of the entity with reports from previous years, provides figures of monetary growth that are confused with real growth. If you cannot validly compare business development and trends in the past, financial information is of little value in reaching conclusions about the future.
In other words, the figures in the financial statements under these conditions are not meaningful or relevant to external users, despite the reliability due to the effect of inflation, in itself it is not affected, because the figures of traditional accounting continue to faithfully represent the transactions occurred in nominal pesos and remain verifiable. What happens is that these representations, although reliable, are no longer relevant.
In other words:
a) The figures of the financial statements to be useful in the decision making of the users, must be balanced relevant and reliable.
b) Inflation irreparably deteriorates the assumption that nominal monetary units are stable as a unit of measurement for transactions, and the informative content, therefore, loses relevance.
c) The problem of the loss of the relevance of financial information is the problem to be solved, as a consequence of the phenomenon of economic inflation.
d) In fact, economic inflation does not alter the reliability requirement of financial information.
2.3. Importance
Over time, accounting has been developed and applied as a sound theory. As an information system, it meets the objectives it pursues and allows the user to make decisions related to the company whose financial statements it analyzes. However, since the currency is the unit of measurement used by accounting, it is important to consider that the currency is only a measurement instrument within accounting, and it should be considered that it has a value that changes to a greater or lesser degree. depending on economic events.
The value of the currency changes when an economy experiences an inflationary process, which is the situation in which there is a general and persistent increase in the prices of goods and services. It is difficult to say exactly what is a low inflation rate and which is a high inflation rate. However, countries such as the United States are said to have low inflation, which averages between 2% and 3% annually, except in the 1970s, when it was higher. On the other hand, countries like Mexico have managed to maintain a very high inflation rate for years, as happened in 1983, when inflation of 80.76% was recognized annually.
The consequence of inflation is that the monetary unit, the currency, loses purchasing power and more and more currencies are needed to buy what was previously bought with less. For example, if on the first day of 1983 $ 120 was needed to buy a certain good, at the end of that same year $ 216.91 was needed to buy the same good ($ 216.91 = $ 120 x 1.8076).
As mentioned, the fact that the currency has a value that changes, decreasing its purchasing power when there is inflation, generates a limitation in financial information if it has been prepared based on the accounting principle of the original historical value.
If a company purchased a machine in December 1982 for $ 100,000 and bought an identical one in December 1983, it is highly likely that, given existing inflation, it has paid a larger sum for it (about $ 170,000). Although it was already said that the 1983 inflation was 80.76% per year, the price of the new machine would not be $ 180,760 because 80.76% refers to the increase in the price of a basket of goods, and when it is published it is said that the general consumer price index increased by 80.76%; however, in the case of the machine, it would have an increase in its price that would occur depending on the specific inflation of that type of asset.
If accounting were carried out on the basis of the valuation principle, total fixed assets on the balance sheet would present an erroneous impression of the information.
Seeing this information, one might think that there was a physical increase of 180% in fixed assets, but what actually happened was a physical increase of 100%, which due to inflation appears to be greater.
If inflation for the year had only been 2%, the degree of distortion would be considerably less.
To correct the limitation that occurs when an inflation rate is high enough to generate useless and unreliable information, the same valuation principle establishes that the figures should be modified in the event that subsequent events occur that make them lose their meaning, applying adjustment methods in a systematic way that preserve the impartiality and objectivity of accounting information. If the figures are adjusted for changes in the general price level and are applied to all the concepts that may be modified that make up the financial statements, it shall be considered that there has been no violation of this principle.
Considering the above, it can be said that the problem that arises is not the accounting system but the unit of measurement used, and consequently, a procedure had to be found that, if it affects the possibility of verifying the operations carried out, allows that the information retains its fundamental characteristics. In Mexico, the restatement of financial statements is the procedure used to correct the distortion caused by inflation to financial information prepared in accordance with the original historical value principle.
2.4. financial statements
The final product of the accounting process is financial information, an essential element for the various users to make decisions. The financial information that these users require is primarily focused on evaluating the financial situation, profitability and liquidity.
In accordance with International Accounting Standard No. 1, regarding the presentation of financial statements:
The financial statements constitute a structured representation of the financial situation and financial performance of an entity. The objective of financial statements for general information purposes is to provide information about the entity's financial position, financial performance, and cash flows that is useful to a wide variety of users when making their economic decisions.. The financial statements also show the results of the management carried out by the administrators with the resources entrusted to them.
Taking into account the information needs of users, accounting considers that every business must present four basic reports. Thus, there are:
• The income statement that reports on the profitability of the operation.
• The statement of changes in stockholders' equity, the objective of which is to show changes in the investment of the owners of the company.
• The statement of financial position or balance sheet, the purpose of which is to present a list of the company's resources (assets), as well as the sources of financing (liabilities and capital) of said resources.
• The cash flow statement, whose objective is to provide information about the liquidity of the business, that is, present a list of the sources of cash and its disbursements, which constitutes a basis for estimating future cash needs and its probable sources.
It is understood that the general user of the information is satisfied if the financial statements of a company are sufficient for a person with adequate technical knowledge to form a judgment, among others, on:
a) The level of profitability.
b) The financial position, which includes your solvency and liquidity.
c) The financial capacity for growth.
d) The flow of funds.
Through this information and other elements of judgment that are necessary, the general user will be able to evaluate the future of the company and make economic decisions about it.
2.5. characteristics
To know the effect that inflation causes, the characteristics of the items in the financial statements must be known.
Monetary items
Monetary items are considered those whose value is always subject to a fixed number of monetary units. The document in which its details are recorded, which may be a promissory note or a bill of exchange, does not consider the possibility of changing its nominal value as a result of inflation.
a) Monetary assets: Some examples of monetary assets are cash in currency and banknotes, time deposits with banks and accounts receivable; Because its value cannot be updated, it generates a loss in purchasing power to its owner, be it a natural person or a company.
b) Monetary liabilities: Unlike the effect it has on monetary assets, on monetary liabilities inflation causes a gain in purchasing power to whom it owes the amount expressed in the respective document. There is talk of a profit because the purchasing power of the monetary units is greater when financing is contracted than at the end, when it must be paid. For example, if a natural person or company obtains a loan in March for $ 10,000 maturing on December 31, the $ 10,000 of March has a higher purchasing power than the $ 10,000 of December, when the liability must be settled.
Interest-bearing monetary items
When a company has monetary items, they can be of two types:
• Monetary items that generate interest - in favor in the case of assets and in charge in the case of liabilities -.
• Monetary items that do not earn interest.
Non-monetary items
a) Non-monetary assets: Non-monetary items are those whose value is not subject to a limited or fixed number of monetary units. When inflation exists, the value of these items should not remain unchanged over time. These items are valued according to the Financial Reporting Standards, based on the price paid by them on the date of their acquisition; but when inflation exists, its value must change to reflect its effect. The problem for the reader is that the traditionally prepared financial statements do not reflect the updated value of these items or they only do so partially.
b) Stockholders 'equity: In the case of stockholders' equity, this section of the balance sheet presents the contribution of the shareholders according to the amounts they contributed on different dates; This constitutes a failure because amounts are being added that, because they belong to different dates, have different purchasing power. The shareholder is interested in knowing whether or not his investment grows in real terms; therefore, you should know if you are at least maintaining the purchasing power of your original investment. The same is the case with retained earnings, reserves, etc.
Statement of income
The following describes each item and how it is valued according to traditional accounting:
• Sales are valued at more or less current purchasing power pesos because they occurred during the year for which information is reported.
• Cost of sales can have purchasing power pesos from the reporting year or from previous years, depending on whether it is a commercial company or a manufacturer. Commercial companies may have in their cost of sales pesos with recent purchasing power if the purchases were made in the reporting year, or previous years if the purchases were made before. Manufacturing companies may have the same case with regard to the acquisition of raw materials and labor costs; however, they may have older purchasing power pesos if the production fixed assets were acquired several years ago.
• Selling and administrative expenses have almost recent purchasing power pesos for those items that are disbursed, and pesos with purchasing power of previous years for non-disbursable items, such as depreciation of fixed assets used in the administrative and sales function..
• Financial expenses contain only the corresponding to the nominal interest rate applied on the principal amount of the loans; This does not represent the real financial cost since it does not include neither the gain in purchasing power that arises from the existence of the liabilities nor the contingent losses also related to the liabilities.
As a result of the above, it can be seen that from the mixture of weights of different purchasing power that is presented in the income statement, the only thing that can emerge is a profit figure that does not represent reality. In addition, in the case of cost of sales and depreciation, the amounts allocated are not sufficient to provide replacement of inventories and fixed assets.
2.6. Update methods
In Mexico, the Mexican Institute of Public Accountants establishes the rules applicable to the preparation and presentation of financial statements. The process of investigating and establishing accounting standards related to the restatement of financial statements began in the 1980s. Until now, Bulletin B-7 and Bulletin B-10 have been published, and the latter has undergone several adjustments to reach the current integrated document.
Adjustment for changes in the general price level
This method aims to translate all nominal values of historical costs into purchasing power pesos as of the date of the financial statements. The National Consumer Price Index is used and is applied to the following items:
• Non-monetary: All non-monetary items are updated, mainly real estate, plant and equipment in use (assets in disuse are not updated), inventories, cost of sales, depreciation for the year and stockholders' equity.
• Monetary: The effect of profit or loss on purchasing power is recognized depending on the time that the company maintained a short or long monetary position in the year. The monetary position is short when the monetary liabilities exceed the monetary assets.
The methodology for the restatement of accounting information with the INPC consists of the following:
a) Classify assets and liabilities into monetary and non-monetary.
b) Consider stockholders' equity as a non-monetary element.
c) Re-express all non-monetary assets, non-monetary liabilities and stockholders' equity using a factor, determined as follows:
NPC of the date of the financial statements
NPC of entry to the records or last valuation
d) Calculate the monetary position, monetary assets, less monetary liabilities, at the beginning of the period. Increase and decrease it with the movements of the period itself, and determine the final monetary position.
e) Re-express the previous monetary position statement, in nominal pesos, using the INPC.
NPC of the date of the financial statements
NPC of the date of the transactions
f) The difference between the balance of the final monetary position updated minus the balance of the final monetary position in nominal terms, if it is a creditor, it is a monetary gain.
g) Re-express the income statement using the INPC:
NPC of the date of the financial statements
NPC of the date of the transactions
h) In cases of depreciation and amortization of non-monetary assets, they are calculated with the previously restated balances of the corresponding non-monetary assets.
i) The information relating to the previous year, for comparison purposes, is previously restated in all the figures of the same:
NPC of the date of the financial statements
NPC of the date of the comparative information base
j) Once the information from the previous year has been restated to year-end pesos, the cash flow statement is prepared with purchase pesos at the date of the financial statements.
Update with specific costs
This method is so named because it originally applied only to non-monetary assets. However, currently in Mexico a combination of the adjustment method for changes in the general price level is applied with the specific cost method.
Today, the provisions of Bulletin B - 10 establish that the only accepted method for restating financial statements is the one used by the INPC. However, by exception, it allows inventory and cost of sales to be adjusted according to their replacement value or specific cost.
The application of this method is intended to replace historical costs with current values or replacement values, at the date of the financial statements.
2.7. Process for recognizing the effects of inflation on financial information
The methodology for the restatement of accounting information with the INPC consists of the following:
a) Classify assets and liabilities into monetary and non-monetary.
b) Consider stockholders' equity as a non-monetary element.
c) Re-express all non-monetary assets, non-monetary liabilities and stockholders' equity using a factor, determined as follows:
NPC of the date of the financial statements
NPC of entry to the records or last valuation
d) Calculate the monetary position, monetary assets, less monetary liabilities, at the beginning of the period. Increase and decrease it with the movements of the period itself, and determine the final monetary position.
e) Re-express the previous monetary position statement, in nominal pesos, using the INPC.
NPC of the date of the financial statements
NPC of the date of the transactions
f) The difference between the balance of the final monetary position updated minus the balance of the final monetary position in nominal terms, if it is a creditor, it is a monetary gain.
g) Re-express the income statement using the INPC:
NPC of the date of the financial statements
NPC of the date of the transactions
h) In cases of depreciation and amortization of non-monetary assets, they are calculated with the previously restated balances of the corresponding non-monetary assets.
i) The information relating to the previous year, for comparison purposes, is previously restated in all the figures of the same:
NPC of the date of the financial statements
NPC of the date of the comparative information base
j) Once the information from the previous year has been restated to year-end pesos, the cash flow statement is prepared with purchase pesos at the date of the financial statements.
When updating the financial statements, it is recommended to use a bridge account. A bridge account is one that exists only while a certain registration process is in progress, and then disappears.
In the case of the restatement of financial statements, the bridge account used is called a transition account, update account or correction for restatement, and serves to make the independent recording of the following update movements:
1. The monetary result that arises as a consequence of having monetary items.
2. The adjustments caused by the stock capital accounts.
3. Adjustments caused by non-monetary assets.
4. Adjustments for updating the income statement accounts.
Inventories
Inventories are updated to be expressed in monetary units of purchasing power at the end of the period. The different layers that make up this item must be taken into account and updated according to the date of acquisition of each one.
The updated value of inventories must not exceed their realization value (estimated sale price less profit margin). The amount of the update will be equal to the updated value of the inventory minus its historical value.
Seat upgrade
Inventories $ X
Restate account $ X
Fixed assets: Cost value
When applying the method of changes in the general price level, both the historical cost of the asset and its accumulated depreciation must be expressed in monetary units of purchasing power at the end of the year.
Each asset will be updated individually, according to the date it was acquired:
Seat upgrade
Asset account $ X
Restate account $ X
Accumulated depreciation
The accumulated depreciation will be updated based on the updated value of the asset to which it corresponds and taking into account the possible changes in the estimate of the useful life.
When changes in useful life are estimated, the accumulated depreciation will be adjusted to express the portion of useful life consumed according to the new estimate.
The amount of the update will be equal to the updated value of the accumulated depreciation minus its historical cost:
Seat upgrade
Restatement account $ X
Accumulated depreciation $ X
Depreciation expense
Updating the depreciation expense for the year implies restating the expense in the income statement based on the updated value of the asset to which it corresponds. The depreciation expense for the year must be expressed in monetary units of purchasing power at the end of the year.
The amount of the update will be equal to the updated value of the depreciation expense less its historical value:
Seat upgrade
Depreciation expense
account $ X Restatement account $ X
Stockholders' equity
The contributions of the shareholders will be updated to be expressed in monetary units with purchasing power at the end of the year.
The updated amount of shareholders' equity will allow the shareholder to visualize his contribution so that the value presented in the balance sheet has a purchasing power equivalent to that which it had at the time it was made. All items of stockholders' equity must be updated: share capital, retained earnings, reserves, etc.
In the case of the profit for the year, it is expressed in purchasing power units at the end of the year, once the income statement has been restated. Therefore, it is given the same treatment as in traditional accounting: the figure is taken from the income statement and presented as is in the balance sheet.
The update entry is made individually for each of the capital accounts: share capital, accumulated earnings, reserves, etc.
Seat upgrade
Restatement account $ X Share
capital account $ X
Update account $ X
Accumulated profit account $ X
Update account $ X
Reserve account $ X
Statement of income
The income statement must be updated in full so that all items are expressed in terms of purchasing power at the end of the year. The net profit obtained in the income statement is already expressed in closing pesos, so there is nothing else to do to bring it to the balance sheet.
Each one of the income statement items (sales, cost of sales, operating expenses, financial expenses, financial products, taxes, etc., that is, items that are incurred during the year) must be carried at closing pesos The exercise. For this, the historical data is taken month by month and carried, with the adjustment factor, at the end of that month to subsequently update the figures at the end of the year.
The amount of the update in the income statement is equal to the updated value of each account minus its historical cost:
Seat upgrade
Debtor nature
account $ X Restatement account $ X
Restatement account $ X
Credit nature account $ X
Result from monetary position
The result for monetary position (REPOMO) exists based on the monetary assets and liabilities that the company has. This effect will be loss when the company maintains a long monetary position, and it will be gain when the monetary position that is maintained in the exercise is short.
When the restatement is carried out in accordance with the theory, the procedure to calculate the REPOMO implies making a calculation whose result will be expressed in monetary units of purchasing power at the end of the year. To do this, the following steps must be followed:
1. Calculate the initial net monetary position, which is equal to the difference between monetary assets and monetary liabilities at the beginning of the year.
2. Identify the movements that during the year caused increases or decreases in any of the two types of monetary items.
3. Calculate the amount of the final monetary position taking into account the initial net monetary position and the movements that occurred in the monetary items during the year.
Initial net monetary possession
(+) Increases in monetary assets (for example, from sales)
(-) Decreases in monetary assets (expense payments)
(+) Decreases in liabilities (payments in kind)
(-) Increases in liabilities (credit purchases)
= Final net monetary position
4. Express each one of the figures mentioned in steps 1 and 2 in pesos of purchasing power at the end of the year, using the adjustment factor from the time each operation was incurred until the end of the year.
5. Based on the values expressed in pesos of purchasing power at the end of the year, calculate the value of the final net monetary position that should exist if the monetary items could be effectively updated.
6. Obtain the REPOMO amount, that is, the monetary loss or gain for the year, as a result of the difference between the updated final monetary position (constant pesos) and the actual final monetary position (current pesos).
The entry for accounting recognition of REPOMO, whether the theoretical procedure is applied or Bulletin B - 10 is applied, is as follows:
Seat upgrade when REPOMO is gain
Update account $ X
Result from monetary position $ X
If the nature of the REPOMO were loss, the entry would imply a result charge for monetary position and a credit to the update account.
2.8. Structure
To understand the process of re-expressing the financial statements, the Mexican Institute of Public Accountants issues bulletin B - 10 "Recognition of the effects of inflation on financial information", which is made up of the following elements:
Background
Scope of the newsletter
General considerations General
rules
Particular guidelines for the application of the general rules
Inventory update - cost of sales
• Valuation
• Methods to determine the inventory
update • Cost of sales update
Updating of property, plant and depreciation equipment
• Valuation
• Recovery value
• Presentation
Stockholders' equity update
• Valuation
• Presentation
Result from holding non-monetary assets
• Valuation
• Presentation
Currency fluctuations
Effect on monetary position
Presentation
Expression of the financial statements in currency of the same purchasing power
Rules to improve comparability of financial statements over time
NOTE: A complete study of bulletin B - 10 is recommended.
UNIT III. STATEMENT OF CASH FLOWS (STATEMENT OF CHANGES IN THE FINANCIAL SITUATION)
3.1. Concept
The cornerstone of financial accounting is the accrual basis, which means that "an income or expense is recorded as such, even if it is not an entry or a cash outlay." This approach implies that the figure that produces the statement of income, net profit, is different from the balance of the cash item, which appears in the first item of the statement of financial position, and can be explained analytically through the statement of cash flow. of cash.
As a consequence of using the accrual basis for the accounting record of transactions, it follows that, in general, income does not coincide with cash inflows; expenses do not coincide with cash outflows and, therefore, the profit figure in the income statement does not coincide with the cash figure shown by the statement in the financial situation.
The only case in which both will coincide would be that in which all income was made in cash and all expenses had been disbursed, which is highly unlikely.
On the other hand, both for the administration of an economic entity and for the main external users (shareholders and creditors) it is important to have information to be able to evaluate two of the most important aspects in the operation of an entity, for profit: the profitability, based on profit figure, and liquidity, based on cash flow.
The cash flow statement (formerly called the statement of changes in financial position) is the financial statement that communicates changes in an entity's resources and their sources in a given period, showing operating, financing and investment activities and their final reflection in cash.
Bulletin B - 12 defines the statement of changes in the financial situation (not repealed in its entirety) as the basic financial statement that shows in constant (real) pesos the resources generated or used in the operation, the main changes occurred in the structure financial position of the entity and its final reflection in cash and temporary investments over a certain period.
3.2. goals
The purpose of the cash flow statement is to present, in a condensed and understandable way, information on the handling of cash, that is, its collection and use by the entity during a certain period and, as a consequence, to show a synthesis of the changes in the financial situation so that the users of the financial statements know and evaluate the liquidity or solvency of the entity.
The cash flow statement is designed to explain cash movements from the normal operation of the business, the sale of non-current assets, obtaining loans, the contribution of shareholders and other transactions that include cash provisions, such as purchase of non-current assets, payment of liabilities and payment of dividends.
Bulletin B - 12 indicates the following objectives:
a) Evaluate the ability of the company to generate resources.
b) Know and evaluate the reasons for the differences between the net profit and the resources generated or used in the operation.
c) Evaluate the ability of the company to meet its obligations, for dividends and, in such case, anticipate the need to obtain financing.
d) Evaluate the changes experienced in the financial situation of the company derived from investment and financing transactions that occurred during the period.
The antecedent of this state is constituted by the state of origin and application of resources, which, although it was true was carried out well before in professional life, some bulletin was not regulated by this name. Currently, the CID of the CINIF, in the project for auscultation of NIF A
- 5, “Elements of the financial statements”, which would have entered into force on January 1, 2005, refers to the statement of changes in the financial situation also as the statement of origin and application of resources or statement of cash flow, citation that certainly does not seem correct, if we take into account the substance over the form, and as the NIF itself points out, that regardless of the form or structure of its determination, the important thing is that the entity identifies the inputs and outputs of resources to measure the effect on cash flows.
This state of origin and application of resources has evolved over time to the state of changes in the financial situation. Proof of this is the Mexican norm that from October 1973 in bulletin B - 4 established the use of the "statement of changes in the financial situation", which was prepared on the basis of working capital and which remained in use until 1982. For December 1983, in accordance with bulletin B-11, the preparation of the "statement of changes in the financial situation based on cash" was established as a mandatory rule, and as of January 1, 1990, according to the bulletin
B - 12, it is mandatory to prepare the “statement of changes in financial position” and, as of January 1, 2006, according to NIF, it is mandatory to prepare as a financial statement the “statement of cash flow or statement of changes in the financial situation ”.
Although it is true that at present this statement of changes in the financial situation is prepared in accordance with the provisions of bulletin B - 12, it substantially retains the provisions of bulletin B - 4, Statement of changes in the financial situation, reason for which we will quote some relevant paragraphs of the latter, and in all cases we will relate it to the new regulations regulated by the NIF issued by the CID of the CINIF.
3.3. Structure
The differences resulting from the comparison between the initial and final statements of financial position constitute what are known as sources and applications of resources.
The sources of resources are represented by decreases in assets, increases in liabilities and capital increases. Resource applications are represented by increases in assets, decreases in liabilities and decreases in stockholders' equity.
To corroborate what has been said regarding the substance contained in this financial statement, we will now study the provisions in force as of 2006 contained in the NIF.
NIF A - 5 regulates that the basic elements that make up this state are the origin and application of resources, and defines them as follows:
Source of resources
They are increases in cash, during an accounting period, caused by the decrease of any other asset other than cash, the increase in liabilities or by increases in stockholders 'equity or stockholders' equity by the owners or, where appropriate, sponsors of the entity..
Application of resources
They are decreases in cash, during an accounting period, caused by the increase of any other asset other than cash, the decrease in liabilities, or by the disposition of contributed or earned capital by the owners of a profit-making entity.
Resource source types
In accordance with NIF-5, three types of source of resources can be distinguished:
a) Operating, which are those obtained as a consequence of carrying out the activities that represent the main source of income for the entity.
b) Financing, which are the resources obtained from financial creditors or, where appropriate, from the owners or sponsors of the entity, to defray operating and investment activities, and
c) Investment, which are the resources that are obtained by disposing of long-lived assets, and represent the recovery of their economic value.
We can see that the source or origin of resources, that is, their obtaining, comes from three activities: operation, financing and investment.
Resource application types
In accordance with NIF A - 5, three types of application of resources can be distinguished:
a) Operating, which are those that are applied as a consequence of carrying out the activities that represent the main source of income of the entity.
b) Financing, which are those applied to reimburse the financial creditors and owners of the entity for their contributed resources, and
c) Investment, which are those that apply to the acquisition of long-term assets.
Similarly, we note that the application of resources is also classified into three activities: operation, financing and investment.
Cash flow generated by or destined for the operation
All cash inflows and outflows that are directly related to the normal course of operations of the economic entity are located in this area: provision of services, production and marketing of products. For its determination it must start from the net profit. Among the most important cash movements in this area are the following:
• Cash sales.
• Collections of credit sales made to clients.
• Cash purchases.
• Payments to suppliers for purchased merchandise.
• Payments of salaries to employees.
• Payments of all expenses related to the operation of the business.
• Tax payments.
Cash flows destined or coming from investment activities
This section should include those concepts related to the sale and purchase of long-term assets that have caused an entry or a cash outlay. Among them are the following:
• Purchase and sale of real estate, machinery, equipment and other productive assets.
• Acquisition, construction and sale of real estate, machinery and equipment.
• Acquisition of shares of other companies on a permanent basis.
• Loans granted by the company to third parties.
• Any other investment or disinvestment of a permanent or long-term nature.
Cash flow destined or coming from financing activities
This section should include all the concepts (other than the components of the operating flow) that produced a cash inflow or generated a cash outflow from financing activities. For example:
• Credits received in the short and long terms, different from those related to the operation of the business.
• Capital repayments.
• Dividends paid, except dividends on shares.
• Loans received and their liquidation.
• Interest payments.
• Shareholder contributions.
Net increase or decrease in cash
The increase or decrease in cash is the amount resulting from the algebraic sum of the three previous sections. All this information is structured as follows:
Determination of net cash flow
Cash flow from operating activities
+ Cash flow from investing activities
+ Cash flow from financing activities
= Net increase or decrease in cash
3.4. Process for its elaboration
The bases to prepare the cash flow statement are:
• Two statements of financial position or balance sheets (that is, a comparative balance) referring to the beginning and end of the period to which the statement of cash flows corresponds.
• An income statement for the same period.
• Complementary notes to the items contained in the financial statements.
The preparation process basically consists of analyzing the variations resulting from the comparative balance to identify the increases and decreases in each of the items of the statement of financial position culminating in the net increase or decrease in cash.
For this analysis it is important to identify the cash flow generated by or destined for the operation, which essentially consists of translating the net profit reflected in the income statement into cash flow, separating the items included in said result that did not imply receipt or cash disbursement (virtual items).
Likewise, it is important to analyze the increases or decreases in each of the other items included in the statement of financial position to determine the cash flow from or destined to financing and investment activities, taking into account that the accounting movements that only represent transfers and do not involve movement of funds must be offset for the purposes of preparing this statement.
The steps for the formulation of the cash flow statement are:
• Determine the increase or decrease in cash.
• Determine the increase or decrease in each of the accounts of the statement of financial position.
• Analyze each of the increases and decreases of the items in the statement of financial position.
• Classify increases and decreases in cash flow.
• Integrate the cash flow statement with said information.
CONCLUSION
The financial statements of a company are the main means to communicate information about its financial situation and results of operations for decision-making, however, in inflationary economies, accounting data based on historical costs, present distorted information that is not very accurate, current, relevant and accurate; therefore it is recommended to update it due to inflation.
BIBLIOGRAPHY
- Guadalupe Ochoa Setzer, Financial Administration, 2nd. Edition, 2004, Mc Graw Hill, Mexican Institute of Public Accountants, Theory of Financial Accounting, Itam, Gerardo Guajardo Cantú, Financial Accounting. Mc Graw Hill. Mexico, 1996. Financial information standards (NIF), IMCP, 2011
