For accounting and tax purposes, all companies that are taxpayers of income tax and complementary are obliged to apply accounting books to apply the comprehensive inflation adjustment system.
Adjustment systems
1. Annual adjustment
It is recorded in the accounting books at the end of the year on December 31. The adjustment value is obtained from applying the annual PAAG or the accumulated monthly PAAG.
2. Monthly adjustment
It is recorded in books at the end of each month. The adjustment value is obtained by applying the monthly PAAG.
Exceptions
Companies that are obliged to keep books have less income and assets than those established by law, nor should non-profit entities and all taxpayers of the special tax regime make adjustments for inflation
Indices used for adjustment
1. PAAG: PAAG is understood as the adjustment percentage of the taxable year, which will be equivalent to the percentage variation of the consumer price for average income.
- Annual PAAG: It is the adjustment percentage of the taxable year between December 1 of the immediately previous year and November 30 of the respective year. Accumulated monthly PAAG: It is the PAAG registered between the first day of the month in which the event was carried out economic and the last day of the month immediately prior to the date to which it is being calculated Monthly PAAG: It is the adjustment percentage for the month, which is equivalent to the percentage variation of the consumer price index for average income, registered the month immediately preceding the month being adjusted.
2. Exchange rate: The values represented in foreign currency such as currencies, titles, deposit rights, investments, debtors, suppliers, must be adjusted based on the exchange rate of the respective currency, as of the closing date. The exchange rate to be used will be the representative of the market set by the banking superintendency.
3. UPAC AND UVR Quote
The values expressed in UPAC and UVR are adjusted based on their final value for the month or the respective year
4. Readjustment agreement
When the titles, rights or investments and debts have a readjustment agreement, they must be adjusted by the value of the agreed percentage.
Adjustment of accounting items
1. Monetary assets
They are those that maintain the same value for not having agreed adjustments and because they do not acquire a higher nominal value due to the loss of the purchasing value of the currency.
These include cash in national currency, deposits in savings and current accounts, term deposits, debtors in national currency, and other credits in favor without any agreed readjustment. These accounts are not subject to inflation adjustments.
2. Non-monetary assets
They are those that are capable of acquiring a higher nominal value due to the loss of the purchasing value of the currency, such as supplies, spare parts, buildings, land, livestock, machinery in assembly, machinery, equipment, furniture, vehicles, computers, contributions in companies and shares, trademark rights, patents and other intangibles effectively paid, other than expenses paid in advance and deferred charges. These accounts are subject to inflation adjustment.
3. Monetary liabilities
They are those that maintain their value because they do not have agreed adjustments, nor do they acquire a higher nominal value due to the loss of the purchasing value of the currency, therefore they are not adjusted for inflation.
The calculation base to make the inflation adjustments is the historical cost and the adjusted cost for the following years
4. Non-monetary liabilities
They are those capable of acquiring a higher nominal value due to the loss of the purchasing power of the currency, such as the debts represented in foreign currency, in UPAC, UVR and those with a readjustment agreement. These are subject to inflation adjustment
5. Equity accounts
The adjustment to equity is made by applying the annual or monthly PAAG to the non-monetary accounts. The equity items that correspond to the profits for the year are not adjusted for inflation, nor the items of the appreciation surplus, whether they correspond to technical appraisals, the recognition of the market value of the assets and the surplus resulting from the estimated intangibles, such as Know-How and goodwill.
6. Memorandum accounts
At the end of each month or each year, the non-monetary memorandum accounts must be adjusted, represented by values that may acquire a higher value due to the loss of the purchasing value of the currency.
7. Income accounts
These are not subject to inflation adjustment.
Accounts used to record adjustments
Companies that are required to apply the comprehensive inflation adjustment system must include in their chart of accounts, an asset account called "Deferred Monetary Correction Charge", a liability account called "Deferred Monetary Correction Credit", an account of equity called "Revaluation of equity" and an income account called "Monetary correction".
Accounting for inflation adjustments
- Assets in foreign currency: The value of the adjustment is equal to the value of the asset expressed according to the exchange rate less the value of the asset according to books. Assets with a readjustment agreement: The value of the adjustment is equal to the value of the asset by the base or percentage registering the difference. Movable assets: These must be adjusted by means of the monthly or annual PAAG. Fixed assets: This adjustment is established with the cost of the property on the last day of the previous year, increasing it with the result obtained from multiplying it by the Annual PAAG.Adjustment of non-monetary liabilities: Non-monetary liabilities recorded on the last day of the year or period, such as liabilities in foreign currency or with an adjustment agreement, must be adjusted based on the exchange rate at the end of the year. heritage:Equity at the beginning of each period must be adjusted based on the PAAG. Assets must exclude the net value of assets such as goodwill, valuations and other intangibles that are estimated or that are not the product of effective acquisition.
