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Inflation Accounting in Develop Ing Countries: the Case of Iraq

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Inflation Accounting in Develop Ing Countries: the Case of Iraq THE UNIVERSITY OF HULL INFLATION ACCOUNTING IN DEVELOP ING COUNTRIES: THE CASE OF IRAQ being a Thesis' submitted for the Degree Ph.D. in Accounting in the University of Hull By IMAD YOUSIF AHMAD B.A. AL-Mustansiryia University, Higher Diploma (Cost Accounting) Baghdad University October 1990 TO MY PARENTS ACKNOWLEDGEMENTS I would like to express my thank to Professor Briston, R. J. for his supervision, guidance, encouragement, and invaluable comments. My thanks go to the Iraqi government for its financial support, and to all the persons those who gave up their time for interviews, and supplied'me with the data needed for this study. Mrs Kathryn Spry has edited the draft. Her efforts are gratefully acknowledged and sincerely appreciated. ABSTRACT This study is concerned with how to account for inflation, in financial reports within the industrial sector. The study aims to recommend an inflation accounting approach which will provide government and managements with information required for decision-making and control. Iraq has been chosen as an example for Arab countries to find out , how management reacts to changes in price level in companies' accounts. In order to achieve this object, a field study has been conducted to discover whether inflation accounting systems are well known and used in Iraqi companies. Moreover, the study examines and assesses the different accounting measurements which have been suggested for financial reports during periods of inflation. In the light of an evaluation of different accounting methods advocated for use during inflation times, a system is recommended for use in Iraqi Industrial Companies. This study starts with the assumption that management needs accounting information which takes into account changes in prices; is provided frequently and in enough detail; is provided on time, and is relevant to management information needs. The study is made in several stages. The first deals with the importance and need for study of inflation accounting. The users of accounting are then considered. i t Measurement methods which are used for inflation accounting in several countries are discussed. The second stage is the case study, which deals with Iraqi industrial companies. The final stage provides an assessment of the findings and draws conclusion for future practice. This work has been carried through and completed during times of wide and great changes in polity, in expectations of national development, in our understanding of inflation and of the purpose and techniques of inflation accounting. Such changes were discussed during the examination. ii ABBREVIATIONS AAA American Accounting Association AICPA American Institute of Certified Public Accountants APB Accounting Principles Board ASC Accounting Standards Committee ASR Accounting Series Release ASSC Accounting Standards Steering Committee BSA Board of Supreme Audit CCA Current Cost Accounting CIMA Chartered Institute of Management Accountants COSA Cost Of Sales Adjustment CPI Consumer Price Index CPO Central Pricing Organisation CPP Current Purchasing Power CV Current Value Cz$ Cruzado (Brazilian Currency) ED Exposure Draft FAS Financial Accounting Standards FASB Financial Accounting Standards Board GFAAA General Federation of Arab Accountants & Auditors GPI General Price Index HC Historical Cost IAAG Iraqi Accountants and Auditors Guild iii IASC International Accounting Standards Committee IASG Inflation Accounting Standards Group ICAEW Institute of Chartered Accountants in England and Wales ICAS Institute of Chartered Accountants of Scotland ID Iraqi Dinar MWCA Monetary Working Capital Adjustment NCCMD National Centre for Consultancy 'andManagement Development NIVRA Nederlands Instituut Van Register Accountants ORTN Obrigacao Reajustavel de Tesouro Nacional ( Readjustable Obligation of the National Treasury) PSSAP Provisional Statement of Standards Accounting Practice SEC Securities and Exchange Commission SSAP Statement of Standards Accounting Practice UK United Kingdom USA United States of America WPI Wholesale Price Index iv Contents Acknowledements Abstract Abreeviations Contents 1. Chapter One: Problem and Methodology 1-9 1.1 Introduction 2 1.2 Statement of Problem 3 1.3 Purpose of Study 5 1.4 Methodology 7 1.5 Organisation of the Study 8 2. Chapter Two: Financial Reporting 10-41 2.1 Introduction 11 2.2 Historical Background 11 2.3 Objectives of Financial Reporting 19 2.4 Who Uses Financial Data 24 2.5 What Information is Required 27 2.5.1 Shareholders 27 2.5.2 Investment Analysts and Advisers 28 2.5.3 Creditors and Lenders 28 2.5.4 Business Contact Group 29 2.5.5 Employees and Trade Unions 30 2.5.6 Government and Official Bodies 30 2.5.7 General Public 32 2.5.8 Management 32 2.6 Characteristics of Useful Information 34 2.6.1 Relevance 35 2.6.2 Objectivity 35 2.6.3 Timeliness 36 2.6.4 Completeness 36 2.6.5 Understandability 36 2.6.6 Comparability 36 2.6.7 Reliability 37 2.6.8 Economy 37 2.7 Financial Reports in Developing Countries 38 2.8 The Need for Communication 39 3. Chapter Three: Inflation Accounting in the UK 42-80 3.1 Introduction 43 3.2 Inflation Accounting History 43 3.3 Inflation Accounting in the UK 53 3.3.1 Historical Background 53 3.3.2 Current Purchasing Power (CPP) 54 3.3.3 Current Cost Accounting (CCA) 58 3.3.3.1 Sandilands Report 59 3.3.3.2 Exposure Draft 18 61 3.3.3.3 The Hyde Guidelines 63 3.3.3.4 Exposure Draft 24 and SSAP 16 64 3.3.4 Comparison of Individual Adjustments 67 3.3.5 Advantages and Disadvantages of CCA Method 73 3.3.6 Other Issued Exposure Drafts 76 4. Chapter Four: Inflation Accounting in the USA and the Netherlands 81-106 4.1 Development of Inflation Accounting in the USA 82 4.2 Current Cost Basis 86 4.3 Five Year Summary 88 4.4 Inflation In the Netherlands 90 4.4.1 Historical Background 90 4.4.2 Limperg's Theory of Replacement Value 90 4.4.3 Current Value Accounting in the Netherlands 91 4.4.4 Replacement Value Accounting at Philips Co., 94 4.4.5 Current Situation in the Philips' system 100 4.4.6 Policies Followed in Valuation Based on CV 104 5. Chapter Five: Accounting For Inflation in Brazil 107-155 5.1 Introduction 108 5.2 Monetary Correction System 1951-64 108 5.2.1 Law no.3470 110 5.2.2 Evaluation of the System Up to 1964 111 5.3 The System of Monetary Correction from 1964 112 5.3.1 Working Capital adjustment 114 5.3.2 Fixed Assets 115 5.3.3 Decree-law no.401 116 5.3.4 Decree-law no.433 117 5.3.5 Decree-law no.1302 118 5.3.6 Decree-law no.1338 120 5.4 Theoretical and Practical Evaluation 121 5.5 The Current System in Brazil 123 5.5.1 The Need for the New System 123 5.5.2 The General Principles of the Current System 124 5.5.3 The New System in Practice 127 5.6 Limitations of the System 134 5.7 Correction Indexes 135 5.8 Monetary Correction and CPP Method 137 5.9 Summary and Conclusion 142 5.10 Other Latin American Countries 145 vi 5.11 Comparison Between The Four Countries 147 ( UK, USA, Netherlands, and Brazil) 5.11.1 Date 148 5.11.2 Applicability 149 5.11.3 Objectives 150 5.11.4 General Concept 151 5.11.5 MWCA and Gearing Adjusting 152 5.11.6 Profit and Loss Account 153 6. Chapter Six: Accounting Development in Iraq 156-208 6.1 Introduction 157 6.1.1 The Nature of the Iraqi Economy 157 6.2 Development of Accounting and Financial-Reports in Iraq 163 6.2.1 State Budget 165 6.2.2 Commercial Acts 166 6.2.3 Companies Acts 167 6.2.4 Income Tax 170 6.2.5 Iraqi Accountants and Auditors Guild 172 6.2.6 State Auditing 173 6.3 Factors Affecting the Development of Accounting in Iraq 175 6.3.1 Accounting Culture 175 6.3.2 Government Accounting 179 6.4 The Uniform Accounting System in Iraq 179 6.4.1 Background Objectives of The System 180 6.4.2 Contents of the Uniform Accounting System 183 6.4.2.1 Financial Reports 185 6.4.2.1.1 Balance Sheet 186 6.4.2.1.2 Current Operation Account 189 6.4.2.1.3 Production, Trading, Profit and Loss, Distribution Account 189 6.4.2.2 Sources and Uses of Funds Statement 191 6.4.2.3 Budgeting System 193 6.4.3 Costs and the Uniform Accounting System 196 6.4.4 National Accounts and the Uniform Accounting System 198 6.5 Users of Financial Reports 199 6.5.1 Management 201 6.5.2 Government Agencies 202 6.5.3 Shareholders 203 6.6 Accounting Standards in Iraq 204 6.7 Evaluation and Summary 204 7. Chapter Seven: Inflation Accounting in Iraq 209-237 7.1 Introduction 210 6.2 Measurement of Inflation in Iraq 210 7.3 Inflation in Iraq 219 vi i 7.4 Government and Pricing Policy 220 7.5 Inflation in Arab Countries 223 7.5.1 Iraqi Research 226 7.5.2 General Framework for Inflation Accounting in Arab Countries 227 7.6 Current Cost and Macro Accounting 231 7.7 Inflation and the Uniform Accounting System 232 7.7.1 Account no.191 and its Opposite Twin Account 233 7.7.2 Account nos.1943,1944 and their Opposite Twin Accounts 234 7.7.3 Depreciation 234 8. Chapter Eight: Iraqi Industrial Companies and Inflation Accounting , 238-284 8.1 Research Sample 239 8.2 Organisation of Study 240 8.3 General Information 241 8.4 Managers and Accountants Responses 244 8.4.1 Report Characteristics and Management Satisfaction 244 8.4.1.1 Timeliness and Frequency 247 8.4.1.2 Satisfaction and Confidence 249 8.4.1.3 Reliability 252 8.4.2 Disclosure of Financial Reports 255 8.4.3 Budget Information and Asset Valuation 258 8.4.3.1 Budgetary Control 258 8.4.3.2 Variance Analysis 260 8.4.3.3 Asset Valuation 264 8.4.4 Inflation Accounting 269 8.4.5 Computerisation 276 8.5 Government Interference 278 8.6 Summary and Conclusion 281 9.
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