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Could inflation accounting be set to return?


As interest rates rise and cost-of-living pressures continue to bite, is it possible the profession could see the return of inflation accounting?

6th Jul 2022
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The financial forecast for 2022 has offered particularly bleak predictions since the start of the year. With the current consumer prices index (CPI) sitting at a 40-year high of 9.1% and an expectation of further increases as we head into autumn, current figures are making for particularly grim reading. 

For some on AccountingWEB, the current inflationary climate has brought back memories of a period of UK accounting history that most had thought had been firmly left behind – the issue of inflation-adjusted accounting. 

A potential change?

In our piece on the most recent attempt by the government to tackle the cost-of-living crisis by increasing interest rates, contributor ROBBIEWHITE believed that the increase was required, but believed that “11% inflation by the year end seems optimistic.” They concluded by asking: “Could we be seeing a return to inflation-adjusted accounts?”

We posed this question in a separate post to the community, asking for their thoughts on the potential return to inflation accounting. The responses from users on this possibility were decidedly negative, with everyone believing that such a move would be disastrous.

“Inflation accounting making a comeback – was it ever here? It was rubbish,” Any Answers regular LionofLudesch wrote, with user Paul Crowley adding: “Needed to learn it to qualify but never saw it in practice; just accountants from big firms playing mind games.”

Veteran of the site Hugo Fair agreed with other users’ assessments, writing that “a lot more has been and gone in the last 40+ years than the hiccough that was, briefly, inflation accounting.”

An unlikely outcome

In a recent interview with AccountingWEB, Steve Collings, audit and technical partner at Leavitt Walmsley Associates Limited, understood the negative reception from the community on inflation accounting and believed that, unlike other hyperinflationary economies, the UK is still a long way from such a decision.

“A report from EY said that countries like Argentina, Lebanon, Turkey and Zimbabwe, with currencies that are subject to high inflation, are prone to enacting IAS 29, which is the accounting standard that deals with rampant hyperinflation,” Collings said.

The EY report Collings cites highlights countries with inflationary figures far beyond that of the problems the UK currently faces. This is something that Collings believes is the chief reason behind a lack of conversation on inflation accounting among UK practitioners.

“GAAPs Section 31 FRS 102, which deals with hyperinflation in the UK, is a concept broadly similar to that of IAS 29. And yet, I haven’t met one person who has used section 31 of FRS one or two or is planning to use section 31 of 102 in fairness.”

Considering contracts

While Collings believed that inflation accounting was not yet on the radar for most accountants, he argued that there was “a need to consider the bigger picture when it comes to what’s going on in the economy.” This is the case especially around the subject of the inflationary issues surrounding contracts and their connection to FRS 102 section 21 Provisions and contingencies.

Contractual agreements, Collings contends, are an area that many businesses will need to begin looking at, with planning for onerous contracts being a necessity. “Certainly some businesses would be needing to look at contracts to see whether or not they need to be recognising onerous provisions or provisions for onerous contracts in the financial statements,” Collings said.

“However, you’ve also got the situation where companies may be a bit nervous of recognising additional provisions for onerous contracts because of course any liability in the balance sheet is going to bring down the value of the net assets.”


With this in mind, Collings believes that companies may consider a revaluation model in order to offset potential liabilities connected with inflationary pressures – yet this brings its own problems. “[The revaluation model] is fine, there’s an accounting policy in FRS 102 where an entity can apply the revaluation model to its fixed assets,” Collings noted. 

“What needs to be remembered is that, as soon as you revalue all the assets in the same asset class, you’re effectively stuck with it. So when everything eventually settles down, a client can’t turn around and say ‘forget the revaluation model’ because you can only change an accounting policy if it results in more relevant and reliable financial information being presented in the financial statements.”

A problematic solution

Collings is steadfast in his belief that inflation accounting was not the answer to the current financial woes the UK is currently experiencing, noting that many older accountants he had spoken to “don’t like it and they don’t want to see a return of it.”

Collings was also keen to note that while the theory behind the application of inflation accounting may seem sound, he believed that in practice “it would be problematic for quite a lot of practitioners”.

Collings also felt confident that, while the current figures aren’t pretty, the return of inflation accounting is unlikely to be on the horizon. However, with the government currently in disarray and inflation continuing to rise, he noted that anything could happen. 

“It’s all really unprecedented, with the cost of living, fuel prices and everything else. It’s just a waiting game at the moment.”

Looking for more information on the hot-button topic that is inflation? On our newest episode of Any Answers Live, we’ll find out how the frozen thresholds and rising inflation is affecting small businesses and what accountancy firms are doing to help their struggling clients. 

Replies (10)

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By listerramjet
07th Jul 2022 10:38

given the sorts of prediction we have being seeing then this is somewhat premature! Beyond the implications for going concern, what would be the point?

Thanks (3)
By tedbuck
07th Jul 2022 11:05

It was pointless then and would be pointless now. Just another excuse for the accounting standards people to add more misery to our lives so that they can polish their egos.

When I started in this game many years ago a set of accounts for a Ltd Company was about 4 pages and could be understood by the client. Now it's about 13 pages of gobbledygook which most clients have to be guided through so they know which pages to look at.

That's progress?

In my book it's nonsense just an exercise in trying to tick boxes. Just like the certificates which we are ordered to put in the accounts. Unprintable opinions on those.

Progress again?

As for PLC accounts - what percentage of shareholders is going to wade though 50 pages of self congratulatory rubbish? They just look at the bottom line and the dividend - if, of course they can find them.

More progress?

Glad I'm going to be out of it soon! Roll on the day.

Thanks (1)
Replying to tedbuck:
By minkie
07th Jul 2022 11:24

As a newly appointed senior at the time I remember having to apply inflation accounting. I did the calculations but never understood it or why it was of any use.
I suppose it kept somebody in a job !!!

Thanks (0)
Replying to tedbuck:
07th Jul 2022 12:05

13 pages, thats childs play. Mine is 39 pages long, and we are £10m top line and less than 100 employees manufacturer.

Thanks (0)
Replying to SJH-ADVDIPMA:
By Paul Crowley
14th Jul 2022 13:48

Less is more
Have you heard of exception reporting?
That many pages on that small a company really is pointless
The important stuff gets lost in pointless detail
Accounts are about accounting to the relevant parties about the stewardship of the company

Thanks (0)
By Paul Crowley
07th Jul 2022 16:02

Deja Vu

Thanks (0)
07th Jul 2022 16:26

God I hope not ! - worst part of accountancy exams that I ever experienced

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By Hugo Fair
07th Jul 2022 20:17

Same answer as last week ... Nah!

Thanks (1)
By paul.benny
07th Jul 2022 21:14

Thia article is just clickbait.

Inflation is now 10% and not expected to persist at that level for long. Current Cost Accounting was devised when we had *sustained* inflation of well above that.

Thanks (0)
11th Jul 2022 13:30

To be honest this was a throwaway remark - I would be very surprised if it came back.
That being said other responders seem to be trusting in the financial predictions and basing their responses (as the responses in the article above have) on the current and predicted levels of inflation.
The original article I commented on mentioned inflation was predicted to hit 11% by the end of the year which I felt was optimistic (my opinion), if inflation were to hit 16-17% for example by the end of the year you would be comparing figures in accounts prepped to say November 2022 with comparative figures where inflation was circa 5%.
I guess we have to wait and see how it plays out.

Thanks (0)