ASC

ASC 255-10

Overall

255 Changing Prices

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In brief

AdvancedDisclosurePresentationForeign currencySubsequent measurement

ASC 255-10 governs supplementary disclosure of the effects of changing prices (inflation) on financial statements. Business entities reporting in U.S. dollars under GAAP are *encouraged but not required* to disclose a five-year summary of current cost-constant purchasing power data — including income from continuing operations on a current cost basis, purchasing power gain or loss on net monetary items, and the inflation-adjusted change in the current cost of inventory and PP&E. The Subtopic also supplies the measurement rules for current cost and lower recoverable amount, the CPI-U restatement mechanics, the translate-restate vs. restate-translate methods for foreign functional currency operations, and guidance on classifying balance sheet items as monetary or nonmonetary.

Key points (7)
  • Disclosure of the effects of changing prices is encouraged but not required (255-10-15-3; 255-10-50-1), and entities may experiment with other forms of disclosure.
  • If provided, the five-year summary must show net sales, income from continuing operations on a current cost basis, purchasing power gain or loss on net monetary items, the increase/decrease in current cost or lower recoverable amount of inventory and PP&E net of inflation, any current cost translation adjustment, year-end net assets, per-share income, dividends declared per share, and year-end market price per share (255-10-50-3), plus the CPI-U levels used (255-10-50-8).
  • Inventory is measured at current cost or lower recoverable amount at the measurement date and PP&E at the current cost or lower recoverable amount of the assets' remaining service potential (255-10-50-20); current cost may be estimated by indexation or direct pricing (255-10-50-23).
  • Only cost of goods sold and depreciation, depletion, and amortization must be restated to current cost; other revenues, expenses, gains, and losses may be taken from the primary income statement (255-10-50-39 through 50-40), and income tax expense is not adjusted or allocated (255-10-50-41).
  • Recoverable amount is measured by value in use unless the asset is about to be sold, in which case fair value less costs to sell is used; a materially and permanently lower recoverable amount for a group of assets must be used as the measure (255-10-50-36 through 50-37).
  • For operations in a foreign functional currency, general inflation effects are measured either after translation using CPI-U (translate-restate) or before translation using a functional currency general price level index (restate-translate), applied consistently to all such operations and periods (255-10-50-45 through 50-46); the restate-translate method requires a parity adjustment (255-10-50-49).
  • The purchasing power gain or loss on net monetary items is the net gain or loss from restating opening and closing balances of, and transactions in, monetary assets and liabilities into units of constant purchasing power (255-10-50-50); classification guidance for monetary vs. nonmonetary items appears in 255-10-55-1 through 55-13 (e.g., a sales-type lease receivable is monetary, an unguaranteed residual asset is nonmonetary).

For students. The single most important takeaway is that all of this inflation reporting is voluntary — an exam trap is treating the detailed five-year summary in 255-10-50-3 as a mandatory disclosure. The monetary/nonmonetary classification guidance in 255-10-55-1 through 55-13 is the piece most often cited elsewhere in GAAP (e.g., highly inflationary economies and nonmonetary exchanges).

current costconstant purchasing powerpurchasing power gain or lossmonetary and nonmonetary itemslower recoverable amountconsumer price index for all urban consumerstranslate-restate and restate-translate methodssupplementary disclosure

Machine-generated study aid for ASC 255-10. Check the source paragraphs below.

255-10-00Status

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255-10-00-1
The following table identifies the changes made to this Subtopic.
Paragraph Action Accounting Standards Update Date
Commencement Date of the Lease (Commencement Date) Added Accounting Standards Update No. 2016-02 02/25/2016
Contract Added Accounting Standards Update No. 2016-02 02/25/2016
Current Market Value Superseded Accounting Standards Update No. 2012-04 10/01/2012
Direct Financing Lease Amended Accounting Standards Update No. 2021-05 07/19/2021
Direct Financing Lease Added Accounting Standards Update No. 2016-02 02/25/2016
Fair Value (3rd def.) Added Accounting Standards Update No. 2012-04 10/01/2012
Income from Continuing Operations Amended Accounting Standards Update No. 2015-01 01/09/2015
Lease Added Accounting Standards Update No. 2016-02 02/25/2016
Lease Payments Added Accounting Standards Update No. 2016-02 02/25/2016
Lease Receivable Added Accounting Standards Update No. 2016-02 02/25/2016
Lease Term Added Accounting Standards Update No. 2016-02 02/25/2016
Lessee Added Accounting Standards Update No. 2016-02 02/25/2016
Lessor Added Accounting Standards Update No. 2016-02 02/25/2016
Leveraged Lease Added Accounting Standards Update No. 2016-02 02/25/2016
Net Investment in the Lease Added Accounting Standards Update No. 2016-02 02/25/2016
Sales-Type Lease Amended Accounting Standards Update No. 2021-05 07/19/2021
Sales-Type Lease Added Accounting Standards Update No. 2016-02 02/25/2016
Underlying Asset Added Accounting Standards Update No. 2016-02 02/25/2016
Unguaranteed Residual Asset Added Accounting Standards Update No. 2016-02 02/25/2016
255-10-50-36 Amended Accounting Standards Update No. 2012-04 10/01/2012
255-10-55-2 Amended Accounting Standards Update No. 2015-10 06/12/2015
255-10-55-2 Amended Accounting Standards Update No. 2012-04 10/01/2012
255-10-55-6 Amended Maintenance Update 2020-18 (PDF) 11/25/2020
255-10-55-6 Amended Accounting Standards Update No. 2016-02 02/25/2016
255-10-55-7A Added Accounting Standards Update No. 2016-02 02/25/2016
255-10-55-8 Amended Accounting Standards Update No. 2016-02 02/25/2016
255-10-55-10 Amended Accounting Standards Update No. 2016-02 02/25/2016
255-10-55-11 Amended Accounting Standards Update No. 2016-02 02/25/2016
255-10-55-12 Amended Accounting Standards Update No. 2010-08 02/02/2010

255-10-05Overview and Background

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255-10-05-1
The Changing Prices Topic provides guidance on reporting the effects of changing prices, or inflation, on financial statements of business entities. The reporting addresses both general inflation and price changes of certain assets.

255-10-15Scope and Scope Exceptions

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Overall Guidance

255-10-15-1
The Scope Section of the Overall Subtopic establishes the pervasive scope for the Changing Prices Topic.

Entities

255-10-15-2
The guidance in the Changing Prices Topic applies to the following entities:
  1. a
    Business entities that prepare their financial statements in U.S. dollars and in accordance with U.S. generally accepted accounting principles (GAAP)
  2. b
    Foreign entities that prepare financial statements in the currency of the country in which the operations reported on are conducted and that operate in countries with hyperinflationary economies.
255-10-15-3
The disclosure of information on the effects of changing prices as outlined in this Topic is encouraged, but not required.

255-10-30Initial Measurement

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255-10-30-1
This Subtopic provides guidance on encouraged disclosures on the effects of changing prices. For that reason, the guidance that describes how to measure items provided in the disclosures is included in paragraphs
255-10-50-19 through 50-55
rather than this Section.

255-10-35Subsequent Measurement

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255-10-35-1
This Subtopic provides guidance on encouraged disclosures on the effects of changing prices. For that reason, the guidance that describes how to measure items provided in the disclosures is included in paragraphs
255-10-50-19 through 50-55
rather than this Section.

255-10-45Other Presentation Matters

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255-10-45-1
This Subtopic provides guidance on encouraged disclosures on the effects of changing prices. For that reason, the guidance that describes how to present the disclosures is included in Section 255-10-50 rather than this Section.

Price-Level Adjusted Financial Statements for Certain Entities in Highly Inflationary Economies

255-10-45-2
The degree of inflation or deflation in an economy may become so great that conventional statements lose much of their significance and general price-level statements clearly become more meaningful. Although this is obvious with respect to some countries, the degree of inflation or deflation at which general price level statements clearly become more meaningful depends on the circumstances.
255-10-45-3
This Subtopic permits a comprehensive application of price-level adjusted financial statements (to the extent such presentation is not inconsistent with guidance in this Subtopic regarding historical cost-constant purchasing power accounting, such as the classification of assets and liabilities as monetary or nonmonetary) in presenting the basic foreign currency financial statements of entities operating in countries with highly inflationary economies if the statements are intended for readers in the United States.
255-10-45-4
This guidance applies only to statements prepared in the currency of the country in which the operations reported on are conducted. Only conventional statements of foreign subsidiaries should be used to prepare historical-dollar consolidated statements.

255-10-50Disclosure

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Introduction

255-10-50-1
A business entity that prepares its financial statements in U.S. dollars and in accordance with U.S. generally accepted accounting principles (GAAP) is encouraged, but not required, to disclose supplementary information on the effects of changing prices. Entities are not discouraged from experimenting with other forms of disclosure.

Presentation

255-10-50-2
This Subtopic provides guidance on those encouraged disclosures. For that reason, the guidance that describes how to present the disclosures is included in this Section rather than Section 250-10-45.
255-10-50-3
An entity shall disclose all of the following information for each of the five most recent years:
  1. a
    Net sales and other operating revenues
  2. b
    Income from continuing operations on a current cost basis
  3. c
    Purchasing power gain or loss on net monetary items
  4. d
    Increase or decrease in the current cost or lower recoverable amount of inventory and property, plant, and equipment, net of inflation
  5. e
    The aggregate foreign currency translation adjustment on a current cost basis, if applicable
  6. f
    Net assets at year-end on a current cost basis
  7. g
    Income per common share from continuing operations on a current cost basis
  8. h
    Cash dividends declared per common share
  9. i
    Market price per common share at year-end.
255-10-50-4
For the purposes of this Subtopic, except where otherwise provided, inventory and property, plant, and equipment shall include land and other natural resources and capitalized leasehold interests but not goodwill or other intangible assets.
255-10-50-5
An entity that presents consolidated financial statements shall present the information required by this Subtopic on the same consolidated basis. The information required by this Subtopic need not be presented for a parent company, an investee company, or other entity in a financial report that includes the results for that entity in consolidated financial statements.
255-10-50-6
The information required by this Subtopic shall be presented as supplementary information in any published annual report that contains the primary financial statements of the entity except that the information need not be presented in an interim financial report. The information required by this Subtopic need not be presented for segments of a business entity although such presentations are encouraged.
255-10-50-7
The information presented in the five-year summary shall be stated as either of the following:
  1. a
    In average-for-the-year or end-of-year units of constant purchasing power
  2. b
    In dollars having a purchasing power equal to that of dollars of the base period used by the Bureau of Labor Statistics in calculating the Consumer Price Index for All Urban Consumers. As a practical matter, this option is not available to entities that measure a significant part of their operations in one or more functional currencies other than the U.S. dollar and that elect to use the restate-translate method for measuring inflation-adjusted current cost information.
255-10-50-8
An entity shall disclose the level of the Consumer Price Index for All Urban Consumers used for each of the five most recent years. If the level of the Consumer Price Index at the end of the year and the data required to compute the average level of the index over the year have not been published in time for preparation of the annual report, they may be estimated by referring to published forecasts based on economic statistics or by extrapolation based on recently reported changes in the index.
255-10-50-9
If the entity has a significant foreign operation measured in a functional currency other than the U.S. dollar, it shall disclose whether adjustments to the current cost information to reflect the effects of general inflation are based on the Consumer Price Index for All Urban Consumers (the translate-restate method) or on a functional currency general price level index (the restate-translate method).
255-10-50-10
The entity shall provide an explanation of the disclosures required by this Subtopic and a discussion of their significance in the circumstances of the entity. Disclosure and discussion of additional information to help users of the financial report understand the effects of changing prices on the activities of the entity are encouraged.
255-10-50-11
In addition to the information required by paragraphs
255-10-50-3 through 50-10
, an entity shall provide the information specified in paragraphs
255-10-50-12 through 50-16
if income from continuing operations on a current cost-constant purchasing power basis would differ significantly from income from continuing operations in the primary financial statements.
255-10-50-12
An entity shall disclose certain components of income from continuing operations for the current year on a current cost basis (see paragraphs
255-10-50-39 through 50-41
), applying the same constant purchasing power option used for presentation of the five-year summary. The information may be presented in any of the following formats:
  1. a
    In a statement format (disclosing revenues, expenses, gains, and losses)
  2. b
    In a reconciliation format (disclosing adjustments to the income from continuing operations that is shown in the primary income statement)
  3. c
    In notes to the five-year summary required by paragraph 255-10-50-3.
255-10-50-13
Formats for presenting the supplementary information are illustrated in Example 1 (see paragraphs
255-10-55-14 through 55-21
). Whichever format is used, the presentation shall disclose (for example, in a reconciliation format) or allow the reader to determine (for example, in a statement format) the difference between the amount in the primary statements and the current cost amount of all of the following items:
  1. a
    Cost of goods sold and depreciation
  2. b
    Depletion
  3. c
    Amortization expense.
255-10-50-14
If depreciation has been allocated among various expense categories in the supplementary computations of income from continuing operations (for example, among cost of goods sold and other functional expenses), the aggregate amount of depreciation on a current cost basis shall be included in the notes to the supplementary information. In addition to information about income from continuing operations, the entity may include the following items in a schedule of current year information:
  1. a
    The purchasing power gain or loss on net monetary items
  2. b
    The increase or decrease in the current cost or lower recoverable amount of inventory and property, plant, and equipment, net of inflation
  3. c
    The translation adjustment.
255-10-50-15
As illustrated in Example 1 (see paragraphs
255-10-55-14 through 55-21
), income from continuing operations does not include the information that is described in paragraph 255-10-50-14(a) through 50-14(c).
255-10-50-16
An entity shall also disclose all of the following:
  1. a
    Separate amounts for the current cost or lower recoverable amount at the end of the current year of inventory and property, plant, and equipment (see paragraphs
    255-10-50-20 through 50-33
    and
    255-10-50-36 through 50-38
    )
  2. b
    The increase or decrease in current cost or lower recoverable amount before and after adjusting for the effects of inflation of inventory and property, plant, and equipment for the current year (see paragraphs
    255-10-50-42 through 50-43
    )
  3. c
    The principal types of information used to calculate the current cost of inventory; property, plant, and equipment; cost of goods sold; and depreciation, depletion, and amortization expense (see paragraphs
    255-10-50-24 through 50-33
    )
  4. d
    Any differences between:
    1. 1
      The depreciation methods, estimates of useful lives, and salvage values of assets used for calculations of current cost-constant purchasing power depreciation
    2. 2
      The methods and estimates used for calculations of depreciation in the primary financial statements (see paragraph 255-10-50-29).
255-10-50-17
For its mineral reserves other than oil and gas, an entity shall disclose all of the following additional information for each of its five most recent fiscal years:
  1. a
    Estimates of significant quantities of proved mineral reserves or proved and probable mineral reserves (whichever is used for cost amortization purposes) at the end of the year or at the most recent date during the year for which estimates can be made (if estimates are not made as of the end of the year, the disclosures shall indicate the dates of the estimates)
  2. b
    The estimated quantity, expressed in physical units or in percentages of reserves, of each mineral product that is recoverable in significant commercial quantities if the mineral reserves included under (a) include deposits containing one or more significant mineral products
  3. c
    The quantities of each significant mineral produced during the year (if the mineral reserves included under (a) are ones that are milled or similarly processed, the quantity of each significant mineral product produced by the milling or similar process shall also be disclosed)
  4. d
    The quantity of significant proved, or proved and probable, mineral reserves purchased or sold in place during the year
  5. e
    For each significant mineral product, the average market price or, for mineral products transferred within the entity, the equivalent market price prior to use in a manufacturing process.
255-10-50-18
In determining the quantities to be reported in conformity with the preceding paragraph:
  1. a
    If the entity issues consolidated financial statements, 100 percent of the quantities attributable to the parent entity and 100 percent of the quantities attributable to its consolidated subsidiaries (whether or not wholly owned) shall be included.
  2. b
    If the entity's financial statements include investments that are proportionately consolidated, the entity's quantities shall include its proportionate share of the investee's quantities.
  3. c
    If the entity's financial statements include investments that are accounted for by the equity method, the investee's quantities shall not be included in the disclosures of the entity's quantities. However, the entity's (investor's) share of the investee's quantities of reserves shall be reported separately, if significant.

Measurement

255-10-50-19
This Subtopic provides guidance on disclosure. For that reason the guidance that describes how to measure items provided in the disclosures is included in this Section rather than Sections 255-10-30 or 255-10-35.
255-10-50-20
Current cost amounts of inventory and property, plant, and equipment are measured as follows:
  1. a
    Inventory at current cost or lower recoverable amount at the measurement date
  2. b
    Property, plant, and equipment at the current cost or lower recoverable amount of the assets' remaining service potential at the measurement date
  3. c
    Resources used on a partly completed contract at current cost or lower recoverable amount at the date of use on or commitment to the contract.
255-10-50-21
The current cost of inventory owned by an entity is the current cost of purchasing the goods concerned or the current cost of the resources required to produce the goods concerned (including an allowance for the current overhead costs according to the allocation bases used under GAAP), whichever would be applicable in the circumstances of the entity.
255-10-50-22
The current cost of property, plant, and equipment owned by an entity is the current cost of acquiring the same service potential (indicated by operating costs and physical output capacity) as embodied by the asset owned; the information used to measure current cost reflects whatever method of acquisition would currently be appropriate in the circumstances of the entity. The current cost of a used asset may be calculated by measuring any of the following:
  1. a
    The current cost of a new asset that has the same service potential as the used asset had when it was new (the current cost of the asset as if it were new) and deducting an allowance for depreciation
  2. b
    The current cost of a used asset of the same age and in the same condition as the asset owned
  3. c
    The current cost of a new asset with a different service potential and adjusting that cost for the value of the difference in service potential due to differences in life, output capacity, nature of service, and operating costs.
255-10-50-23
The following types of information are listed as examples of the information that may be used but are not listed in any order of preferability. The entity shall select types of information appropriate to its particular circumstances, giving due consideration to their availability, reliability, and cost:
  1. a
    Indexation
    1. 1
      Externally generated price indexes for the class of goods or services being measured
    2. 2
      Internally generated price indexes for the class of goods or services being measured.
  2. b
    Direct pricing
    1. 1
      Current invoice prices
    2. 2
      Vendors' price lists or other quotations or estimates
    3. 3
      Standard manufacturing costs that reflect current costs.
255-10-50-24
Various types of information may be used in the measurement methods described in paragraphs
255-10-50-21 through 50-22
to determine the current cost of inventory; property, plant, and equipment; cost of goods sold; and depreciation, depletion, and amortization expense. The information may be applied to single items or broad categories, as appropriate in the circumstances.
255-10-50-25
If turnover is rapid and material amounts of depreciation are not allocated to inventory, cost of goods sold measured on a last-in, first-out (LIFO) basis may provide an acceptable approximation of cost of goods sold, measured at current cost, provided that the effect of any LIFO inventory liquidations (that is, any decreases in earlier years' LIFO layers) is excluded.
255-10-50-26
An entity may substitute historical cost amounts adjusted by an externally generated price index of a broad-based measure of general purchasing power (that is, historical cost-constant purchasing power amounts) for current cost amounts if that substitution would not result in a significantly different number for income from continuing operations than other means of estimating current cost amounts described in this Subtopic. For example, an entity with small amounts of inventory and property, plant, and equipment apart from certain specialized assets (see paragraphs
255-10-50-30 through 50-33
) may be able to report historical cost-constant purchasing power information. In such circumstances, disclosure of the increase or decrease in the current cost or lower recoverable amount of inventory and property, plant, and equipment, net of inflation (see paragraphs 255-10-50-3(d) and 255-10-50-16(b)) is not required, but the disclosures described in paragraphs 255-10-50-10 and 255-10-50-16(a), 50-16(c), and 50-16(d) are required.
255-10-50-27
Current cost measurements shall be based on production or purchase of the asset in whatever location or market would minimize total cost including transportation cost. For a U.S. operation, either:
  1. a
    The purchase would be made in the United States and current cost would be estimated directly in dollars.
  2. b
    The purchase would be made in a foreign market and the current cost in that market would be translated into dollars at the current exchange rate.
255-10-50-28
An entity may need to measure the current cost of inventory and property, plant, and equipment located outside the United States. That may be difficult depending upon the availability of information in the country concerned, and, accordingly, reasonable approximations are acceptable. If a foreign operation first measures current cost in a currency other than its functional currency, that amount shall then be translated into the functional currency at the current exchange rate.
255-10-50-29
There is a presumption that depreciation methods, estimates of useful lives, and salvage values of assets for purposes of the supplementary information are the same as the methods and estimates used for calculations in the primary financial statements. However, if the primary financial statements are based on methods and estimates that partly allow for price changes, different methods and estimates may be used for purposes of the supplementary information.
255-10-50-30
The current cost of mineral resource assets shall be determined by current market buying prices or by the current cost of finding and developing mineral reserves. No generally accepted approach exists for measuring the current finding cost of mineral reserves. To indicate the effects of changes in current costs, it may be impracticable to do more than adjust historical costs by an index of the changes in specific prices of the inputs concerned. That approach may fail to yield a close approximation of the current cost of finding and developing new reserves. In recognition of that difficulty, the requirements of this Subtopic are flexible regarding the approach used to measure current cost of mineral resource assets. The approach may include use of specific price indexes, direct information about market buying prices, and other statistical evidence of the cost of acquisitions.
255-10-50-31
Because paragraph 932-235-50-2 requires an entity to disclose a standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities, the entity may follow the approach in the preceding paragraph or in the following paragraph for its oil and gas mineral resource assets. Paragraph 255-10-50-16(c) requires disclosure of the types of information that have been used to measure current costs.
255-10-50-32
Timberlands and growing timber, income-producing real estate, and motion picture films have certain special features that raise doubts about the applicability of the current cost measurement methods required for other assets. Accordingly, an entity may disclose historical cost amounts adjusted by an externally generated index of a broad-based measure of general purchasing power as substitutes for current cost amounts for such assets and their related expenses.
255-10-50-33
If an entity estimates the current cost of growing timber and timber harvested by adjusting historical cost for the changes in specific prices, those historical costs may either:
  1. a
    Be limited to the costs that are capitalized in the primary financial statements
  2. b
    Include all costs that are directly related to reforestation and forest management, such as planting, fertilization, fire protection, property taxes, and nursery stock, whether or not those costs are capitalized in the primary financial statements.
255-10-50-34
If the entity presents the minimum information required by this Subtopic, the amount of net assets (that is, shareholders' equity) is the amount of net assets reported in the primary financial statements, adjusted for the difference between the historical cost amounts and the current cost or lower recoverable amounts of inventory and property, plant, and equipment.
255-10-50-35
If the entity elects to present comprehensive current cost-constant purchasing power financial statements as supplementary information, the amount of net assets in the five-year summary is the amount reported in the supplementary balance sheet.
255-10-50-36
Recoverable amount may be measured by considering the value in use or fair value less costs to sell of the asset concerned. Value in use is used to determine recoverable amount of an asset if immediate sale of the asset is not intended. Fair value less costs to sell is used to determine recoverable amount only if the asset is about to be sold.
255-10-50-37
If the recoverable amount for a group of assets is judged to be materially and permanently lower than the current cost amount, the recoverable amount shall be used as a measure of the assets and of the expense associated with the use or sale of the assets. Decisions on the measurement of assets at their recoverable amounts need not be made by considering assets individually unless they are used independently of other assets.
255-10-50-38
An entity that is subject to rate regulation or another form of price control may be limited to a maximum recovery through its selling prices, based on the nominal currency amount of the historical cost of its assets. In that situation, historical costs measured in nominal currency may represent an appropriate basis for the measurement of the recoverable amounts associated with those assets. Recoverable amounts may also be lower than historical costs. Nevertheless, cost of goods sold and depreciation, depletion, and amortization expense shall be measured at current cost-constant purchasing power amounts provided that replacement of the service potential of the related assets would be undertaken, if necessary, in current economic conditions; if replacement would not be undertaken, those expenses shall be measured at recoverable amounts.
255-10-50-39
An entity that presents the minimum information required by this Subtopic shall measure income from continuing operations on a current cost basis as follows:
  1. a
    Cost of goods sold at current cost or lower recoverable amount at the date of sale or at the date on which resources are used on or committed to a specific contract
  2. b
    Depreciation, depletion, and amortization expense of property, plant, and equipment on the basis of the average current cost of the assets' service potential or lower recoverable amount during the period of use.
255-10-50-40
Other revenues, expenses, gains, and losses may be measured at the amounts included in the primary income statement. (See paragraphs
255-10-50-20 through 50-33
and
255-10-50-36 through 50-38
for discussions of current cost or lower recoverable amount measurements.)
255-10-50-41
The amount of income tax expense in computations of current cost-constant purchasing power income from continuing operations is the same as the amount of income tax expense charged against income from continuing operations in the primary financial statements. No adjustments shall be made to income tax expense for any temporary differences that might be deemed to arise as a result of the use of current cost accounting methods. Income tax expense shall not be allocated between income from continuing operations and the increases or decreases in current cost amounts of inventory and property, plant, and equipment.
255-10-50-42
The increase or decrease in the current cost amounts of inventory and property, plant, and equipment represents the difference between the measures of the assets at their entry dates for the year and the measures of the assets at their exit dates for the year. Entry dates means the beginning of the year or the dates of acquisition, whichever is applicable; exit dates means the end of the year or the dates of use, sale, or commitment to a specific contract, whichever is applicable. For the purposes of this paragraph, assets shall be measured in accordance with the provisions of paragraphs
255-10-50-20 through 50-33
and paragraphs
255-10-50-36 through 50-38
.
255-10-50-43
For the current year, the increase or decrease in current cost amounts of inventory and property, plant, and equipment shall be reported both before and after eliminating the effects of general inflation (see paragraph 255-10-50-16(b)). In the five-year summary, the increase or decrease shall be reported after elimination of the effects of each year's general inflation (see paragraph 255-10-50-3(d)). An acceptable approximate method of calculating the increase or decrease in current cost amounts and the inflation adjustment is illustrated in Example 1 (see paragraphs
255-10-55-46 through 55-49
).
255-10-50-44
Entities that do not have significant foreign operations or that use the dollar as the functional currency for all significant foreign operations shall use the Consumer Price Index for All Urban Consumers to restate current costs into units of constant purchasing power. Acceptable approximate methods are illustrated in Example 1 (see paragraphs
255-10-55-66 through 55-67
).
255-10-50-45
The effects of general inflation on current cost information for operations measured in a foreign functional currency shall be measured either:
  1. a
    After translation and based upon the Consumer Price Index for All Urban Consumers (the translate-restate method)
  2. b
    Before translation and based on a broad-based measure of the change in the general purchasing power of the functional currency (the restate-translate method).
255-10-50-46
The same method shall be used for all operations measured in functional currencies other than the dollar and for all periods presented. Acceptable approximate methods are illustrated in Example 1 (see paragraphs
255-10-55-66 through 55-70
and
255-10-55-78 through 55-80
).
255-10-50-47
The choice of a measure of functional currency purchasing power should take into account the availability, reliability, and timeliness of a general price level index and the frequency with which it is adjusted. It is anticipated that an appropriate index of the change in the general price level will be available for most functional currencies. Indexes are published in most countries, and some indexes are published periodically by organizations such as the International Monetary Fund, the Organisation for Economic Co-Operation and Development, and the United Nations. However, in some cases indexes may not be available on a timely basis or may not be sufficiently reliable. In those circumstances, management should estimate the change in the general price level.
255-10-50-48
If current cost information for operations measured in functional currencies other than the dollar is based on the translate-restate method, the aggregate translation adjustment on the current cost basis shall be stated net of any income taxes allocated to the aggregate translation adjustment in the primary financial statements (see paragraph 830-30-45-20(c)).
255-10-50-49
If current cost information for operations measured in functional currencies other than the dollar is based on the restate-translate method, the aggregate translation adjustment on the current cost basis shall be stated net of both any income taxes allocated to the aggregate translation adjustment in the primary financial statements and the aggregate parity adjustment. The parity adjustment is the amount needed to measure end-of-year net assets in either of the following:
  1. a
    Average-for-the-year dollars, if income from continuing operations is measured in average-for-the-year functional currency units
  2. b
    End-of-year dollars, if income from continuing operations is measured in end-of-year functional currency units.
255-10-50-50
The purchasing power gain or loss on net monetary items is the net gain or loss determined by restating in units of constant purchasing power the opening and closing balances of, and transactions in, monetary assets and monetary liabilities. Acceptable approximate methods of calculating the purchasing power gain or loss on net monetary items are illustrated in Example 1 (see paragraphs 255-10-55-45,
255-10-55-68 through 55-70
, and 255-10-55-78).
255-10-50-51
The economic significance of monetary assets and liabilities depends heavily on the general purchasing power of money, although other factors, such as creditworthiness of debtors, may affect their significance. The economic significance of nonmonetary items depends heavily on the value of specific goods and services. Nonmonetary assets include all of the following:
  1. a
    Goods held primarily for resale or assets held primarily for direct use in providing services for the business of the entity
  2. b
    Claims to cash in amounts dependent on future prices of specific goods or services
  3. c
    Residual rights such as goodwill or equity interests.
255-10-50-52
Nonmonetary liabilities include both of the following:
  1. a
    Obligations to furnish goods or services in quantities that are fixed or determinable without reference to changes in prices
  2. b
    Obligations to pay cash in amounts dependent on future prices of specific goods or services.
255-10-50-53
Guidance on the classification of balance sheet items as monetary or nonmonetary is set forth in paragraphs
255-10-55-1 through 55-13
.
255-10-50-54
If inflation-adjusted current cost information is based on the translate-restate method, the purchasing power gain or loss on net monetary items is equal to the net gain or loss determined by restating the opening and closing balances of, and transactions in, monetary assets and liabilities in units of constant purchasing power as measured by the Consumer Price Index for All Urban Consumers.
255-10-50-55
If inflation-adjusted current cost information is based on the restate-translate method, the purchasing power gain or loss on net monetary items is equal to the net gain or loss determined by restating the opening and closing balances of, and transactions in, monetary assets and liabilities in units of constant purchasing power as measured by the change in the general purchasing power of the functional currency. The purchasing power gain or loss computed in that manner shall be translated into its dollar equivalent at the average exchange rate for the period.

255-10-55Implementation Guidance and Illustrations

Source downloaded: .Record version 9ec5deeb4436. Effective date must be checked in the source.

Implementation Guidance

255-10-55-1
Paragraphs 255-10-55-1 through 55-13 of this Section provide guidance on the interpretation of paragraphs
255-10-50-50 through 50-55
for the classification of certain asset and liability items as monetary or nonmonetary. The following table illustrates the application of the definitions to common cases under typical circumstances. In other circumstances the classification should be resolved by reference to the definitions. Paragraphs 255-10-55-1 through 55-13 are not intended to provide answers that should be followed regardless of the circumstances of the case.
  • Assets Monetary Nonmonetary Cash on hand and demand bank deposits (dollars) X Time deposits (dollars) X Foreign currency on hand and claims to foreign currency (a) X Securities: Common stocks (not accounted for on the equity method) X Common stocks represent residual interests in the underlying net assets and earnings of the issuer. Preferred stock (convertible or participating) Circumstances may indicate that such stock is either monetary or nonmonetary. See convertible bonds. "Preferred stock (nonconvertible, nonparticipating)" X Future cash receipts are likely to be substantially unaffected by changes in specific prices. Convertible bonds "If the market values the security primarily as a bond, it is monetary; if it values the security primarily as stock, it is nonmonetary." Bonds (other than convertibles) X "Trading account investments in fixed-income securities owned by banks, investment brokers, and others (see paragraphs 255-10-55-2 through 55-3)" X Accounts and notes receivable X Allowance for doubtful accounts and notes receivable X Variable-rate mortgage loans X "The terms of such loans do not link them directly to the rate of inflation. Also, there are practical reasons for classifying all loans as monetary." Inventories used on contracts "They are, in substance, right to receive sums of money if the future cash receipts on the contracts will not vary due to future changes in specific prices. Goods used on contracts to be priced at market upon delivery are nonmonetary." Inventories (other than inventories used on contracts) and commodity inventories (other than those described below) X Commodity inventories whose values are hedged by futures contracts whose contract amounts have not been recorded in the financial statements See paragraphs 255-10-55-4 through 55-5. Loans to employees X "Prepaid insurance, advertising, rent, and other prepayments" "Claims to future services are nonmonetary. Prepayments that are deposits, advance payments, or receivables are monetary because the prepayment does not obtain a given quantity of future services, but rather is a fixed-money offset." Long-term receivables X Refundable deposits X Advances to unconsolidated subsidiaries X Equity investment in unconsolidated subsidiaries or other investees X "Pension, sinking, and other funds under an entity's control" The specific assets in the fund should be classified as monetary or nonmonetary. See listings under securities. "Property, plant, and equipment" X "Accumulated depreciation of property, plant, and equipment" X "The unguaranteed residual value of property owned by a lessor and leased under direct financing, sales-type, and leveraged leases" See paragraphs 255-10-55-6 through 55-7. "Investment tax credits that are deferred by a lessor as part of the unearned income of a leveraged lease" See paragraphs 255-10-55-8 through 55-9. Portion of the carrying amount of lessors' assets leased under noncancellable operating leases that represent claims to fixed sums of money (see paragraphs .255-10-55-10 through 55-11) X Cash surrender value of life insurance X Purchase commitments—portion paid on fixed-price contracts X An advance on a fixed-price contract is the portion of the purchaser's claim to nonmonetary goods or services that is recognized in the accounts; it is not a right to receive money. Advances to supplier—not on a fixed-price contract "Such advances are rights to receive credit for a sum of money, not claims to a specified quantity of goods or services." X Deferred tax assets (a) X "Patents, trademarks, licenses, and formulas" X Goodwill X Deferred life insurance policy acquisition costs (a) X Such costs represent the portion of future cash receipts for premiums that is recognized in the accounts and are sometimes viewed as an offset to the policy reserve. Deferred property and casualty insurance policy acquisition costs related to unearned premiums X Other intangible assets and deferred charges X
  • Liabilities Monetary Nonmonetary Accounts and notes payable X Accrued expenses payable (wages and so forth) X Accrued vacation pay "If to be paid at the wage rates as of the vacation dates and if those rates may vary, accrued vacation pay is nonmonetary." Cash dividends payable X Obligations payable in foreign currency X Sales commitments—portion collected on fixed-price contracts X An advance received on a fixed-price contract is the portion of the seller's obligation to deliver goods or services that is recognized in the accounts; it is not an obligation to pay money. Advances from customers—not on a fixed-price contract X Such advances are equivalent to loans from customers and are not obligations to furnish specified quantities of goods or services. Accrued losses on firm purchase commitments X "In essence, these are accounts payable." Deferred revenue "If an obligation to furnish goods or services is involved, deferred revenue is nonmonetary. Certain deferred income items of savings and loan associations are monetary." Refundable deposits X Bonds payable and other long-term debt X Unamortized premium or discount and prepaid interest on bonds or notes payable X Such items are inseparable from the debt to which they relate—a monetary item. Convertible bonds payable X "Until converted, these are obligations to pay sums of money." Accrued pension obligations Fixed amounts payable to a fund are monetary; all other amounts are nonmonetary. Obligations under warranties X These are nonmonetary because they oblige the entity to furnish goods or services or their future price. Deferred tax liabilities (a) X Deferred investment tax credits X These are not to be settled by payment of cash and are related to nonmonetary assets. Life insurance policy reserves X These represent portions of policies' face values that are now deemed liabilities. Property and casualty insurance loss reserves X Unearned property and casualty insurance premiums X These are nonmonetary because they are principally obligations to furnish insurance coverage. The dollar amount of payments to be made under that coverage might vary materially due to changes in specific prices. Deposit liabilities of financial institutions X Equity Monetary Nonmonetary Capital stock of the entity or of its consolidated subsidiaries subject to mandatory redemption at fixed amounts (see paragraph 255-10-55-13) X Noncontrolling interests in consolidation subsidiaries (see paragraph 255-10-55-12) X (a) "Although classification of this item as nonmonetary may be technically preferable, the monetary classification provides a more practical solution for the purposes of computing the purchasing power gain or loss on a consolidated basis."
255-10-55-2
Trading account securities are securities of all types carried in a trading account that are held principally for resale. These securities generally are carried at fair value. Trading account investments include both fixed-income securities (for example, nonconvertible preferred stock, convertible bonds, and other bonds) and other securities (for example, common stock). Usually, trading account securities are held for extremely short periods of time—sometimes for only a few hours. Frequently, the entity buys and sells the securities expecting to make a profit on the difference between dealer and retail, or bid and ask, prices rather than on price changes during the period securities are held. However, the prices of the securities change with market forces.
255-10-55-3
Trading account investments in fixed-income securities are not claims to receive sums of money that are fixed or determinable. The market prices of the securities might and frequently do change while the securities are held. Generally, nonconvertible and nonparticipating preferred stock, convertible bonds that the market values primarily as bonds rather than as stocks, and nonconvertible bonds should be classified as monetary items. However, those classifications are based, in part, on the assumption that those securities would be held for long periods, if not to maturity. Trading account investments, on the other hand, are held for shorter periods and their value depends much less heavily on the general purchasing power of money and more on the specific values of the securities. Therefore, trading account investments in fixed-income securities should be classified as nonmonetary.
255-10-55-4
Many entities hedge commodity inventories (such as grain or metals). Short hedges are designed to provide a degree of assurance that a decline in the price of the commodity would be offset by an increase in the value of the hedge contract. Short hedges thus tend to reduce the effects of price changes on the inventory that is hedged.
255-10-55-5
There are certain similarities between inventories that are hedged and inventories that are used on or committed to a fixed-price contract. In each case, the risk of gain or loss due to price changes before the inventory is sold is largely or entirely eliminated. To the extent that hedges fix the value of an inventory in dollars (or units of foreign functional currency, if appropriate), the inventory effectively becomes a monetary item.
255-10-55-6
The unguaranteed residual value is included with the minimum lease payments, at present value, in the net investment in the lease.
255-10-55-7
The minimum lease payments are monetary items because they are claims to fixed sums of money. The residual value is not a claim to a fixed sum of money, so it is a nonmonetary item. Some assets and liabilities, of which the net investment in the lease is a good example, are combinations of claims to (or obligations of) fixed amounts and claims to (or obligations of) variable amounts. Ideally, those claims should be separated for purposes of classifying them as monetary and nonmonetary. However, if the information necessary to make the separation is not available or is impracticable to obtain, such items need not be divided into monetary and nonmonetary components and would be classified according to their dominant element. If the net investment in leases is principally claims to fixed amounts, it would be classified as monetary; it would be classified as nonmonetary if it is principally claims to residuals.
255-10-55-7A
The lease receivable arising from a sales-type lease or a direct financing lease is a monetary item because it is a claim to a fixed sum of money. The unguaranteed residual asset arising from a sales-type lease or a direct financing lease is not a claim to a fixed sum of money, so it is a nonmonetary item. Some assets and liabilities, of which the net investment in the lease is a good example, are combinations of claims to (or obligations of) fixed amounts and claims to (or obligations of) variable amounts. Because the net investment in a sales-type or direct financing lease is predominantly a claim to a fixed sum of money, it should be classified as monetary. In accordance with Subtopic 842-30, a lessor includes the unguaranteed residual asset as part of its net investment in the lease. Consequently, the unguaranteed residual asset is accounted for in the same manner as a monetary item so long as it is part of the net investment in the lease. If the lessor sells the lease receivable but retains an interest in the unguaranteed residual asset, the remaining unguaranteed residual asset is accounted for as a nonmonetary item after the sale of the lease receivable.
255-10-55-8
Under paragraph 842-50-35-2, the deferred investment tax credit related to the underlying asset is subtracted from rentals receivable and estimated residual value as part of the calculation of the lessor's investment in the leveraged lease. The lessor's investment in a leveraged lease, including the deferred investment tax credit related to the leveraged lease, is presented as one amount in the balance sheet. As indicated in paragraph 255-10-55-7, the investment in a leveraged lease would be classified as monetary or nonmonetary according to its dominant element.
255-10-55-9
As indicated in the table in paragraph 255-10-55-1, a deferred investment tax credit should be classified as nonmonetary but, if it is part of an investment in a leveraged lease and if the information necessary to separate its elements is not available or is impracticable to obtain, the investment would be classified according to its dominant element.
255-10-55-10
These assets are carried at depreciated historical cost under generally accepted accounting principles (GAAP) and are classified with or near property, plant, and equipment, which are nonmonetary.
255-10-55-11
The classification of a lease as an operating lease under paragraphs
842-10-25-2 through 25-3
indicates that the lessee has not obtained control of the nonmonetary underlying asset as a result of the lease. Thus, the economic significance of the asset continues to depend heavily on the value of the future lease rentals, residual values, and associated costs that do not represent fixed sums of money. Therefore, an asset subject to an operating lease should be classified as nonmonetary.
255-10-55-12
The interests of noncontrolling shareholders in the earnings and equity of subsidiaries are, from the consolidated entity's point of view, claims that are not fixed. Rather, they are residuals that will vary based on the subsidiary's earnings, dividends, and other transactions affecting its equity and so are nonmonetary. (See the following paragraph as to classification of capital stock of the entity or of its consolidated subsidiaries subject to mandatory redemption at fixed amounts.)
255-10-55-13
Such securities are claims of the stockholders to a fixed sum of money and therefore are monetary. Classification as a monetary item called for in paragraphs
255-10-55-1 through 55-13
is only for purposes of determining a purchasing power gain or loss. Those paragraphs do not address how such securities should be classified in balance sheets or the accounting for dividends on those securities.

Illustrations

255-10-55-14
This Example illustrates formats that may be used to disclose the information required by this Subtopic for a manufacturing entity. An entity may choose to disclose the information required by paragraphs
255-10-50-3 through 50-16
in any of the following ways:
  1. a
    In a schedule of annual information (for example, Schedule 1 or Schedule 2), with notes to those schedules
  2. b
    In a five-year summary (for example, Schedule 3 or Schedule 4)
  3. c
    In a five-year summary with notes to that summary (for example, Schedule 5).
255-10-55-15
Many entities include amounts reported in the primary statements alongside current cost-constant purchasing power amounts in the five-year summary.
255-10-55-16
Entities are encouraged to provide more detailed discussions than the illustrative notes in this Example—especially discussion of the significance of the information as it relates to the circumstances of the entity (required by paragraph 255-10-50-10) and the principal types of information used to calculate current cost amounts (required by paragraph 255-10-50-16(c)). Illustrative calculations are given in paragraphs
255-10-55-22 through 55-89
. In the schedules that follow, the Consumer Price Index for All Urban Consumers is expressed in average U.S. dollars.
255-10-55-17
The following table illustrates one format for the statement of income from continuing operations in a schedule of annual information.
  • Schedule 1 STATEMENT OF INCOME FROM CONTINUING OPERATIONS ADJUSTED FOR CHANGING PRICES (a) "For the Year Ended December 31, 19X6 " In Thousands of Average 19X6 Dollars "Income from continuing operations, as reported in the primary income statement" " $22,995 " Adjustments to reflect current costs Cost of goods sold " (8,408)" Depreciation expense " (9,748)" Income from continuing operations adjusted for changes in specific prices " $4,839 " Gain from decline in purchasing power of net amounts owed (b) " $2,449 " "Increase in specific prices (current cost) of inventory and property, plant, and equipment held during the year (c)" " $25,846 " Effect of increase in general price level " 5,388 " Excess of increase in specific prices over increase in the general price level " $20,458 " Foreign currency translation adjustment (d) $(624) (a) "The condensed financial information in this schedule compares selected information from the primary financial statements with information that reflects effects of changes in the specific prices (current cost) of inventory and property, plant, and equipment expressed in units of constant purchasing power. The current cost amounts for inventory and cost of goods sold reflect actual manufacturing costs incurred in 19X6. The current cost amounts for major components of property, plant, and equipment were determined by applying specific price indexes to the applicable historical costs. For assets used in U.S. operations, Producer Price Indexes and Factory Mutual Building Indexes were used; for assets used in foreign operations, appropriate indexes for each country were used. The current cost information is expressed in average 19X6 dollars as measured by the Consumer Price Index for All Urban Consumers." (b) The purchasing power gain on net amounts owed is an economic benefit to the entity that results from being able to repay those amounts with cheaper dollars. (c) "During 19X6, the specific prices (current cost) of inventory increased by $9,108 and of property, plant, and equipment by $16,738. The total increase of $25,846 exceeded the increase necessary to keep pace with general inflation. At December 31, 19X6, the current cost of inventory was $65,700 and of property, plant, and equipment, net of accumulated depreciation, was $89,335 (both measured in December 31, 19X6 units of purchasing power). Those amounts are higher than the amounts in the primary statements of $63,000 for inventory and $45,750 for property, plant, and equipment, net of accumulated depreciation; therefore, it is reasonable to expect income from continuing operations on a current cost basis for 19X7 to remain significantly below that reported in the primary statements." (d) "Current cost amounts for foreign operations are measured in their functional currencies, translated into dollar equivalents using the average exchange rate for the year, and restated into constant units of purchasing power using the Consumer Price Index for All Urban Consumers. Essentially, the foreign currency translation adjustment is the effect of changes in exchange rates during the year on shareholders' equity. The negative translation adjustment indicates that, overall, the dollar has increased in value relative to the functional currencies used to measure the foreign operations of the entity."
255-10-55-18
The following table illustrates one format for the statement of income from continuing operations in a statement of annual information.
  • Schedule 2 STATEMENT OF INCOME FROM CONTINUING OPERATIONS ADJUSTED FOR CHANGING PRICES (a) "For the Year Ended December 31, 19X6 " In Thousands of Dollars As Reported in the Primary Statements Adjusted for Changes in Specific Prices (Current Cost) Net sales and other operating revenues " $275,500 " " $275,500 " Cost of goods sold " 197,000 " " 205,408 " Depreciation expense " 10,275 " " 20,023 " Other operating expenses " 14,685 " " 14,685 " Interest expense " 7,550 " " 7,550 " Income tax expense " 22,995 " " 22,995 " " 252,505 " " 270,661 " Income from continuing operations " $22,995 " " $4,839 " Gain from decline in purchasing power of net amounts owed (b) " $2,449 " "Increase in specific prices (current cost) of inventory and property, plant, and equipment held during the year (c)" " $25,846 " Effect of increase in general price level " 5,388 " Excess of increase in specific prices over increase in the general price level " $20,458 " Foreign currency translation adjustment (d) $(295) $(624) (a) "The condensed financial information in this schedule compares selected information from the primary financial statements with information that reflects effects of changes in the specific prices (current cost) of inventory and property, plant, and equipment expressed in units of constant purchasing power. The current cost amounts for inventory and cost of goods sold reflect actual manufacturing costs incurred in 19X6. The current cost amounts for major components of property, plant, and equipment were determined by applying specific price indexes to the applicable historical costs. For assets used in U.S. operations, Producer Price Indexes and Factory Mutual Building Indexes were used; for assets used in foreign operations, appropriate indexes for each country were used. The current cost information is expressed in average 19X6 dollars as measured by the Consumer Price Index for All Urban Consumers." (b) The purchasing power gain on net amounts owed is an economic benefit to the entity that results from being able to repay those amounts with cheaper dollars. (c) "During 19X6, the specific prices (current cost) of inventory increased by $9,108 and of property, plant, and equipment by $16,738. The total increase of $25,846 exceeded the increase necessary to keep pace with general inflation. At December 31, 19X6, the current cost of inventory was $65,700 and of property, plant, and equipment, net of accumulated depreciation, was $89,335 (both measured in December 31, 19X6 units of purchasing power). Those amounts are higher than the amounts in the primary statements of $63,000 for inventory and $45,750 for property, plant, and equipment, net of accumulated depreciation; therefore, it is reasonable to expect income from continuing operations on a current cost basis for 19X7 to remain significantly below that reported in the primary statements." (d) "Current cost amounts for foreign operations are measured in their functional currencies, translated into dollar equivalents using the average exchange rate for the year, and restated into constant units of purchasing power using the Consumer Price Index for All Urban Consumers. Essentially, the foreign currency translation adjustment is the effect of changes in exchange rates during the year on shareholders' equity. The negative translation adjustment indicates that, overall, the dollar has increased in value relative to the functional currencies used to measure the foreign operations of the entity."
255-10-55-19
The following table illustrates one format for the five-year comparison of selected financial data.
  • Schedule 3 FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA ADJUSTED FOR EFFECTS OF CHANGING PRICES(a) "In Thousands of Average 19X6 Dollars, except for Per Share Amounts" "Year Ended December 31," 19X6 19X5 19X4 19X3 19X2 Net sales and other operating revenues " $275,500 " " $247,500 " " $240,000 " " $235,500 " " $265,000 " Income (loss) from continuing operations " 4,839 " " 1,660 " " (2,102)" " (4,663)" " 1,261 " Gain from decline in purchasing power of net amounts owed " 2,449 " " 7,027 " " 5,432 " " 1,247 " " 6,375 " "Excess of increase in specific prices of inventory and property, plant, and equipment over increase in the general price level" " 20,458 " " 2,292 " " 3,853 " " 8,597 " " 3,777 " Foreign currency translation adjustment (624) (386) (454) (293) 127 Net assets at year-end (a) " 92,027 " " 67,905 " " 60,409 " " 56,966 " " 55,705 " Per share information: Income (loss) from continuing operations $3.23 $1.11 $(1.40) $(3.11) $0.84 Cash dividends declared 2 2.06 2.19 2.42 2.75 Market price at year-end 35 39 43 27 32 Average Consumer Price Index (b) 298.4 289.1 272.4 246.8 217.4 (a) "Net assets include inventory and property, plant, and equipment at current cost and all other items as they are reported in the primary financial statements. No adjustment has been made for the lower tax basis applicable to the current cost amounts included in net assets." (b) "For purposes of this Example, although the years for which information has been provided are nonspecific, the actual 1979-1983 average index numbers have been applied."
255-10-55-20
The following table illustrates one format for the five-year comparison of selected financial data.
  • Schedule 4 FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA "In Thousands of Dollars, Except for Per Share Amounts" "Year Ended December 31," 19X6 19X5 19X4 19X3 19X2 Total revenue As reported " $275,500 " " $239,800 " " $219,100 " " $194,800 " " $193,100 " Adjusted for general inflation (a) " 275,500 " " 247,500 " " 240,000 " " 235,500 " " 265,000 " Income (loss) from operations As reported " 22,995 " " 11,097 " " 4,756 " " 9,977 " " 11,847 " Adjusted for specific price changes (a) " 4,839 " " 1,660 " " (2,102)" " (4,663)" " 1,261 " Purchasing power gain from holding net monetary liabilities (a) " 2,449 " " 7,027 " " 5,432 " " 1,247 " " 6,375 " Excess of increase in specific price of assets over increase in the general price level (a) " 20,458 " " 2,292 " " 3,853 " " 8,597 " " 3,777 " Foreign currency translation adjustment As reported (295) (276) (396) (138) 76 Adjusted for specific price changes (a) (624) (386) (454) (293) 127 Net assets at year-end As reported " 47,700 " " 28,000 " " 20,179 " " 18,819 " " 11,980 " Adjusted for specific price changes (b) " 92,027 " " 67,905 " " 60,409 " " 56,966 " " 55,705 " Per share information: Income (loss) from operations As reported $15.33 $7.40 $3.17 $6.65 $7.90 Adjusted for specific price changes (a) 3.23 1.11 (1.40) (3.11) 0.84 Cash dividends declared As reported 2 2 2 2 2 Adjusted for general inflation (a) 2.00 2.06 2.19 2.42 2.75 Market price at year-end As reported 36 38 41 23 25 Adjusted for general inflation (a) 35 39 43 27 32 Average Consumer Price Index (c) 298.4 289.1 272.4 246.8 217.4 (a) In average 19X6 dollars. (b) "Net assets adjusted for specific price changes include inventory and property, plant, and equipment at current cost and all other items as they are reported in the primary financial statements. No adjustment has been made for the lower tax basis applicable to the current cost amounts included in net assets." (c) "For purposes of this Example, although the years for which information has been provided are nonspecific, the actual 1979-1983 average index numbers have been applied."
255-10-55-21
The following table illustrates one format for the five-year comparison of selected financial data.
  • Schedule 5 FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA ADJUSTED FOR EFFECTS OF CHANGING PRICES (a) "In Thousands of Average 19X6 Dollars, Except for Per Share Amounts" "Year Ended December 31," 19X6 19X5 19X4 19X3 19X2 Net sales and other operating revenues " $275,500 " " $247,500 " " $240,000 " " $235,500 " " $265,000 " Income (loss) from continuing operations (b) " 4,839 " " 1,660 " " (2,102)" " (4,663)" " 1,261 " Gain from decline in purchasing power of net amounts owed (c) " 2,449 " " 7,027 " " 5,432 " " 1,247 " " 6,375 " "Increase in specific prices of inventory and property, plant, and equipment (d)" " 20,458 " " 2,292 " " 3,853 " " 8,597 " " 3,777 " Foreign currency translation adjustment (e) (624) (386) (454) (293) 127 Net assets at year-end (d) " 92,027 " " 67,905 " " 60,409 " " 56,966 " " 55,705 " Per share information: Income (loss) from continuing operations $3.23 $1.11 $(1.40) $(3.11) $0.84 Cash dividends declared 2.00 2.06 2.19 2.42 2.75 Market price at year-end 35 39 43 27 32 Average Consumer Price Index (f) 298.4 289.1 272.4 246.8 217.4 (a) "The condensed financial information in this schedule presents selected information that reflects effects of changes in the specific prices (current cost) of inventory and property, plant, and equipment expressed in units of constant purchasing power. The current cost amounts for inventory and cost of goods sold reflect actual manufacturing costs incurred in 19X6. The current cost amounts for major components of property, plant, and equipment were determined by applying specific price indexes to the applicable historical costs. For assets used in U.S. operations, Producer Price Indexes and Factory Mutual Building Indexes were used; for assets used in foreign operations, appropriate indexes for each country were used. The current cost information is expressed in average 19X6 dollars as measured by the Consumer Price Index for All Urban Consumers." (b) "Income from continuing operations reported in the primary financial statements was $22,995 for 19X6. Current cost income reported in the five-year summary was only $4,839 because depreciation expense on a current cost basis exceeded depreciation expense in the primary statements by $9,748 and current cost of goods sold was $8,408 greater than the amount reported in the primary statements." (c) The purchasing power gain on net amounts owed is an economic benefit to the entity that results from being able to repay those amounts with cheaper dollars. (d) "During 19X6, the specific prices (current cost) of inventory increased by $9,108 and of property, plant, and equipment by $16,738. The total increase exceeded the increase necessary to keep pace with general inflation by $20,458. Net assets include inventory and property, plant, and equipment at current cost and all other items as reported in the primary financial statements (restated into average-for-19X6 dollars). No adjustment has been made for the lower tax basis applicable to the current cost amounts included in net assets. At December 31, 19X6, the current cost of inventory was $65,700 and of property, plant, and equipment, net of accumulated depreciation, was $89,335 (both measured in December 31, 19X6 units of purchasing power). Those amounts are higher than the amounts in the primary statements of $63,000 for inventory and $45,750 for property, plant, and equipment, net of accumulated depreciation; therefore, it is reasonable to expect income from continuing operations on a current cost basis for 19X7 to remain significantly below that reported in the primary statements." (e) "Current cost amounts for foreign operations are measured in their functional currencies, translated into dollar equivalents using the average exchange rate for the year, and restated into constant units of purchasing power using the Consumer Price Index for All Urban Consumers. Essentially, the foreign currency translation adjustment is the effect of changes in exchange rates during the year on shareholders' equity. A negative (positive) translation adjustment indicates that, overall, the dollar increased (decreased) in value relative to the functional currencies used to measure the foreign operations of the entity." (f) "For purposes of this Example, although the years for which information has been provided are nonspecific, the actual 1979-1983 average index numbers have been applied."
255-10-55-22
The following paragraphs 255-10-55-23 through 55-89 illustrate the methodology that might be used in calculating the disclosures in paragraph
255-10-55-14 through 55-21
.
255-10-55-23
Computation of current cost information should be based on a detailed analysis of all transactions; however, the costs of preparing the information can be reduced with little loss of usefulness by simplifying the methods of calculation. Therefore, only cost of sales and depreciation expense need to be adjusted from the amounts shown in the primary income statement. Revenues, other expenses, and gains and losses need not be adjusted. Approximate methods of computation are acceptable for adjusting cost of sales and depreciation expense. The measurement of current cost is not illustrated.
255-10-55-24
The objective in making these calculations is to obtain a reasonable degree of accuracy—complete precision is not required. Preparers are encouraged to devise short-cut methods of calculation, appropriate to their individual circumstances.
255-10-55-25
If inventories and cost of sales are accounted for under the last-in, first-out (LIFO) method in the primary financial statements, the only adjustment normally required in computing income from continuing operations would be to eliminate the effect of changing prices on any prior-period LIFO layer liquidation.
255-10-55-26
Seven basic steps to restate historical cost information into current cost-constant purchasing power information are illustrated in paragraphs
255-10-55-23 through 55-89
:
  1. a
    Analyze inventory (at the beginning and end of the year) and cost of goods sold to determine when the costs were incurred.
  2. b
    Restate inventory and cost of goods sold into current cost.
  3. c
    Analyze property, plant, and equipment to determine when the related assets were acquired.
  4. d
    Restate property, plant, and equipment and depreciation, depletion, and amortization expense into current cost.
  5. e
    Identify the amount of net monetary items (see paragraphs
    255-10-55-1 through 55-13
    ) at the beginning and end of the period and changes during the period.
  6. f
    Compute the purchasing power gain or loss on net monetary items.
  7. g
    Compute the change in current cost of inventory and property, plant, and equipment and the related effect of the increase in the general price level.
255-10-55-27
The methodology illustrated in paragraphs
255-10-55-23 through 55-89
has been developed for the hypothetical entity, Parent Company. Parent Company has a wholly owned foreign subsidiary, Sub Company. Sub Company measures its operations in a functional currency other than the dollar. The changing prices disclosures for Parent Company and Sub Company are developed separately. Merging the amounts calculated for each entity results in a consolidated disclosure:
  1. a
    Paragraphs
    255-10-55-37 through 55-50
    illustrate the minimum recommended calculations for the domestic operations of Parent Company. A method of checking the arithmetic accuracy of the calculations is included in paragraph 255-10-55-51.
  2. b
    Paragraphs
    255-10-55-61 through 55-74
    illustrate the translate-restate method for Sub Company, a foreign subsidiary that does not use the dollar as a functional currency. A method of checking the arithmetic accuracy of the calculations is included in paragraph 255-10-55-71.
  3. c
    The results of the calculations described in (a) and (b) are summarized in paragraph 255-10-55-75 and are reflected in the illustrative disclosures in paragraphs
    255-10-55-14 through 55-21
    .
255-10-55-28
Paragraphs
255-10-55-76 through 55-89
illustrate the restate-translate method for Sub Company. A method of checking the arithmetic accuracy of the calculations is included in paragraphs
255-10-55-81 through 55-82
.
255-10-55-29
Throughout this Example, $ indicates nominal dollars, C$ indicates average 19X6 constant dollars, FC indicates nominal functional currency, C$E indicates dollar equivalents of FC amounts using the translate-restate method, CFC indicates average 19X6 constant functional currency, and CFC$ indicates the translated dollar equivalents of CFC amounts using the restate-translate method.
255-10-55-30
Historical cost-nominal financial statements are as follows.
255-10-55-31
The following table illustrates Parent Company's balance sheet.
  • Parent Company Balance Sheet (Unconsolidated) "As of December 31, 19X6 and 19X5 " (000s) 19X6 19X5 19X6 19X5 Current assets: Current liabilities: Cash " $1,000 " " $2,000 " Accounts payable and accrued expenses " $47,000 " " $32,000 " Accounts receivable " 36,000 " " 16,500 " Income taxes payable " 6,000 " " 6,000 " "Inventories, at FIFO cost" " 63,000 " " 56,000 " Current portion of long-term debt " 5,000 " " 5,000 " Total current assets " 100,000 " " 74,500 " Total current liabilities " 58,000 " " 43,000 " "Property, plant, and equipment, at cost" " 100,000 " " 85,000 " Deferred income taxes " 6,000 " " 5,000 " Less accumulated depreciation " 56,000 " " 46,000 " Long-term debt " 34,000 " " 39,000 " " 44,000 " " 39,000 " Total liabilities " 98,000 " " 87,000 " Capital stock (b) " 10,000 " " 10,000 " Investment in Sub Company(a) " 1,500 " " 1,500 " Retained earnings " 37,500 " " 18,000 " " $145,500 " " $115,000 " " $145,500 " " $115,000 " (a) Investments in Sub Company is recorded at cost and is eliminated in consolidation. Parent Company does not issue separate unconsolidated statements. (b) "1,500,000 shares outstanding."
255-10-55-32
The following table illustrates Parent Company's statement of earnings and retained earnings.
  • Parent Company (Unconsolidated) Statement of Earnings and Retained Earnings "For the Year Ended December 31, 19X6" (000s) Sales " $270,000 " "Cost of goods sold, exclusive of depreciation" " 197,000 " "Selling, general, and administrative expenses" " 10,835 " Depreciation " 10,000 " Interest " 7,165 " " 225,000 " Earnings before taxes " 45,000 " Income taxes " 22,500 " Net income " 22,500 " Retained earnings at beginning of year " 18,000 " " 40,500 " Dividends " 3,000 " Retained earnings at end of year " $37,500 " Net income per share $15
255-10-55-33
Inventory and production:
  1. a
    Inventory is accounted for on a first-in, first-out (FIFO) basis and turns over four times per year. There is no significant amount of work in progress or raw materials.
  2. b
    At December 31, 19X6, and 19X5, inventory consisted of 900,000 units and 1,000,000 units respectively—representing production of the immediately preceding quarter. Management has measured the current cost of inventory at $73 per unit at December 31, 19X6 ($65,700,000), and $58 per unit at December 31, 19X5 ($58,000,000).
  3. c
    Costs were incurred and goods produced as follows.
    • (000s) 19X5 19X6 4th 1st 2nd 3rd 4th Total Historical costs " $56,000 " " $39,560 " " $59,400 " " $42,040 " " $63,000 " " $204,000 " Units produced " 1,000 " 618 900 618 900 " 3,036 " Units sold " 1,000 " 618 900 618 " 3,136 "
  4. d
    At December 31, 19X6, the selling price per unit was $85.
  5. e
    There were no write-downs or disposals of inventory.
255-10-55-34
Property, plant, and equipment:
  1. a
    Details of fixed assets at December 31, 19X6, are as follows.
    • (000s) Date Acquired Percent Depreciated Historical Cost Accumulated Depreciation 19W9 80 " $50,000 " " $40,000 " 19X0 70 " 5,000 " " 3,500 " 19X1 60 " 5,000 " " 3,000 " 19X2 50 " 5,000 " " 2,500 " 19X3 40 " 5,000 " " 2,000 " 19X4 30 " 5,000 " " 1,500 " 19X5 20 " 10,000 " " 2,000 " 19X6 10 " 15,000 " " 1,500 " " $100,000 " " $56,000 "
  2. b
    Depreciation is calculated at 10 percent per annum, straight line. A full year's depreciation is charged in the year of acquisition.
  3. c
    There were no disposals.
  4. d
    Management has measured the current cost of property, plant, and equipment at December 31, 19X6, and 19X5, as follows.
    • (000s) "December 31, 19X6" "December 31, 19X5" Date Acquired Current Cost Accumulated Depreciation Current Cost Accumulated Depreciation 19W9 " $120,000 " " $96,000 " " $110,000 " " $77,000 " 19X0 " 10,000 " " 7,000 " " 6,000 " " 3,600 " 19X1 " 15,000 " " 9,000 " " 7,000 " " 3,500 " 19X2 " 18,000 " " 9,000 " " 12,000 " " 4,800 " 19X3 " 12,000 " " 4,800 " " 10,000 " " 3,000 " 19X4 " 17,000 " " 5,100 " " 15,000 " " 3,000 " 19X5 " 12,000 " " 2,400 " " 10,000 " " 1,000 " 19X6 " 16,000 " " 1,600 " - - " 220,000 " " $134,900 " " 170,000 " " $95,900 " Accumulated depreciation " 134,900 " " 95,900 " Net current cost " $85,100 " " $74,100 "
  5. e
    The recoverable amount has been determined by management to be in excess of current cost, net of accumulated depreciation.
255-10-55-35
Dividends were paid at the rate of $750,000 per quarter.
255-10-55-36
Consumer Price Index for All Urban Consumers (from the Survey of Current Business, U.S. Department of Commerce, Bureau of Economic Analysis, January 19X7) is as follows.
  • December 19X5 292.4 Average 19X6 298.4 December 19X6 303.5
255-10-55-37
The objective is to express the supplementary information in average 19X6 dollars. As indicated in paragraph 255-10-50-34, nominal dollar measurements may be used for all elements of net assets other than inventory and property, plant, and equipment. As indicated in paragraph 255-10-50-39, nominal dollar measurements may be used for all elements of income from continuing operations other than cost of sales and depreciation.
255-10-55-38
Step 1: Analysis of Inventory and Cost of Goods Sold. Inventory is assumed to turn over four times per year. Therefore, inventory with a historical cost of $63,000,000 at December 31, 19X6, is assumed to have been acquired during the fourth quarter of 19X6, and inventory with a historical cost of $56,000,000 at December 31, 19X5, is assumed to have been acquired in the fourth quarter of 19X5.
255-10-55-39
Step 2: Current Cost of Inventory and Cost of Goods Sold. Cost of goods sold, current cost is as follows.
  • Current cost at the beginning of year $58 /unit Current cost at the end of year 73 /unit $131 /unit Average current cost ($131 ÷ 2) $65.50 /unit Units sold during the year (000s) [paragraph 255-10-55-33(c)] "× 3,136" Average current cost of goods sold (000s) " $205,408 "
255-10-55-40
The current cost amounts should be compared with the recoverable amount. This is illustrated below.
  • Market price per unit at end of year $85 Current cost per unit of inventory on hand at end of year 73 Excess—no write-down required $12
255-10-55-41
Step 3: Analysis of Property, Plant, and Equipment and Depreciation. An analysis of property, plant, and equipment was given in paragraph 255-10-55-34.
255-10-55-42
Step 4: Current Cost of Property, Plant, and Equipment and Depreciation. It will usually be appropriate to calculate current cost depreciation, depletion, and amortization expense by reference to average current cost of the related assets (current cost of assets at beginning of year + current cost of assets at end of year ÷ 2), as follows.
  • (000s) Current Cost Current cost—12/31/X5 [paragraph 255-10-55-34(d)] " $170,000 " Current cost—12/31/X6 [paragraph 255-10-55-34(d)] " 220,000 " " 390,000 " ÷ 2 Average current cost " $195,000 " "Current cost depreciation: 10%, straight line" " $19,500 "
255-10-55-43
In this Example, management has determined that the recoverable amount is greater than net current cost of property, plant, and equipment and there is no write-down.
255-10-55-44
Step 5: Identification of Net Monetary Items. Net monetary items (see paragraphs
255-10-55-30 through 55-32
) are as follows.
  • (000s) "Dec. 31, 19X6" "Dec. 31, 19X5" Cash " $1,000 " " $2,000 " Accounts receivable " 36,000 " " 16,500 " Accounts payable and accrued expenses " (47,000)" " (32,000)" Income taxes payable " (6,000)" " (6,000)" Current portion of long-term debt " (5,000)" " (5,000)" Deferred income taxes " (6,000)" " (5,000)" Long-term debt " (34,000)" " (39,000)" Net monetary liabilities " $(61,000)" " $(68,500)"
255-10-55-45
Step 6: Computation of the Purchasing Power Gain or Loss on Net Monetary Items. The amount of net monetary items at the beginning of the year, changes in the net monetary items, and the amount at the end of the year are restated into average 19X6 dollars. The purchasing power gain or loss on net monetary items is then the balancing item as illustrated in the following table.
  • (000s) (000s) Nominal Dollars Conversion Factor Avg. 19X6 Dollars Balance—1/1/X6 " $68,500 " 298.4 (avg. 19X6) " C$ 69,906 " 292.4 (Dec.19X5) Decrease in net monetary liabilities during the year " (7,500)" (a) " (7,500)" Balance—12/31/X6 " $61,000 " 298.4 (avg. 19X6) " (59,975)" 303.5 (Dec.19X6) Purchasing power gain on net monetary items " C$ 2,431 " C$: Average 19X6 constant dollars (a) Assumed to be in average 19X6 dollars.
255-10-55-46
Step 7: Computation of the Change in Current Cost of Inventory and Property, Plant, and Equipment and the Effect of General Price-Level Changes. The increase in current cost of inventories is as follows.
  • (000s) (000s) Current Cost/ Nominal Dollars Conversion Factor Current Cost/ Avg. 19X6 Dollars Balance—1/1/X6 [paragraph 255-10-55-33(b)] " $58,000 " 298.4 (avg. 19X6) " C$ 59,190 " 292.4 (Dec. 19X5) Production [paragraph 255-10-55-33(c)] " 204,000 " (a) " 204,000 " Cost of goods sold [paragraph 255-10-55-39] " (205,408)" (a) " (205,408)" Balance—12/31/X6 [paragraph 255-10-55-33(b)] " (65,700)" 298.4 (avg. 19X6) " (64,596)" 303.5 (Dec. 19X6) Increase in current cost of inventories " $9,108 " " C$ 6,814 " C$: Average 19X6 constant dollars (a) Assumed to be in average 19X6 dollars.
255-10-55-47
The inflation component of the increase in current cost amount is the difference between the nominal dollar and constant dollar measures. The following table uses the numbers from the preceding paragraph.
  • (000s) Increase in current cost (nominal dollars) " $9,108 " Increase in current cost (constant dollars) " C$ 6,814 " Inflation component " 2,294 " C$: Average 19X6 constant dollars
255-10-55-48
The increase in current cost of property, plant, and equipment is as follows.
  • (000s) (000s) Current Cost/ Nominal Dollars Conversion Factor Current Cost/ Average 19X6 Dollars Balance—1/1/X6 [paragraph 255-10-55-34(d)] " $74,100 " 298.4 (avg. 19X6) " C$ 75,621 " 292.4 (Dec. 19X5) Additions [paragraph 255-10-55-34(a)] " 15,000 " (a) " 15,000 " Depreciation [paragraph 255-10-55-42] " (19,500)" (a) " (19,500)" Balance—12/31/X6 [paragraph 255-10-55-34(d)] " (85,100)" 298.4 (avg. 19X6) " (83,670)" 303.5 (Dec. 19X6) "Increase in current cost of property, plant, and equipment" " $15,500 " " C$ 12,549 " C$: Average 19X6 constant dollars (a) Assumed to be in average 19X6 dollars.
255-10-55-49
The inflation component of the increase in current cost amount is the difference between the nominal dollar and constant dollar measures. The following table uses the numbers from the preceding paragraph.
  • (000s) Increase in current cost (nominal dollars) " $15,500 " Increase in current cost (constant dollars) " C$ 12,549 " Inflation component " 2,951 " C$: Average 19X6 constant dollars
255-10-55-50
The following table summarizes paragraphs 255-10-55-47 and the preceding paragraph.
  • (000s) Increase in Current Cost Inflation Component Increase Net of Inflation Inventory " $9,108 " " 2,294 " " C$ 6,814 " "Property, plant, and equipment" " 15,500 " " 2,951 " " 12,549 " Total " $24,608 " " 5,245 " " C$ 19,363 " C$: Average 19X6 constant dollars
255-10-55-51
A reconciliation of shareholders' equity (net assets) on a current cost - constant purchasing power basis acts as a check on the arithmetic accuracy of the calculations. Changes in shareholders' equity during 19X6 in average 19X6 dollars appear in the following table.
  • (000s) " Source Paragraph (within 255-10-55)" Current Cost/ Average 19X6 Dollars "Equity at January 1, 19X6" Inventory 46 " C$ 59,190 " "Property, plant, and equipment—net" 48 " 75,621 " Net monetary items 45 " (69,906)" " 64,905 " Income from continuing operations 75 " 4,592 " Dividends 35 " (3,000)" Gain from decline in purchasing power of net monetary liabilities 45 " 2,431 " "Excess of increase in specific prices over increase in the general price level" Previous par. " 19,363 " " C$ 88,291 " "Equity at December 31, 19X6" Inventory 46 " C$ 64,596 " "Property, plant, and equipment—net" 48 " 83,670 " Net monetary items 45 " (59,975)" " C$ 88,291 " C$: Average 19X6 constant dollars
255-10-55-52
To facilitate the illustration of consolidated amounts in paragraph 255-10-55-75, investment in Sub Company has been excluded from net assets of Parent Company in the preceding paragraph.
255-10-55-53
The functional currency financial statements of Sub Company appear in the following tables.
  • Sub Company Historical Cost/Nominal FC Balance Sheets (000s) "December 31," 19X6 19X5 Cash " FC 2,550 " " FC 1,250 " Equipment " 2,500 " " 2,500 " Accumulated depreciation 750 500 Net equipment " 1,750 " " 2,000 " Total assets " FC 4,300 " " FC 3,250 " Accounts payable FC 600 FC 500 Long-term debt " 2,000 " " 1,500 " Total liabilities " 2,600 " " 2,000 " Capital stock 500 500 Retained earnings " 1,200 " 750 Total equity " 1,700 " " 1,250 " Total liabilities and equity " FC 4,300 " " FC 3,250 " FC: Nominal functional currency
  • Sub Company Historical Cost/Nominal FC Statement of Income and Retained Earnings "For the Year Ended December 31, 19X6" (000s) Revenue " FC 5,000 " General and administrative expenses " 3,500 " Depreciation 250 Interest 350 " 4,100 " Income before taxes 900 Income taxes 450 Net income 450 Retained earnings—beginning of year 750 Retained earnings—end of year " FC 1,200 " FC: Nominal functional currency
255-10-55-54
For simplicity, Sub Company is assumed to have a fixed asset but no inventory. The mechanics of restating inventory and cost of goods sold on a current cost basis are essentially the same as those illustrated for property, plant, and equipment.
255-10-55-55
The fixed asset was acquired on December 31, 19X4. It is depreciated on a straight-line basis over 10 years and is expected to have no salvage value. There were no acquisitions or disposals of assets during the year.
255-10-55-56
Exchange rates between the functional currency and the dollar are as follows.
  • "December 31, 19X5" FC 1 = $1.20 Average 19X6 FC 1 = $1.10 "December 31, 19X6" FC 1 = $1.00 FC: Nominal functional currency
255-10-55-57
Management has measured the current cost of equipment at December 31, 19X6, and 19X5, as follows.
  • (000s) 19X6 19X5 Current cost " FC 5,500 " " FC 4,000 " Accumulated depreciation " (1,650)" (800) Net current cost " FC 3,850 " " FC 3,200 " FC: Nominal functional currency
255-10-55-58
The recoverable amount has been determined to be in excess of net current cost at both dates.
255-10-55-59
Current cost equity in nominal FC at the beginning and end of the year may be computed by adding net monetary items and net property, plant, and equipment at current cost. To determine current cost equity in nominal dollars, those FC amounts are translated at the appropriate exchange rate.
  • December 31 19X6 19X5 (000s) (000s) (000s) (000s) FC Exchange Rate $ FC Exchange Rate $ Monetary items (paragraph 255-10-55-53) Cash " FC 2,550 " $1 " $2,550 " " FC 1,250 " $1.20 " $1,500 " Current liabilities (600) $1 (600) $(500) $1.20 (600) Long-term debt " (2,000)" $1 " (2,000)" " $(1,500)" $1.20 " (1,800)" Net monetary liabilities FC (50) $(50) FC (750) $(900) Equipment—net (paragraph 255-10-55-57) " FC 3,850 " $1 " $3,850 " " FC 3,200 " $1.20 " $3,840 " Equity at current cost " FC 3,800 " " $3,800 " " FC 2,450 " " $2,940 " FC: Nominal functional currency
255-10-55-60
The U.S. and local general price level indexes are as follows.
  • Local U.S. December 19X5 144 292.4 Average 19X6 158 298.4 December 19X6 173 303.5
255-10-55-61
To apply the translate-restate method, amounts measured in nominal FC are first translated into their dollar equivalents. Changes in those dollar equivalent amounts are then restated to reflect the effects of U.S. inflation.
255-10-55-62
The first step is to determine current cost depreciation for the year as follows.
  • (000s) Current cost—beginning of year (paragraph 255-10-55-57) " FC 4,000 " Current cost—end of year (paragraph 255-10-55-57) " 5,500 " " 9,500 " ÷ 2 "Average current cost, gross" " FC 4,750 " FC: Nominal functional currency
255-10-55-63
Current cost depreciation expense for the year is FC 475,000 (FC 4,750,000 × 10%). Computation of current cost depreciation and income from continuing operations does not involve use of a general price level index if measurements are made in average-for-the-year currency units. Accordingly, reported current cost depreciation under the translate-restate method is C$E 523,000 (FC 475,000 x $1.10).
255-10-55-64
Income from continuing operations on a current cost basis is computed by simply replacing historical cost depreciation in income from continuing operations in the primary financial statements with the current cost amount. Accordingly, current cost income from continuing operations is as follows.
  • Net income + historical cost depreciation - current cost depreciation = " FC 450,000 (paragraph 255-10-55-53) + FC 250,000 (paragraph 255-10-55-53) - FC 475,000 (paragraph 255-10-55-62)" = "FC 225,000" FC: Nominal functional currency
255-10-55-65
Reported current cost income from continuing operations under the translate-restate method is C$E 247,000 (FC 225,000 × $1.10). Current cost income has been rounded down from $247,500 to $247,000. This is necessary because current cost depreciation was rounded up to $523,000 from $522,500 and current cost income is a remainder of this number.
255-10-55-66
The second step is to compute the change in the current cost of equipment and the effect of the increase in the general price level. To measure the increase in current cost of equipment in nominal FC dollar equivalents, the effect of the exchange rate change must be excluded. One way to accomplish this is to translate the December 31, 19X5, and 19X6, FC current cost amounts to dollar equivalents at the average exchange rate and then restate those dollar amounts to average 19X6 constant dollar equivalents.
  • (000s) (000s) (000s) Current Cost/FC Exchange Rate Current Cost/$ Conversion Factor Current Cost/C$E "Current cost, net—12/31/X5 (paragraph 255-10-55-57)" " FC 3,200 " $1.10 " $3,520 " 298.4 (avg.19X6) " C$E 3,592 " 292.4 (Dec. 19X5) Depreciation (paragraph 255-10-55-62) (475) $1.10 (523) (a) (523) "Current cost, net—12/31/X6 (paragraph 255-10-55-57)" " (3,850)" $1.10 " (4,235)" 298.4 (avg. 19X6) " (4,164)" 303.5 (Dec. 19X6) Increase in current cost " FC 1,125 " " $1,238 " " C$E 1,095 " C$E: Dollar equivalents of nominal functional currency amounts using the translate-restate method FC: Nominal functional currency (a) Assumed to be in average 19X6 C$E.
255-10-55-67
The inflation component of the increase in current cost amount is the difference between the nominal dollar and the constant dollar equivalent amounts, as follows.
  • (000s) Increase in current cost (nominal dollars) " $1,238 " Increase in current cost (constant dollars) " C$E 1,095 " Inflation component $143 C$E: Dollar equivalents of nominal functional currency amounts using the translate-restate method
255-10-55-68
The third step is to compute the purchasing power gain or loss on net monetary items. Under the translate-restate method, the translated beginning and ending net monetary liabilities are restated to average 19X6 dollars. The U.S. purchasing power gain is then the balancing amount.
  • (000s ) (000s) FC Exchange Rate $ Net monetary liabilities—12/31/X5 (par. 255-10-55-59) FC 750 $1.20 $900 Net monetary liabilities—12/31/X6 (par. 255-10-55-59) 50 $1.00 50 Decrease during the year FC 700 $850 FC: Nominal functional currency
  • (000s) (000s) $ Conversion Factor C$E Net monetary liabilities—12/31/X5 $900 298.4 (avg. 19X6) C$E 918 292.4 (Dec. 19X5) Decrease during the year (850) (a) (850) Net monetary liabilities— 12/31/X6 $50 298.4 (avg. 19X6) (49) Purchasing power gain 303.5 (Dec. 19X6) C$E 19 C$E: Dollar equivalents of nominal functional currency amounts using the translate-restate method (a) Assumed to be in average 19X6 C$E.
255-10-55-69
In some circumstances, this procedure will include a part of the effect of exchange rate changes on net monetary items in the purchasing power gain or loss. A more precise computation that would completely exclude the effect of exchange rate changes would be to compute a separate purchasing power gain or loss for each functional currency operation in a manner similar to that illustrated in paragraphs
255-10-55-66 through 55-67
for the increase in specific prices. For Sub Company, that alternative method produces a purchasing power gain of C$E 18.
  • (000s) FC Average Exchange Rate (000s) $ Conversion Factor (000s) C$E Net monetary liabilities—12/31/X5 (paragraph 255-10-55-59) FC750 $1.10 825 298.4 (avg.19X6) C$E842 292.4 (Dec. 19X5) Decrease during the year (700) $1.10 (770) (a) (770) Net monetary liabilities—12/31/X6 (paragraph 255-10-55-59) FC 50 $1.10 55 298.4 (avg. 19X6) (54) 303.5 (Dec. 19X6) Purchasing power gain C$E 18 C$E: Dollar equivalents of nominal functional currency amounts using the translate-restate method FC: Nominal functional currency (a) Assumed to be in average 19X6 C$E.
255-10-55-70
The first procedure illustrated is less costly because it can be applied on a consolidated basis, and it generally provides a reasonable approximation. Accordingly, that method is acceptable. For this exercise, the more precise computation is used.
255-10-55-71
A reconciliation of equity serves as a check of the calculations and is a convenient way to compute the translation adjustment.
  • (000s) "Equity at 12/31/X5 in average 19X6 C$ - $2,940 (paragraph 255-10-55-59) × 298.4 ÷ 292.4" " C$ 3,000 " Income from continuing operations (paragraph 255-10-55-64 through 65) C$E 247 Purchasing power gain (paragraph 255-10-55-69) 18 Excess of increase in specific prices over increase in general price level (paragraph 255-10-55-66) " 1,095 " Translation adjustment (following paragraph) (624) Increase in equity in terms of U.S. purchasing power 736 " C$ 3,736 " "Equity at 12/31/X6 in average 19X6 C$ - $3,800 (paragraph 255-10-55-59) × 298.4 ÷ 303.5" " C$ 3,736 " C$: Average 19X6 constant dollars C$E: Dollar equivalents of nominal functional currency amounts using the translate-restate method
255-10-55-72
The preceding paragraph shows that the translation adjustment is the amount needed to balance the reconciliation of equity. The translation adjustment may be checked by computing the effect of changes in the exchange rate on beginning-of-year equity and on the increase or decrease in equity during the year. To check the translation adjustment determined under the translate-restate method: translate the beginning- and end-of-year equity on a C$ basis into FC amounts and use those FC amounts to compute the effect on equity of changes in the exchange rate.
  • (000s) (000s) C$ Exchange Rate FC (000s) (000s) " C$" Exchange Rate " FC" Equity at 12/31/X5 in average 19X6 C$ (preceding paragraph) " C$ 3,000 " $0.83 (a) " FC 2,499 " Equity at 12/31/X6 in average 19X6 C$ (preceding paragraph) " 3,736 " $1.00 " 3,736 " Increase in equity C$ 736 " FC 1,237 " C$: Average 19X6 constant dollars FC: Nominal functional currency (a) FC1 - $1.20 = $0.833
  • (000s) Beginning-of-year equity FC 2499 Exchange rate change during 19X6 ($1.20 - $1.00) × (.20) $(500) Increase in equity FC 1237 Difference between ending exchange rate and average rate for 19X6 ($1.10 - $1.00) × (.10) $(124) Translation adjustment $(624) FC: Nominal functional currency
255-10-55-73
If the short-cut method for determining the purchasing power gain or loss described in paragraphs
255-10-55-68 through 55-70
were followed, the translation adjustment would be $(625).
255-10-55-74
Parent Company prepares its changing prices disclosures on a consolidated basis and complies with the minimum requirements in determining current cost income from continuing operations (see paragraphs
255-10-50-39 through 50-40
). Accordingly, revenue, general and administrative expenses, interest, and income taxes (see paragraph 255-10-50-41) are shown at amounts reported in the historical cost financial statements. For Sub Company, those amounts are translated into dollars as follows.
  • (000s) (000s) "FC Amount (Paragraph 255-10-55-53)" Exchange Rate U.S. Dollars Revenue "FC 5,000" 1.10 " $5,500 " General and administrative expenses "FC 3,500" 1.10 " $3,850 " Interest FC 350 1.10 $385 Income taxes FC 450 1.10 $495 FC: Nominal functional currency
255-10-55-75
The "Total" column of the following schedule provides the figures in Schedule 2 of paragraph 255-10-55-18.
  • (000s) (000s) "Source Paragraph (within 255-10-55)" Parent Company "Source Paragraph (within 255-10-55)" Sub Company Total Average 19X6 Units of Purchasing Power Net sales and other revenues 31 " $270,000 " Preceding par. " $5,500 " " $275,500 " Cost of goods sold 39 " 205,408 " " 205,408 " Depreciation expense 42 " 19,500 " 62 through 63 523 " 20,023 " "Selling, general, and administrative expenses" 31 " 10,835 " Preceding par. " 3,850 " " 14,685 " Interest expense 31 " 7,165 " Preceding par. 385 " 7,550 " Provision for taxes 31 " 22,500 " Preceding par. 495 " 22,995 " " 265,408 " " 5,253 " " 270,661 " Income (loss) from operations " $4,592 " $247 " $4,839 " Purchasing power gain (loss) 45 " $2,431 " $18 " $2,449 " Increase in specific prices Inventory 50 " $9,108 " 69 " $9,108 " "Property, plant, and equipment" 50 " 15,500 " 66 through 67 " $1,238 " " 16,738 " " 24,608 " " 1,238 " " 25,846 " Effect of increase in general price level 50 " 5,245 " 66 through 67 143 " $5,388 " Increase in specific prices—net of inflation 50 " $19,363 " 66 through 67 " $ 1 ,095 " " $20,458 " Translation adjustment 72 $(624) $(624) Net assets 51 " $88,291 " 71 " $3,736 " " $92,027 " "December 31, 19X6 Units of Purchasing Power" Inventory 33 " $65,700 " " $65,700 " "Property, plant, and equipment—net of accumulated depreciation" 34(d) " $85,100 " 66 through 67 " $4,235 " " $89,335 "
255-10-55-76
To apply the restate-translate method, the steps illustrated in paragraphs
255-10-55-61 through 55-73
are followed except that all restatements to reflect the effects of general inflation are made using the local general price level index before translation to dollar equivalents.
255-10-55-77
Current cost depreciation and income from continuing operations are FC 475,000 and FC 225,000, respectively, as determined in paragraphs
255-10-55-62 through 55-65
.
255-10-55-78
To apply the restate-translate method, the FC amount of net monetary items at the beginning of the year, changes in the net monetary items, and the amount at the end of the year are restated into average 19X6 CFC. The purchasing power gain or loss on net monetary items is then the balancing item.
  • (000s) (000s) FC Conversion Factor CFC Net monetary liabilities—12/31/X5 (paragraph 255-10-55-59) FC 750 158 (avg. 19X6) CFC 823 144 (Dec. 19X5) Decrease during the year (700) (a) (700) Net monetary liabilities—12/31/X6 (paragraph 255-10-55-59) FC 50 158 (avg. 19X6) (46) 173 (Dec. 19X6) Purchasing power gain CFC 77 CFC: Average 19X6 constant functional currency C$E: Dollar equivalents of nominal functional currency amounts using the translate-restate method FC: Nominal functional currency (a) Assumed to be in average 19X6 C$E.
255-10-55-79
Under the restate-translate method, the local index is used to restate the beginning and ending current cost FC amounts into average 19X6 CFC.
  • (000s) (000s) Current Cost/FC Conversion Factor Current Cost/CFC Current cost net—12/31/X5 (paragraph 255-10-55-57) " FC 3,200 " 158 (avg. 19X6) " CFC 3,511 " 144 (Dec. 19X5) Depreciation (paragraph 255-10-55-77) (475) (a) (475) "Current cost, net—12/31/X6 (paragraph 255-10-55-57)" " (3,850)" 158 (avg. 19X6) " (3,516)" 173 (Dec. 19X6) Increase in current cost " FC 1,125 " CFC 480 FC: Nominal functional currency CFC: Average 19X6 constant functional currency (a) Assumed to be in average 19X6 CFC.
255-10-55-80
The inflation component of the increase in current cost amount is the difference between the nominal functional currency and constant functional currency amounts.
  • (000s) Increase in current cost (FC) " FC 1,125 " Increase in current cost (CFC) CFC 480 Inflation component 645 CFC: Average 19X6 constant functional currency FC: Nominal functional currency
255-10-55-81
As with the translate-restate method, a reconciliation of equity acts as a check of the calculations. A reconciliation of equity also is a convenient point at which to translate the functional currency amounts determined in the preceding tables into dollar equivalents and is a convenient way to compute the translation and parity adjustments.
255-10-55-82
If beginning and ending equity are restated to average 19X6 CFC using the local index, the reconciliation of equity under the restate-translate method would be as follows.
  • (000s) Exchange (000s) CFC Rate CFC$ "Equity at 12/31/X5 in average 19X6 CFC (FC 2,450 [paragraph 255-10-55-59] × 158 ÷ 144)" " CFC 2,688 " 1.20 " CFC$ 3,226 " Income from continuing operations (paragraph 255-10-55-77) 225 1.10 247 Purchasing power gain (paragraph 255-10-55-78) 77 1.10 85 Excess of increase in specific prices over increase in general price level (paragraph 255-10-55-79) 480 1.10 528 Translation adjustment (paragraph 255-10-55-84) (616) " CFC 3,470 " " CFC$ 3,470 " "Equity at 12/31/X6 in average 19X6 CFC (FC3,800 [paragraph 255-10-55-59] × 158 ÷ 173)" " CFC 3,470 " 1.00 " CFC$ 3,470 " CFC: Average 19X6 constant functional currency CFC$: Translated dollar equivalents of constant functional currency amounts using the restate-translate method
255-10-55-83
The translation adjustment is the amount needed to balance the CFC$ reconciliation of equity. The adjustment may be computed as the sum of the following:
  1. a
    The change in exchange rates during the period multiplied by the restated amount of net assets at the beginning of the period
  2. b
    The difference between the average exchange rate for the period and the end-of-period exchange rate multiplied by the increase or decrease in restated net assets for the period.
255-10-55-84
Accordingly, the translation adjustment under the restate-translate method is as follows.
  • (000s) Beginning-of-year equity (paragraph 255-10-55-82) " CFC 2,688 " Exchange rate change during 19X6 ($1.20 - $1.00) × (.20) $(538) "Increase in equity (3,470 - 2,688)" CFC 782 Difference between ending exchange rate and average rate for 19X6 ($1.10 - $1.00) × (.10) Translation adjustment (78) $(616) CFC: Average 19X6 constant functional currency
255-10-55-85
The reconciliation of equity in paragraph 255-10-55-82, in which beginning-of-year and end-of-year equity are stated in average 19X6 CFC, is needed to calculate the translation adjustment in CFC$. However, beginning- and end-of-year equity and the increase in equity must be stated in average 19X6 constant dollars in the supplementary current cost information.
255-10-55-86
Beginning and end-of-year equity in average 19X6 constant dollars are C$ 3,000,000 and C$ 3,736,000, respectively, as computed in paragraph 255-10-55-71. Thus, the overall increase in U.S. purchasing power for the year is C$ 3,736,000 - C$ 3,000,000 = C$ 736,000. However, the reconciliation of equity in paragraph 255-10-55-82 indicates that the increase in equity for the year is CFC$ 244,000 (CFC$ 3,470,000 - CFC$ 3,226,000).
255-10-55-87
The difference between C$ 736,000 and CFC$ 244,000 is the parity adjustment needed to adjust the ending net investment and the increase in the net investment to measures in average 19X6 constant dollars. Accordingly, the parity adjustment is C$ 736,000 - CFC$ 244,000 = $492,000. That amount represents the sum of the following:
  1. a
    The effect of the difference between local and U.S. inflation from December 31, 19X5, average for 19X6 on the restatement of opening equity to average units
  2. b
    The effect of the difference between local and U.S. inflation from average for 19X6 to December 31, 19X6, the restatement of ending nominal dollar equity to average units.
255-10-55-88
The parity adjustment would be calculated as follows.
  • (000s) Beginning-of-year equity (paragraph 255-10-55-59) " $2,940 " Difference between local and U.S. inflation from 12/31/X5 to average 19X6 (158 ÷ 144-298.4 ÷ 292.4) × 0.0767 $225 Equity at 12/31/X6 (paragraph 255-10-55-59) " 3,800 " Difference between local and U.S. inflation from average 19X6 to 12/31/X6 (158 ÷ 173-298.4 ÷ 303.5) × 0.0699 266 491 Rounding difference 1 Parity adjustment $492
255-10-55-89
For display purposes, the parity adjustment may be combined with the $(616,000) translation adjustment (see paragraphs
255-10-55-83 through 55-84
). Accordingly, the net translation adjustment disclosed in the supplementary current cost information prepared using the restate-translate method would be $(616,000) + $492,000 = $(124,000). The components of current cost information based on the restate-translate method thus would be as follows.
  • (000s) "Beginning-of-year equity—$2,940 (paragraph 255-10-55-59) × 298.4 ÷ 292.4" " C$ 3,000 " Income from continuing operations—CFC 225 (paragraph 255-10-55-77) × 1.10 CFC$ 247 Purchasing power gain—CFC 77 (paragraph 255-10-55-78 × 1.10 85 Excess of increase in specific prices over increase in general price level— CFC 480 (paragraph 255-10-55-79) × 1.10 528 Translation and parity adjustments (124) Increase in equity in terms of U.S. purchasing power 736 "End-of-year equity—$3,800 (paragraph 255-10-55-59) × 298.4 ÷ 303.5" " C$ 3,736 " C$: Average 19X6 constant dollars CFC: Average 19X6 constant functional currency CFC$: Translated dollar equivalents of constant functional currency amounts using the restate-translate method

255-10-60Relationships

Source downloaded: .Record version 8bac7ed7bab5. Effective date must be checked in the source.

Contractors—Federal Government

255-10-60-1
For guidance on supplementary information provided by contractors on the effects of changing prices when calculating the purchasing power gain or loss on net monetary items, see paragraph 912-255-50-1.

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