THE EFFECT OF ECONOMIC VARIABLES ON FINANCIAL REPORTING

The article explores the impact of economic variables on the financial reporting in which
we will talk about the inflation. The inflation, even at lower rates affects financial reporting. The
accountants in the United States and the United Kingdom have examined the impact of inflation
on the financial reporting since the mid-1900s (Lothian and Niall, 2013). Despite the fact that the
impacts of inflation on the financial reporting had received significant consideration amid the
late 1970s when the inflation was high. Changes in the general price level due to the inflation
creates distortions in the financial reporting for example:

Most of the historical numbers showing up on financial reporting are not economically

applicable because prices have changed since they were acquired (Konchitchki, 2011).
The reported profits may surpass the incomes that might be distributed to the shareholders

without hindering the organization's continuous operations (McIntyre, 2012).

The asset values for the equipment, inventory and plant do not reveal their economic values to

the business (Edward, 2012).

Future incomes are not easily projected from historical profit (Konchitchki, 2011).
The effect of price changes on financial liabilities and assets is not clear (McIntyre, 2012).
Future capital needs are hard to predict and may prompt to raise leverage, which builds the risk

to the business (Edward, 2012).

The inflated profits figures entice the organization to adopt the easygoing strategy in dealing
with their corporate affairs. In fact, the organization may be in real and challenging issue, and

this approach would keep the organization to take any proactive actions (Edward, 2012).
The inflated earnings likewise urged the organization to give high dividends, which may hurt the

capital impairment of the organization (Konchitchki, 2011).

The organization will tend to ignore the high overheads due to the inflated profit figures
(McIntyre, 2012).
To sum up, inflation might have the hazardous impact on the financial reporting. It is
an uncontrollable external component for the organization. It can be managed if the management

will urge to watch the inflation and compute the possible impacts of it on the financial reporting
to correct the issues emerging from historical accounting in the existence of inflation (Zeff &
Stephan,

2014).

References:
Konchitchki and Yaniv, (2011). Economic Variables and Nominal Financial Reporting:
Implications for Inflation and Stock Prices. The Accounting Review. Vol. 86, No. 3. pp. 1045
1085 Retrieved November 18, 2016, from http://www.msubillings.edu/library/

Lothian and Niall (2013). What's wrong with Historic Cost Accounting? An Overview of the
Issues Involved in Inflation Accounting, Management Decision; Volume: 16; Issue: 8; P: 412
Retrieved November 18, 2016, from http://www.msubillings.edu/library/
McIntyre and Edward V., (2012). Effects of Inflation Accounting Models and Accounting
Techniques. The Accounting Review, Vol. 57, No. 3 (Jul 2012), pp. 607-618 Retrieved November
18, 2016, from http://www.msubillings.edu/library/
Stephan, A. and Zeff (2014). The Impact of Inflation on Financial Reporting: A Review of the
Response of the Accounting Profession in Ten Countries, Managerial Finance; Volume: 2; Issue:
2; P: 83 Retrieved November 18, 2016, from http://www.msubillings.edu/library/