Some aspects of inflation and published accounts

Company accounts are at present drafted in an uneasy compromise between different objectives. It is not yet generally appreciated that no single figure or set of figures can sum up the whole financial state of an enterprise. The basic tools of financial management are short and long-run cash projections and the reports of actual flows which monitor these. The problem in drafting annual accounts so that they will help shareholders and others to make decisions is that financial reality requires a look into the future and this in turn calls for subjective judgement. But the more realistic are the accounts in this sense, the less susceptible are they to objective audit. Inflation adds a further level of distortion, but the effects of this can be brought out in a relatively simple way by making corrections based on movements in a general index of prices. Although there are considerable practical difficulties it seems likely that a more fundamental improvement would be the introduction of a ‘current value’ or modified ‘replacement cost’ approach to ordinary accounting in addition to (but not in place of) the general index inflation correction.