Price-Level Restated Accounting and the Measurement of Inflation Gains and Losses.

Abstract The article reports that the effect of inflation on the value of the firm, in the case of monetary items, can be analyzed at three levels. First, the price-level increase gain or loss measures the real losses to income and principal based upon the change in the general level of prices. General price-level accounting methodology presently measures this effect, with exceptions as noted below. Second, the net holding gain or loss measures the net effect of holding monetary items, considering the price-level increase gain or loss and the absolute income or costs of the monetary items. The possibilities of normal gains and losses offsetting or magnifying price-level increase gains and losses make this second consideration important. The third consideration, that of anticipated price-level increases, affects the accuracy of the conclusions reached in the first two levels of analysis. The first two levels assume that inflation is unanticipated and thus ignore the fact that prior adjustments in return could compensate for the gains or losses as found in those analyses.