10 ASC 255 CHANGING PRICES
PERSPECTIVE AND ISSUES
Subtopic
ASC 255, Changing Prices, contains one subtopic:
- ASC 255, Overall, that provides guidance on reporting the effects of changing prices or inflation
Scope
The topic applies to business entities that prepare US GAAP financial statements and “foreign entities that prepare financial statements in the currency for which the operations and that operate in countries with hyperinflationary economies.”
The ASC disclosures are encouraged, but not required.
DEFINITIONS OF TERMS
Consumer Price Index for All Urban Consumers. An index of price level changes affecting consumers generally often used to measure changes in the general purchasing power of the monetary unit itself.
Current Cost-Constant Purchasing Power Accounting. A method of accounting based on measures of current cost or lower recoverable amount in units of currency, each of which has the same general purchasing power. For operations in which the dollar is the functional currency, the general purchasing power of the dollar is used and the Consumer Price Index for All Urban Consumers is the required measure of purchasing power. For operations in which the functional currency is other than the dollar, the general purchasing power of either the dollar or the functional currency is used (see paragraphs 255-10-50-45 through 50-47).
Fair Value. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Historical Cost. The generally accepted method of accounting used in the primary financial statements that is based on measures of historical prices without restatement into units, each of which has the same general purchasing power.
Historical Cost-Constant Purchasing Power Accounting. A method of accounting based on measures of historical prices in units of a currency, each of which has the same general purchasing power.
Income from Continuing Operations. Income after applicable income taxes but excluding the results of discontinued operations, extraordinary items, the cumulative effect of accounting changes, translation adjustments, purchasing power gains and losses on monetary items, and increases and decreases in the current cost or lower recoverable amount of nonmonetary assets and liabilities.
Income-Producing Real Estate. Properties that meet all of the following criteria:
- Cash flows can be directly associated with a long-term leasing agreement with unaffiliated parties.
- The property is being operated. (It is not in a construction phase.)
- Future cash flows from the property are reasonably estimable.
- Ancillary services are not a significant part of the lease agreement.
Hotels, which have occupancy rates and related cash flows that may fluctuate to a relatively large extent, do not meet the criteria for income-producing real estate.
Mineral Resource Assets. Assets that are directly associated with and derive value from all minerals that are extracted from the earth. Such minerals include oil and gas, ores containing ferrous and nonferrous metals, coal, shale, geothermal steam, sulphur, salt, stone, phosphate, sand, and gravel. Mineral resource assets include mineral interests in properties, completed and uncompleted wells, and related equipment and facilities and other facilities required for purposes of extraction. This definition does not cover support equipment because that equipment is included in the property, plant, and equipment for which current cost measurements are required.
Monetary Assets. Money or a claim to receive a sum of money the amount of which is fixed or determinable without reference to future prices of specific goods or services.
Monetary Liability. An obligation to pay a sum of money the amount of which is fixed or determinable without reference to future prices of specific goods and services.
Motion Picture Films. All types of film, including feature films, television specials, television series, or similar products (including animated films and television programming) that are sold, licensed, or exhibited, whether produced on film, video tape, digital, or other video recording format.
Parity Adjustment. The effect of the difference between local and U.S. inflation for the year on net assets (that is, shareholders' equity) measured in nominal dollars. If only the differential rates of U.S. and local inflation are reflected in the exchange rates (parity), the parity adjustment and the translation adjustment net to zero. Therefore, the sum of the parity adjustment and the translation adjustment represents the effect of exchange rate changes in excess of (or less than) that needed to maintain purchasing power parity between the functional currency and the dollar.
Probable Reserves. Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.
Proven Reserves. Proven reserves are reserves for which both of the following conditions are met:
- Quantity is computed from dimensions revealed in outcrops, trenches, workings, or drill holes; grade and/or quality are computed from the results of detailed sampling.
- The sites for inspection, sampling, and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth, and mineral content of reserves are well established.
Purchasing Power Gain or Loss. 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 liabilities.
Recoverable Amount. Current worth of the net amount of cash expected to be recoverable from the use or sale of an asset.
Restate-Translate. An approach to converting current cost-nominal functional currency data of a foreign operation into units of constant purchasing power expressed in dollars. Using this approach, the current cost-nominal functional currency data are restated into units of constant purchasing power using a general price index for the foreign currency. After restatement into units of constant functional currency purchasing power, the current cost data are translated into dollars. This approach often necessitates a parity adjustment.
Translate-Restate. An approach to converting current cost-nominal functional currency data of a foreign operation into units of constant purchasing power expressed in dollars. Using this approach, the current cost-nominal functional currency data are first translated into dollars and then restated into units of constant purchasing power using the Consumer Price Index for All Urban Consumers.
Translation Adjustments. Translation adjustments result from the process of translating financial statements from the entity's functional currency into the reporting currency.
Value in Use. The amount determined by discounting the future cash flows (including the ultimate proceeds of disposal) expected to be derived from the use of an asset at an appropriate rate that allows for the risk of the activities concerned.
CONCEPTS, RULES, AND EXAMPLES
Elective Disclosures
Business entities are encouraged, but not required, to present supplementary information on the effects of changing prices. ASC 255-10-50-3 contains a list of items that should be disclosed in a five-year summary of financial data:
- Net sales and other operating revenues
- Income from continuing operations on a current cost basis
- Purchasing power gain or loss on net monetary items
- Increase or decrease in the current cost or lower recoverable amount of inventory and property, plant, and equipment, net of inflation
- The aggregate foreign currency translation adjustment on a current cost basis, if applicable
- Net assets at year-end on a current cost basis
- Income per common share from continuing operations on a current cost basis
- Cash dividends declared per common share
- Market price per common share at year-end.
In addition to the disclosures above, 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, an entity should provide the following information (ASC 255-10-50-11 through 16):
- Components of income from continuing operations for the current year on a current cost basis, applying the same constant purchasing power option used for presentation of the five-year summary.
- Separate amounts for the current cost or lower recoverable amount at the end of the current year of inventory and property, plant, and equipment.
- Increase or decrease in current cost or lower recoverable amount before and after adjusting for the effects of inflation of inventory a property, plant, and equipment for the current year.
- Any differences between (1) the depreciation methods, estimates of useful lives, and salvage values of assets used for calculations of current cost-constant purchasing power and (2) the methods and estimates used for calculations of depreciation in the primary financial statements.
ASC 255 includes other elective disclosures related to entities with mineral resource assets. Entities that have elected to make ASC 255 disclosures should refer to the Codification for additional guidance.
Other Sources
See ASC 912-255-50-1 for guidance on supplementary information provided by federal government contractors on the effects of changing prices when calculating the purchasing power gain or loss on net monetary items.