Essay Sample on International Developmental Accounting

Introduction

Each state's government takes approaches to help the economy attain goals of employment, steady prices, and development. Monetary policy is one of the instruments utilized by a central bank in this respect. The monetary policy enables central banks to manage economic fluctuations. Following the global monetary crisis, central banks in developed economies simplified momentary policy by decreasing interest rates until short-term rates almost amounted to zero which restricted the option to cut policy rates further. The prospect of a monetary policy framework is closely connected to the choice of an exchange rate regime. A nation with a fixed exchange rate will have a restricted scope for an autonomous monetary policy as opposed to the one with a flexible exchange rate (Pettinger 2017, p.156). A whole exchange rate regime nurtures an effective inflation targeting system. The need to control fiscal deficit is therefore paramount in an economy. To ensure there is control of inflation and price stability, there is a need to understand how exchange rates and accounting methods work in the inflationary period.

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Need to Control Fiscal Deficit in an Economy

Fiscal deficits occur whenever a government expends more funds than it brings in during the fiscal year. This inability, in some cases, is referred to as the budget deficit and is common among modern governments all over the world. From 1970, the United States government has had higher expenses than proceeds for all but four years. The four most significant budget deficits were witnessed between 2009 and 2012. The gap was reported to be more than $1 trillion each year (Dow 2017, p.1539).

Control of fiscal deficit is essential for the performance of a country. In case deficit occurs due to the government engagement in other spending ventures like grants to enterprises or infrastructure spending, then those sectors selected to receive the money receive a short-term boost in terms of operation and profitability. All deficits are financed through sales of government securities like treasury bonds (Loayza and Schmidt-Hebbel 2002, p.17). A country which can manage budget deficits enjoys less public debt

Deficits are viewed negatively in the limelight. Many economists argue that deficits discourage private borrowing and disrupt the marketplace. Additionally, others proposed that borrowing money today will require higher taxes in the future, which illegally punishes future generations of taxpayers to service the needs of existing beneficiaries (Shaviro 2014, p.456).

The relationship between Fiscal Deficits and Inflation

Inflation is the proportion at which the overall level of values for products is escalating and, then, the acquisition influence of money decreases. The economic discrepancy has come to be extensively considered as the critical element in ascertaining inflation subtleties. The economic concept of price level proposes that continuous budget deficits can lead to inflation (Ramu, Anantha & Gayithri 2016, p.17). The structural economists characterize rising costs to the alterations in demand and supply limitations.

There are two potential ways through which higher fiscal deficit results in greater inflation. One, the administration's loaning needs usually escalate the net loan demands in the economy, propelling the interest rates and hindering private venture. The ultimate reduction in the development level of the economy will result in a reduction in the proportion of goods obtainable for a given proportion of cash balances, thus, the increase in price index (Sun & Liu 2016, p.166). Secondly, the deficit can also result in higher inflation even when central banks fail to liquidate the debt when the private sector liquidates deficits. Therefore, this happens when the high-interest rate compels the fiscal industry to establish new interest-bearing resources that contain the same liquidity ration and are free from risks. In that case, government debt which is not liquidated by the central bank is liquidated by the private sector, and the inflation impacts of higher deficit prevail (Biejer & Skreb 1999, p.123).

Use of Exchange Rates to Control Inflation in an Economy

The exchange rate referred to as value of one currency for the motive of conversion to another. There exists a relationship between exchange rate and inflation. A higher inflation rate in a developed country like the U.S. compared to other nations will tend to decrease the value of the dollar. High inflation in the U.S. means that U.S. products increase in price faster than imported goods (Shirin 2008, p.102). Thus, U.S. products become less competitive and eventually U.S. exports will fall. In the long run, modifications in the relative inflation rate should result in a change in the exchange rates.

The relationship between exchange-rate fluctuations and inflation differs considerably from country to country. When a considerable fraction of a nation's trade is denominated in foreign currencies, its inflation rate will be more strongly impacted by exchange-rate fluctuations (Hussain & Haque 2017, p.37). The strong impacts of currency denomination occur because it is expensive for firms to change prices. It is notable that markets anticipate future inflation. In case they observe a policy likely to result in an increase (for instance, reducing interest rates) then they will tend to sell that currency making it fall in anticipation of the inflation (Rana & Wahid 2017, p.32)

Methods of Accounting for Price Changes in Hyperinflationary Times

IAS 29 of International Financial Reporting Standards IFRS) is the guideline for entities whose viable currency is the currency of a hyperinflationary economy. The IFRS delineates hyperinflation as prices, interest, and wages connected to a price index snowballing 100% or more cumulatively over three years. IFRS stipulates that financial statements should be expressed in the values of the currency existing at the conclusion of the reporting period (Smets 1995, p.225).

Inflation accounting is an unusual accounting approach that can be utilized during times of high inflation whereby financial statements are regulated according to price indexes instead of depending just on cost accounting foundations (Epstein & Jermakowicz 2010, p.76). There are two methods of accounting for price variations in hyperinflationary times-current purchasing power (CPP) and current cost accounting (CCA).

In the CPP method, financial elements and non-financial elements are differentiated. The accounting adjustment for financial elements is subject to analysis of a net gain or loss. Non-financial elements (those with no fixed value) are updated into statistics with a conversion criterion similar to price table at the end of the period separated by price index at the date of the transaction. In the CCA method, both financial and nonfinancial elements are restated to prevailing values (Akcay, Alper & Ozmucur 1996, p.45).

Conclusion

Every country sets goals to attain the desired goals. Some of the goals set to be achieved include employment, growth and stable prices. Central banks use monetary policy to ensure the achievement of the goals. Monetary policy facilitates management of economic fluctuations. Fiscal deficits can be detrimental to the growth of a country. Therefore, it is important for the state to balance its budget. Mismanagement of the exchange rate can result in hyperinflation. Hyperinflation compels enterprises to prepare their statements regularly to make them pertinent to prevailing economic and monetary conditions.

References

Akcay, O.C., Alper, C.E., & Ozmucur, S. 1996. Budget deficit, money supply, and inflation: Evidence from low and high-frequency data for Turkey. Bogazici University, Department of Economics.

Blejer, M. I., & Skreb, M. 1999. Central Banking, Monetary Policies, and the Implications for Transition Economies. Boston, MA: Springer US.

Dow, S. 2017. Central banking in the twenty-first century. Cambridge Journal of Economics, 41(6), pp.1539-1557.

Epstein, B. J., & Jermakowicz, E. K. 2010. Wiley IFRS 2010: Interpretation and application of international financial reporting standards. Hoboken, N.J. : Wiley.

Hussain, M. and Haque, M., 2017. Fiscal Deficit and Its Impact on Economic Growth: Evidence from Bangladesh. Economies, 5(4), p.37.

Loayza, N. & Schmidt-Hebbel, K., 2002. Monetary policy functions and transmission mechanisms: an overview. Monetary Policy: Rules and Transmission Mechanisms, 1 (2), pp.1-20.

Pettinger, T. 2017. Cracking economicsLond:: : Cassell Illustrated.

Ramu M R, Anant, a and Gayithri, K. 2016): Fiscal deficit composition and economic growth relation in India: A time series econometric analysis. ISEC Working Paper, 367(66): pp.1-18.

Rana, E.A. and Wahid, A.N., 2017. Fiscal Deficit and Economic Growth in Bangladesh: A Time-Series Analysis. The American Economist, 62(1), pp.31-42.

Shaviro, D. 2014. Do Deficits Matter?. University of Chicago Press.

Shirin, R. (2008). International accounting. Prentice Hall Of India.

Smets, F. 1995. Central banmacroeconomicic models and the monetary policy transmission mechanism. BIS (a cura di), Financial structure and the monetary policy transmission mechanism, Basel, pp.225-266.

Sun, O. & Liu, Z., 2016. Comparison of monetary policy actions and central bank communication on tackling asset price bubbles-Evidence from China's stock market. PloS one, 11(11), p.p.166.