Chapter 4
INFLATION AND FINANCES
The inflationary phenomenon widely explains and justifies the tax direction of the accounting. Process due to the loss of the buying power of the money, every time more monetary units are required to acquire goods or to cover the costs, which causes that the companies retain profits through mechanisms that reduce the payment of them of less imposing and fewer dividends. The approach to this subject is eminent, independent of the accounting procedure.
The money loses its character of exact measurement because the dollar of today is different from the dollar of some time. Ago in a balance, they appear money of the day of closing (effective), with money of months prior (accounts to receive and inventories) and money with prior years (fixed assets).
This article explains the economic phenomenon. We left from the base that it exists and consequently it is an obstacle that must be overcome by the businessman. Let us remember briefly that the phenomenon is explained fundamentally by an imbalance between supply and demand. This grows permanently; however, the supply in the short-term is non-flexible, when more is as much specialized more is the product in individual.
The economists and mathematicians decide on a periodic rate that serves as a base for the calculation. For them, it is based on the cumulative formulas, the same ones that are used to calculate the compound interest.
P1= P (1 + i) P2= P + P1 (1 + i)2 Pn= P2 + P1 (1 + i)n |
Now let us concentrate on an approach eminently lay.
In real life, the phenomenon is another one. For each company, the raw materials raise in intermittent form. Usually, the manual labor is increased once a year, raw materials once or twice a year, agricultural products, according to the time, the scholastic texts once a year, etc.
It is more recommendable, to come closer to reality, to treat the inflation in this way: When processing the plan of value generation, the company tries to predict with its own experience, the possible rises and the repercussions of the sale prices and the additional requirements of work capital.
Some authors suggest as a more recommendable measurement of the financial situation of a company, who deflates the earnings statements in accordance with the PAAG indexes, percentage of adjustment of the accountable year.
The technique is very simple. It consists of multiplying all the adjustable figures by the PAAG and expressing them as one acquires knowledge in the example. Although the technique introduces additional elements of information, it does not solve in a satisfactory way the problem that raises from the permanent loss of buying power of the currency as a result of inflation. We are going to explain it.
Two basic problems to consider:
a. Which index to choose?
b. Accounts, which are affected in a direct way with the variation of the indexes?
1. WHAT INDEX TO CHOOSE?
General and by sectors Index appears. Some suggest each company must use the index of the sector in which it operates. Others propose the use of the general index arguing that, although the company operates in a certain sector, the monies that it generates, finally go to the owners who use them to satisfy needs of a different order and not very often it is possible to be identified by the cost and the source of used money and, in addition, it doesn't make any sense to do it. By simple logic, it is more recommendable the (PAAG) indicator, the rate of devaluation for assets and obligations in foreign currency, and UPAC for the specific cases that they appear.
2. ACCOUNTS THAT ARE AFFECTED AND HOW?
Let us begin to say that except for the account of cash and banks, all the others are affected by the inflationary phenomenon, but not necessarily in direct proportion. In the case of the temporary investments, the yield margin must contemplate the expected inflation in a directly proportional way.
To the accounts to receive it happens something similar but in inverse proportion. Those who sell on credit must consider when fixing the yield margins, the reduction of prices based on the term. If the rate of inflation that appears surpasses the expectation that is considered to make the calculation, the selling company is affected in that proportion and the benefited buyer. In the opposite case, is the contrary?
With the inventories, it is too relative. In the case of consumption product stores, the effect is directly proportional as it happens in the supermarkets, with the products that compose the basic goods and groceries of a household. Another great amount of goods completely has independent specific behaviors of the index of prices that are published. In this heading, they prioritize other variables like the type of products, the phenomena of technical obsolescence, fashionable changes, technological innovations, costumers changes, and others that require specific analysis.
With the fixed assets in general, the index of increase in the cost of living, little, or anything can be done. A good exercise consists of taking the value from the purchase of machinery (as the phenomenon is opposite), instead of deflating; to extend by the corresponding index and soon to do its own thing with the depreciation it must have and compare the net value that is obtained with the value of the market, to see the independent thing that are the two variables (index of prices to the consumer and value of the market in the machinery and the team in general).
With the real state, the phenomenon is more independent. In this case, the valuation or possible devaluation depends on another great amount of variables that are not the object of this article, as in general the economic conditions, the situation of public order, etc. Some authors teach that, with inflation, the debtors are benefited and recommend the indebtedness widely when the economy is inflationary. Serious mistake. Whoever lends money (the financial sector), and then calculate the interest rate by means of the sum of the inflation expected, the risk, and an awaited yield. The indebtedness is recommendable in the measurement that it exists a clear expectation of yield, with reasonable risk.
All the presented objections, take us to a clear conclusion. And it is that the arithmetical operation does not solve the disinformation problem that appears in regard to the currency principle, which assumes the constant value. If the method of adjustment of financial statements does not solve the problem what do we do?
It depends on the spreading of the decision, to know how much we are going to invest in the calculation of a very precise value. As a general recommendation, the use of a criterion of valuation adapted for all the headings of the assets and the liabilities; the patrimony or value of the company calculates by difference. Don’t forget that in the event of distractions, the effect of taxes is by occasional gains.
3. HOW TO SOLVE THE PROBLEM? - General Recommendations
A. TO INCREASE THE PRODUCTIVITY: while the productivity is increased, will be the relative increase of the costs will be less, by the effect of the behavior of the fixed average cost. In the measurement that the costs of the particular company are raised in a smaller proportion than the general index of prices, the situation will be more advantageous.
The great advance in communications has shortened enormously the distances between the towns. Through the television and the Internet, the world simultaneously lives the launching of a fashion, a technological development, a scientific advance, etc. The speed of information and the advance in transportation have contributed enormously to the development of foreign trade and each time more and more it speeds up.
While the difference of prices is greater between produced comparable goods in different countries, greater it will be the temptation of the consumers and users to matter, because we must not forget that in the long run, the forces of the market prevail.
Whoever obtains smaller production costs, is in better condition to compete in the market and to obtain the best margin of contribution. Benchmarking is a problem for each industrialist to look for the different possibilities of increasing the productivity of its useful raw materials.
B. HIGH ROTATION OF ASSETS IN GENERAL: while more express the costs to recover and profit is obtained, greater will be the probability of pesos of the same buying power of the invested ones are received. The sale of counted aid much to this intention; thus they are possible as the profits in the cash flow.
C. NEGOTIATION IN HARD CURRENCY: these have the particularity of not losing buying capacity. Consequently, the weak currencies lose in relation to them. Whoever exports, receives more and more pesos, by such dollars, which represents an automatic mechanism of readjustment of prices, plus the possible increases that are agreed upon in terms of that strong currency, based on the small devaluation that it can sustain.
D. TO AVOID INDEBTEDNESS IN HARD CURRENCY: by the same previous explanation, viewed in the opposite sense, as long as the circumstances allow it because we know that the generally sophisticated machinery and equipment come from the industrialized countries. The same case appears with some basic raw materials.
E. RETENTION OF PROFITS: it represents an automatic capitalization. Logically, this affirmation is due to interpreting as a guide, not forgetting that the investors look for attractive yields in the long term, but wishes immediate benefits for the sake of their liquidity.
Of course, all the investors do not have the same expectations and the management must look for the capitalization of the company, forgetting all the group of shareholders or owners, but consulting the general interest through the growth of the value of the shares in the market.
F. USE LIFO FOR COSTS: the method assumes that the last units in entering inventory are the first in leaving, therefore to the profits and therefore the payment of taxes and the distribution of dividends are reduced. This method interprets the principle of the company very well because the legal entity has indefinite life with a permanent increase and it will always have to replace and increase its inventories.
G. ACCELERATED DEPRECIATION: this accounting processing helps to reduce the profits and to recover the investment with devalued pesos. Thus the replacement of equipment in agreement with the technological advances is facilitated, increasing levels of productivity and therefore, competitiveness.
H. OLD FASHIONED ACCOUNTING: as in the previous cases, it reduces the apparent profits, not the real ones, which are rather increased by the no paid taxes. Once again, we remember that we cannot absolutely forget the shareholders, who constitute the most important pillar for the company.
F. TO PAY FOR STANDARD: the most valuable technique, because one goes ahead to the inflationary phenomenon, projecting increases of raw materials using the indicators available and the criterion of the experts.
The analysis of the causes of variation in the three elements of the cost: manual labor, raw materials, and general expenses of manufacture, helps to detect problems, improve future estimations, and to implement oriented plans to increase the .
Thus the industrialist goes ahead to the occurrence of the phenomenon and can fix prices that maintain the expected margins for him of profit in real terms, in addition to being a base for the control of costs and the increase of productivity.
G. TO TREAT THE NOT PAYMENT TAXES BY MONETARY CORRECTION: in case it exists in the taxing legislation. For it, one looks for an equilibrium between the value of the patrimony and the value of the monetary assets to neutralize the effect of the adjustments on the profit or monetary loss. Analyzing the structure of the equilibrium, differentiating active monetary three general situations can appear:
a. Non Monetary assets superior to the Patrimony
|
|
It implies greater monetary profit and therefore more taxes from rent. One is a no distributable profit because it is not endorsed by a cash flow.
b. Active monetary = Patrimony
|
|
In this case, the account of monetary correction is neutral; it is most recommendable to neutralize the tributary effect due to the tributary phenomenon.
c. Active no monetary minors that the patrimony
|
|
This it is the case of an account of monetary correction with smaller profit and fewer payments of taxes.
4. ACCOUNTS OF MONETARY CORRECTION
It summarizes by counterpart, all the no monetary adjustments of assets and liabilities, those of patrimony, and those of income, costs, and expenses. It does not consider the adjustments in foreign currency and in UPAC, whose adjustment goes directly to the earnings statement.
One occurs as understood that the general management and particularly the financial executive must be permanently found out the taxing legislation on the matter to be able to take the most recommendable measures for the company individually. Independently if the government demands or not adjustments by inflation or as it regulates them, it is a managerial and very special responsibility of the executives of the accounting and financial area, to prepare financial statements with an eminently administrative approach, which helps to calculate the possible and most objective way the value of the company so that therefore the shareholder can know the intrinsic value of the share and can make a guess of the right decisions.
Example:
In the following pages one acquires knowledge with a good example the re-ex-pressing financial statements (PAAG = 15,69)
GENERAL BALANCE SHEET
(expressed in thousands of pesos)
Non Current liabilities | ||||
Financial obligations | 20,530,287 | 23,425,589 | 27,101,064 | |
Received advance payments and advances | 0 | 2,085,457 | 2,412,665 | |
Deferred taxes | 10,889,250 | 8,202,286 | 9,489,225 | |
Credits by monetary correction | 7,503,277 | 7,893,038 | 9,131,456 | |
Commercial bonds and papers | 4,500,000 | 4,900,000 | 5,668,810 | |
|
43,442,814 | 46,506,370 | 53,803,220 | |
|
65,200,047 | 66,637,694 | 77,093,145 | |
Patrimony of the shareholders | ||||
Share capital | 15,644,483 | 15,644,483 | 15,644,483 | |
Premium in positioning of shares | 46,574,957 | 46,576,957 | 46,576,957 | |
Accumulated gains: | ||||
|
17,630,091 | 14,209,440 | 14,209,440 | |
|
10,546,547 | 13,011,463 | 15,052,962 | |
|
28,176,638 | 27,220,903 | 29,262,402 | |
Revaluation of the patrimony | 69,167,840 | 48,459,168 | 68,054,103 | |
|
12,498,176 | 17,747,070 | 20,531,585 | |
|
715,471 | 256,797 | 297,088 | |
Total patrimony of the shareholders | 172,777,565 | 155,903,378 | 180,364,618 | |
PASSIVE TOTAL AND PATRIMONY OF THE SHAREHOLDERS | 237,977,61 | 222,541,072 | 257,457,763 | |
ORDER ACCOUNTS ON THE OTHER HAND | 48,977,007 | 43,981,788 | 50,882,531 |
RESULT STATEMENT
(expressed in thousands of pesos)
Non Current liabilities | ||||
Financial obligations | 20,530,287 | 32,425,589 | 27,101,064 | |
Received advance payments and advances | 0 | 2,085,457 | 2,412,665 | |
Deferred taxes | 10,889,250 | 8,202,286 | 9,489,225 | |
Credits by monetary correction | 7,503,277 | 7,893,038 | 9,131,456 | |
Commercial bonds and papers | 4,500,000 | 4,900,000 | 5,668,810 | |
|
43,442,814 | 46,506,370 | 53,803,220 | |
|
65,200,047 | 66,637,694 | 77,093,145 | |
Patrimony of the shareholders | ||||
Share capital | 15,644,483 | 15,644,483 | 15,644,483 | |
Premium in positioning of shares | 46,574,957 | 46,576,957 | 46,576,957 | |
Accumulated gains: | ||||
|
17,630,091 | 14,209,440 | 14,209,440 | |
|
10,546,547 | 13,011,463 | 15,052,962 | |
|
28,176,638 | 27,220,903 | 29,262,402 | |
Revaluation of the patrimony | 69,167,840 | 48,459,168 | 68,054,103 | |
|
12,498,176 | 17,747,070 | 20,531,585 | |
|
715,471 | 256,797 | 297,088 | |
Total patrimony of the shareholders | 172,777,565 | 155,903,378 | 180,364,618 | |
PASSIVE TOTAL AND PATRIMONY OF THE SHAREHOLDERS | 237,977,61 | 222,541,072 | 257,457,763 | |
COUNTS ORDER | 48,977,007 | 43,981,788 | 50,882,531 |
The total effect of the adjustments by taking inflation to results was a loss of $1.609.439 (1997 utility by $1.001.812)
STATE OF CASH FLOW
(expressed in thousands of Dollars)
Year n ___________ |
Year (n - 1) ___________ |
Year (n - 1) (re expressed) _______________ |
|
BY OPERATION ACTIVITIES | |||
Received cash of clients | 87,106,196 | 89,032,877 | 103,002,135 |
Paid cash a: | |||
Suppliers | 20,787,674 | 16,518,356 | 19,110,086 |
List, benefits and contribute | 5,221,986 | 4,143,694 | 4,793,840 |
Payments to third | 21,473,990 | 23,473,634 | 27,156,647 |
Subtotal cash payments |
47,483,650 |
44,135,684 |
51,060,573 |
Other income of operation | 340,314 | 30,956 | 35,813 |
Effective Subtotal generated by the operation | 39,962,860 |
44,928,149 |
51,997,375 |
Investment in properties, plants and equipment | -5,265,642 | -9,605,854 | -11,113,012 |
Income in properties, plant and equipment | 4,418,329 | 0 | 0 |
Subtotal (effective net by investment in capital assets) | -847,313 | -9,605,854 | -11,113,012 |
Investments in shares and quotas of social interest | -3,423,796 | -11,026,382 | -12,756,421 |
Income by sale of shares | 0 | 6,000 | 6,941 |
Received dividends | 0 | 652,173 | 754,499 |
Received interests and monetary correction | 171,909 | 499,164 | 577,483 |
Subtotal (cash flow by investment in titles values) |
-3,251,887 | -9,869,045 | -11,417,498 |
Subtotal of net cash by investment | -4,099,200 | -19,474,899 |
22,530,510 |
Received loans | 25,227,384 | 39,810,696 | 46,056,994 |
Payment of loans | -31,908,935 | -56,741,846 | -65,644,642 |
Paid interests | -4,179,242 | -5,092,975 | -5,892,063 |
Emission of shares | 0 | 19,267,116 | 22,290,127 |
Paid dividends | -8,443,041 | 5,446,116 | -6,300,612 |
Payment of quotas of capital of titles debt | -400,00 | -100,000 | -115,690 |
Subtotal of net cash by financing | -19,703,834 | -8,303,125 | -9,605,886 |
Income of cash by other concepts |
2,810,570 |
2,018,261 |
2,334,926 |
Exits of cash by other concepts | -19,997,290 | -17,876,118 | -20,680,881 |
Subtotal of net cash by other concepts | -17,186,720 | -15,857,857 | -18,345,955 |
TOTAL NET INCREASE OF CASH |
-1,026,894 | 1,292,268 | 1,495,025 |
To eating of the year | 2,715,696 | 1,423,428 | 1,646,764 |
At the end of the period | 1,688,802 | 2,715,696 | 3,141,789 |
STATE OF CHANGES IN the FINANCIAL SITUATION
(expressed in thousands of Dollars)
Year n ___________ |
Year (n - 1) ___________ |
Year (n - 1) (reexpressed) ______________ |
|||
SOURCES OF FUNDS | |||||
Net profit | 10,546,547 | 13,011,463 | 15,052,962 | ||
Depreciation and amortization of deposits | 22,184,233 | 18,346,286 | 21,224,818 | ||
Deferred taxes to pay | 2,686,964 | 2,546,825 | 2,946,422 | ||
Credit by deferred monetary correction | 0 | 491,505 | 568,622 | ||
|
35,417,744 | 34,396,079 | 39,792,824 | ||
Financial resources generated by other sources | |||||
|
524,777 | ||||
|
0 | 1,427,194 | 1,651,121 | ||
|
0 | 17,839,923 | 20,639,007 | ||
|
20,708,672 | 16,589,612 | 19,192,522 | ||
|
458,674 | 202,213 | 233,940 | ||
|
21,692,123 | 36,058,942 | 41,716,590 | ||
Total financial resources generated in the year | 57,109,867 | 70,455,021 | 81,509,414 | ||
USED FINANCIAL RESOURCES | |||||
|
2,085,457 | 764,543 | 884,500 | ||
|
35,068,791 | 37,953,564 | 43,908,478 | ||
|
194,239 | 171,213 | 198,076 | ||
|
3,295,302 | 4,008,422 | 4,637,343 | ||
|
9,590,812 | 5,725,387 | 6,623,700 | ||
|
0 | 4,546,669 | 5,260,041 | ||
|
4,598,778 | 12,563,964 | 14,535,250 | ||
|
655,775 | 1,424,594 | 1,648,113 | ||
|
55,489,154 | 67,158,356 | 77,695,501 | ||
INCREASE (DIMINUTION) OF THE CAPITAL OF WORK | 1,620,713 | 3,296,665 | 3,813,913 | ||
TOTAL USED RESOURCES | 57,109,867 | 70,455,021 | 81,509,414 | ||
Discrimination of the variation in the work capital : | |||||
|
|||||
|
1,267,823 | -172,449 | -199,506 | ||
|
-2,294,717 | 1,464,717 | 1,694,531 | ||
|
2,633,144 | -2,122,812 | -2,455,881 | ||
|
1,252,660 | 908,433 | 1,050,966 | ||
|
407,711 | 321,154 | 371,543 | ||
|
3,266,621 | 399,043 | 461,653 | ||
(Increase) diminution in the current liabilities | 3,266,621 | 399,043 | 461,653 | ||
Financial obligations | -3,133,881 | 5,665,128 | 6,553,987 | ||
Suppliers | -242,542 | 44,219 | 51,157 | ||
Accounts to pay | -674,508 | -159,291 | -184,284 | ||
Received advance payments and advances | 166,221 | 57,467 | 66,484 | ||
Tax, burdens, and rates | 2,266,734 | -2,614,844 | -3,056,349 | ||
Labor obligations | -27,932 | -68,057 | -78,735 | ||
Total (increase) diminution in the current liabilities | -1,645,908 | 2,897,622 | 3,352,260 | ||
INCREASE (DIMINUTION) OF THE WORK CAPITAL | 1,620,713 | 3,296,665 | 3,813,913 |
Note:
In Colombia, the adoption of International Financial Reporting Standards (IFRS) from 2017 is a sign of the evolution that our country is having towards an accelerated process of internationalization and good corporate governance practices.