INFLATION AND ACCOUNTING INFORMATION: AN EMPIRICAL ANALYSIS 
ABSTRACT
This study was centered on inflation and accounting information: An empirical analysis. The objectives of the study basically are to find out the level of accounting information and inflation, its adoption and implementation in policy formulation, how effective accounting information and inflation is in complex organizations and financial institutions and also to find out the nature and types of accounting information and inflation used in policy formulation. The researcher used primary and secondary data. The results were presented in tabular form. The ordinary least square method of data analysis was used for the analysis of the data collected from the Central Bank of Nigeria (NCBN). The result of the findings showed that there is need to evolve an accounting system under inflationary conditions which may involve the combination of historical cost accounting, currently purchasing power and currently cost accounting since inflation is a serious problem. It was also discovered that there is the need for the professional accounting bodies in Nigeria (ANNAN and ICAN) to organize workshops and setup research teams to study the problems of accounting information under inflationary conditions in order to enhance the reliability of accounting information. From the empirical analysis we therefore can concluded that inflation has a significant impact on the reliability of accounting information in less developed countries in general and Nigeria in particular.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study                    
Statement of Research Problem                    
Research Objectives                        
Research Hypothesis                            
Research Methodology                        
Scope of the Study                                
Relevance and the Significance of the Study                
Limitation of the Study                            
CHAPTER TWO: LITERATURE REVIEW
Introduction to Accounting Information                    
History of Inflation Accounting                        
Accounting Information as an Intangible Assets                
Reliability of Financial Accounting Information                
Economic Benchmarks to Test Accounting Information Reliability        
Importance of Accounting                        
Inflation                                
Inflation Accounting and its Significance                    
The Need for the Adjustment of Corporate Profit for Inflation        
Budget Deficit and Inflation in Nigeria                
Limitations of Inflation Accounting                         
The Mode Selection of Inflation Accounting                    
Techniques of Inflation Accounting                         
Emergence and Development of Inflation Accounting        
Making Adjustment of Company Account for Inflation             
CHAPTER THREE: RESEARCH METHODOLOGY
Theoretical Framework                            
The Population and Sample                            
Data Collection Method                            
Source of Data                                    
Model Specification                                
Method of Data Analysis                            
CHAPTER FOUR: DATA PRESENTATION AND INTERPRETATION
OF REGRESSION RESULT
4.1    Introduction                                 
4.2    Presentation of Regression Result                         
4.3      Cochrane–Orcutt Estimation Result                    
CHAPTER FIVE:    SUMMARY, RECOMMENDATION AND CONCLUSION
5.1    Introduction                                 
5.2    Summary of Findings                                 
5.3    Discussion of Findings                             
5.4    Policy Recommendations                             
5.5    Recommendations for Future Research                 
5.6    Conclusion                                 
Bibliography                                 
Appendix                                
CHAPTER ONE
INTRODUCTION
Background to the Study
Inflation continues to be a fact of economic life in most countries. High inflation rates have seriously eroded monetary values in these countries over the past two decades, and have brought forth new patterns of economic behaviour.
Historically, it can be noted that the level of discussion and action about the accounting problems caused by inflation has not  surprisingly been closely correlated to the rate of inflation current existing. At low- levels – perhaps under 3% per annum - financial statements based on an historical monetary unit of account have been felt to provide adequate information for most users. While a number of academics, thirsting for perfection in measurement, may always be found in the act of criticizing the historical monetary unit approach, for most people the system worked pretty well. At the other extreme, when the rate of inflation reached dramatic levels…. say over 25% per annum – financial statements based on historical monetary units could be generally agreed to have little value outside of a ritual dance enjoyed by preparers  and actions to supersede such statements was necessary. In the middle range, however, practical answers are not so simple to arrive at. This can be called the “discussion range”, where traditional approaches must be reconsidered but where precipitous action to cope with crisis need not be taken.  It is this stage which has given rise to most of the published work on inflation accounting and it is this stage that we are in today.
In the search for practical answers, it is important that the problem be properly defined. A narrow definition can excessively limit alternatives. Thus I believe that a problem definition which simply asks “shall supplemental general price level adjusted financial statements be required in presenting financial results?” is too narrow in that it eliminates consideration of many relevant alternative means of dealing with inflation in financial reporting. The question that really must be addressed is how financial reporting should be changed as a result of an inflationary environment. In trying to answer this question, a first step is the development of some idea as to what financial statements are trying to do. The true blood committee report identified the fundamental objective of financial statements as being “to provide users with information for predicting, comparing and evaluating enterprise earning power” where earning power is defined as the enterprise’s cash generating ability.  This is consistent with the traditional accounting matching model of income measurement. That model is essentially an averaging one, designed to report as income for a period the long-run average net cash inflow from operations at the current level of  activity in the business. This is what accrual accounting is all about.  Revenue recoded on an “as earned” basis  measures the level of activity and the gross cash inflows at that level.  Cost matching is an attempt to measure long-run average cash outflows at the same level. Within this framework, the balance sheet gives data about the firm’s asset structure and the source of those  assets, but it is fundamentally a set of residuals left over form the determination of accounting income. (Browell and Hirst, 1986).
It is important in understanding this framework to recognize what the accounting model is not trying to measure. Accounting is not attempting to measure either ”economic income” or the value of the firm. While “economic income” is subject to many definitions, a reasonable approximation may be said to be the increase in wealth (adjusted for distribution to owners)  during a period. This economic model is based almost inevitably on future expectations, since the most commonly used measure of wealth at a point in time is the present value of discounted future cash flows.
Accounting data should be useful in supplying information to those who seek to determine the value of the firm, such as the fundamental security analyst, but the data do not attempt to present value or change in wealth. Put in another way, the ultimate objective of accounting in a perfect world is not to have book value equal to the fair market value of the firm. (Whittington, 1983).
In the light of this objective, what is the impact of inflation on financial statements? How does it affect their validity for the purpose they are designed to serve when they are prepared on the basis of an historical monetary unit.
In answering this question, one must first look at the impact of inflation on a business entity. It is immediately apparent that the impact does not fall equally on either businesses or on classes of assets or cost within a business. Some of these differences are reflected in conventional financial statements. The company which is bale to raise its selling prices promptly to maintain its economic position in the face of rising costs is able to reflect this fact in increasing revenue figures while the company faced with competitive factors or government controls which prevent such a prompt response must report lower revenues. Under conditions of very rapid inflation, it may be necessary to report sales by segments of a reporting period and to express sales per segment in terms of some physical unit or index so as to permit understanding of the components of revenue and the level of real activity implied thereby in a rapidly changing environment. In most cases, however, accounting problems caused by inflation are not primarily felt on the revenue side.
On the cost side, however, inflation creates greater distortions when the historical monetary unit approach to measurement is used. It is obvious that matching historical monetary  costs against current revenues will not give a good approximation of the long-run average net cash inflow at current activity levels under conditions of rapidly changing cost, although some artificial conventions such as LIFO may ameliorate distortions to some extent. Nevertheless, in an inflationary time when revenues are largely based on current market phenomena, costs must be similarly based if the matching process to produce a meaningful measures of results.
This seems to argue strongly for a measurement system using current economic costs. Under such an approach, expenses would be based on the current cost of replacement of the particularly assets sold  or used. In this way, the matching process would show a long run average cash flow figure based on current costs at the time transactions occur. This may be described as the earning power of the firm. If the value of the monetary unit is changing so rapidly that the combining of cash generation figures at different points within a year is misleading, an additional adjustment may be called for to equate cash at different points in time.
One of the principal criticism of an accounting system based upon replacement costs is the practical difficulty of achieving these measurements. While such problems are not insignificant, they are also considerably less difficult than has been suggested by some. A recent study reported the application of a replacement cost approach to the financial statements of a medium size company and indicated very few implementation problems. Philip Lamp has used such a system for years. As long as accountants are prepared to develop some tolerance for imprecision, it appears that a practical system can be achieved. Estimates that may be required are considerably less difficult to make than the determination of economic life which serves as the basis for a precise calculation of depreciation expense for any period.
It has been suggested that an accounting measurement system based on price level adjusted historical costs rather than replacement costs will achieve many of the benefits of a replacement cost systems and will have the advantage of being easy to apply since  only a mechanical  process must be undertaken to covert historical monetary measurements into the new system.
While the ease in application cannot be denied, since no new economic measurements must be made, there are serious doubts as to whether any significant benefit will be achieved from such a system. In fact, strong arguments can be made that the data produced by a general price level adjustment system may be affirmatively misleading rather than helpful to the users of financial statements. This arguments must be considered with care before any system using such measurement in mandated on either a primary or supplemental basis.
In essence, financial statements adjusted for a general price level change represent a measurement system based on historical costs expressed in terms of a purchasing power unit. In the interests of easy communication, this may be called pupu accounting. There is no reason to think that pupu accounting will produce any better a measure of long-run average cash flows that will historical monetary units. In the first place, since the impact of inflation falls with dramatic unevenness of various sectors of the economy and various parts of firms, the relationship of historical pupu’s to current cash outflows is tenuous at best.
 Even so, the effects of inflation on the performance of every economic unit go unrecognized in published financial statements. Business continues to report historical cost accounting data without providing supplementary information on management’s ability to protect its financial capital from the erosive power of rising prices.
This conditions  and the absence of adequate historical cost accounting data seriously impair investor capacity to properly evaluate management performance. Investors apply a common adjustment factor to all items in the income statement in assessing the impact of inflation upon a firm’s performance.
The deflated income serves as the criterion of management’s success in facing the effect of inflation. The approach yields unsatisfactory result since it is based on the erroneous assumptions that inflation affects all the components of a  firm’s income in the same way and that real income alone constitute the only success/ facture criterion of managements anti-inflationary performance.
 A new methodology is presented for the assessment of a firm’s performance under conditions of high inflation rates and limited financial disclosure. It is based on an adjustment mechanism (model) which is both concise and unambiguous. The new mechanism utilizes a number of ratios in adjusting historical –cost data to general price-level increases.
 The procedural aspects of the proposed methodology are illustrated by applying it to a member of firms operating in Nigeria, a country of high inflation rates. The relevant findings demonstrate the significance of the new method of investors in assessing, the impact of inflation on their commend over resources, and its limitations in evaluating inflation –related performance on an industry-wide basis.
Research on inflation accounting focuses on two basis issues. The first to the process of establishing the most suitable model of accounting for changing price (Chamber and Dean, 1979) while the second concerns the evaluation of the effects of inflation upon the performance of economic units, most empirical research is the latter kind.
Statement of Research Problem
The place of accounting information and inflation is not a doubt, however it is fairly difficult to identify in the information of long-term policies. It is not known whether government resort to accounting information and inflation at all in policy formations. We do not know the classes of accounting information and inflation implemented by government in formulating policies which is most relevant in terms of organizational institutional development.
It is against this backdrop that the need for this study become very critical. In the light of the above the following questions were raised:
Do companies make adjustment in the financial statement prepared to accounting for inflation?
Does different methods of accounting for inflation give misleading report during inflationary period?
Does inflation make it difficult for management to budget or plan for long-term?
Research Objectives
The main thrust of this study to highlight the imperativeness and effectiveness of accounting information and inflation in formulating of long-term policies to achieve these broad aims the following objectives have been specified as follows:
To ascertain whether companied do make adjustment in the financial statement prepared to account for inflation or not.
To ascertain whether different method of accounting for inflation always give misleading report during inflationary period or not.
To know whether management find it difficult to make budget or plan for long-term during the period of inflation.
Research Hypothesis
In order to carry out this research work successfully, the following hypothesis will be satisfactory tested.
1.    H0:    Many companies make adjustment in the financial statement prepared to account for inflation.
    H1:    Many companies do not make adjustment in the financial statement prepared to account for inflation.
2.    H0:    Different methods of accounting for inflation always give misleading report during inflationary period.
    H1:    Different methods of accounting for inflation does not always give misleading report during inflationary period.
3.    H0:    Inflation effect always affect the management in making budget plan for long-term.
    H1:    Inflation effect does not affect the management in making budget plan for long-term.
Research Methodology
The research will be carried out using secondary data from journals, text books, magazines, financial newspaper, publications, bank annual reports, CBN – journals, and other such journals on these data a regression analysis will be carried out using the Ordinary Least Square (OLS) method.
This will  enable us text our hypothesis and give the necessary interpretation and finally conclude based on our regression results.
Scope of the Study
The impact of inflation comes in the form of rising prices of output and assets. As the financial accounting are kept on historical cost basis, so they do not take into consideration the impact of rise in the prices of assets and output. This may sometimes result into the overstated profits, under prices assets and misleading picture of business etc, hence. This leads towards the need for inflation accounting.
This study is intended to cover the entire commercial banks in Nigeria as this is not possible due to resources constraints. The need to carryout an in-depth study will restrict us to a bank (United Bank for Africa). Since the time frame will be within the period of (1980 to 2009).
In order to derive reasonable data and arrive at reasonable conclusion, this research work is focused on the branch of the bank in Benin City.
Relevance and the Significance of the Study
Accounting information and inflation is very relevant to economy with dynamic economics environment. It is  not of interest to focus the accounting or state has account to be achieved. Accounting information is the cornerstone for strategic management while inflation is the chief cornerstone of monetary management.
The importance of accounting information can be explained using the following words, from the data, which is information in files, when you have at your finger tip these fact, decision making or formulating of policies becomes easy. In as much as accounting information must keep place with business organizations and reflect their interpretation to use in formulating policies and data is relevant to their decision making.
Many countries in the world have not fully succeeded in designing an effective inflation accounting model but long recognized inflation as one of the major factors that could derail the economy of nay nation. It is a self defeat to belief that if UK and USA could live without inflation accounting, then Nigeria could also follow suit. Inflation rate in Nigeria has risen to almost 80% statistically and unofficial rate may be two or three time higher.
Limitation of the Study
This study is limited by the problems associated with secondary data many a time, same data from two sources do not correspond.
Insufficient research material: The researcher encountered some constraints in the collection of information, very limited materials were obtained from the library.