Investment Valuation in India

Impact of Inflation on Financial Statements Fixed Assets under historical Cost accounting – Since the fixed assets are valued at historical cost (in most countries), the assets are stated at a much lower figure than their current replacement costs. This makes the company vulnerable to takeover bids and leads to lower valuations for the shareholders. Depreciation – Since the assets are undervalued, consequently the depreciation on such assets are also undervalued. This leads to distortions in the make or buy decisions of the assets. This consequently overstates the profit of the enterprise. In case of inflation, the cost of raw materials and goods purchased for re-sale are rising. Under the cost concept only cost of purchase is taken to the Income Statement. Generally, in case of Inflation, the fair value is greater than the cost and this difference between the cost and the fair value of such goods is also taken to the Income Statement as Holding Gains. Consequently the profit is agai...