CORPORATE FINANCIAL REPORTING IN MULTINATIONAL COMPANIES THE CHALLENGES OF INFLATION (A STUDY OF SOME SELECTED COMPANIES)

CHAPTER ONE

• Introduction

Seghal and Seghal (2003) opined that financial statements for external reporting are prepared in accordance with the Generally Accepted Accounting Principles (GAAP). A very important principle used in this accounting process is money measurement principle. It requires that all business organization transactions be measured in money unit, for facilities corporate financial reporting and summarization of business result. However, application of money units for measurement of business transactions is based on the assumption that the purchasing power of money remains the same over the period of time and even if there is a change in purchasing power of money that change is magnificent from the pointed view of users of accounting information. But the existence of inflation has not made this to hold good.

According to Ronald (1972), the existence of inflation is distorting the historical cost financial statements values being reported is not a recently observed phenomenon. In certain countries like Nigeria, the annual rate of inflation in recent years has been hundred percent. Historical cost financial statement in these countries would certainly be at odds with financial reports adjusted for inflation. In Nigeria, the highest rate of inflation based on the consumer price index was 72.8% in 1995. Accounts prepared and reported under historical cost basis fail to show the effects of changing prices and in this inflationary period, more realistic information would be required for appropriate decision making by the government management of multinational companies, some accounting system use to base on historical costs, depreciation is charged on the basis of original cost at which assets were required. As a resistant when inflation steps in, funds saved on account would not be adequate to replace assets or to maintain the capital. This further adds constraints to dividend payment.

The multinational companies have this capital structure, which shows assets and current assets profile. The financial statements report shows its profit or loss account, balance sheet, cash flow statements, etc. Inflation distorts the values of both assets and profits reported on historical costs basis. The profit and assets will not show true and fair values. The problem is further complicated as the accounting information provided in the historical cost based financial reports becomes distorted, there by affecting its relevance to users of accounting information.

Conclusively, the result delivery capacity of multinational companies in Nigeria as regards the reporting of their financial performance and their responses to the challenges of inflation which is one of the outstanding features of today’s event caused the researcher to explore into this problem.