Real value is nominal value plus inflation (or minus deflation). The real value of assets changes as the value of currency is not fixed. The inflation process leads to depreciation of money. Therefore, real value of assets presented in currency will change in time.
Inflation and Deflation
Inflation and deflation to a concept that applies to changes in the level of prices. Inflation is an economic phenomenon consisting in an increase in the general level of prices of goods and services offered in the economy and deflacja is an phenomenon consisting in an falling this prices .
Real value vs. amortization
It is important to state, that assets can be in the same time subject of amortization, which will lower their nominal value and finally impact on real value. Thus change of real value can be difficult to spot on balance sheet.
Amortization (depreciation / amortization write-off) is a monetary equivalent of consumption of fixed and intangible assets caused by its physical consumption - created as a result of exploitation and economic (moral) - resulting from technical progress related to the possibility of obtaining modern machines, devices on the market more efficient, cheaper to use, allowing you to get better quality products. This impairment is transferred to the value of products generated using the amortized fixed assets. Depreciation is a type of cost that does not constitute a monetary expense.
The depreciation starts no earlier than after being accepted for use (according to the balance sheet law), in the month following the month of entry into the register (according to tax law), and the ending when the write-offs equalize with the initial value of a specific fixed asset or put into liquidation, sales, shortage.
Basic Methods of amortization :
- Straight Line Method
- Production Method
- Uniform Rate on Diminishing Value Method
Which inflation index?
It is disputable which indicator of inflation should be taken into account. The official index of inflation is usually lower than hidden inflation that can be assessed among others by observation of M3 monetary base change
Basic Inflation index :
Real value vs. perceived value
Perceived value is real value corrected by some impact factors, like e.g. scarcity, novelty, supply and demand.
- Carroll College, James Schneider,(1959). Depreciation of fixed assets Business, Accounting and Economics Undergraduate Theses. 46.
- Lyle M. Bender, (May 1952). Inflation and DeflationSDSU Extension Circulars 482, pages 9.
- Michael J. Boskin, Ellen R. Dulberger, Robert J.Gordon, Zvi Griliches, and Dale W. Jorgenson (1998). Consumer Prices, the Consumer Price Index, and the Cost of Living Journal of Economic Perspective, nr 1, pages 3-26.
- O’brien, R. M. (2007). A caution regarding rules of thumb for variance inflation factors. Quality & quantity, 41(5), 673-690.
- Lyle M. Bender, Inflation and Deflation, page 9
- Depreciation of fixed assets
- The Consumer Price Index, pp 3-7.
Author: Paulina Ściera