Estimation of the inflationary distortion in the book value of companies.

Abstract

There is agreement that inflation can cause distortions that affect the utility of accounting information. In some cases, such as Net Assets and Book Value, these distortions may be exacerbated by their accumulation over several years.
The paper proposes a model for the simplified calculation of the distortion of Net Worth unadjusted in inflationary contexts, in order to approximate its levels of relative distortion, using a minimum number of variables available in public databases. The model reveals that the relative level of distortion depends not only on the general indices used to adjust but also on the proportion of net assets not expressed in closing currency over unadjusted net worth.
In a first empirical approach, a random sample of financial statements filed with the Chilean regulatory authority as of December 31, 2021, was used, assuming two extreme scenarios of maximum and minimum distortion. The results show a significant dispersion in both scenarios depending on the net assets structure in each concrete case.
This initial approach opens up the possibility of fine-tuning, at the same time as extending it to other variables such as the net income of the period. Its widespread use will allow for the decision on whether to adjust or not to adjust to be adopted with more relevant information than the single quantitative data of the inflation rate.