The impact of inflation on financial

accounting and its relation with Arab

Spring
Dissertation Submitted for the partial fulfillment of the
requirements for the degree of
Bachelor of Business Administration
by
1

Tibah Abdullah ali Al-harbi

200930432

Mashael Mohamed Taher

200930660

Haifa Mohsen Athathy

200932182

Ahlam Yahya Esmaael

200930604

Abrar Kacam Maafa

200930507

Major Subject: Business Administration

Under the supervision of
Ms. Nadra Shili
Date of Submission:14.06.1433
Session 1432-1433 H
College of Business Administration
Academic Campus (1) for Girls
Jazan University, Jizan, K.S.A.
1

To our loved parents

To our respected sisters
To our dear brothers
To our friends

We present this study

We thank Allah Almighty, first and foremost for granting us the

success and helped us to complete this study. Peace and
blessing of Allah be upon the best created person, Mohammad,
upon whom, the best prayer and the most perfect blessing.
We are pleased to thank Ms. Nadra shili, who supervised the
study and who spared no effort to provide advice and guidance
throughout the period of the study.

Kingdom of Saudi Arabia

Ministry of Higher Education

Jazan University
College of Business Administration

CERTIFICATE

This is to certify that project report entitled as The

impact of inflation on financial accounting and its
relationship with Arab Spring is an original piece of
work carried out by: Tibah Abdullah Alharbi, Mashael
Mohammad Taher, Haifa Mohsen Athathi, Ahlam
Yahya Esmaael and Abrar Kacam Maafa under the
supervision of Ms. Nadra Shili.
The project is the partial fulfillment of the requirements
for the degree of Bachelor of Business Administration
and has been completed in stipulated time as per the
statutes of University.
Ms. Nadra Shili
(Supervisor)
Accounting

Ms. Nadra Shili

Lecturer of Sciences of
Dept. of Business Administration
INDEX:
Titles

Dedication
Gratitude and appreciation
CERTIFICATE

Introduction
-intrduction of the topic
-study problem
-the importance and reasons of choosing the subject
- Study Objectives
- Study hypotheses
- Study limits
- Study Methodology
Introduction
Chapter I: Inflation and Accounting thought
introduction
Section 1: the impact of inflation on certain accounting assumptions, concepts and principles
-The hypothesis of the objective measurement
-The hypothesis of the accounting unit continuity
Historical Cost Principle
The Convention of Expenses against Income
The Concept of returns achievement
The Convention of disclosure
Section 2: The accounting impacts of inflation on the financial statements
Part I:importance of financial statements and decisions
Part II: The impact of inflation on the financial statements
First: Price changes effects on the financial position measurement
Second: The price changes effect on the measurement of results of work
Part III: The impact of inflation on the financial decisions:
First: Inflation and medium and long term financial decisions
Second: Inflation and short term financial decisions
Abstract of the chapter
Chapter II: The accounting approaches for treating the inflation impact on the financial statements
Section I: Some solutions proposed for treating the inflation effect on the financial statements
Section II: The historical cost modified by the fixed monetary unit
first : The method of modifying the accounting data of the monetary elements as per the modified historical cost
second : Advantages and disadvantages on historical cost principle using fixed monetary unit:
Advantages of historical cost using homogeneous value cash unit
Section III: The role of monetary and financial policies in fighting the inflation
Part I : financial policy
first: Financial Policy definition
Second: Types of financial policies
Third : Tools of financial policy
a- According to the direct effect on the national production criteria
b- According to the standard of covering the expenditure with loan or the monetary issuance
- According to the functions performed by the State
Fifth : Disadvantages of financial policy
part II: the monetary policy
first : Monetary Policy
Second: Types of Monetary Policy
Third : Objectives of monetary policy
Fourth : Instruments of monetary policy
Fifth : advantages and disadvantages of monetary policy

Conclusion
Chapter III: The relationship between inflation and the Arab Spring Events
Section I: inflation rates in Arab spring countries
Section II : The reasons of the increased inflation rates in Arab spring countries

The increa
3- Demand and supply factors
First: Factors cause the total demand to increase: These factors can be summarized in the following units
Second: The factors causing the low total supply
Conclusion
41-41
42-44

Tables and diagrams list

Page No
27
36
37
26
25

Tables and diagrams list

The budget in 31/12/N
inflation rates in Arab spring countries
the top food prices during 2011, the year of revolutions of the Arab
the budget on 31/12/2004 using the value of the common monetary unit at the end of
2004
The homogeneity equation

Introduction:
Inflation is emerging as an economic phenomenon subject to scientific standards at the end of
the 17th century and was formed after expansion of the use of paper money in America and
France where he was exposed to the world of time to another for inflationary surges almost
regularly. Then began to study inflation as an economic phenomenon, especially after recent
discoveries of gold mines across different parts of the world during the 19th century.
Inflation experienced by the First World War years world and subsequent second worst
inflation ever world prices multiplied thousands of times on its pre-war level.

Study problem:
The study problem can be formed as follow:
How does the inflation affect the financial statements and decisions? And what are the policies
that can be followed to overcome and control the inflation?
Furthermore, what is the relation between the economic inflation and the Arab Spring?

The importance and reason of choosing the subject:

The study derives its importance from the significance of inflation phenomena role and

-1

.its effect on the financial statements and percentages

Due to the noticeable increase in the inflation rates during the last years and the

-2

.interest of experts and researchers of this phenomena

The research explores the actual reality connects the inflation phenomena and the Arab

-3

.Spring events

Study Objectives:
To identify the inflation impact on the credibility and fairness of the financial
.statements

-1

To identify the inflation impact on certain assumptions and principles controlling the

-2

.performance of financial accounting functions

To identify the most significant difficulties faced by the management when ignoring

-3

.the inflation impact on the financial items

.To identify the accounting effects resulting from ignoring the inflation impact

-4

.To present some methods and solutions proposed to fight and try to treat the inflation

-5

Study hypotheses:
.Inflation affects the financial statements negatively

.The Arab Spring events are considered as a reason on inflation rates increase

Study limits:
The limits of this study is limited to an overview of the accounting effects of inflation on the
financial statements and the type of relation connecting the inflation with the Arab Spring
events.

Study Methodology:
The researchers, in their course of studying the inflation impact on the financial statements,
depends on:
:The theoretical study

-1

The researchers, in their theoretical study, depend on studying the secondary data
published about the subject matter, which have been collected from books, references,
.internet websites, past studies and so on. They rely on the inductive approach

:Deductive study

-2

The researchers rely on concluding the concepts and definitions contained differently
.in the past studies

:Analysis study

-3

The researchers rely on the analysis of data published about the inflation in the Arab
Spring countries, in the newspapers, news websites, central banks statements and the
.statements of the international monetary fund

:This research contains two chapters

:Chapter I: Inflation and accounting thought, including

Introduction

Section I: The impact of inflation on certain accounting concepts,

.assumptions and principles

Section II: The impact of inflation on the financial statements and

.decisions
Chapter II: The accounting methods proposed to treat the inflation
impact on the financial statements.
Section I: Some solutions proposed for treating the inflation effect on the
financial statements
Section II: The historical cost modified by the fixed monetary unit

:Section III: The role of monetary and financial policies in fighting the inflation

Chapter III: The relationship between the inflation phenomena and Arab Spring
:events, including
.Section I: The inflation rates in Arab Spring countries during the revolutions year

Section II: The reasons of the increased inflation rates in Arab spring

countries

:References
Qalqool Khalid, Hazil Mostafah, the inflation impact on the financial statements, University
Center, Economic Sciences College 2010-2009
Khalid Abdullah al mosleh ,inflation in the Islamic , alqasem
Geofrey t. mills*, the impact of inflation on capital budgeting and working capital , 1996
Yaniv konchitchki, inflation and nominal financial reporting ,January , 10, 2007
http://www.siironline.org/alabwab/edare-%20eqtesad(27)/294.htm
http://www.kantakji.com/fiqh/Files/Accountancy/4k.pdf
http://www.4shared.com/file/CKHvC3YY/_____.html
http://ar.wikipedia.org/wiki/%D8%AA%D8%B6%D8%AE%D9%85_
%D8%A7%D9%82%D8%AA%D8%B5%D8%A7%D8%AF%D9%8A
http://www.souqaldoha.com/vb/t2846.html
http://firashiary.jeeran.com/look/archive/2008/1/441435.html
http://infotechaccountants.com/forums/showthread.php/7346
http://www.ibtesama.com/vb/showthread-t_21280.html
http://www.ahlulbaitonline.com/karbala/html/jurnal/1/athar.htm
http://www.acc4arab.com/acc/showthread.php?t=4387
http\\http://infotechaccountants.com/forums/showthread.php/19229
http://www.jps-dir.com/forum/forum_posts.asp?TID=916

10

Introduction
One of the most significant economic problems that threaten the world is the inflation which
has become a threat to a number of major economic and developing countries. Furthermore, it
has become the focus of experts, economists and researchers in recent years.
What is inflation?
Inflation is defined as a sustained increase in the general level of prices for goods and services.
It is measured as an annual percentage increase.
In spite of all attempts and studies of this phenomenon, but it is still difficult to be controlled
and adjusted. Inflation phenomenon largely affects the economic aspect. Furthermore, the
accounting aspect is influenced by this phenomenon because it reflects the economic and
financial policies represented in the annual balance of payments and annual general budget.
Because of that, this phenomenon has become of not so bad importance in the scientific and
professional reality of accounting due to the large effect of financial inflation on the
accounting information. So what are the effects caused by the inflation on the financial
statements? What are the policies followed to adjust, treat and control the inflation?
Inflation in the Arab countries has witnessed a noticeable increase during the recent years, as
the inflation rates have been changed unexpectedly during the past years. Therefore, is there
any relationship between the increase of inflation rates and the Arab Spring? And if any, what
type of this relationship?

11

Chapter I: Inflation and Accounting thought

Section 1: the impact of inflation on certain accounting
assumptions, concepts and principles
Section 2: The accounting impacts of inflation on the
financial statements

12

Chapter I: Inflation and Accounting thought

The accounting is the important side of business and it Classified by the number of scientists
as language of business1 while it translated the financial vocabulary of the businesses, through
accounting we can governing the board of the business, it discover business progress, business
success or decline , Accounting are affected by the phenomenon of inflation and affect
the accuracy of the data disclosed in the financial statements.

Section I: The impact of inflation on certain accounting assumptions,

concepts and principles:
There is a big contradiction between many assumptions and principles controlling the
performance of the accounting financial functions and the economic conditions resulting from
the inflation, especially the consequent reduction in the purchasing power of the money unit.
In spite of that, the accountants stick to impose the stability of the purchasing power of money
unit, which make the accounting data and information do not truly express the reality of
accounting units activity. Therefore, the inflation effects can be seen in the accounting thought
about some accounting assumptions and principles controlling the financial accounting
functions performance and the resulted accounting data and information.

-The hypothesis of the objective measurement:

This assumption means that to avoid bias to the accounting measurement and avoiding the
personal discretion, as associated really with the evidences of proof where there is a degree of
objectivity over the availability and accuracy of such evidences. According to this hypothesis,
a lot of accountants see that taking the inflation effects on the purchasing power of money
when performing the financial accounting functions is considered as being nonobjective.
Due to the lack of accounting objective measurement for the inflation impact, the recognized
methods are not objective, where they depend on the personal estimation and have a lot of
mistakes of bias and convergence, which lose the objectivity of accounting data and
information. Therefore, the insisting of accountants on imposing the objective measurement,
according to the current sense based on the absolute objectivity ensured by the evidence proof,
and not taking the inflation impact into account when performing the financial accounting
functions, is not justified and can be faced by showing that the objectivity of the accounting

Vijayesh kumar , accounting for decision making , 2012 , page 3 -11

13

measurement is the issue of relativity not being absolute, even in case of insisting the
assumption of the stability of the purchasing power of money.
This is reflected in some accounting measurement problems for determining the annual
installments of fixed assets depreciation, such as the estimation of production age of asset and
estimating its final value and choosing the appropriate depreciation method as well as the
problems of estimating the good inventory and problems relating to estimating some
provisions associated with the traded assets. In most previous cases, a degree of personal
discretion is allowed at the expense of objectivity. And as such much of objectivity can be
assigned in order to take the inflation impact into account when performing the financial
accounting functions. Based on the above, the absolute assumption of the objective
measurement cannot allow taking the inflation impact into account; therefore, the objectivity
concept shall be modified to be relative to both the accounting measurement methods and
results by taking the inflation impact into account, instead of ensuring the measurement
objectivity without ensuring the objectivity of measurement results.

-The hypothesis of the accounting unit continuity:

This hypothesis means that the life of the accounting unit is continuous, and the probability of
being liquidated is considered as an exceptional case, therefore, the accounting unit when
acquiring fixed assets, that would be for the purpose of being traded. Therefore, most of
accountants think that this hypothesis assumes that there is no link between the fixed assets of
the accounting unit and their current value or the market prices. Therefore, they must be
evaluated by their historical cost and not recognizing the increase of prices levels during the
inflation periods.
As the hypothesis of the continuous accounting unit does not have the recognition of prices
changes and evaluating the fixed assets owned by the accounting unit by the historical cost, in
its content, but the fixed assets value involve a wide meaning more than the money units
invested in it, as it is represented in the value of merging such assets in the accounting unit at
all, and thus such value shall not be expressed by the historical cost as it doesnt show the
productivity of the accounting unit. Furthermore, we can say the historical cost does not match
the hypothesis of the continuous accounting unit, as it doesnt take into account the idea of
replacing and thus it assumes implicitly that the life of the accounting unit depends on the
production age of its fixed assets. And as such, the commitment to impose the continuity of the
accounting unit will be more consistent with taking the effects of inflation phenomena into
account when performing the financial accounting functions.

Historical Cost Principle:

This principle means that to use the historical cost in evaluating the various assets owned by
an accounting unit. It is also used to evaluate the costs relating to such assets as well as other
expenses relating to the financial period of measurement. This principle imposes that to
evaluate all liabilities and incomes by their actual historical value at the time of preparing the
14

financial statements and reports. A lot of accountants insists to use this principle until now in
spite of the common inflation waves in the most countries of the world, as it achieves possible
objectivity of accounting data and information resulting from performing the financial
accounting functions.
The historical cost principle depends on the assumption of the fixed purchasing power of the
money unit which doesnt recognize what is caused by the inflation including the continuous
reduction of the purchasing power of money unit. Therefore, applying this principle during the
inflation periods may cause many problems of accounting measurement problems, causing
many mistakes in the results of accounting measurement and makes it nonobjective.
Thus the historical cost principle is considered as one of the accounting principles recognized
as being affected by the inflation phenomena, as any attempt to take the inflation impacts into
account when performing the financial accounting functions must be a departure from it.
Therefore, it is necessary to exclude this principle as well as all loans on which it is based,
when attempting to theorize the financial accounting functions in light of economic inflation
phenomena.

The Convention of Expenses against Income:

This principle means that the measurement of business results for the financial period shall be
done based on comparing the achieved returns with the paid expenses, to have a causal
relationship between them. That means that achieving the returns shall be associated with the
expenses performance. And in case of the difficulty to ensure such relationship practically, we
can resort to finding the time relationship between them; namely, the expenses against the
returns shall be in the same financial period. Therefore, it is possible to apply the accrual basis
of accounting.
Therefore, applying such basis during the inflation periods means to meet the expenses of
many purchasing powers with the returns that usually have one purchasing power, almost, less
than the purchasing power involved in the expenses element. Therefore, the comparison
process itself will be unfair and unequal during the inflation periods, and thus it is necessary to
exclude the assumption of the fixed purchasing power of the money unit and to be modified
once being changed due to the inflation, in order to have the same purchasing power of both
the measurement units of expenses and returns. That is to say that the principle of comparing
the expenses with the returns will be more consistent when taking the inflation impact into
account when performing the financial accounting functions, in order to have equal and fair
comparison.

The Concept of returns achievement:

It imposes that the achievement of returns resulting from the exchanged financial processes of
the accounting unit is based on the sale. That is to say that recognizing such returns and
proofing them in the records shall be done once the sale process is done whether it is cash or
credit. Such principle depends on the assumption of the objectivity of the measurement, as the
objectivity of sale provides the evidence ensuring the objectivity such as the sale documents.

15

There are other principles to achieve the sale can be resorted in certain cases for the purpose of
achieving the maximum objectivity also such as the cash basis in case of installment and
production basis in case of contracting and long term businesses companies as well as the time
basis in case of due interests.
Therefore, the basis of achieving the returns as mentioned above cannot match with the
inflation periods for the following reasons:
It doesnt recognize the capital profits caused almost by the inflation impacts except in
-1
case of the fixed assets by sale, in spite of that they are during the periods of acquiring
such assets, thus they can be utilized for one year only however they relate to other
.previous years
The application of this results in not evaluating the inventory from the perfect
production with the current prices in the market unless they are less than the cost.

-2

.Although it must be assessed by the current market prices continuously

It does not recognize the achievement of profits or losses of acquiring the cash

-3

.elements during the inflation periods although it is ensured reality

Therefore, applying the achievement of returns basis based on the sale during the
inflation periods causes many mistakes in the accounting measurement, thus the
.measurement results would be not objective

The Convention of disclosure:

This principle imposes that it is necessary to have the financial statements and reports
disclosing all accounting data information required to give the reader a clear and accurate view
reflecting the fact of the business results and the financial position of the accounting units.
And as the disclosure principle as mentioned as mentioned above requires the necessary of
taking the inflation impacts into account when performing the financial accounting functions,
as it may be misleading and not reflecting accurately all economic facts related to the
accounting unit, therefore, we can say that the disclosure principle may be more consistent
when taking the inflation impact into account when preparing the accounting data and
information as it will ensure the complete disclosure.

16

Section II: The accounting impacts of inflation on the financial statements

The problem of changing the general level of prices is one o the most significant problem
currently faced by the accountants, as the accounting considers the money is the main unit of
measurement. And as seen in the first chapter, the money is affected directly by the general
level of prices. The phenomena of changing in the general level of prices is not new, but the
new thing is the interesting of accountants in many professional organizations which has
become serious especially from the seventies and through what was produced from recent
studies about the problem. Such main factors cause this interest include the following:
.The continuous increase in the general level of prices
.The increase of interesting in the accuracy of measuring the accounting data
The multiple alternatives in investment and creating the problem of not taking the
.decisions easily without depending on the accurate accounting data
The trend of accountant profession toward the attempt of putting the theoretical bases
.and principles of accounting
All such factors lead to reviewing the accuracy of accounting measurement to the benefit
of the accounting data for the decision makers to their beneficiaries. Therefore the position
of the financial statements of the economic units prepared as per the traditional system in
light of inflation has become of the interest of those preparing such statements and users of
their data of the economists. The matter that went up the attention of those, the convince of
everyone that the inflation is no longer the covenant as it is transient, but it has become a
reality2. And through that and in this section we will discuss the significance of the
financial statements and decisions then the inflation impact on the elements of financial
statements and decisions.

Part I: importance of financial statements and decisions

The gradual development of the financial statements function as a means of delivery of
financial statements for the readers is an example of change continuously in accounting.
The link between the nominal personal accounts was the results of Italians. This technical
procedure has been used for long time before the financial reports being a mere settlement
of financial accounts between the partners or a copy of accounts summery in ledger. The
impact of British on the financial statements and their preparation in the mid 19 th was a
Mahmood Said Mahjoob, Accounting in light of inflation, a lecture given in experts meeting hold in Kuwait 16- 2
18 March 1985 issued in a book titled the inflation in Arab countries , published in 1986, the University institute
of studies, publish and distribution , page 274

17

result of the need of that time and an extension and development of the Italian method in
accounting. This basis stemmed from Italy in addition to the emergence of a range of
accountants at that time enabled them and made them creating a new thing in accounting,
and from that time, the importance of statements in their meaning and benefits has been
increased.3
The intelligent usage by the British of the accounts balances extracted from ledger made
the financial statements a readable thing, a thing that gives more information concentrated
and serialized in a relative groups and thus the importance of financial statements.
The financial statements is the tool by which the economic unit transactions results are
clarified during a certain period of time which is usually one year and determining the
financial position of the unit at the end of the period. The beneficiaries of the financial
statements data are numerous including the shareholder, investor and tax collection officer
and etc. They determine their attitudes and transactions with the economic unit in light of
what is highlighted by these data and about the economic unit. Hence the importance of
the financial statements as a tool to rationalize the economic decision, not only at the level
of the economic unit related to such statements but also at the level of other economic
units and entities4.
The effectiveness of the financial statements as a tool to rationalize the economic decision
depends primarily on the validity of the data they contain, and the financial data validity
depends on the validity of the accounting principles used un preparing such data. The
financial data was prepared according to a group of accounting principles usually called
the recognized accounting principles GAAP, the most important of them are:5.
.Using the nominal money unit as a measurement unit
.To use the original acquiring cost (historical) as evaluation method
.To ignore the changes made in assets values as they havent been achieved
In light of the inflation, the financial statements prepared according to such principles
suffer serious nullifiers.
The analysis and translation of data contained in the financial statements in the present days
need to work hard and smart to understand the nature of these statements and the limits of
their abilities and the values by which the elements are expressed. The readers of such
statements shall understand the nature of relationship between their items. That is to say that
Omar Saeed Hussain, Accounting thought development, Al Nahda Al Arabia , Beirut, 1972, page 40 33
Mahmood Alsaeed Mahjoob, previous reference, page 275 4
Mahmood Alsaeed Mahjoob, previous reference, page 276 5 5

18

the various administrative, financial, productive and sale policies can be judged by studying
these statements. There are many views regarding the purpose of preparing such statements
including Chessman, who summarized the purposes of the financial statements as follow: the
financial reports are amiable means of communication between the investors and a manual has
information for the employees and as catalogue for the company products and benefit
economic information for the printing press interesting in the business affairs and a tool to
strengthen the linkages between the project and community and a book can be studied in
accounting and administration as well as a means to gain the confidence of customers and
suppliers and annual guideline for businessmen 6. Therefore, the main purpose of the financial
report is to provide the investor whether it is a public or private sector with semi-stereotyped
results about the company of his economic interest. But what happens now is that these reports
are used currently with the same importance by the financial analyzers, bankers, employees,
press, suppliers, customers and researchers. The financial statement is considered as a group of
recorded statements applying the common accounting principles in accounting and personal
estimation, and the validity of the personal estimation depends on the ability and experience of
persons preparing such statements and their understanding of the common accounting
principles7. There are many types of financial statements can be distinguished, as there are the
budgets or the financial position list, income list, distribution list or the non-distributed profit
list. The changes list can be added to such lists in the net working capital and the list of cash
flows.
Before discussing the matter of how to treat the accounting thought of changes problem in
prices, we have to identify the impacts of such phenomena on the credibility and
appropriateness of accounting data and information clarifying the results of traditional
accounting measurement.

Part II: The impact of inflation on the financial statements

The general frame of the accounting measurement model depends on a group of common
assumptions and accounting principles which are considered as the base on which the
accounting income measurement is done and determining the financial position of the
economic units, and the principles affected by the inflation but didnt take its impact into
account when preparing the accounting data and information. These assumptions are the
assumption of the fixed purchasing power of the money unit by the necessary that the financial
accounting reports and statements shall depend on fixed measurement unit, that means that the
changes on the measurement unit is not of such importance and thus do not affect the validity
of accounting measurement, so the changes in the purchasing power of the measurement unit
can be ignored.
This assumption excludes the principal of historical cost requiring recording all information of
accounting unit with the actual value at the time of being completed in order to reflect the
Omar saied hasnen , previous reference , page 616
Omar saied hasnen , previous reference , page 62 7

19

6
7

financial events as done, then the assets owned by the accounting unit and all expenses related
to such assets with the original cost at the time of acquiring. The result of that is that the
traditional accounting doesnt give attention to the problem of changed value of the
measurement unit because of the changes in price levels. Therefore, the application of
historical cost principle causes many problems and mistakes in the accounting measurement,
as its results do not reflect the financial position and the results of economic unit works
objectively as mentioned below8.

First: Price changes

measurement:

effects

on

the

financial

position

In light of using the historical cost principle, the assets are measured and evaluated by the
original prices at the time of being acquired. And in light of the continuous increase in prices
the original cost of the noncash elements such as the fixed assets and the inventory differ from
the current cost, especially in case of the historical diverge between the acquiring time and
measuring time, and this leads to including the general budget with past cost numbers do not
express the real economic value at the time of preparing them, as well as acquiring the
economic unit of such elements during the periods of price changes resulting in profits and
losses involved in such assets are not taken into account when measuring their values.
Regarding the appearing cash elements in the general budget such as cash, customers and
suppliers, they depend on the common cash unit at the time of preparing the budget, and
acquiring them during the period of prices changing result in acquiring profits or losses
resulted from the change in the purchasing power of the cash unit, as their impacts are not
reflected in the ownership rights in the general budget.
Therefore, the budged prepared based on historical basis does not show any profit or lose
resulted from acquiring the cash and non cash elements, and based on that following the
historical cost basis in measuring the elements of the general budget leads to the loss of the
economic significance of the elements affecting the decision making process related to the
allocation of the economic resources and leading to the lack of comparability in these items at
the level of the economic unit and the level of sector to which it relates. The inability of these
items to be mathematically collected because of the difference of cash unit used in
measurement when being acquired.9

Second: The price changes effect on the measurement of results

of work
Arab accountants network, the accounting methods of treating the inflation impact on the financial 8 8
statements: http://www.acc4arab.com/acc/showthread.php?t=3395&page=2
Mahmood Abas Badawi, the advanced financial accounting, the new university house, issuance 2002, page 99
361-362

20

The price changes affect the measurement of economic unit processes as the income resulted
from the processes during the periods of prices increase will be inflated and cannot express the
real work results. And as the main function of accounting is to measure the extent of the
economic unit progress and success as reflected in the measurement of income or loses
generated from the particular gesture, it will be necessary to take into account the impacts of
price changes on the validity of measuring the specific items of income in light of the real
income concept of the economic unit, in spite of that the accounting income measurement
methods all agree that the income of the accounting unit shall be measured by comparing the
incomes with expenses participating in achieving them, but they disagree in the interpretation
of the economic unit real income . The problem here is the measurement of income according
to the concept of keeping the capital, which means that to avoid touching the capital after
distributing the period income. So that the economists define the economic unit income as the
amount can be distributed on its owners without reduction in the value of its net assets. That
means to determine the income based on the principle used in measuring and evaluating the
assets of the unit, as the usage of different principles to assess the assets will lead to different
amounts, so to clarify the effects of the price changes on the measurement of the economic
unit work results, it will be important to use the income measurement methods and the
relations with the concept of keeping the capital, as there are three methods as follow10:
The method of preserving the monetary capital: According to this method, the historical cost
method is used as a basis for the evaluation of the fixed assets items and the relating items of
expenses. Based on that the depreciation became one of the important items in the income
statement, supported with monetary units of high purchasing power in case of inflation
connected with the date of acquiring the specified fixed asset, while the incomes related to
them with monetary units of low purchasing power are measured reflecting the current prices
during the measurement year. Therefore, two non homogenous measures are used in
determining the accounting income, based on which inflation effects emerge during the
periods of high prices. That is to say that, the elements of determining the accounting income
are measured by ignoring the price changes causing the achieved profits do not express the
real profits as they contain sham capital gains during the high prices periods, the distribution
of which causes the non preservation of the real value of the capital in one side, and the
increase of tax burden because of the income tax on such inflated profits from the other side,
in addition to the economic unit products.
The method of preserving the real physical capital: this method depends on comparing the
achieved returns during the period with the expenses related to them based on the current
replacement prices of the assets used during the same period. The income is measured taking
into account the price changes effects only to keep the real physical capital not the monetary
capital. The capital at the beginning of the financial period is represented in a group of
physical assets transferred into expenses part of them is used for funding the used physical
assets and the balance is considered as an income for this period. According to this method the
income does not include the capital profits as the changes in the assets values are not
considered as an income, but as a modification for the monetary capital to continuo expressing
the real physical capital from the point of view of the businessmen.
Mahmood Abas Badawi, previous reference, page 362-365 10

21

 The method of preserving the general purchasing power of capital: this method depends on
the basis of modifying the accounting data and information prepared by the historical cost to
reflect the general price changes at the end of the financial period. That is to say that the
income measurement is conducted taking into account the effects of the general price changes
only through choosing a general measurement unit for the purchasing power. Therefore, the
volatility in the measurement unit can be overcome, then the silence approximate state has
been achieved. Wed like to emphasize that this method really is only the comparison of
expenses with returns after expressing the two with fixed units of purchasing power not a
method of measuring the real profit.

Part III: The impact of inflation on the financial decisions:

The economic unit is in need continuously to providing the accurate information about its
environment or its ability to keep up with the current development for the purpose of
competition and keep the performance development, and it is also depends on the decisions
taken by the economic unit, and because of the importance of the financial decisions as seen in
the first requirements, it emphasizes mainly on the accounting and financial information
available and accurate characterized by the objectivity, and such data is always faced by
changing because of the inflation and the associated increase in prices.
First: Inflation and medium and long term financial decisions
The first person responsible for the financial and accounting information distortion is the
economic unit officer or the shareholders. And any distortion in such information can make
volatility and disruption in managing the economic unit, and all that affect the decisions taken
in the investment financial operations and allocating the result as well as the decisions of the
general meeting of shareholders especially toward the banks and tax authorities. Therefore we
distinguish between long term and short term decisions, and now we will discuss the impact of
inflation on medium and long term decisions.

Inflation and financial planning: Most of economic units perform the programming
process before financial planning. Putting long term financial plan is a difficult process, and
the difficulty increases relatively according to the term covered by the plan. In light of the
price changes it should be taken into account some principles and financial bases for the
continuity the application of the plan accurately and here are some financial plans related to
the price changes11.
1)The financial planning for the supply changes: When purchasing the economic unit for
primary materials or products or when being imported, it trades in light of inflation and allow
the movement of monopoly in light of high prices.

Qirsh Abdulqadir, capital markets measurement lectures, academic year 2001-2002- Al Aghwat University 11

22

2)The financial planning for the wages changes: The wages expenses are considered as
difficult variable used by the economic unit. The increase in wages increases the demand of a
certain good or service, thus the prices become high, causing inflation wave.
3)
The financial planning for the variables of renewing programs: In the third world
countries most of economic units resort to import the technological equipments to match the
progress making them reconsidering their economic programs ensuring their dependence in
issuing their programs.
Second: Inflation and short term financial decisions:
The inflation not only affects the long and medium term financial decisions but also affect the
short term financial decisions, including:
1)The inventory: the inflation affects the inflation as the inventory circle shows a continuous
renewal in light of the general price changes, and the impact differs according to the term and
the turnover of the inventory.
In case of the rapid turnover of the inventory the result will be the same.
In case of the weak turnover the result will decrease, and therefore the inflation affects the
decisions relate to the inventory.
2)Inflation and treasury: The flows shall be associated with the exploitation circle, but the
flows away from the exploitation is affected by the inflation, and in such cases the needs of
treasury increase more and more to be more than the resources, and the flows resulted from
the exploitation activity are affected also by the inflation resulting in the inflation impact on
the inventory then on the treasury.
3)Inflation and profits distribution: If the economic unit depends on the traditional accounting
principles especially the historical cost principle, it will get outrageous profits resulting in
virtual corporate profits more than the real profits and supporting the self funding and also the
prejudice to the rights of users and group dividends.
4)Inflation and prediction: the prediction allows the estimation of the needs of the firm of the
resources relating to the exploitation activity, and it determines all returns and costs. The
prediction may distort all inputs and will not allow for making the right decisions in case of
estimation and comparison between the firms especially the completion.
5)Inflation and loans: In order to enable the economic unit to use optimally the working
capital, it shall avoid the bad decisions hindering the unit, especially related to searching for
the short term funding, and resorting to banks which are considered as a real danger, and the
short term depts. which exceed the exploitation assets making the economic unit not able to
solvency12.

Conclusion:
The inflation led to give financial information is not reliable and poor to the accuracy based on
this information the responsible will making appropriate decision then this decision will be
Contrary to the reality and the opposite of the truth as well as the financial decision taken
affected by the inflation it may change, they will need to check it time to time when the
Qalqool Khalid, Hazil Mostafah, the inflation impact on the financial statements, University Center, Economic 12
Sciences College 2010-2009 page 125

23

inflation rates increase or decrease then Inflation affects negatively on the financial statements
and decisions

Chapter II: The accounting approaches for

treating the inflation impact on the financial
statements
24

Section I: Some solutions proposed for treating the inflation

effect on the financial statements
Section II: The historical cost modified by the fixed
monetary unit
Section III: The role of monetary and financial policies in
fighting the inflation

Chapter II: The accounting approaches for treating

the inflation impact on the financial statements
25

In this chapter we will look to innovative ways to address the impact of inflation on financial
statements

Section I: Some solutions proposed for treating the inflation

effect on the financial statements:
In this section we will discuss the proposed solutions for treating the impact of inflation on the
financial statements including:
Prondler approach: According to this approach, the financial statements shall be reviewed
periodically, as well as the evaluation process which always delayed to be executed by the
general authorities. The process shall be complete and shall include all items of the budget not
including some of them only. The evaluation process has many benefits as it uses one
coefficient only for all items13.
Prondler considers this single coefficient as a tool avoiding the fraud and to make the
reevaluation process successful and effective it shall be done gradually and it may done based
on the external efficiencies and based on the published documents and the financial
statements of the firm. According to the practical technology it can be as follow:
To arrange the budget items in four sections: Investments, consumptions, exploitation values,
cash values and group capitals.
To prepare the revision balance for each month to give the changes resulted from these four
sections.
Prondler increases them to seven items adding the consumption, shareholding bonds and
results in order to determine:
The highest cash value in investment.
The highest cash value in inventory
The losses in cash value.
And in order to compare the budget at the beginning of the activity and at the end of it, it shall
be limited to reevaluating the budget and also studying the movement of accounts because of
the monthly results and transfers resulted from one section to other, and at the end of the
process we get the highest cash value of the inventory and the losses in the cash value.
Indicator method: The people of this method see that all difficulties come from outside and
changes involved in the cash value, and the effects on information are not because of the non
adaption of the traditional accounting system with such changes. Such method keep the
traditional accounting system and its principle of keeping the historical cost and the starting
point through which it is possible to identify the result achieving profits or losses and it keeps
the stability of cash capital.
Reevaluation by many indicators: It is known as Dobio approach. The numbers appeared in
the budget and accounts relating to the result right by many indicators from modifying the
evaluation of each item. Such modification is not mentioned in documents14.
The summery of this section is that in spite of the continuity of inflation crises and the
consequent impacts on the financial information and data which are considered as a reference
Talal Ibrahim Sijini, the Arab Magazine or Administrative Sciences , January 1, 1999 page 77 13

26

for decision making, but there are no effective solutions treating the inflation impacts on the
financial statements and the accounting information. The proposed solutions can be inadequate
or they conflict with the general accounting principles. This creates a problem at the time of
evaluation for the various elements, or it refuses perfectly the traditional accounting system
and try to exceed it by giving the idea of changing it with dynamic accounting system. It is
noted that the various accounting boards and the professional accounting organizations always
search for the solutions of the price changes problems, and provided may suggestions of
various accounting new methods in order to improve the accounting record of the financial
processes by expressing them realistically or approximately realistically, and this is what we
will try to express in the following sections of this chapter.

Section II: The historical cost modified by the fixed

monetary unit:
The inflation negatively affects the accounting measurement unit as seen in the previous
section. And as we know, the purchasing power of money is reduced by the increase of the
general level of prices. Therefore, it is not allowed to compare between the financial
statements because of the heterogeneity of the accounting measurement unit, and because of
this problem the studies in this field have been developed to identify the alternatives to reduce
the inflation impact on the financial statements 15. The accounting studies interested in
determining the characters supposed to be available in the accounting information as they are
interesting for the target purposes. The study of FASB issued in 1980 is one of the most
important studies in this field as it emphasized on the characters of the appropriate dependable
comparable information and to achieve the appropriate information when being presented at
the appropriate time. And in order to achieve the comparability character, accounting methods
shall be applied to be implemented from time to time and from one economic unit to other.
Therefore, the study interested in the impacts of price changes on the accounting measurement
unit. Therefore, by attaching additional financial statements the changes at the level of prices
become clear and the caused results on the financial results of the firm. Therefore, the methods
of treating such phenomena are various, there are the modification of accounting measurement
methods based on the current method instead of the historical cost method and leaving the
modification of monetary unit or by modifying the basis and the measurement unit together. In
this section we will identify the modified historical cost method known also as the accounting
based on the changes at the general level of prices. According to this method, the measurement
unit is modified based on the historical cost, as the changes occur in light of the emergency
changes on the purchasing power of the monetary unit. The modification of the accounting
statements depends on the standard numbers of prices and as a result of depending on the
Qirsh Abdulqadir, the lecture of changes of exchange prices and the impact on the budget, Al Aghwat 14
University 2001
Wasfi Abdulfatah Abu Al Makarim, Advanced studies in financial accounting, New University House, 15
Alexandria , 2002, page 340-353

27

standard numbers, the advantages of this principle are the simplicity when modifying and the
objectivity. We can understand that easily, furthermore, the preparation of the standard
numbers is not the responsibility of the accounting but prepared by the competent
governmental boards. But the accountant is responsible for choosing the appropriate standard
number when modifying to facilitate the process and get the best results. The standard number
of the consumer prices is considered as the most number used and shall be issued by the
competent authorities every one month or three months, and shall not subject to any
modification after being published, as applied in USA based on the recommendations of
Financial Accounting Standards Committee.
When applying the historical cost principle, a group of rules shall be followed as follow16:
A distinction between the money elements and non money elements shall be made: the
money elements mean the assets and liabilities determined by a fixed number of money units
regardless of price changes. The non money elements mean the elements of values not giving
fixed number of money units as their prices vibrate according to the price changes.
The modification shall be done by differentiating between the financial position accounts and
result accounts: The group of financial position accounts shall be modified based on the
general level of prices when acquiring the item required to be acquired and until the date of
preparing the modified financial position list, but the result accounts calculation group
including the returns and expenses, it is assumed that they flow periodically during the year.
first: The method of modifying the historical data using fixed
monetary unit:
The purchasing power of money as mentioned above is affected by the price changes, when
the general level of prices increases, the purchasing power of money decreases.
For example, when assuming that the standard number of the general level of prices in 2000
for example is 100 and in 2005 is 125, the purchasing power in 2005 in relative to 2000 is
equal to 80% namely = 0.8. That means that the increase in prices in 25 monetary units leads
to the reduce of the purchasing power with 20%. Here, the price changes lead to the change in
the measurement unit. The homogeneity in the monetary unit shall be achieved in accordance
with the following equation17:
The standard number of price of measurement year:
historical data as per a fixed monetary unit =
X Historical data as per nominal
monetary unit
homogonous
index for the base year prices

Mohammad Abbas Badawi, advanced financial accounting , New University House, Alexandria, 2002 page 16
369-370
Wasfi Adulfatah Abu Al Makarim Previous reference , Page 353 17

28

For example: One of the companies issued the shares of 60000 monetary units for taking the
good stock of 60000 monetary units. The standard number at the end of the current year is
105, and the exchange process when the standard number of prices is 100, and assuming that
the activity of this company is limited in this process, then the general budget at the end of the
year will include the stock of 60000 monetary unit and a continuous capital of the same value
as per the nominal value. When preparing this budget according to the value of the money at
the end of the year, we will follow the following procedures:
The stock as per the monetary unit at the end of the year is X105/100 6000 = 6300.
The invested capital as per the monetary unit at the end of the year is X105/100 60000 =
6300
Instead of expressing the transfer coefficient in the form of ordinary fraction it can be formed
in the form of decimal fraction by finding the rate between the two numbers, and usually the
average standard umber is used for the current year.
Therefore, according to the transfer coefficient at the time of modification:
Transfer coefficient = the standard number at the end of the year + the exchange date standard
number /2
When preparing the financial statements compared with many years, the data of all years shall
be comparable as they depend on monetary units of one purchasing power.
For example: A company X purchased a building of 500000 in 2000, as the standard number
of prices was 160 and 200 at the end of 2003 and 220 at the end of 2004
Requirement: To determine the value of the land at the end of 2003 and 2004?
Answer:
To disclose the land value in 2003 budget using the monetary unit at the end of this

(1

:year as follow
The land value according to the monetary unit at the end of the year is 200/160
.X500000 = 625000
When disclosing the land value in 2004 budget using the monetary unit at the end of
:2004 it shall be modified in 2003 as follow
The land value according to the monetary unit at the end of the year is X220/200
625000 = 687500

:There is alternative method to modify the building value directly as follow

29

(2

The building value according to the monetary unit of the end of 2004 is 220/160 X
500000 = 687500
In light of that, the data in the budget on 31/12/2004 using the value of the common monetary
unit at the end of 2004 will be as follow:
Year

2003

2004

Value of building

687500

687500

It is cleared from the data of the budget that there is no increase in the building calculation
during 2003 and 2004, as the value was determined by the homogeneous monetary unit, then
the data has the comparable character.
The comparability can also be provided for the current year data using the monetary unit in the
basis year, but it is better to modify the data according to the value of the monetary unit in the
current year with the prices level I the previous years, and such information will be much
appropriate for the purposes of decision making.
And to clarify the idea, we will give the following example, which is a budget taken and
modified as per the value of the monetary unit at the end of the current year, as the standard
number of the price level at the beginning of the year is 190 and at the end of the year is 250,
and it is assumed that the stock of the end of the period has been purchased when the standard
number is 200 and the land has been purchased when the standard number was 150, and at the
time of issuing the capital shares the standard number was 200.
The budget in 31/12/N
Unit: WN
Assets

HC
NMU

Transfer
coefficient

MHC

Deductions

HC
NMU

Transfer
coefficient

MHC
(WN
M)

Lands
Stock

30000
40000

250/150
250/200

50000
50000

Capital

80000

250/200

1000
00

Customers

20000

20000

Suppliers

10000

1000
0

Money

60000

60000

Loans

30000

3000
0

Hold Profits
30000

3000
0

30

Total

150000

180000

Total

150000

1800
00

It is noted on the budget that:

The monetary calculations, customers, suppliers and loans are not modified as they are
monetary units and of determined value, regardless of the change in the general level of prices.
First: The method of modifying the accounting data of the monetary
elements as per the modified historical cost
We have noted in the previous requirement that the modification is limited in the
nontraditional elements in addition to the capital shares for the purpose of giving the
accounting information the comparability property and to preserve the cash capital as
mentioned above. And it is necessary to distinguish between the cash and non cash elements
when modifying the data according to the modified historical cost principle, as the
modification of the cash element will result in a different effect.
In spite of that the cash elements shown in the budget are not in need for modification
according to the changes in the general level of prices as their nature is considered as current
cash units, but these elements can cause profits or losses for the economic unit in the
purchasing power during the change periods in the general level of prices. The firm may make
profit or losses according to the net of its monetary position which is determined by finding
the difference between the cash assets and cash liabilities. Therefore, achieving net profits or
net losses by the economic unit is based on the negativity or positivity of the monetary units,
and they will be positive when the monetary assets are more, and negative in case of vice
versa.
Second: Advantages and disadvantages on historical cost principle
using fixed monetary unit:
Advantages of historical cost using homogeneous value cash unit:
Advantages can be summarized as follow18:
Redrafting the financial statements using a unit of homogeneous purchasing power provides
more appropriate information for the decision makers as it shows the inflation impact whether
on the operations or the financial positions.
This method helps the economic unit management to evaluate its monetary policies as it
discloses the profits and losses on the monetary elements.
This principle provides the comparability property of the accounting information whether on
the economic unit to compare the past with the present or on the economic units working in
one economic field.
Wasfi Abdulfatah Abu Al Makarim , Previous reference 354 18

31

The modified information19 can be based on, as they are achievable because the standard
number used in modification can be prepared by neutral specialized governmental authorities.
Disadvantages of historical cost using homogeneous monetary unit20:
In many cases the cost of preparing the additional financial statements more than the benefits
of the economic unit.
The profits in the purchasing power cannot be considered as a real funding source.
The additional information are not appropriate with the experiences and understanding of the
decision makers.
It depends on the historical cost basis when measuring the accounting evaluation causing
failure in accounting disclosure.
Using such method may cause inaccurate results as the economic units are affected by
inflation related to the assets used not the general inflation.
Taking this method to the profits and losses in the monetary assets into account may be
misleading in case of not making such profits or losses.

Section III: The role of monetary and financial policies in

fighting the inflation:
The countries use the financial and monetary policies to ensure the economic stability which
means that to ensure a high rate of economic growth in light of the prices stability and the
complete allocation of production elements

Part I: financial policy

First: Financial Policy definition
The financial policy is a group of rules, procedures and decisions taken by the government in
any country to achieve a group of objectives agreed during a specific period of time.
It can be defined also as the program designed by the country and executed using the source
of public revenues and the agreement programs to create intended effect and to avoid
unintended effect on all variables of economic, social and political activity to achieve the
objectives of society and policy in its advanced concept, and using all tools to achieve the
general economic objectives of the country.

Second: Types of financial policies21

Wasfi Abdulfatah Abu Al Makarim , Previous reference, 370 19
Mahmood Al Saeed Mahjoob, Inflation in Arab world, 1986, page 280 20

32

1- The financial policy with expansionary direction, and such case the country can increase
the total spending size directly by increasing the size of spending, and indirectly by reducing
the tax size on the consumption to encourage the consumer spending and reducing the taxes on
the profits to encourage the investment spending.
2- The financial policy of deflationary direction: as the country reduces the total spending size
directly through reducing the spending and indirectly by increasing the taxes on consumption
to reduce the consumer spending.

Third: Tools of financial policy:

The financial policy uses three main tools, including the general expenditure and general
returns and budget balances.
Public expenditures: the public spending is the mirror reflects the activity of the
-1
country in the reality of the economic life. Therefore, the spending can be defined as
the total spent by the country including all expenses of various authorities in order to
.get the required resources to perform the services meeting the public needs
The expenditure has three elements which are the cash amount, the authority of spending and
the objective of meeting the requirements. The general expenditures are divided into many
sections based on specific criteria.

a- According to the direct effect on the national production

criteria:
The general expenditures according to this criteria include
1- the real expenditures: which lead to the direct increase in the national production, so
it is called the productive expenditure.
2- Manufacturing expenses: which are used by individuals, they do not lead to
the consumption of state resources, but they lead to transferring the purchasing power from the
public sector to the private sector, These expenditures are divided into: transformative social
expenditure, manufacturing expenses, expenses of the transformative economic financial.

b- According to the standard of covering the expenditure with

loan or the monetary issuance
Regular expenses: which do not make increase in funds, in other words, do not generate
income.
Extraordinary expenses: are those that generate income, which lead to increase the funds to
increase the financial amounts and increasing the personal services.

c- According to the functions performed by the State:

Haiah Ismail, Lectures in general finance, not published, Mohammad Khudair University, 2004/2005, page 21
112

33

Administrative classification: The expenditures are divided according to the

-1

.administrative boards regardless of the activity type of such board

Functional classification: It divides the general expenditures according to the functions

-2

.performed by the state

Public revenues : The amounts received by the state by sovereign or through its
properties or external resources, by loans, whether internal or external loans or through

-3

.22the inflating monetary issuance

:The revenues are divided into

-2

.Ordinary revenues: taxes, fees and state property revenues

-1

Non ordinary revenues, such as the general or public loans and the monetary issuance.
The public budget is a financial board organized in advance of the methods used to get
the public revenues and achieving the public spending required to meet the needs of
the public during a specific period of time. The budget is a tool to guide the potentials
to achieve specific objectives related to the country activity. As the country can play
its role in the life of the society during the next period which is usually one year, it
shall evaluate or estimate the expenses required to perform all activities, and to
estimate the revenues required to cover such expenses, and in such way it can meet the

-2

.expenses estimations with the revenues estimations for the next financial year
The effectiveness of the financial policy tools: The financial policy tools within the general
economic policy and the financial policy tools are the distribution of taxes and the distribution
of spending and the way of dealing with the public debts or the extra amounts.

Taxes

-3

All types of taxes such as income taxes, company taxes and the indirect taxes as well
as the custom fees imposed on the goods and services, whether being local or imported
from outside. As the country imposes a tax to achieve a specific objective serving the
economic policy of the country. As the country impose on specific goods for protecting

Al Jilfah : http://www.djelfa.info/vb/showthread.php?t=94378 22

34

a national industry or redistributing the national income or the country may intend to
.affect on its revenues of the imported goods serving its public economic policy
For example, when the state reduces the taxes for the low income people, it helps them
to increase their consumption or their consuming expenditures with the same level
reduces, but if it increases the taxes on the high income people, that will not affect their
high consumption, but it will affect their savings without any change in their
.consuming expenditures and being kept at the same level
Tax controlling: The idea of tax controlling controls the most important items of taxing
theory as a part of the public financing policies in controlling the factors of public
expenditure. And as one of variables used in associated with the budget policy in
controlling the inflation and recession, to make tax controlling policy forming a major
pillar of budget policy pillars in facing the economic fluctuations and controlling the
inflationary pressures movements in the national economic to achieve the stability and

-1

.balanced growth in the developing economies

:Government spending

-2

The size of the government spending and its distribution on the various activities
within the state have an effect on such activities and the effect on a certain activity will
.affect other activities associated with it
The total spending may be fixed namely without increase or decrease, but
redistributing it on the economic activity may have major impact, as for example, the
spending can be reduced on the roads and constructions and increased in the education
activity for example. Therefore, the distribution of spending has a major role and it
may be in increasing the spending on a specific activity at the account of other activity
promoting the economy. Another example, the education spending can be reduced and
the investment activities spending and be increased to allocate the unemployment.
Therefore, the state of not raising the total spending, the spending on a specific activity
shall be at the account of other activity. Such policy shall be designed according to the
.requirements and plans of the country

Government debt the policy of public loans

Public debt and the amount of growth and how to obtain it are important in terms of
government fiscal policy is affecting the general economic situation in the country, as

35

-3

he at the same time in the event of a surplus, the size as well as the amount of growth
and how to exploit its impact on economic activities in the state

Fourth: Advantages of financial policy:

1-It controls the inflation phenomena because of the effective tools.
2-It ensures the stability and economic balance by affecting the actual demand levels and
balancing it with the achieved labor size.
3- The financial policy practices its work through the government spending by controlling its
structure and size and also through the individual spending of persons and projects.
4-It has an important role in determining the level of economic and social welfare in the
country by providing the citizens with their requirements of various services.
5-Verifying the national income resources by verifying the investment fields of achieved
financial surpluses and not depending on one source as a base of national income as seen in
the oil countries.

Fifth: Disadvantages of financial policy:

Disadvantages of financial policy:
1-The limited effectiveness of the financial policy.
2-Time gaps, including three gaps in this policy:
a-Perception gap: the period between the need of work and meeting such need.
b-Achievement gap: The period between realizing the need of work and the actual change time
in the policy.
c- Response gap: The period between the actual change in policy and the time in which the
new policy affects the economy actually. 23

Part II: the monetary policy

First: Monetary Policy
Monetary policy based on the relationship between interest rates in an economy, and this is the
price that can be borrowed money, and the total supply of money. Monetary policy uses a
variety of tools to control one or both of these, to influence outcomes, such as inflation and
economic growth and exchange rates with other currencies. Where the currency under a
monopoly of issuance, or when there is a system of regulations issuing currency through banks
that are related to the Central Bank and the monetary authority has the ability to change the
money supply and thus influence the interest rate (to achieve policy goals)
Second: Types of Monetary Policy
Mishmish Najah, the effectiveness of the financial monetary policy in treating the inflation, 2004:1980 page 23
112

36

We can distinguish between two types of monetary policies:

AExpansionary monetary policy
BContractionary Monetary Policy
a- Contractionary monetary policy: it aims to treat the inflation state faced by the
economy of a certain country, and it reduces the creation of monetary tools.
Thus, the goal of monetary policy towards inflation is to reduce the creation of monetary
instruments which reduce the creation of money and reduce the money supply and thus the
reduction of spending on individuals and institutions buy goods and services.
Some argue that any monetary policy a success is not rushing to bring inflation in the stage
and then cured, but monetary policy is balanced is working to maintain the rate of increase in
fixed money supply growth because that is investigating the stability of the price level, as the
money supply is specified main for each of the general price level and the level of gross
national product and employment, as well as employment.
b- Expansionary monetary policy: It aims to treat the recession or deflation state faced by
the economy, and in such cases the central bank increases the monetary supply and increases
the demand on the goods and services.
This is because increasing the amount of money would increase the incomes of individuals,
institutions, and thus stimulate demand for consumer goods and investment goods both

Third: Objectives of monetary policy

The main objectives of monetary policy in:
1. Achieve stability in prices
And one of the most important objectives of monetary policy, where each state is seeking to
avoid and control inflation at the same time treat the recession and economic stagnation
2. Monetary stability and economic
It is necessary that I seek monetary policy to adjust the money supply with the level of
economic activity, ie, control the amount of money in line with the level of economic activity
and thus avoid currency crises and economic development leading to economic stability as the
monetary stability that would bring economic stability
3. Contribute to the achievement of balance in the balance of payments and improve the value
of the currency
Can contribute to monetary policy in the reform and deficit reduction in the balance of
payments by the central bank raised the price of the rediscount leads in turn to the commercial
banks to raise interest rates on loans, thereby reducing credit and domestic demand for goods
and services, thereby reducing the severity of high domestic prices and thus promote exports
and reduce imports.

37

On the other hand result in higher interest rates internally to the demand of foreign customers
to deposit their money in banks and thus the national entry of more capital to the State, which
helps to reduce the deficit in the balance of payments.
Thus, we find that reducing the size of fiat money in the national economy by raising interest
rates play a major role in reducing the deficit in the balance of payments.
4. Contribute to achieving the goal of full employment
And in common with fiscal policy and is based on the increase of money supply in case of
unemployment and recession to increase the effective demand in increasing investment and
employment in the national economy.
5. Counter-cyclical
Among the main objectives of the goal of treatment of cyclical fluctuations experienced by the
national economy of inflation and deflation and mitigation so as not to be affected by the
national economy to shocks violent reflect negatively on the level of balance of general
economic (production, employment and income) and other words to maintain monetary
stability through the tie between savings and investment.

Fourth: Instruments of monetary policy

The monetary policy is divided into two parts and the expansion of monetary policy
contractionary monetary policy
:Expansionary monetary policy instruments

-1

a- Cut the discount rate, an indicator of the desire of the Central Bank in the promotion
of bank credit to commercial banks increased their borrowing from the central bank,
or some re-discount bonds, the central bank to return them and get the cash.
Interest rate cut: a reduction of the interest rate on commercial bank loans and credit
-b
facilities to individuals, which occur as a result of the central bank to reduce the discount rate
on commercial banks. Which motivates individuals to borrow and to obtain liquidity in
?banks

Reduce the percentage of legal reserves that commercial banks had to keep them
from each deposit

-c

Purchase of open market operations: the central bank to enter the open market and

-d

.buy government bonds from commercial banks to increase liquidity in it

Deflationary monetary policy

38

-2

It is the opposite to the expansionary monetary policies and its objective is to reduce
.the money supply in the national economy

First: Tools of deflationary monetary policy: Using the monetary policies tools in the
opposite direction of using them in the expansionary monetary policies and their
.procedures
1234-

The increase of deduction rate

The increase of interest rate
The increase of legal reserve rate
The entrance of the central bank in the open market as a seller24.

Fifth: advantages and disadvantages of monetary policy

1- Disadvantages of monetary policies:
a-The difficulty of applying them at the appropriate time
b-The difficulty of choosing the most effective procedures.
c-The determination of the quantitative size of each procedure.
2-Advantages of monetary policies:
a-The clear tools and speed determination and execution of them.
b-The fast reactions of them.

Conclusion:

http://www.tadawul.net/forum/showthread.php?t=112 24

39

Conclude at the end of this chapter that the accounting methods to address the impact of
inflation, which has been presented and despite the different technique adopted by each
method, it was not new and added to the accounting principles some of the amendments, as
taken into account the changes in the general level of prices and made the elements of
financial statements evaluate a new way, according to all method of trying to give more honest
because it excludes the impact of inflation.
However, these methods did not change the accounting principles generally accepted in most
of them had graduated from the principle and the basis of historical cost, this leads us to say
that the field is still open but accountants and researchers in this area to provide new access to
the best in accounting for inflation.
Each style of the previous methods had disadvantages that made the results reached
accounting remains a relative accuracy, use and reliability in decision-making, if there is no
way of fully integrated to express accurately and objectively the impact of price changes on
the elements of financial statements and brings us to the desired results, although all working
methods to maintain the capital of the monetary and economic unity of the economy
Through this chapter we can say that inflation is the phenomenon of a measurable quantity and
valuation and subject to the amount of special techniques depends largely on the price indices,
especially the index of consumer prices. Inflation is significantly associated with the level of
prices and volatility, as linked to the size of the money supply available and the size of
demand and supply totals. And could also be argued that the financial statements of great
importance to express the fact the organization. And We have shown how inflation distorts the
accounting data and affect the sincerity of the results of the financial statements. Valoslob
most effective to address the impact of inflation is the current cost method with the use of a
homogeneous unit cash value.
And it can be said that the effects of inflation should accountants be addressed, and
economists to find effective solutions, and must continue to work until they reach the best
solutions and the most benefit of the institution and the national economy and also for the
owners to maintain the economic capital and cash the best way.
In the end, this cannot be considered as Inquiry Find reliable, but rather to look more into this
phenomenon even get better results give credibility to the financial statements and additional
private financial statements upon which to make decisions regarding future investment and
future of the institution.

40

Chapter III: The relationship between inflation

and Arab Spring Events:

Section I: inflation rates in Arab spring countries

Section II: The reasons of the increased inflation
rates in Arab spring countries

41

Chapter
III:
The
relationship
between
inflation and the Arab Spring Events:
The Arab economy was suffering mainly from the effects of the global financial crisis which
emerged in early 2008 and continued in 2009 and 2010, then the Arab spring revolutions came
in some countries in the region to increase the bad circumstances,25 as the production stopped
in some countries and reduced in other countries causing the increase f prices and the
unemployment level and poverty. The question remains: Is the inflation is the one affected the
Arab revolutions? Or the Arab revolutions is the one affected the increase of inflation rates?
In this chapter we will discuss the inflation rates in the Arab spring countries during the last
years and the most important reasons of the vibration in the inflation rates in such countries

Section 1: inflation rates in Arab spring countries

The following table shows the inflation rates in some countries of revolutions during the last
years before and during the revolutions:

Inflation rate
Country
2009

2010

2011

Egypt

11,7

11,6

11,8

Yemen

3,7

21,1

31

Tunisia

3,5

4,4

Syria

2,8

4,4

Bahrain

2,8

http://www.january-25.org/post.aspx?k=57136 25

42

As seen in the previous table, there are vibrations in the inflation rates in the Arab countries
especially after the revolutions starting with Tunisia 2010 followed by other countries. The
inflation rates were increasing causing the fears in such countries.

Section 2: The reasons of the increased inflation rates

in Arab spring countries
1-

The increase and decrease of goods prices.

How the goods prices affect the inflation?

The good prices affect the inflation in three methods:
(1)The direct impact: the direct impact extend depends on the importance of such good used in
calculating the inflation rate in the consumer prices.
(2)The indirect impact: the increased prices of goods may affect the prices of goods and
services through the economic channels generally. This may happen as a result of the increase
of production cost or the increase of wages to match the increase of prices in the life.
(3)The impacts on demand: the changes in goods prices may have various impacts on
inflation, and this depends on the state of the country, regarding being exporting or importing
country. If the goods prices increase, the importers of such goods will have a greater economic
growth, as the increase shall strengthen the demand, and as a result will increase the inflation
pressures, On the other hand, will see a decline in their incomes the align importers and in
demand, and consequently a decline in inflation.
The high prices are not by the price of specific good but the prices of the main materials such
as the food materials, drinks, vegetables and fruits, and also the increase of housing, dresses
and footwear prices contributes in the support of the inflation rates increase.
Here are the top food prices during 2011, the year of revolutions of the Arab
Country

Egypt

13,2%

Yemen

1,04%

Syria

43

Average food price 2011

8%

Tunisia

3,9%

Bahrain

4,5%

The food prices have increased in these countries in record numbers exceeded the expectations
of experts. And because the Arab countries import a lot, they snaked in the case of food
inflation when prices rose. For example, in Egypt, in which the food support takes 4% of its
budget, the food in 2011 became 13.2, because of the continuous political turmoil of the
country deteriorating the economic situation due to the escape of some investments without
alternatives and the stop of a number of local factories reflected negatively in the local market
states causing the imbalances between the supply and domestic demand.26
The housing prices increased in Egypt as well as the oil prices, as the price of a barrel became
98.69.27
In Yemen, it is clear that during the political crisis in Yemen, the currency exchange rates of
Yemen currency before the Dollar became less, and the Riyal lost 20% of its value against the
dollar to be 241 Riyals for one dollar. This resulted in the unprecedented increase in the goods
prices and main services with the percentages of about 30% in urban areas and 60% in rural
areas. The fuel prices also by 500 % after the cessation of oil production, and the oil
derivatives prices increased and as a result the transportation and food goods prices increased
to be 13.2, as the demand decreased due to the high increase in prices and because of the loss
of the purchasing power for the consumer.28
In Syria, the removal of subsidies on diesel fuel has resulted in the increasing of the trading
and industrial cost of all agricultural and industrial goods.29
The inflation in Syria cannot be measured because of the increase in the prices of goods and
foods materials as it relates to many factors such as the monetary block and flow as well as
other factors, as the increase of the monetary block exceeding 30the supplied goods and
See alqabas, independent political newspaper, Kuwait, 16/11/2011 http://www.alqabas.com.kw/Article.aspx? 26
id=685256&date=16032011
Reem Abdel Hamid, worsening food problems after Arab spring, 17 March 2012 27
http://mamlaktelchocolate.gogoo.us/t15105-topic

28See angle Arabic, Saturday 14 January 2012

/https://www.zawya.com/arabic/story.cfm/sidZAWYA20120116101548

http://www.aawsat.com/details.asp?section=6&article=658384&issueno=12097 29

44

services in the local market will cause the increase in prices as the most important symptoms
of inflation.
In Tunisia, the food goods prices increased after the revolution with high rates because of the
absence of the economic control by the country and the absence of the superseded goods such
as sugar and oil as well as the monopoly of goods to smuggled to Libya and to be sold there in
double prices. The cause of the high prices of goods in Tunisia may be the lack of balance
between the demand and supply as the decline in supply and the high prices are the most
important causes of inflation31

2-The decline of production

The decline of production is the second important factor causing the increase of inflation in
the productive countries. The production is considered as a main circle in exchanging the main
and necessary goods and being available all the time. And after the revolutions of the Arab
Countries, the production in these countries has been declined.32
The economic growth rate has declined during 2010/2011 compared with the previous years,
as the RDP at market price became 893.9 billion while it was expected to be 901 billion. The
real growth average became about 1.8% during 2010/2011 compared to 5.1% during the
previous years. The decline of growth average cause is the irregularity of production wheel
because of January revolution and the revolutions in the Arab countries, affecting the trading
movement in such countries and the disorder the Arab capital markets especially the Gulf
ones, in addition to the growing problem of debts in EU countries, and the high world prices.
In Tunisia, as a result of revolutions in the country, the production level decreased to
unexpected low levels and the revolutions caused the disrupt of the activities of most of the
sensitive productive units.

Adel Al Saeed, the political crisis of Yemen, Middle East, Arab International Magazine, 14 June 2011. 30
http://www.aawsat.com/details.asp?section=6&article=626435&issueno=11886

http://syria-news.com/readnews.php?sy_seq=139920 31
Mubasher info, Egypt decline , 12 positions in the international competition 2012 32
http://www.mubasher.info/portal/CASE/getDetailsStory.html?goToHomePageParam=true&storyId=2047799

45

As a result of that, the decline of the productive indicator of mining sector during the first nine
months of this year, from 94.1 points to 39.1 points during the same period of 2010, while the
productivity of power sector declined from 127.8 to 120.6 points.333435
The justification for this decline is also justified by Mustafa Bouziane that the drop in
productivity was due to a protest within the institutions hindering significantly device
production figures, index of industrial production (GDP) increased by 5.2 percent during the
first 9 months of (2010/2011) compared to 1.8 percent during the same period (2009 / 2010)
also reduced the total index of 7.132 points in the end of September 2010 to 4.129 points in
the end of September 2011. It was about 120 foreign institution card operation is estimated at
40 thousand workers shut their doors for good because of the Cascade protest movements and
social demands, which he considered unjust and "illegitimate and illegal."
We add that Tunisia is planning to explore about 24 new sites this year, through investments
in the range of 2.6 billion dinars (1.8 billion dollars), compared with 1.4 billion dinars (965
million dollars) last year pumped36.
He added that Tunisia is planning to explore about 24 new sites this year, through investments
in the range of 2.6 billion dinars (1.8 billion dollars), compared with 1.4 billion dinars (965
million dollars) last year pumped.
In Yemen, the real GDP has declined during 2011 from 15% to 20%. The agriculture and
fishing sector growth declined during the past year about 10% and the industry sector about
18.4% due to the absence of the oil derivatives and electricity services. The service sector
declined about 17.9% and there was almost complete stop in the construction and building
sector. The tourism and hotels sector stopped37.
Among the most prominent economic consequences as a result of the crisis of political unrest
in Yemen "Disable the path of economic and social development in the country by diverting
public resources allocated for the maintenance of investment to current expenditure and stop
working in public investment, and increased concerns among investors in the private sector,
and find some kind of caution in the private sector Importers of them, particularly in the
import of goods and products from foreign markets and thus the loss of much of the revenue
potential of the private sector
The declie of production indicators in Tunisia to the low levels havent been witnesses before, 26 December 2011 33
.http://www.24h.tn

Al Jazirah net, economy and business, the decline of oil production in Tunisia 34
http://www.aljazeera.net/ebusiness/pages/f212f775-065d-46a8-a29a-c71891689ccb

Al Jazirah net, economy and business, previous references 35

See Aljazeera.NET, economy & business, decreased production of hydrocarbons, 36
http://www.aljazeera.net/ebusiness/pages/f212f775-065d-46a8-a29a-c71891689ccb Tunisia
Newzment, 08/02/2012, planning explores the decline of DPG in Yemen by 14.5% 37

46

So it has been observed an increase in the percentage gap in domestic demand overall
negative of 4.3 per cent in 2010 to 5.6 percent 2011, and the financing gap of 66 per cent to 90
per cent, and these ratios reflect the high rate of adoption of the national economy to the
outside world both for the provision of goods and essential services or to finance
development.38
In Syria, the GDP growth decreased 3.4% during 2011, after the growth of 3.2% in 2010.The
deposits in Syrian banks declined 30% to 346.4 billion pounds until the end of the past year 39.
The local production of oil decreased by ranging from 30% to 35% as a result of the sanctions
imposed on Syria, and it faces severe difficulty in exporting, and the European companies
suspended their works because of the sanction imposed on Syria40.

:Demand and supply factors

-3
First: Factors cause the total demand to increase: These factors
can be summarized in the following units:
1-The increase of the consumer and investment expenditure: The theory of balance relating to
the total supply and demand and prices system assume that the conjunction of defect in the
balance by increasing the total expenditure above the complete operation level, forming the
increase in the total expenditure met by the similar increase in the products and the featured
items, assuming reaching the complete operation size, then the total expenditure size is the
critical as a reason of inflation reasons.
2-The expansion in opening credits by banks: The expansion of banks in giving credits shall
be considered as one important factor in providing the markets with large amounts of cash.
The country may want to activate the general works and increase the production, then it
encourages the banks to open the credit operations with their common means such as reducing
the interest rate. Then the businessmen come more to investment, and this in turn cause the
increase of prices predicting the inflation phenomena, the first reason of it was the credits
opened by the banks for the producers.
3-The budget deficit: This method is easy and resorted by the governments and countries to
finance their productive projects and operating the productive elements broken the society.
And the budget deficit does not happen by chance as much as countries deliberately produce,
Taher hozam, a crowd Net, economic, Yemeni government complaining Traha inflation and domestic 38
output. Sana'a,Saturday, March 31, 2012http://hshd.net/news14355.html
,
See na'am, Syria's economy is heading for a dark tunnel andreeling system 39
See Syrian oil production fell by 30% due to the political situation, http://www.an3m1.com/category-economy- 40
business/entry
http://www.menafn.com/arabic/qn_news_story_s.asp?storyid=1093467015 37,

47

to finance the funding schemes, the Government intends to do, resorting to provide the
necessary expenses necessary in many ways. The budget deficit is intended to increase public
expenditure on general revenues to the extent that the government borrows from the central
bank. And that the budget deficit is intended way resorted by the government while being
aware of the bad effects, and that such borrowing in order to revive economic activity, and the
provision of works and implementation of the vogue of civilian and military programs in this
case by the level of full employment. As if all elements of production operated, the overhead
in this case does not find a port to be sound and in this case the cause of rising prices, which
were a result of the imbalance between the flood of money in circulation goal of increasing
public spending, and supply the commodity.
4-Funding the military operations: the wars are considered one of the established reasons of
inflation as punctuated by large public expenses. In such case, if the country sees that its
financial capacity has been weakened, it resorts to the nearest resources which is the issuance
mechanism to provide it with the required money.
5-The rise in wage rates: the direct and effective reason in the high wage rates and living
expenses lies in the heart of the capitalism economic systems allowing the free trade union
and give it the productivity costs right reducing the profits rates at full operation level, and
such problem can be overcome by proposing the following solutions by the government:
-Agreement with the labor unions to support the demand of increasing the wages for specific
period of time.
-Agreement with the labor unions to ask for the increase of wages relatively with the increase
in productivity to keep the relative stability of prices.
6-Expectations and Mental conditions: This may be because the rise in aggregate demand
effective to psychological factors and an estimated more than economic factors, is often of
psychiatric cases to individuals significant impact on the emergence of certain phenomena
inflationary Perhaps the best cases where the circumstances of the psychological effects
effective are the periods of war, where the conditions are ripe to accept rumors and predictions
of higher prices in the future that increases the activity and recovery, and in the investment
sector consequent to predict the rise in prices, the feet of producers to recruit assets current for
higher rates of profit, and so sufficiently intense to capital investment, which increases the unit
aggregate demand effective and vice versa when predicting lower prices.

Second: The factors causing the low total supply:

1-Achieving the perfect usage phase: the national economy my reach the complete usage and
operation phase for all productive elements, and the productive board will be unable to meet
the demand requirements.
2-Inadequate production: the productive board may be inflexible and inadequate in providing
the market with the necessary requirements of high demand.
3-Shortage of capital: the inflexibility of the productive board may be because of the shortage
of the capital used at the time of the full operation level, making distance between the money
supply and the goods supply, and the emergence of inflation as an indicator of having the
defect of equilibrium in the domestic markets reflecting the shortage in the productive supply.

48

Conclusion
By the help of Allah we have completed the study of inflation impact on the financial
statements and the relationship with the Arab Spring events. The high inflation caused many
effects on the financial statements, as the financial data and information shown in these
statements changes due to the high inflation rates, but the methods taken to treat that
contributed in facing such phenomena. The researchers conducted analysis study for inflation
in the Arab Spring countries during the revolutions year. The high rates of inflation are
upward since the beginning of the Arab revolutions, and then began to fall in some countries
after the events of revolutions, and raised in the majority of countries after the revolutions. The
researchers concluded that the high inflation rates in the Arab spring countries before the
revolutions are the major factor which caused the revolutions because of the economic states
and the high prices. And after the revolutions, they caused the more high inflation rates due to
the deteriorating of the political situation, causing the decline of production and the increase of
demand and the bad economic states. So it is concluded that the inflation was the cause of
such events of Arab Spring and the Arab Spring events caused the increase of high inflation
rates in the form exceeded the expectations.

49

Study recommendations
The researchers recommend the following:
The attempt to detect the mysterious role played by the business firms in increasing the

-1

.inflation rates and providing the methods enabling the researchers to discover that
.The attempt to find the methods causing the balance of inflation rates in the future
To search for the methods reduce the continuous increase in the inflation rates in the Arab
Spring Countries

50

-2

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