Help me please. Can’t get it.
On p. 214 there is an example 5. It is said that the increase in 1 % in inflation causes obligation to increase by 106 and expense to increase by 8.
And they calculate the new debt to equity with the following adj. =(total liabilities+106)/(equity -106).
The question is why (equity -106)? I don’t understand( Why not (equity -increased expense(8))? assume no taxes.
There are also similar adj. in example 6, p. 218.
I don’t have the books right now, but considering that A = L+ E, if you increase inflation rate you benefits obligation will increase. Where will you take the money to fund the obligation? From the equity. The total amount of assets will not change.
Regarding the increased expense of 8, it depends on whether you are at the begining or the end of the period. Can’t comment on it without the book.
what will be the entry then cr liability, dt equity ? but what part of equity?
and if there is a tax - 30% what will be?
I know may be it is all simple, but i have problems ((
I think i got it. Change in inflation rate is a change in assumption, that results in actuarial loss. Which can be reported either in income or other comprehensive income. But as there assumed to be no tax impact - we decrease the equity by the same amount as we increase liability, right ??
But i still would like to know the effect of taxes. Can somebody explain please. Thank you.