Impact of Inflation on the Financial Statements of Firms in South Korea

This chapter discusses the deleterious effects of inflation on the financial statements of firms, even in countries reporting low inflation rates. The first objective towards achieving this aim is presenting and describing the rationale underlying the Brazilian model for recognising inflation in financial statements, based upon identifying the gains and losses arising from monetary assets and liabilities. Brazil has experienced inflation for more than five decades; the Brazilian model is, therefore, considered the main mechanism for recognising the impact of inflationary effects in financial statements. Second, using the multiple case study methodology, this chapter aims to apply this Brazilian model to a set of firms located in a country with a low inflation rate, such as South Korea (14% inflation in the past decade). The results are consistent with previous studies that found that inflation can result in significant misstatements in financial statements even in an environment with low inflation rates. For instance, at an inflation rate of 2.3%, the Korean Air Lines Co. reported the difference between nominal earnings and real earnings as 192%. This study contributes not only to academic literature, but also to the preparers of financial information, investors, analysts, and accounting regulatory bodies by drawing their attention to the fact that even currently disclosed nominal financial statements may contain material misstatements.