Question

Describe how the general price level adjusted (GPLA) model accounts for changes in the general purchasing power of the reporting currenct over time. what are the strengths and weaknesses of the GPLA model?

Answer 1

there are main concepts or methods that used in accountin in several countries and several organizations as well. Historical cost model and inflation djusted accounting models are most repurted of them. General price level adjusted (GPLA) model comes under the inflation djusted accounting models with current cost adjusted (CCA) model.

When an entity use GPLA model in accounting, it consider the changes in general puchasing power of reporting currency over time.

method:

as an example, company A which is situated in China is dealling with several countries like USA, UK, India and France. S they are dealing with several foreign currencies like US dollers Uk poumnd, Indian rupees, Euro and their own currency China Yen.

When they preparing the financial statements they can select an appropriate currency value which reflect the effect of inflation on their currency and what is their true purchasing power in the means of that currensy as following example

If company A need

Nominal value	Current Exchange rate	Value in US $
China yen 100 000	100	1000
Indian rupees 600 000	60	1000
UK pounds 9000	90	900
Euro 5000	50	100

Note: these exchange rates are taken as random values to explain

based current values they can build up convertion rates (GPLA convertion rates) for accounting purpose also can do as follow

item	nominal value	convertion factor	GPLA basis
equipment (vale)	100000 $	120/110	109091
vehicle (cost)	600000 $	120/110	654545

like that they can see their true purchasing power in selected currency by using this model. also they can compare the increment or decresed values over tine with exchange rates.

strengths and weaknesses of the GPLA model

strengths

- GPLA model represent the purchasin power of reported currency over time. so company can do better predictions and investment based on current situation

- GPLA model converts the nominal values of divers currencies into a constant purchasing power

weaknesses

- Inflation affect on different goods and services differemtlt.but this model takes it as an equal effect

- Model use ratios in conversion purpose which can consider as cride ratios

- This model is not significant to the entity based on their own policies