Financial Reporting Considerations: Inflation and Rising Interest Rates

As companies prepare for year-end financial reporting, it’s important to consider the implications of inflation and rising interest rates, which can affect financial reporting in many ways, as discussed below. Many of the financial reporting areas affected involve impairment or valuation analyses, which often hinge on discounted cash flow models. As a result of inflation and rising interest rates, developing estimates of future cash flows and related inputs (e.g., discount rates) may be more challenging than in prior periods. Management also should avoid over-relying on historical trends in these uncertain times.

Key financial reporting considerations discussed in this publication include:

• Inventory
• Financial Instruments, including trade receivables
• Impairment of non-financial assets
• Business combinations
• Hedging
• Debt
• Supplier finance program obligations
• Leases
• Revenue recognition and loss (onerous) contracts
• Employee benefits
• Share-based payments
• Taxes and realizability of deferred tax assets
• Government grants and assistance
• Risks and uncertainties
• Going concern
• Discount rates

While most of our discussion focuses on the measurement of various accounts in the financial statements, this publication also highlights the importance of good disclosures when preparing the financial statements in times of economic uncertainty and matters with respect to inflation and rising interest rates that may affect SEC filings.