Financial effects of different levels of inflation on the profits of all listed commercial banks in Thailand

Abstract

Scope and Method of Study: A study was designed to determine the effects of different levels of inflation on three major financial aspects of all nine listed commercial banks in Thailand in 1978. Those three investigated aspects are: (1) reported net-of-tax profits; (2) the incidence of bank's income tax; and (3) dividend cover. The basic data for this analysis were obtained from the published reports of the 9 commercial banks listed on the Securities exchange of Thailand during the entire 1970 - 1978 period. To test the impacts of different levels of inflation, three years are selected. The year 1970 is selected for the year experienced low inflation rate, the year 1978 for a moderate rate of inflation and the year 1974 for a high inflation-rate year. The procedure used for the adjustment of net income followed essentially the ideas tentatively recommended by the AICPA in APB Statement No.3 and the ASSC in the Provisional Statement of Standard Accounting Practice No.7. Three major items (revenues and expenses from operations, depreciation, and monetary holding gains) involved in the adjustment procedure, by using the consumer price index as a basis for the rate of general price change.

Findings and Conclusions: Adjusted incomes of sampled banks tend to be less than nominal earnings, even if monetary gain are included; and that a substantial portion of adjusted profits in an inflationary period is the result of monetary holding gains. It is also clear that tax charges and dividend appropriations are sometimes not covered by adjusted incomes, even when monetary gains are included. Moreover, when there is covered, the proportions of profit taken in tax charges and distributions are generally far higher than is suggested by the conventional historic cost figures.