Inflation Accounting Australia 2025: What Businesses Need to Know

Australia’s economic forecast for 2025 is marked by persistent inflationary pressures, prompting business leaders and accountants alike to revisit how they report, analyse, and plan for financial performance. Inflation accounting—a practice designed to adjust financial statements for the effects of changing price levels—is becoming critical for Australian businesses seeking to present a fair and accurate view of their financial health.

Why Inflation Accounting Matters in 2025

Inflation in Australia has remained above the Reserve Bank of Australia’s (RBA) target range, with the Consumer Price Index (CPI) projected to hover around 3.2% in early 2025. While this is a moderation from the 2022-2023 highs, it still erodes the purchasing power of money and distorts traditional financial statements that rely on historical costs.

• Asset Values: Fixed assets purchased years ago may be significantly undervalued on the books, giving a misleading sense of profitability and financial strength.

• Profitability Metrics: Revenues and expenses recorded at different points in time become difficult to compare, clouding true business performance.

• Investor Confidence: Stakeholders may misinterpret reported profits, not realising they’re inflated by outdated cost bases.

For business owners, investors, and even employees negotiating wage increases, understanding the real value behind the numbers is more important than ever.

Methods of Inflation Accounting Used in Australia

There are two primary approaches to inflation accounting:

• Current Purchasing Power (CPP) Method: This method adjusts all items in the financial statements using a general price index, such as the CPI. The goal is to restate figures in terms of the current purchasing power of money.

• Current Cost Accounting (CCA) Method: Instead of using a broad index, CCA revalues assets and expenses to reflect their current replacement costs. This is particularly relevant for industries with significant physical assets—think agriculture, manufacturing, or transport.

Australian accounting standards (AASB) have not mandated inflation accounting for all companies, but with inflation sticking around, large corporates and ASX-listed companies are increasingly disclosing the impact of inflation in their financial statements and investor updates. In 2025, the Australian Accounting Standards Board is consulting on updated guidance, with many experts predicting more robust disclosure requirements for inflation impacts—especially for businesses with international operations or long-term contracts.

Real-World Examples: Inflation’s Impact on Business Reporting

Let’s look at how inflation accounting is playing out in the Australian business landscape:

• Retail & FMCG: Supermarket giants like Woolworths and Coles are using inflation-adjusted reporting to explain margin pressures and inventory valuation swings. Their 2024-2025 financial reports highlight the difference between nominal and real profit growth.

• Construction: Builders and property developers are facing rapid increases in material and labour costs. Companies reporting under CCA are more accurately reflecting the true cost of ongoing projects, helping to prevent undercapitalisation and future cashflow shocks.

• Manufacturing: Firms with large holdings of plant and equipment are updating asset values to reflect higher replacement costs, ensuring that depreciation and cost-of-sales calculations remain meaningful for management and investors.

These changes are not just academic—they affect everything from bank covenants to executive bonuses and tax planning.

Practical Steps for Adopting Inflation Accounting

For businesses considering a move to inflation-adjusted reporting in 2025, here’s what to prioritise:

• Update Accounting Systems: Invest in software capable of handling indexation and revaluations, or work with an accountant experienced in inflation accounting.

• Educate Stakeholders: Ensure management, investors, and staff understand why reported figures might shift and how to interpret them.

• Review Contracts: Renegotiate long-term supply or sales agreements to include inflation-linked adjustments.

• Monitor Regulatory Developments: Stay alert for new AASB rules, as 2025 may bring more prescriptive requirements for inflation disclosures, particularly for listed entities.

Adopting inflation accounting isn’t just about compliance—it’s about transparency, risk management, and building trust in a volatile market.

The Bottom Line: Preparing for a More Transparent Future

Inflation accounting is no longer a theoretical exercise for Australian businesses. As inflation continues to shape the economic environment in 2025, leaders who embrace inflation-adjusted reporting will be better positioned to make informed decisions, maintain investor confidence, and chart a stable path forward.