AES Gener S.A. (formerly Chilgener S.A.) is a large provider of electric transmission services in Chile. The firm also provides electricity to selected regions in Argentina. Exhibit 7.17 presents the balance sheet for Gener on December 31, Year 2 and Year 3. Exhibit 7.18 presents the income statement for Gener for Year 2 and Year 3. Excerpts from the notes to its financial statements follow:
Summary of Significant Accounting Principles
General. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in Chile and with the regulations issued by the Chilean Superintendence of Securities and Insurance.
Price Level Restatement. These consolidated financial statements have been restated through the application of an adjustment based on the change in the consumer price index in order to reflect the effect of fluctuations in the purchasing power of the Chilean peso. Restatements have been based on the official index published by the Chilean National Institute of Statistics which amounts to a 2.8 percent increase for Year 2 and a 1.1 percent increase for Year 3. Moreover, income and expenses were also restated so as to express them at year-end purchasing power. The Year 2 financial statements and their relevant notes have been adjusted (without being reflected in the accounting records) by 1.1 percent with the only purpose of allowing their comparison with the Year 3 financial statements in constant pesos of December 31, Year 3.
Inventories. Inventories consist of raw materials, parts and accessories valued at their corresponding acquisition cost. The values shown do not exceed their estimated net realizable values and are reflected in income on the basis of weighted-average cost in accordance with generally accepted accounting principles.
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Fixed Assets. Fixed assets are valued at cost plus price-level restatement. The value of fixed assets was last adjusted 17 years before Year 3 in accordance with the regulations of the Chilean Superintendence of Securities and Insurance. Depreciation has been calculated on a straight-line basis on the adjusted value of assets, in accordance with their remaining useful life. Depreciation amounted to P50,070,542 for Year 2 and P45,980,590 for Year 3. It is included in operating costs and includes additional depreciation for technical reappraisal of fixed assets amounting to Pl,687,514 in Year 2 and Pl,312,755 in Year 3.
Bonds. Bonds payable are shown at their nominal year-end value plus accrued interest and price-level restatement.
Required
a. Does Gener's reporting most closely resemble (1) acquisition cost/constant peso reporting, (2) current cost/nominal peso reporting, or (3) current cost/constant peso reporting? Explain.
b. Why does Gener restate the financial statements to reflect the changes in the pur¬chasing power of the Chilean peso when the consumer price indices for Year 3 and Year 2 (2.8 percent increase for Year 2 and a 1.1 percent increase for Year 3) increased at relatively low levels?

c. Interpret the last sentence in the note on price level restatement.
d. What is the likely reason that Gener reported a price level restatement loss on its income statement for Year 2 and Year 3?
e. Assume that sales and price level changes occurred evenly during Year 2 and Year 3. Compute the nominal peso change in sales between Year 2 and Year 3.
f. Have the current replacement costs of Gener's fixed assets increased at a faster or slower rate than the general price level? Explain your reasoning. If you do not think that the disclosures permit an answer to this question, explain your reasoning.
g. Why does the amount in the Technical Revaluation of Fixed Assets account remain at P42,213,625 during Year 3 if the note on fixed assets indicates that Gener recognized depreciation on the revalued fixed-asset amount?

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EXHIBIT 7.17 AES Gener S.A Balance Sheet (amounts in millions of constant December 31, Year 3, Chilean pesos) Problem 7.17) December 31: Year 2 Year 3 Assets Cash Accounts Receivable Inventories Other Current Assets P 5,386,499 206,277,965 8,983,858 16,920,882 P 237,569,204 P 748,890,960 42,213,625 33,197,862 13,896,635 9,662,300 Total Current Assets Fixed Assets, at cost Technical Revaluation of Fixed Assets 42,213,625 Accumulated Depreciation.. P 383,505,18 Other Assets P 997,859.522 P 772,719 ,898 P1,460,980,893 P1,393,794,290 Total Assets … … Liabilities and Shareholders' Equity Accounts Payable 52,763,494 6,082,839 53,635,673 7.019,521 P 546,684,433 58,646,512 P 481,708,646 33,388,399 P 515,097,045 P 690,150,712 42,213,625 76,239,547 P 808,603,884 Long-Term Debt Total Noncurrent Liabilities Paid-In Capital Technical Revaluation of Fixed Assets P 690,150,712 42,213,625 Retained Earnings.... 52,413.415 76239,547 Total Liabilities and Shareholders' Equity P1460,980,893 P1,393,794,290 EXHIBIT 7.18 AES Gener S.A Income Statement (amounts in millions of constant December 31, Year 3, Chilean pesos) Problem 7.17) December 31 Year 2 Year 3 P229,590,527 (191,239,032) 194,445,116) Operating Margin Selling and Administrative Expense P 35,145,411 9,955,170) (8,883,575) P 50,160,848 . P 40,205,678P 26,261836 P 33,412,263 31,454,883 3,705,245 (31,684,693) (35,381,913) P 20,199,229 118,593,310 1,513,011 (28,346,815) (88,737,247) Share of Profits of Investees Other Non-Operating Income Expenses Price Level Restatemen P 22,534,992 Non-Operating Income Income before Tax Income Tax . .P 1,089,542 P 48,796,828 4,881,635 5,719,770 P 35.575450 P53678-463