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Highly Inflationary Economies

Highly Inflationary Economies. 10- 1. In highly inflationary economies, SFAS 52 mandates the use of the Temporal Method for translation. Why?. Disappearing Plant Problem If the Current Method were used, the US $ equivalent would be VERY small due to the rapidly increasing exchange rate.

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Highly Inflationary Economies

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  1. Highly Inflationary Economies 10-1 In highly inflationary economies, SFAS 52 mandates the use of the Temporal Method for translation. Why? Disappearing Plant Problem If the Current Method were used, the US $ equivalent would be VERY small due to the rapidly increasing exchange rate.

  2. Defining “Highly Inflationary Economy” 10-2 • Remember, SFAS 52 mandates use of the temporal method, with remeasurement gains or losses reported in income!!! • A “highly inflationary economy” is one having a cumulative three-year inflation exceeding 100% (With compounding, this is about 26% inflation per year for three straight years)

  3. Current Rate Method Example 10-3 • Duzy Co., is a wholly owned foreign sub of Maly Corporation. Duzy Co.’s transactions and financial statements are denominated in the local (functional) currency, the Pater (PT). • Using the following information, translate their statements into US $.

  4. Current Rate Method Example 10-4 • Duzy Co.’s common stock was issued in 1992 when the exchange rate was $1.00 = 1.20 PT. • Fixed assets were acquired in 1993 when the exchange rate was $1.00 = 1.10 PT. • As of Jan. 1, 2008, the R/E balance was translated at $350,000. • Inventory was acquired evenly throughout the year.

  5. Current Rate Method Example 10-5 • The Dec. 31, 2008 translation adjustment had a debit balance of $69,841. • Dividends were declared on March 15, 2008, and equipment was sold on October 1, 2008. • The following exchange rates were in effect during the year:

  6. Current Rate Method Example 10-6 Determine the appropriate exchange rates to use for each account.

  7. Current Rate Method Example 10-7 Weighted average rates are generally used for Sales, COGS, and other recurring expenses.

  8. Current Rate Method Example 10-8 The actual historical rate is used when we can identify it efficiently.

  9. Current Rate Method Example 10-9

  10. Current Rate Method Example 10-10 Determine the appropriate exchange rates to use for each account.

  11. Current Rate Method Example 10-11 The beginning R/E is carried over from the prior year.

  12. Current Rate Method Example 10-12 The net income is taken from the income statement.

  13. Current Rate Method Example 10-13 Dividends are translated at the historical rate on the date of declaration.

  14. Current Rate Method Example 10-14

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