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Subject 7. Hyperinflationary Subsidiaries PDF Download
A hyperinflationary economy is defined as one with a cumulative three-year inflation in excess of 100 percent. With compounding, this equates to an average of about 26% per year for three years in a row.

Currencies in hyperinflationary economies depreciate vis-a-vis the $US. When assets are translated at current exchange rates, this can cause the disappearing asset problem, that is, even though the assets remain at historical cost on the subsidiary's balance sheet, the depreciation of the local currency results in a reduction in their carrying amount on the consolidated balance sheet.

In highly inflationary economies, SFAS 52 mandates the use of the temporal method for translation. If the current method were used, the US$ equivalent would be VERY small due to the rapidly increasing exchange rate.

The IASB has taken a different approach to the problem. Current standards require companies in hyperinflationary economies to index their financial statements to a general price level index and, then, to translate the statements at a current exchange rate.

The two methods are generally similar as they eliminate the problem of disappearing assets and liabilities. However, the two approaches are different and produce different measures of equity and income.

User Contributed Comments 4

User Comment
danlan2 Must use temporal method in this case.
Oksanata "vis-a-vis" is bugging me...
joao4131 This is wrong

According to the CFA Institute.
You should use the current rate method

Q. Which of the following is Lars’s most appropriate answer to Eriksson’s question concerning the accounting method used for Anart in 2015?

A No, the current rate method is being used, after restating nonmonetary items for inflation.
B No, the current rate method is being used, after restating all accounts for the general price index.
C Yes, the temporal method is being used, as in past years.


"A is correct. Because Anart is an extension of Trana (Anart sells 100% of its production to the group) its functional currency would be the Swedish krona, not the local currency, and it would be considered an integrated foreign operation. As an integrated foreign operation, Trana would normally, and historically, have accounted for Anart using the temporal method. But the country in which Anart operates is experiencing high inflation; three years (2013–2015) of rates near 30% would exceed the 100% indicator of hyperinflation. Therefore, under IFRS, the nonmonetary items must be adjusted for the loss in purchasing power to better reflect economic reality. Note that only the nonmonetary items are adjusted because monetary ones would already be expressed in the monetary unit current at the balance sheet date.

B is incorrect because only nonmonetary items are affected by the loss of purchasing power and must be restated.

C is incorrect because now that the high inflation has lasted at least three years it can be considered hyperinflation, and different translation methods must be used to reflect economic reality."
breh @joao4131 It depends. US GAAP: temporal method. IFRS: current rate method. The example you use should use the IFRS method.
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