CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Which of the following is (are) true for U.S. based companies with subsidiaries operating in hyperinflationary economies?

I. Cumulative three-year inflation must exceed 100% to qualify as hyperinflationary.
II. Subsidiaries must use the temporal method.
III. Subsidiaries would translate all income statement accounts at an average rate.
A. I and II
B. I and III
C. I, II and III
Explanation: Subsidiaries located in countries with hyperinflation (cumulative three-year inflation exceeding 100%) must use the temporal method. The logic to this requirement is as follows: If inflation is extremely high, then the local currency is depreciating rapidly relative to presentation currency. Therefore, when the current exchange rate is used to convert assets and liabilities into the presentation currency, they are rapidly decreasing in size in the presentation currency. However, the nominal value of such things as inventory and assets (nonmonetary assets) does not normally decrease in a hyper inflationary environment - they normally increase in value in nominal terms in line with the rate of inflation.

User Contributed Comments 3

User Comment
danlan2 III is wrong, for example, COGS is at historic rate.
Hishy Agreed. The key was that III said "ALL income statement accounts".
JChewL2 hyperinflationary environment: IFRS = current, GAAP = temp
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