For publicly accountable companies, with foreign operations in countries with a hyper-inflationary economy, what should be done prior to translation?
A)The subsidiary's financial statements must be adjusted for changes in the price levels of the subsidiary's country.
B)The subsidiary's financial statements must be adjusted for changes in the price level of the parent's country.
C)The subsidiary's financial statements must be adjusted by the average inflation rate of the subsidiary and the parent companies' countries.
D)No adjustment is required unless the changes in price levels of the subsidiary country exceed 1000%.

Question

Quizplus · Accepted Answer

When a parent company has foreign operations in a country with hyper-inflationary economy, the financial statements of the subsidiary must be adjusted for changes in price levels. This is because inflation distorts the value of money over time, and the historical cost of assets and liabilities may not accurately reflect their current value. To prepare for translation, the subsidiary's financial statements should be restated using the current rate method or the temporal method. The current rate method uses the current exchange rate to translate all assets and liabilities at the balance sheet rate and all income and expenses at the average rate. On the other hand, the temporal method uses the functional currency of the subsidiary to translate assets and liabilities at the historical rate and income and expenses at the exchange rate at the time of the transaction. In any case, the financial statements must reflect the impact of hyperinflation on the subsidiary's operations.

For Publicly Accountable Companies, with Foreign Operations in Countries with a Hyper-Inflationary