sabaruch

The nation of Deadoa is experiencing hyperinflation. A subsidiary of a multinational operating in Deadoa will notice changes in its purchasing power and in its financial results as reported on its parent company's financial statements. Which of the following best describes the situation for a subsidiary operating in Deadoa? Purchasing power will:

A) dramatically appreciate and the local currency will be rapidly appreciating against the presentation currency.

B) quickly deteriorate and the local currency will be rapidly appreciating against the presentation currency.

C) quickly deteriorate and the local currency will be rapidly depreciating against the presentation currency.

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Purchasing power and Deadoa currency will depreciate.

sabaruch

In reality, what best describes the real value of non-monetary assets and liabilities in a hyperinflationary environment?

A) Typically not affected because their local currency-denominated values decrease to offset the impact of inflation.

B) Typically not affected because their local currency-denominated values increase to offset the impact of inflation.

C) All non-monetary accounts are re-measured at the current rate.

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Typically not affected because their local currency-denominated values increase to offset the impact of inflation (i.e., real estate values typically rise with inflation).

sabaruch

A hyperinflationary economy is typically defined as one that has:

A) cumulative inflation that exceeds 100% over a three-year period.

B) an inflation rate that exceeds 10% per year for three consecutive years.

C) cumulative inflation that exceeds 100% over a twelve-year period.

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The typical definition is that cumulative inflation exceeds 100% over a three-year period.

sabaruch

Assume U.S. GAAP for this question.) For a subsidiary in a hyperinflationary economy, the functional currency should be the:

A) Local currency.

B) Subsidiary's operating currency.

C) Parent's currency.

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The functional currency should be the parent's currency. Under IFRS, the firm would restate the financials for inflation, and then translate under the current rate method.

sabaruch

Which translation method should be used under a hyperinflationary economy when using U.S. GAAP?

A) All-current, because dividends are translated at the rate that applied when they were issued.

B) Temporal, because all non-monetary accounts are re-measured at the historical rate.

C) Monetary/non-monetary, because all monetary accounts are translated at the historical rate.

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The temporal method is more appropriate because all non-monetary accounts are remeasured at the historical rate. Under IFRS, the financials would be restated for inflation, and then translated under the current rate method.