Question

Answer the following questions and use GAAP cite appropriate justification for your answer.

3. Company A has a foreign subsidiary located in a country that historically has had a highly inflationary economy. However, during the current year, the economy of the country of the foreign subsidiary is no longer considered highly inflationary. How does this change affect Company A’s accounting and reporting related to the foreign subsidiary?

Answer 1

Inflation accounting is a special accounting technique that can be used during periods of high inflation whereby financial statements are adjusted according to price indexes, rather than relying solely on a cost accounting basis. Companies operating in countries experiencing rapid and sustained levels of inflation or hyperinflation may be required to update their statements periodically in order to make them relevant to current economic and financial conditions.

If the Subsidiary is no longer highly inflationary then Company A need not follow the Inflation accounting any further.