U.S. GAAP: hyperinflationary economy

A foreign subsidiary in a hyperinflationary economy:

Year	t-3	t-2	t-1	3-year
Real interest rate	2.00%	2.50%	3.00%
Nominal interest rate	34.64%	29.15%	25.66%
Inflation	(1+34.64%) /(1+2.00%)-1 = 32%	(1+29.15%) /(1+2.50%)-1 = 26%	(1+25.66%) /(1+3.00%)-1 = 22%	(*1)102.91%

(*1) (1+32%)(1+26%)(1+22%) - 1 = 102.91%

A foreign subsidiary in a hyperinflationary economy:

			U.S.GAAP	IFRS
test: hyperinflationary economy?			Yes (*2)	Yes
			Temporal
Subsidiary: Functional currency			Parent's reporting currency
Inflation-adjusted value of the nonmonetary assets and liabilities of the foreign subsidiary			No (*5)	Yes (*3)
Translation losses			(*4)	(*4)
(1) Subsidiary's financial statement adjustment for inflation			No: nonmonetary assets and liabilities	Yes
(2) Net purchasing power gain or loss recognition?				Yes(I/S)
(3) Then, the subsidiary is translated into the parent's currency.			Temporal	All-current

(*2) 3-year cumulative inflation rate > 100%

(*3) IFRS accounting standards allow the parent to translate an inflation-adjusted value of the nonmonetary assets and liabilities of the foreign subsidiary at the current exchange rate, removing most of the effects of high inflation on the value of the nonmonetary assets and liabilities in the reporting currency.

(*4) In a hyperinflationary environment, the parent company can reduce translation losses by:

• reducing its net monetary assets or
• increasing its net monetary liabilities.

In order to do this, the parent should issue debt denominated in the subsidiary's local currency and invest the proceeds in fixed assets for the subsidiary to use in its operation.

(*5) NOT restated for inflation.