How does accounting for foreign inflation differ from accounting for domestic inflation? What does double dipping mean in accounting for foreign inflation? Why are financial statements potentially misleading during periods of changing prices? What are some of the consequences of overstated earnings?

Solution Preview

Question 2
How does accounting for foreign inflation differ from accounting for domestic inflation?

What are the differences? Accounting for foreign inflation diverges from accounting for domestic inflation in many ways. Initially, the rates of inflation overseas are often elevated than they are domestically, which increases possible distortions changing prices cause on a an entity's reported results. Further, as foreign exchange rates and differential countrywide rates of inflation are rarely perfectly negatively correlated, care must be taken to avoid "double-dipping" when combining the results of foreign operations.

Kindly think in the following terms: Application accounting for foreign inflation influences the treatment of most companies operating in foreign countries. The differing operating and economic characteristics of varied types of foreign operations will be distinguished in accounting for them. Adjustments for currency exchange rate changes are excluded from net income for those fluctuations that do not impact cash flows and are included for those that do. The requirements reflect these general conclusions:

Please think of the following: The economic effects of an exchange rate alter on an operation that is relatively self-contained and integrated within a foreign country relate to the net investment in that operation. You should think of the following: Translation adjustments that arise from consolidating that foreign operation do not impact cash flows and are not included in net income.

The economic effects of an exchange rate transform on a foreign operation that is an extension of the parent's domestic operations relate to individual assets and liabilities and impact the parent's cash flows directly. Accordingly, the exchange gains and losses in such an operation are included in net income.

You should think of the following: Contracts, transactions, or balances that are, in fact, valuable hedges of foreign exchange risk are accounted for as hedges ...