essary to recognize the additional replacement cost of assets in the income statement
to the extent they were financed by debt. In June 1985, SSAP No. 20 was suspended
and withdrawn in April 1988.^26
20.11 INFLATION AND TRANSLATION. The issues of inflation and translation
have been treated in FAS No. 33, FAS No. 52, FAS No. 70, and FAS No. 89. The
seminal work on inflation, FAS No. 33, was issued before FAS No. 52; then FAS No.
89 made the information requirement optional.
The latest information, from FAS No. 89, discusses the translate-restate method. A
foreign subsidiary first adjusts depreciation in local currency to a current cost basis and
then calculates a current cost income, which is translated into dollars at the average ex-
change rate during the year.^27 These dollar figures are then consolidated into the par-
ent’s balance sheet. The U.S. consolidated figures are then restated into constant dollars.
Under the restate-translate method, current cost in the local environment is deter-
mined and restated to reflect the effects of general inflation in the local currency, be-
fore translation.^28 Both translate–restate and restate–translate are allowed by FAS
No. 70.^29 Since the results will almost certainly be different, one has to decide which
exercise gives the better information. Restate-translate has the advantage that local
currency statements are developed which reflect both current cost and general price
level adjustments in the local currency. Translate-restate requires only one set of re-
statements for price level adjustments and is thus simpler.
Under hyperinflation, neither method is used and the financial statements of the
foreign entity shall be remeasured as if the functional currency were the reporting
currency.^30 Therefore, if an economy has a cumulative inflation of approximately 100
percent or more over a three-year period, nonmonetary assets are translated at his-
torical dollar exchange rates. In effect, the dollar becomes the reporting currency.
There is no easy adjustment for hyperinflation, but an example will show that there
are many possibilities.
Suppose a U.S. company invests $1,000 in a Latin-American country when the
exchange rate is 33,000 Fc to $1. A year later the foreign asset has a current cost of
70,000,000 Fc, the local inflation has been 100%, the U.S. inflation has been 5%, and
the exchange rate is 72,600 Fc to $1. These assumptions incorporate experience with
hyperinflationary economies, where it is not uncommon for assets to increase in
value faster than the government statistics which give the “official” price level index
and the exchange rate outraces both asset values and government statistics because it
is influenced by future expectations. Given these facts for one asset only, we can see
several possible valuations:
Fc Rate U.S.$
Historical cost 33,000,000 (33,000) 1,000
Price level indexed 66,000,000 (72,600) 909
Historical cost
U.S. indexed 33,000,000 1,050 (+5%)
Current cost 70,000,000 (72,600) 96420.11 INFLATION AND TRANSLATION 20 • 23(^26) Nobes and Parker, 2000, p. 400.
(^27) FAS No. 89, paragraph 80, FASB, 1986.
(^28) FAS No. 89, paragraph 80, FASB, 1986.
(^29) FAS No. 70, paragraph 4, FASB.
(^30) FAS No. 52, paragraph 11, FASB, 1981.