Currency Translation

Sometimes, the financial statements of a subsidiary are translated into the parent company’s currency before being presented, which complicates the evaluation of the subsidiary. In such cases, it’s important to understand the translation principles used. See the table for GAAP and IFRS guidelines:

When inflation is not high, both systems use the current method. This means all financial statements are translated into the parent company’s currency using year-end exchange rates (except for equity items), and exchange gains or losses are recorded in the OCI account.

According to GAAP, hyperinflation is defined as cumulative inflation exceeding 100% over three years, while IFRS considers additional factors.

In hyperinflation scenarios, GAAP uses the temporal method, meaning all figures are converted using current exchange rates on a daily basis.

Under IFRS, during hyperinflation, the subsidiary’s year-end figures are first adjusted based on the CPI, and then converted to the parent company’s currency using the year-end exchange rate.

Please review this table, in case you need formulas find Excel file:

Source: Valuation, Measuring and Managing the Value of Companies – by McK.&Co, T. Koller, M. Goedhart, D. Wessels