7.1 Overview

ASC 830 states that one of its objectives is for a reporting entity to “provide information that is generally compatible with the expected economic effects of a rate change on [the entity’s] cash flows and equity.” In providing such information, the entity needs to use a stable measuring unit (i.e., a stable currency).

In economies with significant inflation, the local currency may eventually be deemed instable. Although any degree of inflation may affect the usefulness of an entity’s financial statements, the higher the inflation rate, the less relevant historical costs become (i.e., historical values diminish over time and become smaller than similar costs incurred in a highly inflationary environment). Therefore, ASC 830 requires that entities operating in environments deemed to be highly inflationary remeasure their financial statements in the reporting currency.

This chapter discusses how to determine when highly inflationary conditions exist and the related accounting for a change in functional currency when an economy has been designated as highly inflationary.