In reality, what best describes the real value of non-monetary assets and liabilities in a hyperinflationary environment? A) All non-monetary accounts are re-measured at the current rate. B) Typically not affected because their local currency-denominated values increase to offset the impact of inflation. C) All non-monetary accounts are re-measured at the average rate. D) Typically not affected because their local currency-denominated values decrease to offset the impact of inflation. Your answer: D was incorrect. The correct answer was B) Typically not affected because their local currency-denominated values increase to offset the impact of inflation. —> ok so i know i’m suppose to use the temporal method and use historical values…someone explain the rest of it to me. Is it just trying to say that since prices (inflation)is rising it helps to have the LC increase as well? But this seems wrong to me becuase if your country’s inflation is high wouldn’t your country’s currency (LC) decrease?? huh??
high inflation is accompanied by currency depreciation (relative PPP)
if lc decreases in value the fixed assets tend to increase in value… otherwise all of the sudden all the houses, buildings, fixed assets would become really cheap real estate is good protection against inflation
another way to look at this question is to realize that A and C are outright wrong based on the accounting rules. so you’re left with B or D. D is wrong because prices/value goes up with inflation
Ah I see thanks florinpop. Like gold… thanks!!
When inflation is high shouldn’t the local currency fall?
Yes it does…but i guess what they mean is fixed asset values don’t fall like real estate. So like gold/real estate is a good hedge against inflation basically.
say there’s a 100k house and the currency rate is 1LC/FC now the LC depreciates wildly to .25LC/FC the house will appreciate to 400k LC, otherwise you could buy it with only 25k FC
they’re asking if “in reality” does the value of the underlying asset denominated in local currency change - so exchange rate doesn’t matter. If the turkish lira inflates by 100%, the cost of real estate or equipment will just rise at the same rate. I guess this is the reason that temporal makes sense in hyperinflationary environments - asset would be brought on the functional currency books at the historical exchange rate (which would have been pre-inflation) and thus would be booked at a $ value closer to its actual worth.