As a potential investor in the shares of multi-
national enterprises, which inflation method,
restate-translate or translate-restate, would
give you consolidated information most
relevant to your decision needs? Which infor-
mation set is best from the viewpoint of the
foreign subsidiary’s shareholders?
Zenoff and Zwick proposed that the financial statements of the subsidiaries be first restated to reflect changes in the purchasing power of the foreign currency unit and then translated at the closing rate of exchange.This method is better suited to resource allocation as the management is able to evaluate the performance of the subsidiary in terms of the environment in which its assets are domiciled.This method is being criticized for being inconsistent and less sound.
The Translate-Restate Approach:
This method provided that foreign accounts are first translated into US Dollars,then restated as their United States purchasing power equivalents,using the index of changes in the general price level in the united States.This method has the advantage that it not only reveals in the financial statement the effects of changes in foreign currency exchange rates but also discloses the effect of parent country inflation on the prospective returns to the parent company investors.
Apr 7th, 2015
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