Impact of Hyperinflation on Consolidated Financial Statements

Hard Multinational Operations Impact On Financial Statements

GlobalTech Inc. is a multinational corporation based in the United States that manufactures electronic components. It has subsidiaries in several countries, including Brazil and Japan. For the fiscal year ending December 31, 2023, GlobalTech Inc. must prepare its consolidated financial statements, integrating the financial results of its subsidiaries.

GlobalTech's subsidiaries operate in hyperinflationary economies. As a result, the financial statements of its Brazilian and Japanese subsidiaries are prepared in their local currencies (Brazilian Real and Japanese Yen, respectively). The functional currency for the Brazilian subsidiary is the Brazilian Real, while the Japanese subsidiary operates predominantly in Yen. GlobalTech must translate these financial statements into U.S. dollars for consolidation.

Considering the requirements of IFRS and the implications of operating in hyperinflationary economies, which of the following statements about the impact on GlobalTech's consolidated financial statements is correct?

The translation effects from the Brazilian Real and the Japanese Yen will be included in other comprehensive income and will not affect the profit or loss.

The hyperinflation adjustment for the Brazilian subsidiary must be recognized in profit or loss, impacting the income statement directly.

The consolidated financial statements will reflect the historical exchange rates for all transactions, irrespective of the hyperinflation economies.

Hint

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