After you became “Minister of Accounting” in Freedonia, The BRICK Company established a Freedonian subsidiary known as Little Bricks. Under your leadership, the Freedonian economy did well and inflation was not a problem so The BRICK Company reported the performance of Little Bricks under the current rate method. After drinking too many Lattes at the Fox and the Hound, you have decided (over the objection of family, friends and music lovers) to leave the world of accounting, enter the final season of “Freedonian Idol” and embark on a singing career.This shock to the Freedonian economy (and people’s ears)has caused massive inflation.Now, under US GAAP The Brick Company would have to report the performance of Little Bricks under the temporal (monetary/nonmonetary) method.
REQUIRED
Accounting requires the current rate method when a currency is stable. Do you agree with this? Why or why not?
Accounting requires the temporal rate method when a currency is unstable. Do you agree with this? Why or why not?
In situations like Freedonia, companies may have to switch methods of accounting for foreign operations. When a company switches, consistency is lost.If you were back in your old job would you have Brickell Company switch or stay with the original method?Defend your position.
Does your answer to part 3 change if you believe the inflation is temporary (3 to 5 years) or permanent (more than 5 years)? Defend your position!