APPROACHES FOR ADJUSTING THE FOREIGN SUBSIDIARY'S FINANCIAL STATEMENTS TO THE EFFECTS OF INFLATION IN THE HOST COUNTRY
APPROACHES FOR ADJUSTING THE FOREIGN SUBSIDIARY'S FINANCIAL STATEMENTS TO THE EFFECTS OF INFLATION IN THE HOST COUNTRY

Summary/Abstract: This paper is dedicated to inflation and its impact on the international activities of multinational companies. Inflation is an economic factor that significantly affects the performance of multinational companies and is beyond the control of foreign subsidiary’s managers. Therefore, if a multinational company wants to evaluate the performance of foreign subsidiaries and their managers, it needs to take into account the impact of inflation. The aim of this paper is to provide an understanding of the issues of inflation in the host country and its impact on the financial statements of foreign subsidiaries. During inflation periods, the figures in the financial statements are inaccurate, which contributes to the misleading managerial decisions that affect the performance of the company as a whole. Therefore, in the performance evaluation process, multinational companies should take into consideration the influence of inflation on the financial statements of their foreign subsidiaries. Consequently, this paper shows and thoroughly analyses the separate approaches for adjusting the financial statements of foreign subsidiaries to reflect the inflation effects in the host country, namely the restate–translate approach and the translate-restate approach. Eventually, recommendations are given for a relevant approach for adjusting the financial statements to the effects of inflation in the host country. On the basis of the obtained results, the contribution of this paper is reflected in the determination of the relevant financial statements adjusting approach to the effects of host country inflation that provides the evaluation of the actual performance of foreign subsidiaries and their managers.

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