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Former Member

What is Hard Currency?

Hi,

I see that in controlling area configuration, we will use hard currency if in those countries<b> "inflation is very high"</b>

Can u tell me how it is linked to inflation, and one real time example where exactly we go for this currency?

Thanks in advance,

chaitanya

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    author's profile photo Former Member
    Former Member
    Posted on Dec 03, 2007 at 09:36 PM

    Chaitanya:

    As you already know hard currency is used in places with high rates of inflation.

    You would use hard currency in the following scanario:

    My interpretation of www.easymarketplace.de pdf - MEXICO page 42:

    You buy a machine for MXN 1,000,000 (Acquisition cost)

    Depreication rate 10%

    Inflation is running at 25%.

    First you will calculate depreciation without accounting for inflation. Assume a rate of 10% which gives you 100,000. So unadjusted net value of machinery is $9.9mn

    Since inflation is 25%, it means that your acquisition cost is 25% higher, hence:

    25% of 1,000,000 = 250,000, this amount is again taken as a base amount for calculating additional depreciation.

    Now calculate depreciation on 250,000 @10% = 25,000

    The adjusted amounts are:

    Total acquisition cost: $1,000,000 + $250,000 (due to inflation) = $1,250,000

    Total depreciation: $100,000 + 25,000 = 125,000

    Net value of machinery at year end: $1,250,000 - $125,000 = $1,125,000

    Under normal circumstances, your acquisition cost and depreciation would have been $1,000,000 and $100,000 respectively, but due to extremely high inflation rates you would have to make the adjustments as above.

    Note that inflation rate has only affected the acquisition cost of the machinery, the "rate" of depreciation has remained unchanged - 10% in both the cases, the "amount" of depreciaiton will ofcourse differ as the base amount/acquistion cost changes due to inflation.

    Assign points if info helps

    Vj

    Message was edited by: Vj

    Vj

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