What is Hard Currency?
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,
Victor J replied
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
Message was edited by: Vj