When the Inflation Adjustment of G/L Accounts program adjusts foreign currency balances using this method, it splits the valuation amount between the inflation gain or loss and the foreign exchange gain or loss.

The program proceeds as follows. First, it valuates the foreign currency balance using the exchange rate on the inflation adjustment date. It posts the valuation amount to the foreign currency gain or loss account.

Second, it calculates the inflation amount on the balance in the local currency, and subtracts this from the foreign currency gain or loss account and posts it to the inflation gain or loss account.

The amounts are always posted in your local currency only, not in the foreign currency.

Assume that your local currency is the UNI.

At the start of the month, one of your foreign currency accounts has a balance of USD 10,000, which is worth UNI 80,000 in your local currency, as shown in the following graphic:

At month-end, you run the Inflation Adjustment of G/L Accounts program. First, it valuates the foreign currency balance in UNI. The balance is still USD 10,000, but a dollar is now worth UNI 8.50, so the program posts the following document (in UNI only):

The program then works out how much of that amount is from inflation. The general inflation rate over the month was 0.5%, which accounts for UNI 400 of the increase (UNI 80,000 ´ 0.5%). So the program posts another document:

After the system has posted both of the documents, the foreign exchange gain is UNI 4,600, and the inflation gain is UNI 400: