Accounting realization of the day — Inflation and Depreciation

After reading the McKinsey Quarterly article on Inflation and Earnings, realized that seemingly currency-neutral financial ratios like operating margin and profit margin are in fact affected by the currency in which they are reported.

This is because of non-cash expenses like asset depreciation which are based on how much was paid for an asset in the past–due to differing rates of inflation, the ratio of “2010 US dollar” to “2000 US dollar” is very different from “2010 Indian rupee” to “2000 Indian rupee”. Assuming higher rates of inflation for the rupee, the operating margin would be higher when reported in rupees, compared to when reported in dollars.

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