est in our example. Another glance at Exhibit 27.2 shows that bonuses and commis-
sion payments will be based on inflated sales values whenever payment terms are
lagged to the subsequent period.
Perhaps the most serious shortcoming of traditional reporting systems is that they
may encourage results manipulation. Assume now that exchange rates at the end of
each of the next three months are as follows:
End-of-month 130
End-of-month 169
End-of-month 220In this example, a salesperson gets together with a favored customer and arranges the
following: deliver and invoice TL2,000,000 of a product on Day 30 of Month 1 at
TL2,500,000 with 60-day payment terms instead of invoicing at TL2,000,000 on the
same date with 30-day payment terms. The attractiveness of this arrangement is not
hard to fathom. Under conventional reporting methods the revised sales value would
be $19,231 (TL2,500,000/TL130) versus $15,385 (TL2,000,000/TL130) under
traditional measurements, an additional sales “pick-up” of almost $4,000 or 25%.
From the customer’s point of view, the actual cost of the purchase will be only
$11,364 (TL2,500,000/TL220) versus $11,834 (TL2,000,000/TL169), a cost sav-
ings that is hard to resist, other things the same. Indeed, under these circumstances,
the customer is likely to be the one initiating such a proposal.
Under the proposed reporting system the incentives for such arrangements to
occur are lessened. In reporting the sales transaction at the exchange rate prevailing
on the payment date, the transaction would be recorded at $11,364 rather than
$11,834. From the selling firm’s perspective, the better alternative would be to in-
voice the sale at TL2,000,000 with 30-day payment terms. The reporting system pro-
posed here provides the salesperson with the incentive to take this proper course of
action.
Our model thus encompasses using the actual or forecasted exchange rate prevail-
ing on the day of payment to record local currency transactions. Those dates are gen-
erally in the accounts receivable system (that is, already on sales invoices) and thus
this reporting system is readily implemented. To reiterate, the idea is to use “accrual
accounting” while maintaining a “cash accounting” mentality. Some have argued,
and correctly so, that sales and expenses in hyperinflationary environments have built
into them an implicit interest rate. Hence, the need to discount local currency trans-
actions to their present values prior to translation. Our model emphasizes the differ-
ence in the exchange rate between the invoice date and the collection date. This ex-
change differential automatically incorporates the implicit interest differential (the
International Fisher Effect^8 ). Under our reporting framework, there is no need to
think about what the interest rate is or worry about how to calculate an appropriate
27.3 SALES REVENUE 27 • 7(^8) Under a freely floating system of exchange rates, spot rates of exchange are theoretically determined
by the interrelationships between national rates of inflation, interest rates, and forward rates of exchange,
usually expressed as premiums or discounts from the spot rate. If the forecasted rate of inflation in Turkey
one month ahead is 30% higher than in the United States, the lira can be forecast to decline in value by
30% relative to the dollar. By the same token, interest rates for maturities of comparable risk can be ex-
pected to be 30% higher on Turkish securities than on comparable U.S. securities. For an extended dis-
cussion of these relationships, see Eiteman and Stonehill, 1995 and Gunter Dufey and Ian Giddy, Chap-
ter 6 of this volume.