Accounting now leads the salesperson in the right direction. It also discloses when
the salesperson has made the wrong decision. For proper performance measurement
in a hyperinflationary environment, management must reclassify the translation gains
or losses reported under Statement 52 back to the related expense lines to reflect soft
currency costs in hard currency terms.
In using forecasted exchange rates to book soft currency transactions, we are cog-
nizant of the fact that the firm may experience variances caused by unexpected rate
changes; that is, forecast errors. Under the proposed reporting framework the future ex-
change rate can be modified at any time. Assume for example that we are projecting an
exchange rate of TL169 $1 two months into the future per Exhibit 27.4. The actual
rate turns out to be TL174, a distortion of about 3% over a two-month period. Exhibit
27.5 illustrates what would happen to our assumed TL1,000,000 expense in our last ex-
ample which assumed invoicing on Day 30 of Month 1 with 30 days payment terms.
In this case the actual expense turns out to be $170 less ($5,917 – $5,747) than
the firm thought it was going to be. A practical expedient, and one that minimizes
user confusion, especially for exchange rate variances that are small, would be to
leave the original number unchanged and simply let the variance fall below the line
as a nonoperating translation gain. Under today’s traditional reporting system, the
translation gain that would have been reported below the line is $1,945 ($7,692 –
$5,747). The translation gain that would be reported under the proposed model, as a
27 • 10 FINANCIAL REPORTING IN HYPERINFLATIONARY ENVIRONMENTS1001101201301401501601701801 1020301020301 US$=TL 100169Projected Future U.S.$ Rate vs Actual174MONTH 1 MONTH 2US$ PROJECTED US$ ACTUALExhibit 27.4. Unexpected Rate Changes.