Assume instead that the inventory is purchased on Day 30 for cash and immediately
sold with 30 days payment terms. In this case, the gross margin percentage would be
only 35% versus the customarily reported 50%:
Sales TL2,000,000/169 $11,834
Cost of Goods Sold TL1,000,000/130 _______7,692
Gross Margin ______________$ 4,142
Gross Margin % 35.0%Can anyone properly run a business with such distortions?
27.6 CONCLUSION. U.S. generally accepted accounting principles are poorly
adapted to meet the needs of companies operating in hyperinflationary environments
such as Latin America, Eastern Europe, or the Far East. Traditional reporting systems
report large exchange gains or losses which are difficult to interpret, mismatches rev-
enues and expenses, greatly overstates interest income and expense, and does not re-
solve the implicit interest problem. As a consequence, management is provided a
poor information base for planning and control decisions.
These deficiencies can be largely overcome. The transactions-based reporting
model described here:
- Allocates translation gains and losses back to the specific revenues and expenses
to which they are related - Provides both headquarters and subsidiary management with numbers that will
lead to better decisions - Eliminates the need for parallel controls
- Facilitates performance comparisons over time
- Is consistent with U.S. GAAP
The proposed reporting framework will not eliminate entirely all translation gains
or losses. Some translation losses will inevitably persist owing to missed collections,
forecasting errors, unprotected bank balance floats, and delays in identifying other
possible causes. However, the gains can be significant. We have observed instances
where companies adopting the proposed reporting framework in Brazil have man-
aged to reduce their translation losses by 96, and in some instances, 100%. With a lit-
tle additional effort, conventional accounting data can be transformed into informa-
tion that is useful to management.
SOURCES AND SUGGESTED REFERENCES
Beaver, William H., and Mark A. Wolfson. “Foreign Currency Translation and Changing
Prices in Perfect and Complete Markets.” Journal of Accounting Research, Autumn 1992, pp.
528–550.
Brooke, James. “New Money No Innovation in Brazil.” New York Times, July 9, 1994, p. C-1.
Collins, Terence R. “Risk Management in Hyperinflationary Environments.” In F. D. S. Choi,
Handbook of International Accounting. New York: John Wiley & Sons, 1991, pp. 28.1–28.24.
Coopers & Lybrand. Reporting Reality From High-Inflation Countries. New York: Coopers &
Lybrand (U.S.A.), 1989.
27 • 12 FINANCIAL REPORTING IN HYPERINFLATIONARY ENVIRONMENTS