27 • 1

CHAPTER

27

FINANCIAL REPORTING IN

HYPERINFLATIONARY

ENVIRONMENTS: A TRANSACTION

ANALYSIS FRAMEWORK FOR

MANAGEMENT*

Frederick D. S. Choi

New York University

CONTENTS

27.1 Introduction 1
27.2 Management Reporting Framework 3
27.3 Sales Revenue 5
27.4 Operating Expenses Including
Cost of Sales 8

27.5 Gross Margins 11

27.6 Conclusion 12

SOURCES AND SUGGESTED

REFERENCES 12

27.1 INTRODUCTION. Control issues dominate management concerns in high in-
flation environments. Financial reporting limited to unadjusted accounting data may
result in distorted or illusory profits which are useless, possibly even harmful, to
management.
In this chapter, we will show how financial statements presented in soft currency
tend to distort operating results reducing comparability over time and providing un-
reliable performance measures for managerial planning and control decisions.
U.S. generally accepted accounting principles (U.S. GAAP) are used by many
multinational business enterprises (U.S. and non-U.S.) that operate in inflationary en-
vironments around the world. While U.S. GAAP provide useful guidelines in prepar-
ing hard currency statements, they are poorly adapted to meet the reporting needs of
firms operating in high inflation countries.^1
In consolidating the accounts of foreign subsidiaries, Statement of Financial Ac-
counting Standards No. 52 (SFAS 52)^2 mandates use of the current rate translation
method whenever the functional currency of the parent company’s foreign affiliate is

*The author wishes to thank Ronald R. Gunn, Finance and Administrative Director of BS Continental,
for his assistance with the previous edition of this chapter.

(^1) Coopers & Lybrand, 1989.
(^2) Financial Accounting Standards Board, 1982.