International Finance and Accounting Handbook

actions are translated to a common currency.^6 In short, the model employs “accrual
accounting” with a “cash accounting” mentality.
As we highlighted earlier, translation of soft currency income statements to hard
currency per FAS 52 tends to give rise to large translation gains or losses. Commonly,
these gains or losses are one of the larger items in the income statement.
In the following analysis we focus on the translation gains and losses generated by
FAS 52. While many would attribute these gains and losses to foreign exchange risk;
that is, the translation of a monetary asset or liability position in Turkish lira by a de-
valued exchange rate, we will show that the translation gain or loss is really due to
an improper accounting for events that occurred “above the line.” In a hyperinfla-
tionary environment, conventional accounting treatments often distort the underlying
economics of a firm’s efforts and accomplishments. Our model seeks to minimize
such distortions. We examine the following areas:

• Sales Revenue


• Expenses, including Cost of Sales


• Gross Margins

Exhibit 27.1 contains our working assumptions. Inflation and lira (TL) devaluation
is 30% per month or 1.2% per work day. Accordingly, the general price level index

27 • 4 FINANCIAL REPORTING IN HYPERINFLATIONARY ENVIRONMENTS

MONTH 1 MONTH 2

100

110

120

130

140

150

160

170

180

1 102030102030

MONTH/DAY

1 US$=TL 100

109.6

119.6

130.0

141.6

154.5

169.0

Exhibit 27.1. Inflation and TL Devaluation = 30%/Month (1.2%/Work Day).

(^6) The notions of economic interpretability and symmetry are discussed in more rigorous fashion in
Beaver and Wolfson, 1992.