discount rate. After all, it is the exchange rate difference that operating management
is concerned with.
What would happen if the customer delays payment beyond the promised payment
date? In our reporting framework, normal payment conditions would be reflected in
reported sales and gross margins. Thus, if a customer agrees to pay on a certain date,
the transaction would be booked at the exchange rate prevailing on the agreed pay-
ment date. Thus, the salesperson knows at the time of sale what his profit margin will
be. If payment takes place after the promised date, the loss in dollars would be re-
ported below the line as a translation loss and partially or totally attributed to the line
of business or sales segment that is responsible for its incurrence. That loss however,
would likely be compensated by interest income as original sales terms would nor-
mally include a penalty and interest for delayed payments. The latter would appear
as additional interest or miscellaneous income below the line. Alternatively, the loss
could be backed out of reported gross margin to reflect a sale that was realized in hard
currency later than expected.
27.4 OPERATING EXPENSES INCLUDING COST OF SALES. In applying our model
to expenses, we embrace the same environmental assumptions that we employed
with respect to revenues (see Exhibit 27.1); namely monthly inflation and lira deval-
uation of 30%. We contrast with our proposed reporting model the traditional ac-
counting treatment accorded a TL1,000,000 expense under varying invoice dates and
payment terms. We again assume the use of month-end rates to record the expense
transactions. Use of average rates would produce similar results.
In our first scenario, assume that the firm is invoiced on the first day of the month
with a cash payment. Our model would record the expense when cash payment is
made; the traditional model would record it at month’s end.
Actual TL1,000,000/TL100 $10,000
Reported TL1,000,000/TL130 _______$ 7,692
Variance ______________$ 2,308In this instance the expense would be understated by 30%. The understated ex-
pense, in turn, would be offset below the line by a nonoperating translation loss.
In the next scenario, assume the firm is invoiced on Day 5 and given 25 days in
which to remit payment. Because payment is made on the same date as the measure-
ment date, there would be no variance and the reported expense would reflect the un-
derlying economics of the transaction. In our experience, this situation is the excep-
tion rather than the norm.
Assume now that the firm is invoiced on Day 30 and given 30 days payment terms.
In this case, reported expenses would be overstated by $1,775 or 23.1% determined
as follows:
Actual TL1,000,000/TL169 $5,917
Reported TL1,000,000/TL130 ______7,692
Variance ($1,775)____________This variance of $1,775 would be offset by a translation gain appearing below the
line. Additional outcomes based on other invoice dates and payment terms are illus-
trated in Exhibit 27.3.
27 • 8 FINANCIAL REPORTING IN HYPERINFLATIONARY ENVIRONMENTS