The horrors of high inflation…the messenger doesn’t always get shot

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In the mid-1990s, a few years after I’d started LLP Group, I was asked by one of our international customers to go to Moscow to sort out the mess they’d made of their SunSystems implementation. They were using the system for the purchase of their affiliates’ products, for inventory management, and for sales to their direct customers and distributors all over Russia. And of course they were using SunSystems for both local Russian accounting and for balance sheet, cash flow and P&L reporting to their head office in the USA, in USD.

The mess was a mess of several kinds. The Russian authorities were accusing the company of understating its Ruble profit and of implicit tax evasion, and Head Office couldn’t make sense of the USD-denominated reports it was getting, which seemed to overstate profit. A major factor in both of these messes was the fact that Russia was then a ‘hyper-inflationary’ economy. Special accounting rules are supposed to kick in when cumulative inflation over three years exceeds 100%, but this organisation hadn’t even got the basics right, let alone Inflation Accounting.

inflation

Now, SunSystems is a superb tool when it comes to dealing with demands from multiple directions. It can manage local Russian reporting in Rubles against a statutory Russian chart of accounts at the same time as USD reporting against a corporate chart of accounts. And it can do all of this without your having to enter a transaction more than once. Of course, there are always a few adjustments you need to make to reflect differing accounting policies (depreciation rates, for example) but these are few. LLP Group’s LLP International team has built its reputation on helping international organisations to do these kinds of things in SunSystems.

So my job was to set up the right structures and processes, export the entire set of ledgers, and bring them back into the system in the right way.

The biggest difference was that the previous set up had taken no account of the rules that apply in a hyper-inflationary situation, in particular of the requirement that for corporate reporting stock must be valued at historical exchange rates. When stock is bought in USD it gets valued in the Rouble balance sheet based on the exchange rate on delivery day. But when it’s sold, you can’t just convert its delivery Ruble value into USD on the day of sale, since this will show it as having depreciated materially if exchange rates have changed markedly. Profit, as stated in USD, and reported to Head Office, will thus be overstated. Margins will have been exaggerated.

When we’d finished the reprocessing of the ledger we ran the corporate balance sheet and discovered a ‘translation difference’, a loss, of more than a million USD. This translation difference, which always emerges when you go through the process of converting a balance sheet at a variety of different exchange rates, is reported as part of the P&L. I thought at first we must be wrong, so we checked and checked and checked again, and came reluctantly to the conclusion that it was right. The company needed to report an additional unexpected loss to its Head Office of more than one million USD.

The Russian Chief Accountant and I, once we were absolutely certain of our findings, nervously reported this to the CEO.

‘Are you sure?’ he asked.

‘Yes.’

‘Are you really sure?’

‘Yes, really sure.’

‘@!£$,’ he said, ‘but not your fault. I was afraid it would be bad news. But thanks for sorting out the mess.’

You don’t always get shot for passing on bad news, even in Russia.

SunSystems is still one of the best options for businesses that need a common accounting system all around the globe. It is extremely agile, powerful, and cost effective. And you can find SunSystems consultants to support you in almost every country in the world. Contact me to find out more.

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3 thoughts on “The horrors of high inflation…the messenger doesn’t always get shot

  1. LLP International - SunSystems consulting and implementation across borders

  2. How do you measure compliance with a core SunSystems design? | LLP Group - software consultancy & implementation

  3. SunSystems in Russia – Perfectly Possible for the Determined Amongst Us – Adam Bager

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