Inventory cost / profit in high-inflation multi-currency environment

I’m working in two main currencies: US Dollars and RTGS Dollars (Zimbabwe). I have RTGS Dollars as my base currency, but it’s devaluing quite quickly. I buy and sell my stock in US Dollars. The result is that my profits from selling stock are greatly inflated in RTGS Dollars, as you can see from this example:

The US$ to RTGS$ exchange rate is 1:2. I buy an item for US$100. Manager reports the cost as RTGS$200.

Two months later the US$ to RTGS$ exchange rate is 1:4. I sell the above item for US$125. Manager reports the sale price as RTGS$500, and that I have therefore made a profit of RTGS$300 on the sale. To me I have only made a profit of US$25, or RTGS$100.

Should I be doing anything differently? Should I change my base currency to US Dollars?

I realise this topic probably isn’t Manager-specific, but as I don’t know how other accounting software would handle this situation I’d appreciate any insight or suggestions from others who are better qualified than I am.

The same concern applies to the capital accounts. I’m contributing funds in US Dollars, which Manager translates into an RTGS amount. Once we have the returns from those funds, I’d like to be able to repay myself the same US Dollars I contributed, but because of the inflation in RTGS Dollar terms it’ll look like I’m paying myself a vastly bigger amount.

I appreciate this might all be Accounting 101, and welcome suggested sources for further reading to understand all of this.

Changing your base currency will serve no purpose. For tax reporting and such, you will need to convert back to RTGS anyway. This illustrates the vitality-sucking effects of inflation. We tend to ignore those effects when inflation rates are modest, but they are still real. I may hold an investment for 10 years and pay tax on an apparent capital gain of 25%, thinking I’ve made a profit. But if inflation was running 3% per year, I’ve actually lost money. In your case, the effect is revealed in higher net profits. The only reason the unpleasant effects are visible to you is because you are comparing things to your USD measuring stick. The reality is, depending on how long you held the USD asset, you might have lost money on it in real terms, because the USD is also devaluing over time, just not as rapidly as the RTGS.

1 Like

Thanks @Tut. There are lots of concepts and implications for me to get my head around as a new business owner.

I have now run into a problem with how to deal with this in a particular situation in Manager:

I purchased some stock from a supplier who is not a registered tax payer. So, I need to withhold 10% of the purchase price and pay that to the tax authority. The transaction was conducted in USD, and so the tax must also be paid in USD (according to the regulations). However, between the time of my purchase and paying the tax authority, there has been some inflation, and so the RTGS values that Manager is recording no longer match up, and it shows me as having overpaid the tax authority.

The US$25 I owed was recorded as RTGS$100, for example (at a rate of 1:4), but now when I pay the US$25 it’s using the new rate of 1:5 and records it as a payment of RTGS$125, with me having overpaid by RTGS$25.

In some transactions in Manager it is possible to set the equivalent amount in the base currency when transacting in another currency, but I don’t have that option when making a payment. Do I need to create a new account into which I post the difference? Or is there another way to handle this?

@GrahamvdR, you have many issues to deal with in your situation. To understand all this, it will be helpful to create a test business, uncluttered with any other transactions. In the test business, set an exchange rate for January 1 of .25USD per RTGS and one for June 1 of .20USD per RTGS. Create a bank account in USD and one in RTGS. Set starting balances of 1000 for each bank account in their respective currencies. (See this Guide if you don’t know how to do that: https://www.manager.io/guides/15718.) Also create a supplier denominated in USD.

First, you have tax withheld at the source on your purchase. For an explanation of that, see this Guide: https://www.manager.io/guides/12346. Create a purchase invoice dated in January for your USD supplier with one line item for 100USD (it doesn’t matter what it’s for or where you post the expense) and one for the withholding tax at -10USD. Now look at the Summary to see what happened.

The tax withheld will be calculated in the currency of the supplier, in this case USD. But it will be posted to your Withholding tax payable liability account in RTGS at the exchange rate in effect on the day of the transaction. You would end up owing 40RTGS to the tax authority for your supplier. That amount will not change, even when the exchange rate later changes to 1:5. In this case, things would work in your favor, assuming you could pay the amount in RTGS.

Unfortunately, you have the apparent requirement to remit the withheld tax in USD. This is your tax authority’s attempt to force you to bear the consequences of currency devaluation. The thing is, you can only pay in USD if you have a USD bank account. And you will need to independently determine what amount was withheld in USD. If you pay 10USD on June 6, and post the payment to Withholding tax payable, the payment will be converted at the new exchange rate. The result will be a 50RTGS debit to the liability account, meaning the tax authority owes you money. Whether they would ever pay that or allow it to offset other amounts you owe them is beyond my knowledge. You need to consult a local accountant or the tax authority about that.

The complication, as you have no doubt realized, comes from your authority’s requirement to submit withheld tax in a foreign currency. Manager has no trouble calculating withholding tax in foreign currencies, but there is no way to avoid conversion of the liability to base currency. But some local expert will have dealt with this issue. Seek their advice.

1 Like

Thank you @Tut for your very considered responses and suggestions to someone who is essentially just bumbling through basic accounting concepts and procedures. I hate to think where I would be now without Manager forcing me to learn and adhere to good accounting practices. I will do as you suggest and get some local advice.

Yes, but the valuation of that US$25 has changed due to the differing exchange rates.
In the end your profit is based on the currency movement not the product value movement.

The product value movement is US$100 to US$125.
But the currency movement is between RTGS$200 which was paid and RTGS$500 which was received. Therefore your profit is RTGS$300 as you turned RTGS$200 into RTGS$500.

Or put it this way, if the currency movement had been RTGS$200 which was paid and RTGS$150 which was received. Would you still be maintaining that you made US$25 profit even though you turned RTGS$200 into RTGS$150, or would it be a RTGS$50 loss.

1 Like

Thanks @Brucanna. That’s a helpful explanation.