Dollars vs. Zollars: Zim puts accounting standards to test

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Phillimon Mhlanga

Government’s insistence on a fixed 1:1 exchange rate has continued to create headaches for companies who have to report within prescribed accounting standards.

This comes as the US dollar, adopted as the main currency of use since 2010, is no longer the only indicator of functional currency after economic and monetary policies over the past two years saw the introduction of a surrogate currency and huge electronic balances, which grew on the back of incessant issuance of treasury bills.

Within the past two years, the effects of the economic and monetary policies has shown through the difference in exchange rate between the so called local “defacto” currency and the US$ in the informal market.

The economy has struggled to sufficiently manage the multicurrency regime, with the Finance and Economic Development Minister Mthuli Ncube last week saying that government will deal with currency reforms after tackling budget and current account deficits, which he said were ravaging the economy.

But, in the meantime the country is faced with a currency conundrum, which has given local entities a headache when presenting financial statements. They are in stuck in a quagmire as to which currency to use.

Last week, the country’s oldest and largest accountancy body, the Institute of Chartered Accountants of Zimbabwe (ICAZ) through its Accounting Practices Committee (APC), released some guidelines on how to deal with the currency issues, when presenting their financials.

This ICAZ said, was their way of contributing to the national guidance on reporting considerations on change in functional and presentation currency in Zimbabwe to be issued by the Public Accountants and Auditors Board, which has the mandate to set financial reporting standards in Zimbabwe

The guidance is merely a guide of how to implement International Financial Reporting Standard (IFRS) on the circumstances change in functional currency and potential hyperinflation in Zimbabwe and it’s not a separate standard, hence the guidance shall be applicable immediately.

These, however, are subject to the monetary policy measures applicable to Zimbabwe. For example, all its foreign Currency Accounts (FCA) real time gross settlement (RTGS) account. Is required to receive or pay its foreign currency amounts in US dollar at 1:1.

“What presentation currency should the Zimbabwean reporting entity use for preparation of its financial statement,” the report said.

“IAS 21 permits the presentation currency of a reporting entity to be any currency (or currencies)? IAS also permits a stand-alone entity preparing financial statements or an entity preparing separate financial statements in accordance with IAS 27 Separate Financial Statements to present its financial statements in any currency (or currencies). If the entity’s presentation currency differs from its functional currency using the closing rate method.

“When the presentation currency is different from the functional currency, its results and financial position are also translated into the presentation currency using the closing rate method.”

“When the presentation currency is different from the functional currency, the fact shall be stated, together with disclosure of the functional currency and the reason for using a different presentation currency.”

A reporting entity in Zimbabwe has a choice to use any presentation currency, other than its functional currency, as long as it discloses the reason for not using its functional currency as its presentation currency,”

ICAZ, however, indicated that: “If the reporting entity concludes that its functional currency  is no longer the United States dollar or any other that was used in prior periods since 2009 that will result in a change in functional currency, the exchange rate would be the ratio of exchange for two currencies. The exchange to use as the spot rate, closing rate or average should be determined as guided by IFRS.”

There are also considerations for no change in functional currency including the  pricing by major retailers  that remains the same regardless of the mode of settlement. There is, ICAZ said, a need to assess the underlying cause for increases in product prices that has been experienced in the last few months.

Apart from that , other entities have continued to be able to access foreign currency and therefore their product pricing has not been impacted. Other businesses are able to operate in Zimbabwe without importing or exporting. They have, however, been affected by the increases in prices that is prevalent in the country.

Banking headache: FCA accounts

Meanwhile a report of FinX says that Zimbabwe banks are in the process of setting up a system that allows seamless local bank to bank FCA transfers.

In October, banks were directed to effectively operationalise the ring-fencing policy on Nostro accounts by separating FCAs into two categories, namely Nostro FCAs and RTGS FCAs.

During an ICAZ workshop on financial reporting considerations Stanbic Chief Financial Officer Solomon Nyanhongo said currently trade between the banks and customers is quite complicated owing to the separation of accounts.

“Implementation of local bank to bank FCA transfers is still a challenge as Anti Money Laundering issues may be raised by correspondent banks if volumes increase significantly,” he said, adding that the only platform available for interbank transfers is that of Real Time Gross Settlements (RTGS).

However, he said transfers within the same financial institution can be easily done.

“For instance, moving FCA funds from Stanbic Bank to ZB Financial Service Bank entails sending information via the United States of America where it goes through the exchange process there. It will then be transferred back into the same country and credited as a nostro receipt.

“So the situation now increases the risk with our corresponding banks. The local market is already considered a high risk market because of some entities which are designated under the United States Treasury’s Office of Foreign Assets Control (OFAC),” he said.

In October this year, the country experienced a ‘chaotic market reaction’, to which economist, Professor Tony Hawkins said the two factors that created the market instability, was the 2 percent tax transaction and the monetary policy statement on nostros. He said if consultations had preceded these two factors, then instability that followed would have been avoided.

“My problem is neither of these two measures went through the legislature, they were Statutory Instruments. This is government by decree not government by democracy or by consent therefore the legislature’s role really is not obvious because it was not consulted,” he said.

Commenting on the current currency challenges, founder and chief executive officer of CAA, Anesu Daka, said foreign investors with interest in Zimbabwe, are likely to face difficulties in realising their assets and also servicing their liabilities at the 1:1 rate.

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