PHILLIMON MHLANGA
The Reserve Bank of Zimbabwe (RBZ) has rejected a proposal by the country’s accounting profession regulator, the Public Accountants and Auditors Board (PAAB), to backdate February’s introduction of the functional currency to January this year for reporting purposes.
The government gazetted Statutory Instrument (SI) 33 of 2019 in February which introduced the Real Time Gross Settlement dollar (RTGS$). This was followed up by another SI 142 of 2019, abolishing the multicurrency regime, leaving the Zimbabwe dollar as the sole legal tender. The change of the functional currency created serious headaches for accountants.
For the last reporting season, several companies listed on the Zimbabwe Stock Exchange and banks delayed publishing their financial results by about one month as they waited for guidelines from the PAAB. SI 33 created challenges in terms of compliance with the international financial reporting standard (IFRS) due to possible conflict with the international accounting standard 21 (IAS 21). PAAB manager for standards, Honest Murindagomo, told a KPMG International Financial Reporting Standards meeting in Harare on Tuesday that the RBZ had turned down PAAB’s proposal.
“We have been engaging with RBZ and submitted our request to the central bank to backdate the function currency introduction from February 2019 to 1 January 2019 for accounting purposes, something which would have provided fair presentation of financial reports. I can disclose that it was not positively considered,” Murindagomo told the meeting.
The refusal by RBZ to take on board the proposal comes as companies in Zimbabwe are faced with valuation dilemma. Emos Mazarire, a senior partner at Knight Frank Zimbabwe, suggested that companies should stop reporting until the valuation issues were sorted out.
“What’s happening is weighty and frightening,” he said. “We should get it right. There is a lot of volatility. From my point of view, it creates havoc in the market. As we are in the reporting season and towards the year end reporting, we should suspend valuations and reporting.”
But PAAB chairman, Brian Njikizana, said Mazarire’s proposal was not workable as some listed companies were obliged to do so as part of the requirements by the bourse.
“Some valuers are saying we should suspend reporting because we cannot come up with credible figures. But we cannot do that because some companies are required to publish by the Zimbabwe Stock Exchange. Yes it’s true we have serious challenges but we have a responsibility to report,” Njikizana said, adding: “We have done the best although there are challenges to achieve a true and fair position.”
The refusal by the central bank to backdate the introduction of the functional currency comes as Zimbabwean firms are in a financial reporting quandary going into the December year-end reporting season, due to unfavourable fiscal and monetary policies. Many companies are likely to be adversely affected as it will be difficult to achieve a fair presentation, according to accountants. Almost every company audited in 2018 got a qualified or adverse opinion.
Accountants say there is no way out for 2019 financials because the country’s accountancy sector has been forced to take the legal route compliance rather than substance, violating the international accounting standards (IAS), especially the IAS 21.
Accountants told the KPMG International Financial Reporting Standards meeting that it would be difficult for companies to achieve a clean audit opinion (for December year-end) as Zimbabwe is battling what they described as a “perfect storm” for the yearend (2019) financial reporting due to complexities caused by the operating economic and regulatory environment. This means financial statements will not be meaningful to users. Investors depend on financial reports for decision making. This, experts say, will result in potential investors going elsewhere than Zimbabwe.
What will negatively impact financial reporting include the date of the change of the functional currency, the appropriate rate to use due to the significant volatility in exchange rates, the treatment of monetary and non-monetary assets and liabilities, and the balancing figure upon the change in functional currency.
There is also no guidance so far from the PAAB. This has seen companies struggling to ensure all appropriate adjustments are made to valuations and profitability, a situation which will make financial statements published not meaningful to users who cannot make informed decisions based on them. There are also serious problems with comparative financial information regarding the 2018 comparative financial data. It means accountants have to change their accounting policies and apply one to present the 2018 comparative information.
Other accountants are grappling with three foreign exchange rates, the interbank where very little forex is accessed, the willing buyer, willing seller rate where the rate is not known because it will be a private arrangement, and the black market rate where rates are usually punitive but forex is always available.
When it comes to reporting, accountants say they are not sure which appropriate exchange rate to use in order to get a clean audit opinion. Themba Mudadi, a partner at KPMG Zimbabwe, said the situation was complex.
“We have issues to deal with, for example the 1 January 2018 to February 2019 date (when the government changed the functional currency). How do you account for that gap?” he asked. Mudadi continued:
“The other issue is the foreign exchange rate. There was 1:1, 2:5 and so forth. The key question is at what point did we have an active market? If we use 2:5, are we in line with the IFRS? Some kept US dollars; some went on to keep inventory in US dollars. There is the issue of use of average exchange rate, but will it represent a fair exchange rate? It also depends on the volatility of the exchange rate. Yes it can, but there is the need to balance it with the volatility of the exchange rate. So, it is difficult. For 2019, are we going to have clean [audit] opinions because in 2018, we had adverse opinions?”
A partner at KPMG South Africa, Shandhir Lachman, said there were numerous “accounting implications” after the change in functional currency, including what appropriate rate to use on the date of the change of the functional currency that occurred in the middle of the reporting period, and subsequently the treatment of monetary and nonmonetary assets and liabilities upon the change in functional currency.
There are key considerations, Lachman said, “especially the significant volatility in exchange rate” adding that entities are required to use a more representative exchange rate. IFRS, however, has specific guidance on what official rate to use that can be accessed. But most companies were using the black market rate because it was from there that they were able to access forex.
Some were using the Old Mutual, PPC implied rate, which can be used as a proxy of the official exchange rate. Other accountants said there was a need for PAAB to guide the market quickly on these issues, and whether Zimbabwe was in a hyperinflation era or not for reporting purposes, because they were grappling with these in preparation for the December year-end financial reports.
Murindagomo, the PAAB manager for standards, said the body was “open to provide guidance soon so that accounts should be more relevant and more reliable”. Njikizana said guidance on whether the economy was in hyperinflation or not would be out in three weeks’ time. William Mandisodza, the associate director at KPMG Zimbabwe, said it was difficult to “reverse the tide” in the next three years “given that month on month inflation is in double digits”.
