PHILLIMON MHLANGA
Apparels retailer Truworths Zimbabwe Limited reported a sharp rise in impairments during the 26 weeks to January this year, with the provisions for bad loans surging by 11,8 percentage points to 20 percent from 8,2 percent recorded in the same period in prior year.
This development comes after companies listed on the Zimbabwe Stock Exchange and banks were forced to adopt a new version of the International Financial Reporting Standard 9 (IFRS 9), issued by the International Accounting Standards Board (IASB). The new rules under IFRS 9 replace the International Accounting Standard 39 (IAS 39), which was the primary accounting standard that dealt with impairment of financial instruments.
IFRS 9 requires companies to estimate the credit loss allowances, a situation which may be challenging and involves a high degree of judgment.
The surge was attributed to, largely, a weak economy which has triggered an erosion of disposable incomes of most Zimbabweans, with the majority failing to service their debts.
Truworths, the holding company for Truworths Man, Topics and Number 1 stores, took a hit on its balance sheet and this has remained the biggest hurdle to the operations of the retail group after adopting the new standard, which now requires companies listed on the local bourse and all financial institutions, to move from an incurred loss model to an expected loss model, which allows companies to make prudent provisions against expected losses or account for impairments on loans or estimate future credit losses, a move which is likely to significantly impact on companies, making a big change for companies and the users of financial statements.
Group chief executive officer of the Zimbabwe Stock Exchange listed group, Bekithemba Ndebele, said impairments increased by 11,8 percentage points to 20 percent.
Rising defaults have resulted in the doubtful debts ending up being written off as bad debts.
“IFRS 9 was adopted retrospectively on July 9, 2018 with an adjustment to the group’s opening retained earnings,” Ndebele said in a note accompanying the company’s latest financial statements.
“Comparative financial statements were not restated as permitted by IFRS 9. The adoption of IFRS 9 increased the allowance for impairment as a percentage of the debtors book to 20 percent compared to 8,2 percent in 2018 as per IAS 39. A significant component of the increase in the doubtful debt allowance is due to the consideration of macro-economic and forward looking information which was neither required nor allowed under the previous accounting standard IAS39.”
Ndebele expect inflationary pressure to continue eroding consumer purchasing power and confidence. Zimbabwe’s year on year inflation has risen to 59,39 percent in February from 56,9 percent in January , pushed by increases in the price of basic goods, according to the Zimbabwe’s statistical Agency.
This means that under the IFRS 9 rule, Truworths, recognised not only credit losses that have already occurred but also losses that are expected in the future. This allows a company to be appropriately capitalised for the credit that it has written.
Experts who spoke to Business Times this week said IFRS 9 model uses a dual measurement approach that requires recognition of either a 12 months expected credit loss for assets that are likely to suffer a significant increase in credit risk or provide for allowance for lifetime expected losses if there is a significant increase in credit risk.
As a result, reported credit losses are expected to increase and becoming more volatile under the new credit loss model. According to paragraph 59 of IAS, companies have been determining loan loss provisions through useful factors that are considered when testing for impairment performance of a financial instrument such as significant financial difficulty, breach of contract, decline in future expected cash-flows by the borrower, among other things.
But now, companies are expected to make expected credit losses.
This effectively means that companies have to move from the traditional incurred loss model to an expected credit loss, which, by any means, requires more judgment in considering information related not only to the past and present but also to the future economic conditions.
The measure of the credit loss allowance will again demand use of data and information not previously used under IAS 39.
IFRS 9 comes at a time when lenders are faced with challenging economic conditions, a situation which has resulted in borrowers’ repayment capacity getting more constrained.
The economic hardships have negatively impacted business, leading to an unprecedented number of fashion retailers such as Barbours and Greatermans, collapsing, and others placed under receivership or judicial management. These challenges have resulted in significant credit risk in the sector, with high non-performing loans (NPLs) having been reported. This has resulted in poorly performing loan books in the sector.
Truworth’s debtors’ book stood at $9,826 million, with trade debtors amounting to $8,657 million, with the balance, amounting to $1,169 million constituting other receivables.
Revenue for Truworths went up 18,7 percent to $10,214 million during the period under review from $8,605 million delivered in the same period in prior year.
Profit for the year went up by 175 percent to $1,505 million from $548095 reported in the comparative period in the previous year. Trade expenses increased by 11,2 percent.
Total assets went down 2,77 percent to $15,813 million from $16,263 million.
