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Auditors raise red flag on property evaluation

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AUDITORS have raised a red flag over the valuation of assets by property companies in the half-year ended 30 June 2020, issuing adverse opinions that have questioned the validity of the financials.

MERLIN GARWE

Property valuation is an assessment of the property’s value based on the location, condition and other many factors.

Zimbabwe has gone through a series of currency reforms over the past years that has created a conundrum for reporting firms that are listed on the Zimbabwe Stock Exchange.

Audit firms wrote adverse opinions for Zimre Property Investments (ZPI), Dawn Properties and First Mutual Properties (FMP), pointing out that the application of a conversion rate to US dollar valuation inputs when calculating Zimdollar property values is not an accurate reflection of market dynamics.

This is because the risks associated with currency trading do not reflect the risks associated with property trading.

Normally, valuations rely on observable and sufficiently frequent historical transactional market evidence. PricewaterhouseCoopers (PwC), which audits ZPI’s financial books, highlighted that monetary policy changes, specifically Statutory Instrument 142 of 2019 which reintroduced the Zimbabwean dollar (ZWL) as the sole
legal tender effective 24 June 2019, resulted in a limited period for observable transactional evidence.

“Market evidence for capitalisation rates in ZWL were limited as at 30 June 2020 for purposes of the valuation of
commercial and industrial properties using the income capitalisation method. For residential properties and land, in order to determine the ZWL values of the investment properties as at 30 June 2020, US$ inputs were used and then translated into ZWL using the closing interbank exchange rate,” PWC said.

“The application of a conversion rate to US$ valuation inputs to calculate ZWL property values is not an accurate reflection of market dynamics as the risks associated with currency trading do not reflect the risks associated with property trading.

In addition, PwC said the interbank exchange rate is not considered an appropriate spot rate for translation as required by International Accounting Standard 21 thus was not practicable to quantify the financial effects of this matter on the condensed interim financial information.

During the same period, Deloitte and Touché, the auditors of Dawn Properties, said they were unable to obtain sufficient evidence to support the appropriateness of simply applying the closing Zimdollar-US dollar auction exchange rate in determining the Zimdollar fair value of investment property, plant and equipment.

The audit firm said this was without any further adjustments to reflect how prevailing economic conditions would impact market participants on pricing investment property, plant and equipment in Zimdollars.

“Such matters include, but are not limited to: the correlation of the responsiveness of ZWL valuations of property, plant and equipment to the auction exchange rate and related underlying USD values; and the extent to which
supply and demand for the items of property, plant and equipment reflects the implications on market dynamics
of the auction exchange rate,” Deloitte and Touché said.

The valuation of property, plant and equipment, according to International Financial Reporting Standards, requires fair value to be determined on the assumptions that market participations would use when pricing the asset on the one hand.

On the other hand, FMP group’s investment properties were valued in US dollars using historical US dollar denominated inputs and converted to Zimdollars at the interbank rate both in prior year and at the auction rate as at 30 June 2020.

Their auditor, EY, also believed that applying a conversion rate to a US dollar valuation to calculate Zimdollar property values may not be an accurate reflection of market dynamics, as risks associated with currency trading do not always reflect the risks associated with property trading.

Owing to the nature of the matter, EY was unable to quantify the possible impact therefore declaring a disagreement with management on the conversion of the US dollar valuation into Zimdollar valuation. The prior year’s audit report was also modified due to this matter.

Only Masholdings received a modified opinion because of the possible effects of the matter on the comparability of the current year’s financial results with that of the prior year in which it got an adverse opinion.

The property market continues to be on the receiving end of an economic environment characterised by declining capacity utilisation, low occupancy and policy inconsistencies.

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