CHARTERED accountants BDO Zimbabwe have issued an adverse opinion on Willdale Limited’s financial position and fair value measurement for the first half-year ended 31 March 2023 as the country’s macro-economic crisis presents accounting headaches to local firms.
BDO Zimbabwe gave an adverse review on the basis that the company did not comply with the International Financial Reporting Standard (IFRS) 13 on fair value measurement and the International Accounting Standard (IAS) 21 on the effects of changes in foreign exchange rates, when they prepared their interim financial information.
“Based on our review, due to the significance of the matters discussed in the Basis for Adverse Conclusion paragraph, the inflation-adjusted interim financial statements do not present fairly the financial position of Willdale Limited as at 31 March 2023, and of its financial performance and its cashflows for the six months period then ended in accordance with International Financial Reporting Standards,” said the auditors.
An adverse opinion indicates that a company’s financial statements are misrepresented, misstated, and do not accurately reflect its financial performance and health.
The building material supplier had an investment at fair value through other comprehensive income and investment property with carrying amounts of ZW$2.8 billion and ZW$4.5 billion in the period under review from ZW$1.8 billion and ZW$3.3 billion in 2022, respectively.
In the previous and current period, the company engaged an external valuer who valued the investment in United States dollars and the values were converted to ZW$ using an internally determined exchange rate.
The chartered accountant said the translated balances did not give a reasonable indication of fair value as defined by IFRS 13 — Fair value measurement.
“In the current environment, it is not likely that the ZWL price derived from translating the USD value at an internally determined exchange rate would be the price at which a ZWL denominated transaction would,” said the auditor.
“Accordingly, we were unable to determine whether adjustments to the carrying amounts of investment at fair value through other comprehensive income and investment property were appropriate in these circumstances,” added BDO.
IFRS 13 paragraph 2 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In translating foreign currency-denominated sales and expenses, Willdale did not use the spot exchange rates on the dates of the transactions but used blended rates or historical exchange rates.
The auditors added that the non-compliance of IAS 21 [effects of changes in foreign exchange rates], had a material effect to the financial statements, although the impact could not be quantified.
“We could not quantify the financial impact of the non-compliance with IAS-21, but it is considered to be material to the financial statements. Accordingly we cannot express an opinion on revenue and expenses,” the auditor said.
IAS 21 [effects of changes in foreign exchange rates] requires all foreign currency transactions to be recorded, on initial recognition in the functional currency by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.
Meanwhile, the company recorded revenue growth of 29% to ZW$3.2 billion for the period under review compared to ZW$2.6 billion recorded the same period in the prior year.
Contrary to the revenue increase, sales volumes declined by 16% compared to the prior period largely due to low stock availability, resulting from electricity shortages that affected production.
Willdale incurred an operating loss of ZW$606 million for the period due to low revenue base and high seasonal costs.
In his statement accompanying the company financials, Cleophas Makoni said they are encouraged by the backlog for individual housing, which remains huge while the government drives construction of housing in all provinces.
“These and other infrastructure projects will provide the critical mass for sustainable revenue and profitability in the short to medium term,” he said.