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Currency volatility poser for financial reporting

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INDEPENDENT audit firms have raised the red flag on some Zimbabwe Stock Exchange-listed companies which failed to comply with international financial reporting standards as the currency conundrum continues dogging the economy, The NewsHawks has established.

BERNARD MPOFU

Rising inflation and the volatility of the Zimbabwe dollar are some of the key issues which arose during the reporting period, with several companies announcing that they were coming up with strategies to ensure they stay afloat.

At a time the economy continues to wobble, retailers and other service providers are now charging prices based on the official exchange rate, parallel market rate, Real-Time Gross Settlement rate and several others, depending on the mode of payment consumers opt to use.

This week, audit firms which are required to play an oversight role on publicly listed companies issued adverse opinions as local firms ditch the official exchange rate when preparing the financials during the ongoing financial reporting.

In its report attached to African Distillers’ full-year audited financial information for the year ended 31 March 2022, the local unit of international audit firm Ernst & Young argued that by determining its own exchange rate during the preparation of financial statements for the period under review, Afdis failed to adhere to International Financial Reporting Standards.

The auditors also noted that the financials failed to comply with International Accounting Standard (IAS) 29 which relates to reporting on hyperinflationary economies and IAS 21.

IAS 21 gives guidance relating to the effects of changes in foreign exchange rates in volatile markets.

“Effective 1 August 2020 to 31 March 2022, management applied an internally generated exchange rate (transaction rate) to translate foreign currency-denominated transactions and balances to functional and reporting currency, the Zimbabwe dollar (ZW$,” Ernst & Young said.

“We believe that the use of a transaction rate was inappropriate for financial reporting as it does not meet the definition of a spot rate. We believe that management should have applied the auction rate as it met the International Financial Reporting Standard definition of spot rate.”

Afdis, in its response attached to the financials, defended this decision, saying in determining the closing rate applied at year-end, the company considered the rate which supplies were being charged, the rate at which foreign currency was being obtained from sales and the rate it accessed foreign currency on the foreign exchange trading auction during the year.

Grant Thornton, the independent auditors for mining concern Hwange Colliery Company Limited, also issued an adverse opinion, citing failure to comply with IAS 21 and IAS 29.

“During the prior and current financial years, the foreign currency-denominated transactions and balances of the company were translated into ZWL using the interbank exchange rates/foreign currency auction rates which were not considered appropriate spot rates for transactions as required by IAS 21,” the auditors wrote.

“The opinion on the prior year financial statements was modified in respect of this matter and the misstatements have not been corrected in the financial statements for the year ended 31 December 2021.

“Had the financial statements been prepared in accordance with the requirements of IAS 21, many elements would have been materially different. The effects of the non-compliance with the requirements of IAS 21 have been considered to be material and pervasive to the financial statements as a whole.”

Earlier on in the week manufacturing concern Cafca’s auditors Grant Thornton also raised the foreign exchange dynamics when it issued the company’s results for the six months ended 31 March 2022.

Questions sent to Admire Ndurunduru, the Public Accountants and Auditors Board chief executive, on what impact this would have on shareholders were not replied to.

Last year, the country’s largest beverage producer, Delta Corporation, turned down professional advice from international audit firm Ernst & Young, to apply foreign currency auction system exchange rates in the preparation of financial statements, saying the opinion was out of touch with reality.

“The directors and management disagree with the professional conclusion of our auditors on the application of IAS 21,” Delta chairperson Sternford Moyo said in a commentary to the financial statements.

“The independent auditors, EY, have issued a modified review opinion for the period ended 30 September 2021 as they believe that the determination of an estimate exchange rate is not compliant with International Financial Reporting Standards. The auditors believe that the auction exchange rate is the appropriate spot exchange rate…This is contrary to the circumstances applicable to the entity … There are varying views on the matter and we urge the Public Accountants and Auditors Board to provide appropriate guidance to the market,” Moyo said.

This week, the local unit was trading at ZW$258: US$1 on the official auction against ZW$400: US$1 on the parallel market.

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