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Ernst & Young cautions over TSL valuations

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ERNST & Young (EY) Zimbabwe has raised concern over Tobacco Sales Limited’s propriety in using foreign currency for property valuations, saying it might not be an accurate reflection of the current market dynamics as exchange rates continue to take a toll on entities.

This comes as the Chartered Accountants of Zimbabwe (Icaz) recently raised a red flag over determination of an appropriate exchange rate for property valuations, saying they have always been overshadowed by the need to comply with International Accounting Standard (IAS) 21.

Exchange rate volatility and high inflation have forced the market to opt for US dollar-pegged trades to preserve value while currency fragilities have continued to haunt the accounting profession.

In its report upon completing auditing the 2021 financial results for TSL, EY said while historical US dollar amounts based on similar transactions have been used as a starting point in determining values on the market-comparable approach, it noted that market participants take into account different risk factors in determining an appropriate value in Zimdollar terms which are not necessarily limited to an exchange rate.

“We have concerns over the appropriateness of using a foreign currency for the valuation inputs and then applying a conversion rate to a US dollar valuation to calculate ZWL property values as in our opinion this may not be an accurate reflection of the current market dynamics where there is a disparity between exchange rates. With respect to the implicit investment approach, the US dollar-estimated rentals may not be an appropriate proxy for the ZWL amounts in which rentals are settled. While historical USD amounts based on similar transactions have been used as a starting point in determining comparable values on the market comparable approach, it is noted that market participants take into account different risk factors in determining an appropriate value in ZWL terms which are not necessarily limited to an exchange rate,” EY said

Consequently, EY said the property values may be materially misstated. The audit firm said it was unable to determine what adjustments may be necessary to correct for these amounts.

During the period, the   group’s investment properties and freehold land and buildings are carried at ZW$3 246 257 520 and ZW$1 953 412 955 respectively as at 31 October 2021.

Policy inconsistencies, which have also played a significant role in fuelling inflation,  have seen a number of  companies failing  to comply with international accounting standards.–Staff Writer.

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