KC ROTTOK CHESAINA
ZIMBABWE has introduced a new currency known as the ZiG which is short for Zimbabwean Gold.
The difference between this currency and its predecessors is that its value is linked to the gold price. The currency started trading in early April and it remains to be seen whether this new batch of notes will be the solution to the country’s longstanding currency problems.
There are multiple companies in South Africa with operations in Zimbabwe and they will have questions as to the impact of the new currency on their financial reporting. There are four fundamental questions that
arise:
1. Does ZiG eliminate hyperinflation accounting?
International Accounting Standard (IAS) 29 (Financial Reporting in Hyperinflationary Economies) applies to the accounting for any entity whose functional currency is the currency of a hyperinflationary economy. A key characteristic of a hyperinflationary economy is one where the current inflation rate over three years is approaching or exceeds 100%.
This has been the case for Zimbabwe which has led to entities accounting for financial statements using the principles in IAS 29 to restate prior year figures for comparability with current year amounts. With a new currency having been introduced, it is expected that goods will be priced in ZiG which will necessitate a reassessment of whether prices are increasing at a hyperinflationary rate. If it is concluded that hyperinflation ceases to exist then IAS 29 ceases and the figures at the end of the previous reporting period translated to ZiG would be the basis for current year accounting without further restatement.
2. What is the functional currency of entities in Zimbabwe?
Per IAS 21, financial statements should be prepared in accordance with the functional currency of the entity. Functional currency is defined as the currency of the primary economic environment in which the entity operates. It is the currency that mainly influences sales prices for goods and services and influences labour, material and other costs. Entities in Zimbabwe will need to assess whether ZiG has become the new functional currency; if so, the entities will apply translation procedures applicable to the new functional currency prospective from the date of the change.
3. Is the change to ZiG an event after the reporting period?
In accordance with IAS 10, entities should assess whether events after the reporting period are adjustable or non-adjustable. Events that lead to adjustment of amounts reported at year end are those that reveal conditions that existed at year end while other events are considered non-adjustable. As ZiG was only adopted in April, entities with financial year ends prior to that would treat this as non-adjustable. Per IAS 10.21, these entities would need to disclose the change in functional currency as well as the estimate of the financial effect of adopting ZiG.
4. What if ZiG lacks exchangeability?
A currency is exchangeable if an entity is able to obtain the currency within a time frame that allows for a normal administrative delay through a market or exchange mechanism. In August 2023, the IASB issued an amendment to IAS 21 dealing with this exact issue, the fact that in several instances an entity has currency units that cannot be exchanged for a significant amount of another currency.
There has been long-term lack of exchangeability between the US dollar and the Zimbabwean dollar. The amendment to IAS 21 states that an entity should utilise an exchange rate that reflects the rate that an orderly exchange transaction would take place between market participants at the measurement date. In other words, the IFRS 13 fair value principles should be applied if ZiG is found not to be readily exchangeable to other currencies.
About the writer: KC Rottok Chesaina is chief IFRS officer at Financial Minds Consulting. The above is not financial reporting advice, contact us for any IFRS-related consulting and training requirements. Email: [email protected].
