IAS29 an unnecessary burden: Accountants

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Zimbabwean companies are now required to apply International Accounting Standard 29 (IAS 29) in their financial reporting effective July 1, 2019, according to the Public Accountants and Auditors Board (PAAB), but preparers of accounting books are of the opinion that the move will not add any value.

IAS 29, which deals with financial reporting in hyperinflationary economies, requires the International Financial Reporting Standards (IFRS) financial statements of any entity operating in a hyperinflationary economy to take full account of the effects of inflation using a “current purchasing power” approach.

Observers say allowing IAS 29 to be applied in the country by the PAAB, which is mandated to regulate auditing and accounting standards in the country, means acknowledgement by authorities that the country has now entered hyperinflation.

According to a report prepared by PricewaterhouseCoopers (International) titled “Understanding IAS 29” in a hyperinflation environment, people accumulate wealth in non-monetary assets or in stable foreign currency.  The Standard also provides that in hyperinflation conditions, monetary amounts are expressed in terms of a relatively stable foreign currency while prices for credit sales and purchases are calculated to compensate for the expected loss of purchasing power during the credit period.

Further, interest rates, wages and prices are also linked to a price index; and the cumulative inflation rate over three years is approaching, or exceeds, 100 percent.

“A cumulative three-year inflation rate exceeding 100 percent is a strong indicator of hyperinflation, but the qualitative factors should also be considered.”

However, the decision by the PAAB comes at a time Zimstat is no longer publishing annual inflation figures after Finance and Economic Development Minister Mthuli Ncube said 2019 prices are not comparable with those that prevailed in 2018.

Minister Ncube said annual inflation figures will only be released in February 2020 because prices are no longer measured in United States dollars but in the Zimbabwean dollar, making the figures incompatible.

In October 2018, Zimbabwe was using a multi-currency system anchored by the US dollar, but has since adopted a mono-currency making price comparisons difficult, according to Minister Ncube.

“The change in the currency regime from multi-currency (system) to Zimbabwe dollar has definitely impacted on the base for calculation of (consumer price indices), and hence inflation,” said Minister Ncube.

However, although Zimbabwe’s month-on-month inflation for September slowed to 17,7 percent according to Zimstat, the annual figure is estimated to have reached 353 percent, probably prompting practitioners to adopt the use of IAS 29.  In a statement released Friday last week, the PAAB said “there is broad market consensus within the accounting and auditing professions that the factors and characteristics to apply the financial reporting in hyperinflationary

economies standard (IAS 29), in Zimbabwe have been met.”

It said while cognisant of paragraph 7 of IAS 29; in light of multiple stakeholders including tax authorities and other sector specific regulators who are amongst the users of financial statements, it is recommended that prepares exercise professional judgement in considering the presentation of historical financial information as supplementary information alongside the primary IFRS financial statements which would be inflation-adjusted in terms of the requirements of IAS 29.

“Where historical financial information is presented alongside IFRS financial statements adjusted for IAS 29, it must be made quite clear which represents the primary financial statements,” reads the PAAB statement.

Accounting and auditing practitioners are however of the opinion that IAS 29, which requires a detailed series of procedures represents a challenge for reporting entities and auditors without adding value.

The preparation of financial statements using IAS29 requires an understanding of the underlying economic concepts and a complex series of procedures and reconciliations to ensure accurate results, according a financial director with a local firm who requested anonymity for professional reasons.

“It’s a position from our regulator, PAAB, so I can’t say much.

“The factors have to be carefully weighed because it is not desirable to move in and out of hyper-inflationary reporting within a short time period.

“We are just going to spend countless hours doing something that I don’t believe is of any value.

“We are better off pegging everything to the USD than applying that standard,” the director said.

Another practitioner, who also cannot be named shared the same sentiment and said in 2007/8 hyperinflation adjusted accounts did not add value.

“I don’t think readers will use IAS29 accounts for decision making. Companies have to prepare US dollar accounts or use certain performance indicators to measure progress,” he said.

In terms of the additional work involved, he said even chartered accountants like him would still need refresher training.

“I am not exactly sure how much work is involved but this standard will definitely bring about increase in audit fees.”

A partner with a local audit firm said applying IAS29 “is a tick-the-box kind of exercise, which not a lot of people understand, but necessary for purposes of complying with the accounting standards.”

He however noted that IAS29 is complicated and “is a lot of work for preparers and auditors to check. It seeks to report hyper-inflated numbers in such a way that there is comparability between current periods and prior periods.”