Zimbabwe’s blended inflation sparks confusion

Government’s decision to allow entities to quote and sell goods and services in the United States dollar and the local unit has triggered confusion on which inflation index to use by companies preparers of accounts and investors, Business Times can report.

ZIMSTATS, the government’s agency tasked with producing inflation figures, has been publishing blended inflation alongside consumer price Index (CPI), following the promulgation of Statutory Instrument 185 of 2020,which allowed entities to quote and sell goods and services in both US$ and ZWL$.

The blended inflation, entails a combination of inflation for prices that are quoted in US$ and inflation for prices quoted in ZWL$.

Zimbabwe has been experiencing significant hyperinflation and the functional currency affected most is the Zimbabwe dollar.

This has confused the market on what functional currency to use for reporting.

This week, the Institute of Chartered Accountants of Zimbabwe (ICAZ), issued a guideline following the confusion in the market.

ICAZ said entities that see an increase in US$ transactions over ZWL$ transactions will need to do an assessment of whether their functional currency has changed from ZWL$ to US$ in accordance with International Accounting Standard (IAS) 21 on the effects of changes in foreign exchange rate.

It also highlighted that selection and use of the general price index in the restatement of financial statements in accordance with IAS 29 requires the use of a general price index that reflects changes in general purchasing power.

In Zimbabwe, the currency which was assessed to be in hyperinflation is the ZWL$ while the US$ is not and accountants do not need to do an assessment because this does not concern them.

“Entities that still use the ZWL$ as the functional currency should continue to use CPI and not a blended CPI in the preparation of inflation adjusted financials.

“A blended inflation adjustment index is not appropriate in the preparation of inflation adjusted financial statements as the financials are prepared in a particular functional currency (either ZWL$ or US$) and not reported in a blended currency,” ICAZ said.

“Similarly, any inflation index should also be specific to the reporting currency. “Therefore those entities whose functional currency is ZWL$ should continue preparing hyperinflation accounts using the ZWL$ CPI.” – Business Times