The accounting dilemma facing Zimbabwe in the midst of severe limitations to financial reporting
Recently Zimbabwe set several world records. Swimmer Kirsty Coventry set the world record in the 200m backstroke at the Beijing Olympics and broke her own record in Rome this year. Cricketer Charles Coventry equalled the highest individual ODI score with a remarkable 194 not out. However, Zimbabwe has earned another less glamorous world record. Paul Hanke of the Cato Institute estimated Zimbabwe’s annual inflation to have reached 79.6 billion percent in November 2008. This number never made it into the official records, as the fundamentals across the Zimbabwe economy have, over time, changed their nature to such a degree that the Zimbabwe dollar itself was not a consistent measure of value at any single point. Hence, measuring the movement in its value between two points, and generating a single inflation index for the nation was impossible.
This phenomenon arose during early 2008 when restrictive price controls, coupled with inflation levels that had reached exponential levels of over 50% month on month, forced many entities to revert back to barter trade alongside formal trading. Deals were done where tyres were bought with sugar and cows. Banking charges were paid in petrol. These transactions were often accounted for at the controlled price, which was usually far from the fair value.
Later in the year, the growth of the amount of printed paper money in circulation was outstripped by the growth in the digital liquidity that the banks and the stock market displayed. Paper cash was used for different purposes from digital cash and the value of this paper cash diminished at a slower rate due a lack of supply, meanwhile the value of digital cash continued to diminish very rapidly. This, in part, led to the emergence of several different values, reflected as different exchange rates within the Zimbabwe dollar at a point in time. For example, in early October 2008 (note that this is after 13 zeros had already been dropped from the currency), a leading Zimbabwean economist indicated that the exchange rate against the US Dollar for paper cash was approximately Z$2,500, while on the same day the transfer rate for digital cash was over Z$900,000 and the Old Mutual Implied Rate which is derived off the value of the same share trading on the ZSE, the JSE and the LSE was approximately Z$580,000. These different values within the Zimbabwe dollar were each subject to their own unique inflation levels.
These changes in value became increasingly rapid, often moved by over 100% in a single day and did not move uniformly over the various sectors, or even various cities in Zimbabwe. The Old Mutual Implied Rate had bolted to over Z$600 quadrillion to the USD by the middle of November 2008. The Zimbabwe Stock Exchange ZSE then ceased trading. When it re-opened in February 2009, it was trading in USD. In such extreme hyperinflation, many fundamentals are very difficult, if not impossible to measure.
The Zimbabwe government last published an official Zimbabwe dollar inflation index in July 2008. This, combined with the complexities of not having a stable currency due to the phenomenon described above, meant that there were severe limitations to accurate financial reporting in the period from August 2008 to when the Zimbabwe dollar was abandoned in early 2009. During this period the Institute of Chartered Accountants in Zimbabwe set up a technical subcommittee to address these challenges, as it was impossible to apply IAS 29 “Financial Reporting in Hyperinflationary Economies” without a general price index, or IAS 21 “Exchange Rates” without a single spot rate.
In early 2009, the local accounting bodies and the ZSE jointly informed the public that all audit reports for Zimbabwe dollar financial statements for the year ended 31 December 2008 would carry either a disclaimed or an adverse opinion. Transitional guidance titled “Change in Functional Currency 2009” was then released. This encouraged all entities to fair value for their assets and liabilities on the date they adopted a new currency to establish a fair opening position. Most entities adopted a new currency on 1 January 2009 and adopted the USD. ICAZ continued to consult the IASB informally and SAICA formally on this matter, to try and establish a reasonable solution to this dilemma.
Zimbabwe, while very eager to remain within IFRS, acknowledges that IFRS never envisioned the circumstances that it has experienced, particularly where the functional currency is no longer a consistent and reliable unit of measure and becomes dysfunctional. Zimbabwean entities that have applied the transitional guidance are currently not in full compliance with IFRS, as they were not able to adhere to IAS 29 and IAS 21 when changing their functional currency.
Most have been faithfully measuring every transaction subsequent to fair valuing their opening position in the currency they adopted in accordance with IFRS. ICAZ and SAICA are currently working together and engaging the IASB with the goal of bringing Zimbabwean entities back onto full compliance with IFRS as soon as possible. This could be done either through the amendment of IAS 29 “Financial Reporting in Hyperinflationary Economies”, IAS 21 “The Effects of Changes in Foreign Exchange Rates” or IFRS 1 “First-time Adoption of International Financial Reporting Standards”.
Gordon Whiley CA(Z), BCompt (Hons), is a member of the Accounting Procedures Committee of the Institute of Chartered Accountants in Zimbabwe.