The numbers do not tell whole story

IN an economy where there are constant moving parts, businesses trading in multiple currencies and exchange rates used for pricing are different to those used for settlement of creditors and the actual value of receivables is constantly up in the air. Historically, inflation adjusted numbers alone do not tell any meaningful story.

It is high time; preparers are more aggressive and tell their stories differently and the Zimbabwe Stock Exchange needs to produce additional reporting requirements.

If you read the Johannesburg Stock Exchange (JSE) Sens announcements, you get more information on the story of the business than a whole set of annual reports for a Zimbabwean company, just as an example.

The conundrum

Most formal businesses in the country use the Reserve Bank of Zimbabwe (“WBWS”) willing-buyer willing-seller rate as a spot rate in their accounting system.

Sales in foreign currency are translated at the lower auction rate in the accounting system into Zimbabwean dollar presentation currency.

• Rampaging inflation hits Old Mutual . . . giant slips to $9 billion loss after tax
• Monetary measures spur exchange rate stability: RBZ
• Zim deploys IMF windfall to horticulture
• Banker demands $21m from land developer

Pricing and sales in local Zimdollars are driven by alternative exchange rates which are at a premium of between 50-120% of the auction rate, thus a unit sold in Zimdollars will have a higher value than the same unit sold in foreign currency.

However, both these are treated the same under inflation accounting. I hope I have not lost my non-accountants in this illustration.

If a business sells more volumes in foreign currency, inflation accounting will have a lower revenue number as compared to if the same units were sold in local currency.

A company whose sales mix in respect of currencies between current and prior year skews towards foreign denominated sales will have a lower revenue number hence an unfavorable picture when the annual report is analysed at face value under inflation accounting.

It is worsened when a company whose sales mix is more in United States dollar (USD) while its cost structure is Zimdollars, as application of hyper-inflation accounting will convert a Zimdollars cost, which already has an inflationary adjustment further that has a compounding effect. While its sales which are reduced by the lower official exchange rate hence you end up either making a loss or a lower revenue growth while volumes on the contrary increased.

Inflation accounting is there to enable comparability by adjusting a historical transaction to its current value as at the reporting date, with businesses trying to get ahead of inflation, prices are changed regularly, at times daily or weekly.

IAS 29 will further inflate the already inflated number and at times the price increase by the companies is ahead of the CPI numbers published which are used on hyperinflation, introducing further distortions in reported numbers.

A certain segment of the market uses pseudo accounts or shadow accounts using a stable currency which has its complications and is not IFRS compliant and cannot be part of the annual report.

Other preparers have resorted, with the aid of technology, to having separate ledgers for transactions of each type, which has its own complications and is not IFRS compliant as well.

In a market where a US dollar sale was financed in Zimdollars makes analysing performance difficult for decision-making without other additional assumptions being added to the analysis.

The story regarding complexities in producing cost of sales is not talked about enough. Some preparers have systems where it just makes sense to keep cost of sale in US dollar, are the assumptions to convert that into Zimdollars being fully disclosed?

And for manufacturers using average costing method or FIFO, with the raw material cost mainly a foreign component, conversion costs mainly an inflated Zimdollarsposition, this is another story that is not fully told of its impact on inventory valuation, which states lower of cost or net realisable value.

I predict most stock numbers we see have an unrealised exchange gain intelligently put in there one way or the other.

New problem in the horizon

Say we want to issue US dollars financials; most businesses have legacy systems hence getting reliable information in US dollars for a company whose sales are a mix of currencies can prove to be a challenge, at least in the first year of application, while at the same time the revenue authority still wants a Zimdollar trial balance or Zimdollars management accounts.

Secondly, most businesses' mix of currencies is constantly changing, hence proving that functional currency is now USD, technically this can be a challenge for many, we can expect a qualification there.

Thirdly, accounting standards state that for a currency that is of a hyperinflationary economy, one must prepare inflation adjusted financials first and then translate them back to US dollars using the closing rates, this is pure disaster as the resultant results are significantly lower than the true USD position apart from monetary assets and liabilities.

I predict a few companies will attempt to produce audited US dollars financial statements, which will obtain a qualification particularly around the transition or conversion from Zimdollars to US dollars and this opens the market to management bias on the assumptions taken in the process and this will force companies to adopt the revaluation model to address the PPE valuation.

Confusing story indeed

When one opens a newspaper, there is a high likelihood that there is a notice by one of the listed companies informing the public of a delay in the publication of the results, mostly December year end results and some even September and October 2022 results at the moment, one wonders what the real story is behind this.

Compliance mandates companies to still publish those results but the question is what do we do with the information? What is the story management is telling the market?

It is my view that far greater things are happening in companies that are not shown in the numbers, for many companies, nonperformance is hidden through price adjustments and fair value adjustments.

We normally hear somewhere in the press release that a certain percentage of sales was in US dollars. How come there is non-disclosure of the same percentages for expenses in US dollars and borrowings and creditors? I am sure they paint the color of the story better. If risk management disclosures around currency risk were fully given prominence that could help.

A set of financial statements is relevant if it can tell the story of how management obtained capital, applied it to their processes, risks faced in sweating that capital and the financial and non-financial outcomes.

Hence a pure focus on stale financials and a press release, which is but “a copy and paste” of prior year wording surely does not say much.

As a mere user of the financials, I am concerned as to the reliability of these stale numbers by the time they come out. Are the auditors even really being the assurance provider?

We expect at least reasonable assurance, but I am not sure how reasonably assured I am when the delay notice states that the auditor was finalising certain aspects of the audit four months after the year end. What is the real story the management and auditor are not telling users of financials?

If the auditor is incompetent or incapacitated what has management done to at least assure the user that the numbers are telling the full story?

What is stopping management disclosing at least unaudited numbers timely? We can compare such to the audited results once they come out.

If the preparer at times struggles to make sense of their numbers, what more his/her stakeholders, or are we opening ourselves to loss of value in annual reports.

Listening to most press briefings when listed companies publish their annual reports, the consistent innuendos is that the numbers are not saying the true picture or you sometimes see or hear the chief finance officer (CFO) bringing new set of numbers of key performance indicators and going at length to focus on those as opposed to his numbers in the pack.

I have experienced many meetings where the audit committee blatantly said these numbers do not make any sense.

Conclusion

It therefore becomes imperative for professional accountants such as chartered accountants (Cas) to do as my lecturers said: “We are not number crunchers.”

We must provide more supplementary information to the annual reports to our stakeholders to make more sense and allow them to make meaningful use of the reported numbers.

The chairperson’s statement, operations report, KPI summaries which further aid the reported numbers become invaluable. Analysts need to move away from the surface of the numbers but focus on what part of the story the numbers are not fully addressing.

Financial statements should remain relevant to the needs of their users, understandable, reliable and be comparable such that a rational reader should be able to make meaningful decisions based on the published financial information.

• Makwara is a chartered accountant with both local and international experience in finance, accounting, auditing and business strategy. He is part of the Institute of Chartered Accountants in Zimbabwe and the views expressed in this article are personal views based on his professional experiences.