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A volatile mix of high inflation and Covid-19 turmoil has thrown Zimbabwe’s financial reporting system into a tailspin. Chartered accountants have a front-row seat as this turbulent situation unfolds. Business reporter Fidelity Mhlanga (FM) this week caught up with Institute of Chartered Accountants of Zimbabwe (Icaz) chief executive officer Gloria Zvaravanhu (GZ) to get insights about the effects of Covid-19 on the reporting system, among other issues.
Below are excerpts of the interview:
FM: What will be the impact of Covid-19 on Zimbabwe’s reporting system?
GZ: In Zimbabwe, we report in accordance with International Financial Reporting Standards (IFRS). There is a lot of work being done internationally to assess the impact of Covid-19 on reporting and Icaz has been sharing many technical papers with its members to prepare for this. Our website also has the technical papers for market reference.
Covid-19 will affect most of the International Reporting Standards. However, the key ones that can be singled out are:
Going concern — International Accounting Standard 1. Presentation of financial statements requires management to assess a company’s ability to continue as a going concern. Material uncertainties that cast significant doubt on the company’s ability to operate under the going concern basis need to be disclosed in the financial statements. It is highly likely that many companies large and small, and particularly in certain sectors which were unable to operate during the (Covid-19) lockdown, will have issues relating to the current situation that need to be considered by management.
Fair value measurements — In line with IFRS 13, fair value measurements, particularly of financial instruments and investment property, will need to be reviewed to ensure the values reflect the conditions at the balance sheet date. This will involve measurement that considers the effect of Covid-19 in the expectations of future cash flows related to the asset or liability at the reporting date. In the current environment, the volatility of prices on various markets has also increased. This affects the fair value measurement either directly — if fair value is determined based on market prices (for example, in case of shares or debt securities traded on an active market), or indirectly — for example, if a valuation technique is based on inputs that are derived from volatile markets. Consequently, special attention will be needed on the commodity price forecasting that is used in developing fair value conclusions.
Measuring expected credit loss assessments (ECLs) IFRS 9 (Financial Instruments) — The Covid-19 impact on credit risk will be more severe and immediate in various sectors due to the loss of revenues during the lockdown. The increased credit risk faced by banks and lenders is related to exposures to borrowers in highly affected sectors. Provisions estimations will need to be refined to take into account the impact of Covid-19 for the remaining life of a financial instrument, such as loans to borrowers whose credit risk has increased significantly due to Covid-19. There is likely going to be a significant increase in such provisions in the banking sector in Zimbabwe.
Accounting for Covid-19-related rent concessions applying IFRS 16 — Leases — In light of Statutory Instrument 96 of 2020 on rent deferments, there will be need to apply judgement on the impact of the lease accounting and cashflows to take into account the changes in lease payments.
FM: What must companies do to ensure they adhere to good reporting standards?
GZ: In Zimbabwe, it is a requirement to comply with IFRS. To ensure compliance, companies need to have the necessary accounting and reporting skills with their organisations. They must, therefore, employ professional accountants who belong to a professional accounting organisation (PAO).
In Zimbabwe, Icaz is the longest established and pre-eminent PAO. Icaz supports its members through providing technical guidance and the relevant continuous professional development courses (CPDs) that allow the accounting professionals to be up to date with international standards.
Icaz members are also backed by a network of international professionals that helps keep them up to date with international developments. Companies should find such skills invaluable, not just in reporting, but also in strategic thinking.
Professional advisory firms which are members of Icaz also provide technical advisory services to ensure adherence to the International Financial Reporting Standards.
Icaz also provides general guidance on technical issues and thought leadership papers which are found on the Icaz website. The institute is also running online CPDs on various topics that will aid the companies in adhering to IFRSs.
Icaz also reviews the financial reports of listed entities on a rotational basis and gives advice and recommendations to the preparers to aid them in improving the reporting in accordance to IFRS. Icaz, as a founding member of the International Federation of Accountants, does this to improve the quality of reporting in the market. Icaz intends to extend this to public interest entities.
FM: What could be the impact of delays and missed deadlines in reporting on the economy?
GZ: Investors rely on the financial reports for decision-making. Timely, quality and internationally aligned reporting is a key consideration for investors. Delays in quality reporting can negatively affect the decision to invest or not by a foreign investor.
Other decisions relating to capital requirements considerations and dividend declarations will also be affected by delays in reporting.
The most significant frustration will fall on investors, whose reactions might affect the sustainability of businesses. Government agencies such as Zimbabwe Revenue Authority (Zimra) and regulators also require timely financial information from companies in carrying out their mandates.
FM: Share with us the feedback from chartered accountants since they began reporting using International Accounting Standard (IAS) 29. What have been the challenges?
GZ: Zimbabwe has been in hyperinflation before and the last IAS 29-compliant financials were prepared in 2008. Zimbabwe influenced and contributed to the crafting of the IAS 29 standard, therefore applying the standard on IAS 29 for reporting was not to be a challenge for Zimbabwe, all things being equal. Unfortunately, all things have not been equal in Zimbabwe and challenges were posed by:
The complexities resulting from the change in currency during the same period.
The brain drain that happened over the past couple of years meant that the training investment and experiences of accountants who prepared the last IAS 29-compliant financials was lost, leading to re-training and causing some delays in reporting in general.
Challenges with getting timely and reliable inflation statistics.
Icaz has offered workshops and training in the market to address the challenges. As with everything, it is hoped that the second round of IAS 29 reporting will be more efficient than the first.
FM: I have noticed that audit notes from companies that have reported their financials indicate that auditors have an adverse opinion on the numbers. Does it mean we cannot rely on these financial results?
GZ: An adverse audit opinion in simple terms means that an auditor will be informing the financial statement users that the financials are not presenting a true and fair reflection of the financial position of the entity in line with IFRS or other requirements. The reason for such an opinion will be provided in the basis of opinion paragraph and this will vary from entity to entity.
In Zimbabwe the audit opinions of most companies were in the recent past, generally qualified for non-compliance with IAS 21 — effects of changes in foreign exchange rates. It is however necessary to appreciate the reasons for qualification, entity by entity, as there could be some other issues over and above the general qualification on IAS 21 that prevailed in Zimbabwe.
Financial statement users rely on financial statements for varied reasons. An adverse opinion would generally mean that it will not be advisable to rely on financial statements based on the reasons highlighted in the basis of opinion paragraph. Users would need to assess the impact of the reasons for the adverse opinion before determining whether or not to rely on the financial statements of any particular entity.
FM: Last year, Icaz ran a 100-day campaign against corruption dubbed the “Icaz 100-day campaign against corruption”. Did the campaign yield the desired results?
GZ: The thrust of the campaign was to promote good governance practices by denouncing corruption in all aspects of our lives and society. This is in line with the Icaz values of integrity, honesty and responsibility, which form the basis of the chartered accountancy profession. The institute believes this would change someone’s actions, deter someone from corrupt activities and improve our accountability to each other as a nation.
Based on various feedback received, the campaign went some way in achieving its objectives. More still needs to be done as undoing an undesirable culture is always a journey of many steps and requires cooperation by all concerned.
FM: What tax holidays would you advise the government to provide to companies to cushion them from the impact of Covid 19?
GZ: As an institute, we are in active engagements with Zimra on tax matters. Policy-related tax matters are dealt with through the Ministry of Finance. On the 12th of May 2020, we had an online workshop with Zimra where they were sharing the initiatives they had taken in light of Covid -19.
Some of the key submissions made to them to consider were:
Reviewing of the donations allowable for Income Tax deductions to cover donations made by corporates towards Covid-19.
To consider waiver of penalties and interest on overdue amounts for a period of time, in light of the cashflow effects of Covid-19 on business.
Relaxation of tax returns submission deadlines and enhancement of the Zimra system for online submissions.
More efficiency in processing of Value-Added Tax and other tax refunds given the cashflow constraints imposed on most companies.Relaxation of thin capitalisation rules to enable companies to borrow for capitalisation purposes post-Covid-19.
FM: Zimra has a strategic plan for 2019 to 2023, geared at simplifying processes through automation. What are the pros and cons for the accounting profession?
GZ: This can only be a good thing, more so given the changes brought about by Covid-19 where remote working is likely to be more prevalent in the future. It is the way to go. With it will obviously come risks and arbitrage opportunities that will need to be properly planned for and minimised.
FM: What risks does Covid-19 pose on transfer pricing?
GZ: Most entities are facing financial challenges in this environment and related companies might overlook the need to respect transfer pricing rules in the transfer of goods and services as a way of cushioning each other in this environment. Entities will need to seek expert advice if any changes are made to related-party transactions in reaction to the impact of Covid-19.
l Read the full interview on www.theindependent.co.zw