Interpreting Financial Statements in An Evolving Multicurrency Environment

Interpretation of financial statements is one of the most critical steps in making an economic decision over a particular investment. Investors and other users of such information have since relied on preparers of financial statements (accountants), those who independently analyse to give opinions on the figures (auditors and analysts) and any other relevant information that may assist in pointing out to the business’s future operations. Interpreting financial statements is critical in making decisions such as whether or not to buy shares of a listed or private entity, extending a debt facility or assigning a credit rating to an entity’s existing debt. However, for such information to be deemed helpful to the intended user, it has to satisfy the following conditions:

a. Relevance – The information in the financial statements must be relevant to the user.

b. Faithful Representation – The information must be complete, neutral and free from bias.

c. Comparability – The financial statements should be comparable to other periods or companies.

d. Verifiability – The information should be verifiable by independent parties. e. Timeliness – The information should be available in a timely manner.

Over time, Zimbabwe’s currency system has evolved from the post-independence Zimbabwe Dollar to the most recent multicurrency system. This, however, has brought its own challenges to the capital markets which rely on financial statements to make sound economic decisions. The following are some of the challenges faced by our local capital markets in interpreting the presented financials:

1. Lack of comparability—Analysts require at least 5 years of historical financial statements to get a sense of how the business has been performing. This aids in creating forecasts, which feed into valuation models. The change in functional currency and/or presentation currency creates a challenge as a result of the shift in economic dynamics........READ MORE