NO NEED FOR INFLATIONARY ADJUSTMENTS; OK ZIM FINANCIALS MAKE cents IN USD

Because of IAS 29 Financial Reporting in Hyperinflationary Economies, a firm’s set of accounts are the inflationary adjusted ones and not the historical. Its auditors will express an opinion on these, with the historical presented only in support. This in turn means, the directors technically present to investors the audited inflationary adjusted accounts. However, in Zimbabwe you will find out that though this is practiced in compliance with reporting standards and statues, investors still rely more on the historical figures.?

Let us take a closer look at OK Zimbabwe’s latest accounts. In the last annual report for the year ended 31 March 2021 the firm’s performance is weak based on inflationary adjusted figures – but surprisingly strong historically. Just to illustrate, the directors made sure that the historical figures were presented directly opposite the inflationary adjusted under the Financial Highlights section of the report, though they proceeded to comment on inflationary adjusted figures only. In compliance, of cause.

But, which results should we really rely on? Neither. Not because of the inherent weaknesses of the IFRS in question nor of the inflation rates being used, but because ours is a highly informal economy. And currently the informal economy is not in a hyperinflationary state. In actual fact, prices are very much stable. How? Well, because the economy uses a different set of functional currency and presentation currency – which is the US Dollar. (For the record, this is not a foreign currency, it seized being one a long time ago, around 2009 or thereabout.)

To illustrate my point, I will digress a little and take time to consider the primary factors of determining the appropriate functional currency of an entity, as prescribed by another IFRS; IAS 21 The Effects of Changes in Foreign Exchange Rates:

Question 1 – Which currency influences your selling price?

Question 2 -??Which currency whose competitive forces and regulations determine your selling prices?

Question 3 – Which currency mainly influences your input costs?

I wonder if your answers to these questions, for Buy Zim, were different from mine. Enough said.

Okay, back to OK lets assess the firm’s performance in U-S-D vis-a-vis the inflationary adjusted figures (historical figures included in parenthesis). Note: I have used the rates which were obtainable on the alternative foreign exchange market, on the year ended date, which market is probably the most accessible to most retail customers (Disclaimer: I am not promoting this market).

In USD, OK Zim’s revenues are actually double that of prior year instead of the presumed slump of 2% (historical: 494% increase). Gross profit increases by more than half instead of contracting by a third (historical: 350% increase). Both EBITDA and Operating profit record marginal increases of 8% and 4% respectively, instead of the 88% and 115% drop (historical: 221% and 211% increment). Even Profit for the Year also increases by a healthy 18% instead of the 46% reduction (historical: 251% increase).

Though the USD results are positively correlated to the historical ones, they are not as wild, and are fit for financial modelling. Well, one might wonder, ‘why go through all these pains when you can tell just by reading the historical?’. Unfortunately, this is not always the case. In some instances, USD results paint a different picture to historical; especially where prices were not adjusted faster than the gains of the USD over the ZWL Dollar.

In other words, OK Zim did well on pricing. Though revenues increased by 494%, in historical, volumes actually fell by 13%. This means prices were raised by more than the 199% appreciation on the US Dollar recorded during the same period (eh, on the alternative market, that is). Do you still think you need to adjust your accounts for inflation; I certainly don’t!