RBZ MONETARY POLICY – IMPACT ON FINANCIAL REPORTING

In May 2016, the RBZ introduced the priority list as an exchange control measure. Subsequently, the bond notes were introduced in October 2016 through Statutory Instrument 133 which amended section 44 of RBZ Act. There was also increased encouragement to use plastic money/electronic money (RTGS and mobile) to alleviate the liquidity crisis. In 2017, Statutory Instrument 122A also amended the RBZ Act in clarifying the definition of “currency” in Zimbabwe and introduced the consequences of illegal currency trading at exchange rate other than 1:1.  The above measures caused the use of local money (RTGS, bond note and coins) to be more dominant than the US$ in carrying out business transactions. The US$ was relegated to only carry-out foreign payments as per the exchange control approvals through the priority list. These developments and events raised very big financial accounting and auditing issues, which caused the accounting profession sleepless nights. The profession then resolved to closely monitor and assess the reporting and auditing implications was of the monetary policy changes.

Reporting Challenge

The reporting challenge arose when traders started charging a premium on their prices if a buyer paid in other forms of money other than the US$ cash. When the availability of the US$ became worse in 2017, the key question boggling accountants and auditors was whether the US$ was still a dominant currency in transactions or whether there was now a local currency. International Financial Reporting Standards (IFRS) requires an entity to identify its bookkeeping currency (referred to as functional currency). This currency is not identified out of choice of the entity but rather it is the dominant currency of the primary economic environment in which an entity operates. It should be noted that earlier in 2010, the US$ had been identified as the dominant currency used in Zimbabwe over the South African Rand and other currencies that had been adopted by the government. By end of 2017, it was very difficult to still defend the US$ as the book-keeping/functional currency as the premium between the US$ and local dollar was now very apparent. The following reporting and auditing challenges therefore arose:

  • Will the US$ financial statements provide useful and relevant financial information which is fairly stated to the users?
  • Are RTGS and bond dollar amounts translated at 1:1 to US$ fairly stating the financial position and performance of reporting entities?

Many stakeholders or users of Zimbabwean financial statements, those that are local and foreign, started making noise on the above issues. This was bound to increase the country risk; it was also contradictory to the mantra “Zimbabwe is Open for Business” and posed a reputation risk to the accountancy profession for failing to protect the public financial interest through lobbying the monetary authorities.

Role of the accounting profession

The accounting profession began a process of monitoring the monetary policy changes, related laws and underlying market impact since 2016. In the 2016 reporting period, it was assessed that there was no strong indication that the US$ was no longer the functional currency. However, towards the end of 2017, the realization that US$ was no-longer a dominant currency and that a de facto/surrogate local currency had emerged became very strong. There was a close call on whether the US$ was still the functional currency as the decision had to be voted for in the technical committees, but the majority felt the US$ was still dominant at throughout 2017. What is important though, is that in 2016 and 2017 the accounting profession provided relevant guidance on additional disclosures in financial statements to assist users to make sense of the functional currency dilemma. The guidance was also done in consultation with the relevant authorities like RBZ.

In 2018, especially after the January and October monetary statement, the separation of the RTGS and Nostro confirmed that the US$ was no longer the dominant currency. The emergence of the runaway inflation also buttressed this conclusion. The accountancy profession has been at the heart of this issue studying and researching to come up with relevant guidance to assist preparers of financial statements and auditors. The activities included obtaining legal opinions, IFRS technical analysis, consultation with economists and sharing notes with other fellow local and international standard setting bodies. This resulted with the conclusion that RTGS, mobile money, bond notes and coins represented a de-facto local currency. This conclusion was also shared with the relevant authorities as the basis to which financial statements would be prepared and audited, if there were to achieve fair presentation and IFRS compliance.

Compliance with international best practice of reporting, e.g. IFRS was at the top of the accounting profession, considering Zimbabwe failed to comply with IFRS in 2008. Compliance with IFRS in financial reporting would help in managing the country risk and the support the Zimbabwe is Open for Business mantra as well as attraction of the foreign direct investment.

Impact of February 2019 MPS

During the debates and interactions, the contentious issues were the name of the currency which will be referred to in financial statements, if the US$ was no longer appropriate and what exchange rate could be used to translate amounts from US$ to local $ or vice versa.

The 20 February RBZ monetary policy clarifies these issues and assist accountants and auditors to do their work clearly. Firstly, it clears, the elephant in the room, that there is a local currency, namely RTGS dollar. Hence, a Zimbabwe dollar (ZW$). It also provides a formal platform for market observable exchange rate between the ZW$ and other currencies through the inter-bank exchange market. This now mirrors the reality that the US$ was and is no longer the dominant (functional/booking-keeping currency) in Zimbabwe. Thus, the ZW$ will now be used as the book-keeping or functional currency, however, an entity can chose to present the actual financial statements using a different presentation currency to its functional currency as long as the reason is disclosed.

Key questions for accountants and auditors still remaining are: when did the US$ stopped being the functional currency? What exchange rate will be used to translate the exchange rate of before the launch of the inter-bank exchange market, considering that they were transactions between US$ and the ZW$ before 20 Feb 2019? These, I would like to admit, are a lesser devil to deal with than producing so called IFRS compliant financial statements in a currency neither pronounced nor accepted by the authorities and translating at an exchange rate other than the 1:1 per the law.

It is important to note that accountants do not create policy, rather their primary role is to protect the public financial interest by preparing financial reports that reflect the true and fair economic substance of the transactions and events they purport to present, and to provide an audit opinion (assurance) that the financial reports are fairly present the economic substance of the transactions and events obtaining. Reporting financial statements using US$ at an exchange rate of 1:1 was no longer fairly stating the economic substance of the transactions and events obtaining in Zimbabwe. Thus, acceptance of the existence of the ZW$ and that it is not 1:1 with the US$ is simply acceptance of economic reality. It is not in the space of accountants to say is it right or wrong, rather as an accountant we are obliged to preside on the substance of reality and facts. Hence, the reign of the IFRS principle of “economic substance over legal form”.

All reporting entities should now look out for the “Currency Reporting and Auditing Guidance” after updating with the 20 February 2019 RBZ monetary policy statement implications from the Public Accountants and Auditors Board (PAAB). PAAB is the Zimbabwe standard setter and regulator of accounting and auditing practices in Zimbabwe.

The accounting profession has been proactive and focused on protecting public financial interest. I am glad that the acceptance of the existence of the local $ as a local currency by the authorities and to float the exchange rate was the right thing to do and as pointed by the monetary policy it will conserve value. This a big stepping stone towards compliance in global best practices.

Recommendation

My experience on this issue as a commissioner of enquiry in the conversion of pensions and insurance values from ZW$ to US$ taught me a few things. I therefore draw upon it to recommend a few pointers so that we avoid the 2008/2009 mistakes:

  1. Impact Assessment: Government should instruct that an impact assessment of the new currency policy be carried out for all relevant sectors, e.g. banking, insurance, foreign obligations, etc.
  2. Transition Guidance: Transitioning guidance must be created and approved by an independent currency transitional council to avoid significant prejudices or changes in policies which affect public interest, as was seen 2008.

NB: It is not appropriate to introduce a pervasive change such as pronouncement of a currency and not provide guidance on how the resulting impact will affect the public.