REPORTING - icaz.org.zw IMPLICATIONS OF CU… · IFRS CONSIDERATIONS 2 Review of:-SI 33 and PAAB...

REPORTING IMPLICATIONS OF CURRENCY REFORMS IN ZIM – JULY 2019

By Anesu Daka CA(SA)(Z)

AGENDA

BACKGROUND

1

IFRS CONSIDERATIONS

2

Review of:

-SI 33 and PAAB Guidance, SI 142

3

BUSINESS IMPLICATIONS OF S1 33 AND S1 142

4

AUDIT CONSIDERATIONS

5

WAYFORWARD

6

Chronology of Events

1 Feb 2009

Adoption of multi-currency

2015

Introduction of Bond Coins and demonetization of ZW$

Oct 2016

Introduction of Bond Notes through – SI 122A

Feb. 2018

Quarantine of USD balances (RBZ MPS)

Oct. 2018

Separation of USD Nostro and RTGS USD (RBZ MPS)

Feb. 2019

Introduction of RTGS$ as per SI 33

24 June 2019

SI 142 and return of the ZWL$

IFRS Considerations

Objective, Usefulness & Limitations of GPFS

Users of GPFS

KEY ATTRIBUTES

Compliance & Non-Compliance with IFRS

Reporting Challenges in Zim

IFRS implications

Objective GPFS?

Key Aspects:- Objective of GPFS- Note Users as per IFRS

Attribute of Useful AFS:- Fundamental attributes- Enhancing

Substance vs Legal form

Does recording transactions and preparing AFS as US$ at 1:1 provide USEFUL financial Information?

Compliance with IFRS?

Q. Are You still compliant with IFRS?

Is Zimbabwe Still in IFRS – IFRS1.3

Q. Are You still compliant with IFRS? • Dec Year End • Post Dec Year [March, June, Etc]

Quiz 1?

• Was there a local currency in Zimbabwe before 22 February 2019?

• YES

• NO

Analysis of Events TimeLine

3rd Q of 2016 2nd Q 2017 to early 2018SI 122A

2nd Q 2018 to early2019 – SI 33

2nd Q 2019

SI 142

FactPattern

Introduction ofelectronic moneydue to US$ cashand Nostroshortage andforeign paymentpriority list.

Emergence of a significantpremium (below 100%)between US$ and RTGSand lack of exchangeabilityand priority list notworking.

US$ to RTGS premiumpasses 100%,quarantining andseparation of RTGSand US$ bankaccounts andintroduction of RTGS$ as official currency

Issue of ZWL$

as solo legal

tender and

removal of

multi-

currencies as

legal tender

GeneralConclusion FC

US$ functionalcurrency

Either US$ or RTGS(defacto) depending oneach case ????

RTGS functionalcurrency (defacto),unless provenotherwise???

ZWL$ as

functional

currency??

WHAT ARE THE REPORTING ISSUES?

1. What is the Functional and Reporting Currency?

2. What is the impact of change in functional & reporting currency and what is the date of actual change?

3. Presentation Currency?

4. Exchange Rate Considerations (1:1 or Parallel or Estimated)?

5. Presentation & Disclosure- Fair Presentation?

6. Is the Zim operating environment hyperinflationary?

7. How should foreign investors report their interest in Zimbabwe?

Functional Vs Presentation currency

• Functional currency is the currency of the primary economic environment in which the entity operates.

• Presentation currency is the currency in which the financial statements are presented.

You also need to realize that an entity can actually choose its presentation currency, but it CANNOT choose its functional currency

What is functional Currency?

How to Determining Functional & Presentation Currency

Case StudyZim Ltd

• Zim Ltd is a Zimbabwe listed supplier of certificate printing paper. The paper is sourced from its South African 60% subsidiary, Mzansi Ltd.

• During the year the following transaction occurred:

• Purchase of certificate printing paper raw material (annual supply- ZAR5 million) from Mzansi

• Purchase of special printing machine from a China (US$ 500,000). The consideration was paid in advance before the supplier shipped the printing machine.

• Zim quotes its sales as US$0.25 or ZWL$1 per copy and approx. X>90% of sales were settled in ZWL$. Labour and material costs acquired in Zimbabwe is all settled in ZWL$, despite that some suppliers also quote their prices in US$. Zim Ltd uses its foreign currency for foreign payments, including dividends from Mzansi.

Mzansi Ltd

• Mzansi sales all its products in ZAR in and outside RSA, and all its costs are in ZAR. Mzansi raises and services its own debt and only remit dividends declared and paid. Only 15% of Mzansi Ltd sales are with Zim Ltd.

Q. Determine functional currency and presentation currency for Zim Ltd and Mzansi Ltd.

Summary of the IAS 21 Approach

Determines its own Functional

currency (para 9-14)

Translate foreign

currency into functional currency

(transaction & FOs)

Report effects of

translation

para 20 -34 & 38-50

Parent or Foreign operation

Step 1

Determine Functional CurrencyFunctional currency (FC) is the currency of the primary economic environment in which the entity operates. (FC is NOT a choice)•Also refer as the book-keeping currency for recording the original transactions or the dominant/most used business currency.

@Chartered Accoutants Academy

Step 1- Determine FC

Zim Ltd

Primary Indicators?

Currency for Sales Price?

Currency of country whose competitive forces and regulations

Currency that influences labour, etc

No secondary indicators

Mzansi

Primary Indicators?





@Chartered Accountants Academy

Functional Currency of a foreign operation- par 11-13

• Key QTN – Is the FO (Mzansi Ltd) an extension of the parent entity or not?

• Identifying the functional currency of a foreign operation- Consider IAS 21 para 11:

Is FO autonomy/free from Parent?What is the proportion of Txns btwn Parent and FO? High or

Low?Does FO cash flows directly and immediately remitted to

Parent.Is FO raising and serving its own funding or gets parent

support?

Step 1- Determine FC Zim Ltd Primary Indicators?





ZWL$

MzansiPrimary Indicators - para 9?




No secondary indicators – para 10?

Foreign operation indicators – para 11

Degree of autonomy

Inter company transactions

Cash flow impact on reporting entity

Financing

ZAR

Uncertain FC and Change in FC - par 12-13 & 35-37Para 12: Where FC is not obvious?

• management uses its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions

• Management should gives priority to the primary indicators in paragraph 9

Change in FC:• Para 13 NB: Once determined, the functional currency is NOT CHANGED,

unless there is a change in those underlying transactions, events and conditions.

• Para 35-37 – provides guidance in accounting for change in FC

•Presentation currency (PC) is the currency in which the financial statements are presented. (an entity can chose any presentation currency) para 18 &19

Step 1- Determine PC

Zim Ltd

PC is Choice?

Normally same as functional currency, when different disclose –para 53

ZWL$

US$

Mzansi

PC is Choice?

Normally same as functional currency, when different disclose – para 53

• ZAR

• ZWL$

Lets bring it home?

What are the examples of currencies in Zimbabwe?

What is the Functional Currency of most reporting enties operating in Zimbabwe?What is should be the presentation currency in Zim?

@Chartered Accountants Academy

Quiz 2?

• Which date do you this is the date of effective change in functional currency ?

A. 1 October 2016

B. 1 October 2018

C. 22 February 2019

D. 24 June 2019

E. Entity specific

Quiz 2?

• Which date do you this is the date of effective change in functional currency ?

2015


Oct 2016


28 Feb. 2018


1 Oct. 2018


22 Feb. 2019


24 June 2019


Time Series AnalysisTime Line 3rd Q of 2016 2nd Q 2017 to early 2018

SI 122A

2nd Q 2018 to early 2019– SI 33

2nd Q 2019

SI 142

FactPattern

Introduction ofelectronic moneydue to US$ cashand Nostroshortage andforeign paymentpriority list.

Emergence of a significantpremium (below 100%)between US$ and RTGSand lack ofexchangeability andpriority list not working.

US$ to RTGS premiumpasses 100%,quarantining andseparation of RTGS andUS$ bank accounts andintroduction of RTGS $ asofficial currency

Issue of ZWL$ as

solo legal tender and

removal of multi-

currencies as legal

tender

IAS 21

indicator

s

Sales and labour

cost, etc – 100%

US$

Significant portion of sales

and expenses quoted in

US$ but settled in RTGS

and bond – 70/80%

Priority list- 1:1?

Approxitely100% sales

and costs quoted in US$

but settled in RTGS and

bond – 100%

Priority list- 1:1?

All sales and

expenses quoted in

US$ but 90% settled

in RTGS and bond –

re-emergence of US$

GeneralConclusion FC

US$ functionalcurrency

Either US$ or RTGS(defacto) depending oneach case ????

RTGS functional currency(defacto), unless provenotherwise

ZWL$ as functional

currency

Test of Substance vs Legal form

Chronology of Events

1 Feb 2009

Adoption of multi-currency

2015


Oct 2016


Feb. 2018


Oct. 2018


Feb. 2019


24 June 2019


Test of Substance vs Legal form

Date of change in functional currency?

• 1 October 2018– separation of RTGS and Nostro

• 22 Feb 2019 legal adoption of RTGS as part of legal currency – Sec 44C RBZ Act

• 24 June – Bond notes and coins and RTGS = ZWL$ and sole legal tender

• Receipt of funds from RBZ at 1:1 - imports

Quiz 3?

• Should the interbank rate the appropriate rate for translating balances?

A. YES

B. NO

Exchange Rate Considerations

• Does 1:1 or interbank rate between US$ and $RTGS achieve fair presentation?

• Are the RTGS$ balances easily exchangeable with the US$?

• What are the considerations?Spot rate vs Closing RateLong-term lack of exchangeability- indicators?Short-term exchangeability If 1:1 or Interbank is not fair-value, which one is? Legality? 10 YearsEstimation: - Purchasing Power Parity model or Implied Exchange rate

Types of Exchange rates

• Spot rate- is the exchange rate at transaction/specific date.

•Closing rate- is the spot rate at the reporting date.

• Forward rate- is the exchange rate for the exchange of two currencies at a future agreed date.

NB: exchange rate are measured in terms of IFRS 13 (fair value measurement)

Anesu Daka CA(SA) - CAA

When does IFRS 13 apply?

40

For example, if you own an Investment Property…

IAS 40/21 Investment Properties may be measured on initial

recognition and at the end of each reporting period at

its fair value

13

What

and

when

Key Issues in Accounting of foreign Transaction1. What is the Transaction Date (TD)?

2. What is the exchange rate on transaction date (transaction date rate)?

3. What is the rate at reporting date (Reporting date rate)?

4. How much are the exchange gain/loss?

5. Where are the exchange gains/loss recognised, i.e. P&L or OCI or other?

Initial Recognition – para 22

• The date on which the transaction first qualifies for recognition

• Recognise (record an asset, liability, income, or expense) when the risk and reward of ownership has passed.

• Risk and rewards of ownership passes on TRANSACTION DATE – date of shipment of F.O.B (free on board), e.g.

Dr Inventory/PPE, Bank e.t.c

Cr Foreign payable/Loan, e.t.c

Anesu Daka CA(SA) - CAA

Does willing buyer willing seller achieve fair value?•The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Which market do we get the price from?

44

Fair value is the price in the …

Principal marketOr, if no principal market, the

most advantageous market

The market with the greatest volume and level of activity for the asset or liability

The market that maximises the amount that would be received to sell the asset and minimises the amount that would be paid to transfer the liability

Webster Sigauke - Chartered Accountants Academy 45

Market participants

Independent Knowledgeable

Able to enter into a transaction

Willing to enter into a transaction

Interbank Rates

• As the interbank pass the test to be regarded as the principal market?

• The inter-bank exchange rate can be used as a starting point and should be adjusted with other market available information like the over the counter/principal-to-principal premium or exchange rate between the US$ and the RTGS$ on the parallel market.

• Failure to mention and provide sensitivity related to the limitation of the exchange rate will not achieve relevant and faithfully representing financial information.

• Note that exchange rate becomes complex when required to be determined during or earlier than 2018.

Quiz ?

• Exchange gains and losses should be presented in which statement?

A. P&L

B. OCI

C. Directly in SCE

Cause of Translation

1. Foreign transaction – exchange gain or loss only monetary items

2. TB of Foreign entity – FCTR – OCI but can recycled to P/L

3. Change in functional currency – CFCR - ??

Accounting for gains and losses from Translation

Gains and losses on monetary assets

Gains and losses on non-monetary assets

Deferred tax implication of the gains and losses

Subsequent realisation of any reserves arising

MPSIntroduction of the RTGS

Acceptance of a premium between USD

and RTGS

Interbank exchange for foreign currency

SI 32Expanded definition of

currency to include RTGS and electronic

money

Extended SI122A which included bond notes and

coins as legal tender

SI 33Sets up the conversion process from USD to

RTGS dollars

Effective date of conversion 22 Feb 2019

Take on balances at 1:1 and thereafter the

prevailing interbank rate

SI 142

ZWL$ solo legal tender and no more foreign

currencies

CONCEPT OF

REPORTING PAAB

GUIDANCE

- Effective date 1 Jan 2018

- Paper is not taking away IFRS provisions but giving additional considerations.

- Acknowledges IFRS and ISAS as the reporting guidelines;

- Responsibility is on entity and directors,

- For 2018, recommends entities to comply with the law with regard 1:1 exchange rate

- Takes the MPS impact to be a non adjusting event

- Recommends the following disclosures:1. IAS 10 non adjusting events in full

• 2. Three SFP’s

i) Monetary Assets and Liabilities (Nostro FCA USD),

ii) Monetary Assets and Liabilities (RTGS Dollar) and

iii) Non-monetary Assets and Liabilities (whose underlying values or amounts are

denominated in USD).

The total amount for each line item should be reconciled to the amounts presented in the primary Statement of Financial Position. - A sensitivity analysis with regard to monetary and non-monetary assets at various

exchange rates

Challenges with it…..

• Advises compliance to SI33 1:1, this may not be in compliance to IFRS

• Ias 1 par 16

Other Interpretations of IFRS1.Substance over form

2.Which events took place after reporting period

• RTGS was pronounced to be a currency

• Conformation that USD and RTGS are not 1:1 (setting of interbank rate)

3. Do the events confirm a position that already existed in 2018?

• RTGS is a currency – Not legally but it confirms the substance conclusion which already had been reached.

• USD and RTGS are not 1:1 – confirms the position which already existed in substance as of 2018.

3. Therefore entities must make the assessment

If conclusion is Functional currency has changed• Translate using spot rate.

• For P&L you can use average rate if spot cannot be determined (Usually if volume of transactions is high)

5. What Exchange Rate do I use

• Rate is entity specific (if you can access USD at own price)- Implied Exchange rate

• Old Mutual implied rate

• PPP etc

Verifiable!!!!

6. Effective from what date

date when the reporting entity can demonstrate that the reporting entity was significantly using a currency other than its previous functional currency

1 January 2018 going forward

Legal Consideration – SI33

Legal Perspective

• Change in functional currency was on 22 February

• RTGS was not a currency before 22 February 2019

• Bond notes was a currency based on 2017 regulations

IAS 10 Consideration

• The SI 33, is an adjusting event

• IFRS assessment would have given a different date in functional currency

• SI 33 confirmed what the new currency was

• In substance, SI33 did not change anything in which transactions or events where happening.

Non- Compliance – December 2018

• Complying with SI33, meant non compliance with IFRS with IFRS in the following:• No assessment of functional currency was done

• Presentation of Financial in USD even though SI33 confirmed certain judgements and estimations before finalisations of Accounts

• Interbank rate gave after a period of lack of exchangeability for certain companies

Post December 2018 year ends

• Change in functional currency (legally happened during the year)

• Still needed to do an assessment of when the functional currency changed

• Use IFRS guidance to do the conversion.

Implications of Change in Presentation currency• Restate prior period to reflect the new currency for comparative

purposes

• Adjust opening balances

• Consider 3rd balance sheet to reflect adjusted opening balances.

Other SI 142 Issues

• Legacy debts

• Retention

• 90 day on dual listed stocks

Business implications

Negative

• Tax implication

• Inflation

• Cost of production

• Staff turnover

• Positive

• Cheap exports

• Long-term solution

AUDIT CONSIDERATIONS

• What is purpose of audit?

• Are the AFSs going to be qualified and why?

• Are financial statements going to be IFRS Compliant?

What is objective of audit?

• Protecting the public interest!!

• What are specific audit Issues:• Exchange Rates• KAM/s• Provisions, Contingent Liabilities, etc.• Going concern (empty shelves, prices, liquidity, etc.)• NOCLAR (SI 122A/142 and money-laundering) & Penalties• Insolvency (real foreign obligations vs RTGS balances)• Increased country risk – dry FDI inflows• Intimidation Threat/Limitation of Scope• Failure to comply with IFRSs• Except For vs Disclaimer vs Adverse• Fraud- economic pressure

IFRS 1 First time Adoption – IFRS Compliance

Hyper Inflation Considerations

• Is Zimbabwe in hyper-inflation?

Hyper Inflation Considerations

What is hyper inflation

Indicators for hyper-inflation reporting

Hyper Inflation reporting

Hyper Inflation Indicators

1

The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency.;

2

the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency.

3

sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power(d) interest rates, wages and prices are linked to a price index; and

4

(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%.

Application of the standard

Question & Answer

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