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The accounting conundrum: How to report currency issues and how to account for TBs

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The accounting conundrum: How to report currency issues and how to account for TBs

HARARE – A lot of debate has emerged over the appropriate classification for Treasury Bills under accounting standards more so the treatment of discounted bills.  This comes as Govenment has of late been funding its fiscal requirements through issuance of Treasury Bills and as such a lot of entities (particularly financial) are holding the instruments on their balance sheets as already witnessed on the CBZ Holdings and Barclays results.

There are six classes of TBs; exporter funds (for RBZ debt), bills issued in lieu of outstanding amounts owed by the Ministry of Finance such as the amounts collected from the civil servants’ payroll that was supposed to be remitted to the banks to service the loan obligations of civil servants, TBs purchased directly from the Reserve Bank, those issued under AFTRADES, ZAMCO and RBZ capitalisation TBs.

KPMG senior audit manager Onika Ndori told an Institute of Chartered Accountants of Zimbabwe seminar last week that TBs are generally classified under IAS 39.9 at fair value through profit or loss, held to maturity investments, loans and receivables and available for sale financial assets while there is need for further measurement over the life span.

She noted that if the instrument is held at fair value through profit or loss it had to meet either of the following conditions. (a) It is classified as held for trading. A financial instrument is classified as held for trading if:
(i)            it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term;
(ii)           (ii) on initial recognition, it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or
(iii)          (iii) it is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).
(b) Upon initial recognition, it is designated by the entity as at fair value through profit or loss.

Under Available for sale financial assets Ndori noted that if TBs are designated into this category at initial recognition, the TBs will be measured at fair value with all fair value changes recognised in other comprehensive income.

However, she added that for Zimbabwean TBs; “it can be concluded that there is no market for these instruments due to the unavailability of information on trades that are occurring on the secondary market.

“Therefore, entities will have to make use of other valuation techniques in order to determine FV.

“This therefore falls into Level 3 criteria and entity management will need to disclose the inputs they have used in determining the FV. Their auditors will need to assess reasonableness of these inputs. For instruments carried at amortised cost it can be assumed that the amortised cost best estimates the instrument’s FV.”

IAS 39 is a standard currently under major revisions, or removal to be precise. It will be fully replaced by the new standard on financial instruments IFRS 9 by 2018.  CBZ Holdings CFO Colins Chimutsa said the group was “quite happy” with work done on the adoption of the standard. “We are being assisted by a firm parented in South Africa and though the standard will kick in 2018 we are happy with the progress made to date.”

Barclays FD Sam Matsekede told analysts on Monday that the new standard would require the industry to be more conservative and more forward looking as the standard is model driven by projections. “We expect that there would be an increase in provision levels if we are to be prudent. We should be able to respond to that as an industry by ensuring that we instill proper discipline in our lending practices and start to anticipate some of the dynamics which it will bring ahead of 2018 when it is due.”

On how to value Treasury Bills under the new standard, Matsekede said: “Do we believe that Government will perform in their obligations? In making that first assessment we need to ask what tools  they have and how effective they are to ensure they can sustain obligations. Having said that from history, since dollarization, Government has honoured all its obligations both in terms of interest and capital repayments.

“The debate should be around the accounting currency. If you are issuing them in US$, are you issuing them to a foreigner or? Maybe those elements will then start talking to concerns around a default.” But so far TBs have performed.”

Meanwhile, ICAZ has engaged the Reserve Bank of Zimbabwe to discuss exchange control directives to allow accountants fair value disclosure on reporting currency and functional currency. This comes as debate is currently ongoing on accounting procedures to use when foreign currency is being accessed at a premium and the cost offloaded to consumers.

RBZ last year introduced a new surrogate currency, the bond notes, which trade at par with the US dollar. However due to scarcity of the US dollars, the parallel market charges a premium of between 5-8% on the bond notes.

Barclays Bank financial controller and ICAZ accounting committee member Taitos Mukuku said: “We have however concluded that as at December 31, 2016 the reporting and the functional currency was the US dollar as such we need to report on that basis. However, it is not a guarantee that by June or July this year things will still be like that. This situation needs to assessed  continuously that’s why are engaging the central bank.”

Mukuku said the challenge companies were facing was on how to report cash and cash equivalents especially under an environment where they have money in the banks are but failing to pay their creditors due to unfunded nostro accounts.

“One cannot have a situation where the company has books that indicate they have $10 million yet they are failing to settle a $1 million debt. We need full disclosure of accounting policies and procedures and banks should fund their nostros to enable accountants ample time to balance their books and mirror accounts relevant to the user,” he said.

Mukuku said there will certainly come a time when it will be publicly acceptable to note that the currency has changed.

On the issue of bond notes Mukuku said: “We calculated the characteristics of bond notes and concluded that they fit in cash and cash equivalents disclosures. But the environment is also changing.  We have users who do not understand why companies are failing to pay their debts even with cash on their books,” he said.

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