Accuracy is key as companies delay publishing financial statements

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KEY TAKEAWAYS

  • The delay follows the change in functional and reporting currency in Zimbabwe effective June 24, 2019
  • Usefulness of published corporate financial statements depends on their timeliness as well as their accuracy.
  • In the face of hyperinflation, in certain cases companies are permitted to use inflation-adjusted figures, restating numbers to reflect current economic values.
  • The process of adjusting accounts to factor in price changes can result in financial statements being constantly restated and altered.

Harare – CFI Holdings limited, a leading agricultural-based industrial holding company, has become the latest entity since the turn of the current year to announce a delay in the publication of pending financial statements.

In 2019, quite a number of companies delayed publication of financial results and for this year CFI joins National Tyre services Limited (NTS) and Falcon Gold Zimbabwe Limited which have all announced a delay in publication of financial statements for the period ended 31 September 2019 to no later than 31 January 2020.

This follows the change in functional and reporting currency in Zimbabwe effective June 24, 2019 where companies listed on the local bourse have been forced to make adjustments and revaluations of financial statements, thus delaying publication of financial statements as this requires more time.

Basically, financial statements serves the purpose of communicating crucial information about the financial health of a company and they should be made available to stakeholders in time so that they can use the information reported therein to make important decisions.

As such, usefulness of published corporate financial statements depends on their timeliness as well as their accuracy. Given the existing economic climate, accuracy has become a major sticking point as companies seek to present a clearer picture of their financial position in inflationary environments.

Financial results published in 2019 have been largely inflationary adjusted and given the change in reporting currency, a like for like comparison with financials published in 2018 became difficult to factor in.

NTS said “the Company will present inflation-adjusted financial statements as its primary financial statements and these are still undergoing the necessary review processes.”

By definition, inflation accounting is when financial statements are adjusted according to price indexes, rather than relying solely on a cost accounting basis to paint a clearer picture of a firm’s financial position in inflationary environments.

When a company operates in a country where there is a significant amount of price inflation or deflation, historical information on financial statements is no longer relevant. To counter this issue, in certain cases companies are permitted to use inflation-adjusted figures, restating numbers to reflect current economic values.

IAS 29 of International Financial Reporting Standards (IFRS) is the guide for entities whose functional currency is the currency of a hyperinflationary economy. The IFRS defines hyperinflation as prices, interest, and wages linked to a price index rising 100% or more cumulatively over three years.

Inflation accounting has its advantages and disadvantages. Chief among the benefits of this model is matching current revenues with current costs which provides a much more realistic breakdown of profitability.

On the downside, providing adjusted figures can confuse investors and give companies the opportunity to flag numbers that shine it in a better light.

In addition, the process of adjusting accounts to factor in price changes can result in financial statements being constantly restated and altered.

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