zimbveka approved project (ii) final

FACULTY OF COMMERCE AND LAW

AN EVALUATION OF THE EFFECTS OF COMPLIANCE TO IAS 29 “FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES” ON

FINANCIAL REPORTING: A SURVEY OF ZSE LISTED COMPANIES (YEARS 2000-2007).

BY

ZIMBVEKA TAPIWA

PO568832A

A RESEARCH PROJECT SUBMITTED TO THE ZIMBABWE OPEN UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF

THE BACHELOR OF COMMERCE DEGREE IN ACCOUNTING.

SUPERVISOR: MR M. KAJAUCHIRE

ZIMBABWE OPEN UNIVERSITY, JUNE 2008.

AN EVALUATION OF THE EFFECTS OF COMPLIANCE TO IAS 29 “FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES” ON FINANCIAL PERFOMANCE AND POSITION: A SURVEY OF ZSE LISTED COMPANIES (2000-2007)

______________________________________________________________________________

RELEASE FORM

NAME OF AUTHOR: ZIMBVEKA TAPIWA

PROJECT TITLE: An evaluation of the effects of compliance to IAS 29 on financial performance and position on entities: A survey of ZSE listed companies (2000-2007).

DEGREE TITLE: Bachelor of Commerce Degree in Accounting

YEAR GRANTED: 2008

Permission is hereby granted to the Zimbabwe Open University Library to produce single copies of this project and to lend or sell such copies for private, scholarly or scientific research purposes only. The author reserves other publication rights and neither the project nor extensive extracts from it may be printed or otherwise reproduced without the author’s written approval.

SIGNED: ----------------------------------------------------------

DATE: ------------------------------------------------

PERMANENT ADDRESS: 16028 Unit ‘P’ P. O. Seke CHITUNGWIZA 091 2 835 580

____________________________________________________________________________________

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APPROVAL FORM

The undersigned certify that they read and recommend to the Zimbabwe Open University for acceptance, a research project entitled; “An evaluation of the effects of compliance to IAS 29 on financial performance and position: A survey of ZSE listed companies(sample) 2000-2007”, submitted by Zimbveka Tapiwa in partial fulfillment of the requirements of a Bachelor of Commerce Degree in Accounting.

----------------------------------------- ---------------------------------RESEARCH SUPERVISOR DATE

----------------------------------------- --------------------------------PROGRAMME COODINATOR DATE

----------------------------------------- ------------------------------------EXTERNAL EXAMINER DATE

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DEDICATION

My heartfelt gratitude goes to my wife, Lorraine who has always believed in me and has been

my source of inspiration. I thank her for the opportunity cost she incurred while providing me

with all the support possible financial and otherwise.

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ACKNOWLEDGEMENTS

I would like to acknowledge the contributions of all those who made it possible for me to conduct this research project. Firstly, I would like to thank God Almight for the gift of life. I would also like to express my sincere gratitude to the university for affording me an opportunity to build my future upon, the directors whose companies have been used in this survey for allowing me to do this research with their entities as case studies. Also I thank my supervisor Mr Misheck Kajauchire for the unlimited guidance, access and advice he offered throughout the research study. I give special mention to the following people who assisted me in various ways, hence made it possible for this document to be put together;Mr Luke Chiseva and family, Albane F. Chipiyo, Nathan Chayambuka and my family members for your support and advice during the whole process of achieving my dream. Thank you very much and may the able Lord bless you in abundance.

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__________________________________________________________________________

CONTENTS_____________________________________________________________________________

ABSTRACT viii

Chapter 1 INTRODUCTION 1

1.0 Introduction 1

1.1 Background 1

1.2 Statement of the problem 4

1.3 Research objectives 4

1.4 Research question 5

1.5 Hypothesis 5

1.6 Limitations 5

1.7 Assumptions 6

1.8 Significance of Study 6

1.9 scope of the study 7

1.10 Definition of terms and abbreviations 8

1.11 Summary 9

Chapter 2 LITERATURE REVIEW 10

2.0 Introduction 10

2.1 Accounting for income and capital in a stable economy 10

2.2 Historic accounting in a hyperinflationary economy 11

2.3 Financial reporting in hyperinflationary economies 17

2.4 Conclusion 23

Chapter 3 RESEARCH METHODOLOGY 24

3.0 Introduction 24

3.1 Research design 24

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3.2 research instruments 25

3.3 Sampling 26

3.4 Data collection procedures 29

3.5 Summary 30

Chapter 4 DATA PRESENTATION AND DISCUSSION 31

4.0 Introduction 31

4.1 Findings and analysis 31

4.2 Primary data 31

4.3 Secondary data 37

4.4 Summary 43

Chapter 5 SUMMARY, RECOMMENDATIONS AND CONCLSIONS 45

5.0 Introduction 45

5.1 Summary 45

5.2 Conclusion 47

5.3 Recommendations 47

REFERENCES 48

APPENDIX A 49

APPENDIX B 52

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ABSTRACT

The framework, which is a conceptual accounting framework, sets out the concepts, which

underly the preparation and presentation of financial statements, deals with four main issues

among them being the objective of financial statements. According to this framework, the

objective of financial statements is to provide information about an entity’s financial

performance, position and changes in financial position that is useful to a wide range of users so

that they can make informed economic decisions about that entity. For financial information to

be useful in this regard, the information has to be reliable, relevant, understandable and

comparable. In the face of the hyperinflation that has crippled the economy, can financial

information presented on the conventional historic cost accounting be considered relevant,

reliable and comparable in our situation?

The research seeks to investigate and evaluate the effects of compliance with IAS 29 ‘Financial

Reporting in Hyperinflationary economies’ by Zimbabwe Stock Exchange listed companies. The

motive was driven by the new developments that it’s now mandatory for all listed companies to

restate their financial statements to the measuring unit current at the balance sheet date to take

into account the effects of inflation.

An analysis of the effects of compliance has been made on the selected financial statements of

twelve ZSE listed companies (pulled from various sectors in the country) from 2000, being the

period when the country became a hyperinflationary economy, and for the product of the

research, to 2007.

In conclusion the researcher will evaluate the merits of hyperinflation accounting and try to

provide some perspective on its future role in investment and business decisions.

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CHAPTER 1

INTRODUCTION

1.0 Introduction

This chapter contains the background of the study, which answers where the research has

emanated from, its objectives, the problem the research seeks to solve, how the problem can be

solved and what the researcher thought was the significance of the study. Encompassed in this

chapter are constraints which may arise from methods used to collect data, resource factors and

other disturbances. However various relevant assumptions have also been incorporated so that

the product remains valid. The chapter also highlights the scope of the research, that is, the areas

that the researcher has covered or the areas from which the data used in this research has been

collected. The researcher has also identified various parties who are likely to benefit from this

study and how they are to benefit from it. The last section of the introduction deals with the

definition of terms, abbreviations and other names of entities that have been used in the research.

1.1 Background to the study

In the last decade, hyperinflation accounting has been adopted as a supplementary financial

statement in Zimbabwe. This comes after years of debate about why adjusting financial accounts

for inflation. In a way, this is a sad commentary on the state of inflation in the Zimbabwean

economy. Inflation has attained a degree of permanence and consequently hyperinflation

accounting is becoming a standard feature of corporate reporting. The debate about the reasons

and impact continues but now theory is being confronted with actual data. Therefore we should

shift attention from methods to applications and test the utility of this kind of accounting.

Eventually the application of this data to the real life problems of investment and business

management will confirm whether it is ideal and beneficial to comply to IAS 29.

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Although specific price changes occur in a stable state environment, they have not been deemed

of sufficient continuing importance to require recognition in accounting for income and capital

for the project or the firm, although logically they might be. When price changes become

persistent and pervasive due to inflation, the concepts of income and capital become very

difficult to report and compare over time.

Unlike inflation, which is widely considered to be normal in a healthy economy, hyperinflation is

always regarded as destructive. It effectively wipes out the purchasing power of private and

public savings, distorts the economy in favor of extreme consumption and hoarding of real

assets, causes the monetary base whether specie or hard currency to flee the country, and makes

the afflicted area anathema to investment. At Independence, in 1980, the Zimbabwe dollar was

worth about $1.50 US. Since then, rampant inflation and the collapse of the economy have

severely devalued the currency, with many organisations using the US dollar instead.

(http://en.wikipedia.org/wiki/Hyperinflation : 19 september 2007)

In this hyperinflationary economy, money is losing its purchasing power at such a rate that any

comparison of amounts arising at different times, is misleading. Reporting of operating results

and the financial position in the local currency in historical concepts is proving not useful.

Inflation rate has gone out of control it has become very difficult to compare the performance of

entities over time since prices would have changed several times. Historical cost-based system of

accounting in this hyperinflationary economy is posing two basic problems. Firstly, many of the

historical numbers appearing on financial statements are not economically relevant because

prices have changed since they were incurred. Secondly, since the numbers on financial

statements represent dollars expended at different points of time and, in turn, embody different

amounts of purchasing power, they are simply not additive. Hence, adding cash of $10,000 held

on December 31, 2002, with $10,000 representing the cost of land acquired in 1955 (when the

price level was significantly lower) is a dubious operation because of the significantly different

amount of purchasing power represented by the two numbers

In 2002, the Institute of Chartered Accountants of Zimbabwe (ICAZ) declared that the country

was in a hyperinflationary situation in terms of IAS 29 and that financial statements prepared by ____________________________________________________________________________________

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http://en.wikipedia.org/wiki/Hyperinflation


its members should be prepared according to the methods set out in that standard. It can be noted

that directors of companies were not forthcoming in this regard until now when it is being made

mandatory for all listed companies. Even to those who complied were not sure what the reasons

were of doing so, for example the Chairman of CBZ bank (the then Jewel bank) highlighted in

his report when presenting financial statements for the year 2003 “Our position regarding

inflation adjusted results remains unchanged. Our view is that these results do not reflect the

actual performance of the bank. We, however, continue to publish the inflation adjusted results

to comply with IAS 29” (www.cbz[dec2003results]).

In the interim report for Hunyani Holdings for the period April 2006, was the note “these

financial statements have not been prepared in conformity with IAS 29. The Directors are of the

view that the current method and principles of preparing inflation adjusted financial statements

would not result in a fair presentation of the group’s profit or financial position. Furthermore,

due to the limited use of any inflation-adjusted statements, it is believed that no useful purpose

will be served by complying with the standard. Accordingly, the financial effects of non-

compliance with IAS 29 have not been formally established” (Financial Gazette June 1-

7,2006:18). From this, one can observe that some directors are still referring to the historic cost

statements as they not fully understand and interpret the inflation-adjusted statements.

A survey conducted by the researcher in the ZSE handbook (2006) revealed that by the end of

the year 2006 companies such as Border Timbers Ltd, Radar Holdings, Chemco Holdings,

Falcon Gold Ltd, Gulliver Consolidated Ltd, Hunyani Holdings Ltd, Old Mutual Plc and

Powerspeed Electrical among others had not yet complied with the standard. The financial

statements of these companies were still being prepared on the historic cost basis.

The Institute Of Directors of Zimbabwe (IODZ), the Zimbabwe Stock Exchange (ZSE) and the

Institute Of Chartered Accountants Of Zimbabwe (ICAZ) had to declare 2007, as the year in

which inflation adjusted statements will be the focus of financial reporting in Zimbabwe.

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Cheater (2007: 11), lamented on the business community and the government‘s tendency to

refuse to refer to inflation adjusted financial statements, preferring instead the historical cost,

which in his opinion, in general paints a much rosier picture.

He went on to say that the very financial reporting which could and should be used by business

to show clearly to the authorities and to society the effects of hyperinflation is rubbished. The

very people who prepare the inflation adjusted financial statements, company directors and

managers and even members of the Institute of Chartered Accountants themselves rubbish it.

It is against this background and development that the researcher examines and evaluates the

effects of compliance to IAS 29, describes and explains these effects for understanding to

various parties as to why companies should comply with these three institutions’ directive.

1.2 Statement of the problem

Some accounting executives, directors, business community and the government have been

reluctant to fully embrace IAS 29 despite the escalating hyperinflation in the economy. The

researcher will give the merits of IAS 29 so as to assist industry and commerce to appreciate the

standard.

1.3 Research objectives

a) To produce a well –researched document that will assist commerce, industry and fellow

students to appreciate the merits of hyperinflation accounting.

b) To determine the effects of compliance with IAS 29 in a hyperinflationary economy and

highlight the problems that confront hyperinflation accounting.

c) To identify the causes of reluctance to fully embrace IAS 29 by the business community

and the government.

d) To establish whether business, investment and other business decisions made basing on

inflation adjusted financial statements do differ materially from those made basing on

unadjusted financial statements.

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1.4 Research questions

a) Is restating financial statements the best way to provide useful information about an

entity’s financial performance, position and changes in financial position on which a

wide range of users can base meaningful economic decisions?

b) Are there any significant effects of compliance to IAS 29 in hyperinflationary

economies?

c) Are the financial reporting methods based on historical cost achieving the desired

financial reporting objectives in hyperinflationary economies?

d) What is causing reluctance to fully adhere to the requirements of IAS 29 by the business

community?

1.5 Hypothesis

The following hypothesis is developed:

Null hypothesis:

Historic cost financial statements are inadequate to portray the true and fair view of the

financial status of the entity in a hyperinflationary economy.

Alternative hypothesis

Historic cost financial statements are adequate to reflect the true and fair view of the

financial status of the entity in a hyperinflationary economy.

1.6 Limitations

The following limitations are likely to be faced:

A) The use of sampling: the use of samples has an inherent limitation that the samples may

not reflect the true characteristics or traits of the whole population.

B) Lack of enough finance can limit the sample size and the exploitation of the most

effective methods of data collection.____________________________________________________________________________________

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C) Confidentiality- organisations were not willing to divulge some information which was

classified confidential.

1.7 Assumptions

a) All selected entities are a true representative of the entities in their respective sectors to

provide the required information to do the inferences.

b) Minimum finance for the research will be obtained to enable the researcher to gather

information that leads to reasonable conclusions.

c) Financial statements will give truthful information adequate to make reasonable

inferences.

1.8 Significance of study

1.8.1 To the corporate world.

The study is intended to give directors of companies an overview of the effects of compliance to

IAS 29 on the financial position and performance of their entities. The study seeks to answer the

question why entities in Zimbabwe should restate their financial statements at the measuring unit

at the balance sheet date.

The study will be of importance to the corporate world, as it will highlight the merits and

demerits of hyperinflation accounting.

The research can also be found useful to entities that may want to apply the standards for the first

time since the procedures and items that require restatement have been included

The research is also intended to be useful to shareholders for them to fully comprehend what

inflation adjusted financial statements mean in terms of the investments they make in various

entities.

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By answering why compliance with IAS 29 on the Zimbabwean economy is ideal, companies

with no mandate to comply can appreciate the importance of its application.

1.8.2 To the institution

The research can also be of benefit to other scholars for future research as it provides a basis for

further arguments.

1.8.3 To the student

The research is in partial fulfillment of the Bachelor of Commerce Degree in Accounting at the

Zimbabwe Open University.

1.9 Scope of the study

The study is a survey of the Zimbabwean Stock Exchange listed companies. Effort was made to

incorporate entities listed on the stock exchange from all sectors of the economy. Below are

companies, the researcher has used and the sectors for which they stand. An analysis of the

financial statements of these entities has been made for the period from 2000 to 2007.

SECTOR COMPANIES

Agro-processing Seed Company

Chemco Holdings

Consumer Meikles Africa Ltd

Star Africa Ltd

Construction Murray and Roberts Ltd

Radar Holdings

Financial Kingdom Financial Holdings Ltd

CBZ Holdings Ltd

Industrial Gulliver Consolidated Ltd

Power Speed Ltd

Tractive Power Holdings

Mining Falcon Gold Ltd

(Source: The Financial Gazette- Top Companies Survey 2006 Magazine)____________________________________________________________________________________

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The researcher used information from published financial statements, journals and other reports

from institutions such as the Central Statistics Office (CSO).

1.10 Research instruments

a) Questionnaires will be used as the primary research instrument as they provide an

efficient way of collecting responses from a large sample prior to qualitative analysis.

b) Interviews will also be conducted to supplement the questionnaires for the benefit of

having a face to face interface with the respondent.

1.11 Definition of terms and abbreviations

Inflation –the persistent expansion of the volume of purchasing power over and above

any corresponding growth in real input.

Hyperinflation- is inflation that is "out of control," a condition in which prices increase

rapidly as a currency loses its value (http://www.sjsu.edu/faculty/watkins/hyper.htm)

Current cost accounting- a system of valuing assets based on their replacement cost rather

than their cost when purchased or produced. Balance-sheet values of non-monetary assets

are stated at their value to the business at balance date. Adjustments are required to

depreciation, cost of sales, working capital and gearing, and are reflected in the balance

sheet as a current cost reserve (http://www.anz.com/edna/dictionary.asp ).

Consumer price index- is an index number measuring the average price of consumer

goods and services purchased by households. The percent change in the CPI is a measure

of inflation and is calculated by Central Statistical Office

(http://www.wikipedia.org/wiki/CPI)

GPI- General Price Index

CPI- Consumer Price Index

CSO-Central Statistical Office

IAS 29- International Accounting Standard 29

ICAZ- Institute Of Chartered Accountants of Zimbabwe____________________________________________________________________________________

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http://www.wikipedia.org/wiki/CPI

http://en.wikipedia.org/wiki/Inflation

http://en.wikipedia.org/wiki/Index_number

http://www.anz.com/edna/dictionary.asp

http://www.anz.com/edna/dictionary.asp?action=content&content=balance_sheet

http://www.anz.com/edna/dictionary.asp?action=content&content=balance_sheet

http://www.anz.com/edna/dictionary.asp?action=content&content=gearing

http://www.anz.com/edna/dictionary.asp?action=content&content=working_capital

http://www.anz.com/edna/dictionary.asp?action=content&content=balance_date

http://www.anz.com/edna/dictionary.asp?action=content&content=asset

http://www.sjsu.edu/faculty/watkins/hyper.htm


IoDZ- Institute of Directors Of Zimbabwe

ZSE- Zimbabwe Stock Exchange

1.11 Summary

This chapter has been looking at how the standard (IAS 29) that is the subject of this analysis

became of significance in the Zimbabwean situation and the reluctance some directors of

Zimbabwean entities have been building despite the escalating prices of goods and services. The

next chapter is a review of what other researchers had to say. The literature reviews gives the

areas of major concern in that some areas, which will form the basis for analysis in the chapters

that follow.

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CHAPTER 2

LITERATURE REVIEW

2.0 Introduction

This chapter is designed to review prior works on the subject of reporting in a hyperinflationary

economy. The objective is to give the reader a background to the subject so that s/he can

appreciate and get an understanding of the earlier researches and developments on the subject

done prior to this project research. The literature also help to identify authoritative voices and

thesis that have been presented by various researchers or authors and use that as a starting to

point to establish an analytical framework for this research project. Though every effort was

made to include many literatures, the reader should appreciate that the review is not exhaustive.

Most of the works cited in this chapter are mainly researches from outside Zimbabwe since little

researches on the subject have been done locally.

2.1 Accounting for income and capital in a stable price economy

Some basic concepts of economics and accounting that are worth reader exposition in

order to understand the data produced under both the historic cost method and inflation

adjusted financial statements are as outlined below;

The economic concept of income, in fundamental terms, was stated as the maximum value,

which a man can consume during a week (or period) and still expect to be as well off at the end

of the period as he was at the beginning. (http://newman.baruch.cuny.edu). In other words,

income is the amount that can be consumed without impoverishing the individual (or firm).

Capital is a source of income and cannot be consumed without affecting future income. The

distinction between income and capital becomes very important during inflation.

Capital is invested to buy machinery and inventory, people are hired, a product is produced or a

service rendered, revenue is received and production costs are paid. At the end of the project the

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http://newman.baruch.cuny.edu/


machinery is worn out and junked, without value. The inventory is liquidated in production. The

cash remaining is allocated by the proprietor first to his original capital, which must be fully

preserved, after which any surplus can be considered net income, profit or earnings. The amount

of income compared to the amount of capital invested determines the rate of return of earnings

on the capital.

If a project runs for several periods, it may be desirable to know what is earned in each period. In

order to do so, it is necessary to allocate some of the cost of long-lived assets to each period by a

depreciation charge, in order to ensure that the total cost is recouped over the life of the project

(http://www.jstor.org/journals). This insures that periodic income in excess of the capital

allowance can be paid out without fear of impoverishment. At the end of the project, capital is

reclaimed through cash in the depreciation fund, the equipment being worn out and of no further

use. Depreciation is thus a means of allocating capital consumption to earning periods. In the

project situation it is not a reserve fund accumulated to replace the equipment when it is

exhausted. Although in theory that could be done if another project were undertaken, that would

be a new capital investment decision. In any event, such accumulation would be adequate

because it is assumed that the new equipment could be purchased at the old price under stable

state conditions.

Capital can be measured in two ways in money terms and physical terms (Von Well 2004:12).

Under stable price conditions financial capital and physical capital are identical. Capital in

money terms is intact at the end of the project and it will command the same physical assets as at

the beginning.

2.2. Historical cost accounting under hyperinflation

The terms "maximum value" and "well-off" concepts become more difficult to define under

conditions of changing prices. Are "value" and "well-off" to be expressed in money terms or real

terms?

Norby (http://www.newman.baruch.cuuy.edu) said when price changes become persistent and

pervasive due to inflation, the concepts of income and capital must be refined. Under inflation,

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http://www.newman.baruch.cuuy.edu/

http://www.jstor.org/journals


the cash flow from operation of a single project may increase over what was expected at the

outset due to higher selling prices. In addition, at the completion of the project the equipment,

which was deemed worthless under stable price conditions, now has an unexpected residual

value. However, the original capital invested in the enterprise has been fully reserved through

depreciation and conversion of the inventory to sales and is returned at the end of the project out

of accumulated cash flow.

Net income for the project is greater than expected due to the residual value of the equipment

and the extra profit on inventory due to rising prices. This income is called a holding gain while

the income from the project based on stable price conditions is considered operating income. If

this is a one-cycle project the distinction is of no consequence because all income can be

distributed along with the original capital. Financial capital has been preserved and physical

capital is moot.

Suppose at the end of the project, the investor wants to know whether his additional money

resources, comprised of his original capital and the earnings derived from the project, will buy as

much as at the beginning. This depends on how he wants to use the money. In general, if the

general price level has risen, the gain in real buying power of these funds is less than the gain in

money terms. However, individuals are more affected by price changes in the specific thing they

consume than by the price change of a fixed basket of goods purchased by a typical urban

family. Thus, any measure of the investor's wealth or well being at the end of the project under

conditions of rising prices using historic cost accounting is imprecise.

Despite this reservation, it is useful to show in a general way whether the buying power of the

capital and the accumulated income is as great at the end as at the beginning. This could be

determined by reference to price changes for the specific goods the investor wants to purchase

but for convenience and general comparisons a broad price index is used. No single index is

representative of all price changes in the economy but the Consumer-Price Index (CPI) is a

popular measure. Thus, financial capital may or may not have been maintained over the life of

the project in terms of its buying power, that is, in real terms after adjusting for the rise in

general prices as measured by an appropriate price index.

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In a sequence of projects under conditions of rising prices, an increase in capital investment

becomes necessary (http://www.jstor.org) Upon completion of the first project, the investor

wishes to embark on a second project of the same scale but finds that his original capital is

insufficient to buy the necessary equipment and inventory. In other words physical capital has

been impaired. He must use some of the earnings from Project 1 to provide capital for Project 2.

The necessary additional capital is measured by the holding gains in Project 1 because they

represent the amount by which the cost of new assets exceeds the original cost. Thus, only

operating income from Project 1 can be distributed currently without impairing operating

capability. In sum, financial capital has increased by the amount of the holding gains but

physical capital remains the same. Under inflation, financial capital and physical capital are no

longer identical (Norby 1983:5).

Over the sequence of projects, the investor will have invested successively larger amounts of

financial capital, the increment over the original amount having been derived from holding gains.

Operating income would have been paid out. At the end of the sequence, his total capital will be

the sum of his original capital plus retained earnings (holding gains) and will be higher than in

the stable state economy. The retained earnings can now be distributed and the original capital

liquidated. Physical capital is no longer pertinent (http://www.jstor.org/journals)

During this sequence, operating income will be regarded as the most significant measure of

return because it is distributable currently but at the end retained holding gains are also paid out.

Thus total net income constitutes the full return on capital for the total life of the projects.

The investor's wealth has increased and, if desired, the buying power of his wealth can be

measured by application of the index of prices most appropriate to the circumstances. It is not

necessary to make this calculation to manage the sequence of projects however. The investor and

the manager must make decisions in actual dollars (Berliner 1983:65).

The going-concern with its mix of overlapping and sequential projects is more complex than a

sequence of single projects but the accounting for income and capital follows the same

principles. The first objective is to maintain physical capital, i.e. operating capability

(http://www.jstor.org/journals) With rising prices, this requires greater financial capital that can

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http://www.jstor.org/


be obtained from reinvested earnings or new capital. In simple terms, the amount of holding

gains in each cycle will measure the amount of earnings require to be retained. Operating income

will reflect the current cost of assets used in production and so can be distributed currently. In

practice, the separation of conventionally calculated income into operating (current cost) income

and holding gains can be complex and imprecise because replacement cycles of some assets are

long, new assets may not be the same as retired assets, and current prices or costs of complicated

assets are not always readily determinable. Suppose an entity has 50 units of opening stock worth

$1000 and it requires $2000 to buy the same units of stock at year-end and it sells the stock for

$2500. The profit can be split into the two elements as follows:

Opening stock: 50 units, purchased replacement stock sale of opening stock at year cost $1000 at year end 50 units, $2 000 end 50, units, $2 500

Historical profit $1 500

Holding gain $1 000 current cost profit $500

The illustration shows that if the historic profit of $1500 had been distributed, then there would

be insufficient funds to replace the stock sold. It is clear that if replacement stock is purchased at

$2000 only $500 is available for distribution and that is more reasonable measure of profitability,

the remaining $1000 is stock appreciation due to rising cost of replacing stock.

This simplified analysis now provides a basis for defining levels or layers of income and capital

under inflationary conditions. These definitions are comprehended by the concept of capital

maintenance. They form the model of inflation-adjusted financial statements.

Income: In the ongoing business, income that can be distributed currently has the greatest

significance. This has been referred to as operating income but current cost income is a better

term because it is distinguished from stable state (historical cost) operating income. It indicates

that all current costs have been provided out of revenues, thus providing funds to replace

production assets at current prices. Operating capability is maintained or sustained and therefore

sustainable income is an alternative term. This income is distributable except to the small extent

that additional monetary working capital may be required to carry additional receivables and

payables. These elements are not costs, however.____________________________________________________________________________________

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Holding gains are the second category of income. They reflect the rise in value of inventory and

fixed assets for the period. Current cost calculations are based on these adjusted values. Holding

gains can be sub-divided into realized and unrealized but these terms are useful only to reconcile

reported historical cost income. Holding gains cannot be distributed as long as prices remain at

or above the current level because they must be reinvested in the business to sustain operating

capability. They can be paid out only at liquidation or when operating capability is reduced.

According to Konchitchki (2007:5) the effects of inflation manifest in future cashflows when

historical cost basis is used for reporting. Thus the holding gains manifest upon liquidation.

Capital: The two concepts of capital, financial capital and physical capital (Von Well 2006:12),

in a stable state environment are identical; the same dollars of financial capital represent the

same amount of physical operating capability over time. Under hyperinflation, the same physical

operating capability will require increasing amounts of financial capital as prices rise. In simple

terms the required financial capital will be the original capital plus accumulated holding gains,

sometimes called revaluation surplus.

Norby (1983:33) suggests that the essence of hyperinflation accounting is capital maintenance.

The relevant question is which kind of capital is to be maintained. Ordinarily, an entity would be

expected to maintain or increase its operating capability. Hence both financial and physical

capital must be maintained in their respective terms, linked by the effect of specific price

changes on the firm. Under hyperinflation, financial capital normally would increase to maintain

physical capital. However financial capital might increase although physical capital declined

because prices of existing capacity rose sharply but the capacity was not fully replaced.

Conversely, declining prices despite inflation would release some financial capital for

distribution although physical capital remained the same, e.g., computers. In the real world of

course, these relationships are far more complex and difficult to measure. It turns out, however,

that the only accounting difference between two concepts is the recognition of holding gains,

which are included in income for financial capital but are called a capital maintenance

adjustment for physical capital. For information analysis of the firm, capital ought to be

examined from both viewpoints. (http://newman.baruch.cuny.edu. April 19, 2008)

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http://newman.baruch.cuny.edu/


Real capital measures the command of financial capital over economic resources in general, as

measured by an appropriate index of general price changes.

It can therefore be seen from the above explanations of the effects of hyperinflation on capital

and income that there is need for both financial and physical capital to be kept at par. This can

only be achieved when financial statements are restated to the measuring unit current at the

balance sheet date. International accounting standard 29 tries to take account of the effects of

inflation on the financial statements of entities.

Sandilands (1974-1975:1) highlighted that the historical accounting convention at that time of

high inflation in United Kingdom could not reflect the high rates of inflation. He stated that

companies were in danger of overstretching themselves, as declared profits did not reflect their

true position and thereby paying undue rates of tax. It was emphasisesd by the committee that an

agreed system of inflation accounting which could provide accurate information about the true

position of business. The committee did recommend the adoption of the system of current cost

accounting, which because of its inherent limitations was subsequently replaced by IAS 29.

(http://www.bopcris.ac.uk: 10 April, 2008)

Under a historical cost-based system of accounting, inflation leads to two basic problems. Firstly,

many of the historical numbers appearing on financial statements are not economically relevant

because prices have changed since they were incurred.... Secondly, since the numbers on

financial statements represent dollars expended at different points of time and, in turn, embody

different amounts of purchasing power, they are simply not additive. Hence, adding cash of

$10,000 held on December 31, 2002, with $10,000 representing the cost of land acquired in 1955

(when the price level was significantly lower) is a dubious operation because of the significantly

different amount of purchasing power represented by the two numbers

( http://en.wikipedia.org/wiki/Inflation_accounting : 10 April, 2008 )

Konchitchki (2007; 10) gave an example of a purchase of land for $100 fifty years ago and

purchasing an additional land parcel for $100 a year ago and the firm recognising land at $200 in

its financial statements. He said this implies a loss of information because the land parcels were

purchased with the same dollar amount, but at periods with different purchasing power. He goes ____________________________________________________________________________________

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http://en.wikipedia.org/wiki/Inflation_accounting

http://www.bopcris.ac.uk/


on to say combining dollars from two periods in a historical reporting system is analogous to

combining dollars and euros. He concludes that the example highlights that inflation leads to

historical accounting amounts being unreflective of the true opportunity costs for the firm in

terms of consumption units. He also said historical accounting can lead to a distortion with

considerable consequences, even when inflation is low.

Farmer (1981:13) outlined the disadvantages of historical accounting in a hyperinflationary

economy that include;

a) Non-current asset values are unrealistic,

b) Comparisons of performance over time are invalid,

c) The analysis and interpretation of profit trends and return on capital measurements become

meaningless.

d) Depreciation based on historic cost is inadequate a measure of the value of the asset used

and this will be insufficient if replacement prices have arisen.

e) Historic accounts do not reflect the erosion of capital caused by inflation; it is desirable to

provide for the replacement costs of stocks before recognising distributable profit.

f) Return on capital employed figure is invalidated as balance sheets become out of date as

assets are undervalued compounded by an overvaluation of profit as cost of sales overheads

are understated thus when comparing profit on capital employed figure there is double

inflationary effect as the numerator is overstated and the denominator is understated.

2.3 Financial reporting in hyperinflationary economies.

IAS 29, “Financial Reporting in Hyperinflationary Economies” is an integral part of IFRS

(International Financial Reporting Standards), which requires that financial statements of an

entity operating in a hyperinflationary economy take full account of the effects of inflation using

a “current purchasing power” approach:

In a hyperinflationary economy, reporting of operating results and financial position in the local

currency without restatement is not useful. Money loses purchasing power at such a rate that

comparison of amounts from transactions and other events that occurred at different times, even

within the same accounting period, is misleading. [IAS 29:2]____________________________________________________________________________________

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The basic principle in IAS 29 is that financial statements of an entity that reports in the currency

of a hyperinflation should be stated in terms of the measuring unit current at the balance sheet

date. Comparative figures for prior periods should be restated into the same currency-measuring

unit. [IAS 29.8].

Applying a general price index makes these restatements. Items such as monetary items that are

already stated at the measuring unit current at the balance sheet date are not restated. Other

items are restated based on the change in the general price index between the date those items

were acquired or incurred and the balance sheet date.

However the standard does not establish an absolute rate at which hyperinflation is deemed to

arise – but allows judgement as to when restatement of financial statements becomes necessary.

It does not also, define a hyperinflationary economy but stipulates the characteristics that

indicate the existence of hyperinflation [IAS 29.9]. The characteristics are as follows:

The general population prefers to keep its wealth in non-monetary assets or in a relatively

stable foreign currency. Amounts of local currency held are immediately invested to

maintain purchasing power; this condition is evident in Zimbabwe as many people now

either keep or transact business in foreign currency.

The general population regards monetary amounts not in terms of the local currency but

in terms of a relatively stable foreign currency. Prices may be quoted in that currency.

Sales and purchases on credit take place at prices that compensate for the expected loss of

purchasing power during the credit period, even if the period is short and

The cumulative inflation rate over three years approaches, or exceeds, 100%.

The standard requires that monetary and non-monetary items be segregated. All balance sheet

amounts that are not expressed in terms of the measuring unit current at the balance sheet date

should be restated. Monetary items do not need to be restated, as they represent money held, to

be received or to be paid. Monetary items are therefore already expressed in current purchasing

power. Examples of monetary assets and liabilities are cash and amounts due from debtors,

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marketable debt securities, trade receivables, notes receivable, other receivables, trade payables,

accrued expenses and other payables, current income tax, borrowings and notes payable.

Assets and liabilities other than monetary items are called non-monetary items. All elements of

shareholders’ equity are non-monetary once paid in or accumulated. Examples of these include

prepaid expenses, advances paid on purchases, inventories, marketable equity instruments,

investments in associates, property, plant and equipment, intangible assets, advances received on

sales, deferred income (for example, government grants) and shareholders’ equity.

Non-monetary assets and liabilities are restated in terms of the measuring unit current at the

balance sheet date, using the increase in the general price index from the transaction date when

they arose to the balance sheet date.

All non-monetary components in the balance sheet, excluding retained earnings, are restated by

applying a general price index from the dates on which the items arose at the first application of

IAS 29. Restated retained earnings, excluding current year earnings, are the balancing figure

derived from all the other amounts in the opening restated balance sheet.

Non –monetary items at fair value or net realisable value

Some non-monetary assets may be carried at fair value at the balance sheet date such as property,

plant and equipment revalued by an independent appraiser as allowed under IAS 6, marketable

securities fair valued under IAS 39 and investment properties carried at far value under IAS 40

fair value model. The historic cost amounts should be restated to obtain the appropriate monetary

gain or loss. The restated carrying amount should then be compared to the current values and the

difference, if any, charged or credited to the income statement or shareholders’ equity in

accordance with the appropriate standard. In simple terms revalued non-monetary items are

restated from the date of revaluation.

Prepaid expenses

Prepaid expenses are restated from the date of the payments to the balance sheet date.

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Inventories

Raw materials: obtain the historical cost prices and acquisition dates of raw materials. The

average ageing of items could be estimated using inventory turn over if a detailed ageing of

inventory cannot be obtained. If FIFO method is used for valuation purposes, restate raw

materials based on the ageing of the related items using the increase in the general price index

from the period from purchase date to the balance sheet date. If an annual average is used, restate

raw materials using the annual average increase in the general price index.

Work in progress and finished goods: deduct the historical depreciation expense of property,

plant and equipment that is included in the cost of finished goods, as this will be replaced with

the restated depreciation expense. The inventory is restated using the bases on the ageing of the

composition of cost elements included in inventories. After completion of restatement, the

attributable depreciation calculated by reference to the restated property, plant and equipment is

added back.

Investment in associates;

The balances of investments are restated using the increase in the general price index from the

purchase date and cost of purchase. Compare the restated investment balance with the market,

and adjust the investment balance.

Property, plant and equipment;

Any revaluations of construction in progress, property, plant and equipment and the associated

depreciation that does not comply with IAS 16 should be eliminated such that restatements will

be based on the historical cost prices and acquisition dates. Restatement should not be based on

the date of reclassification from the construction in progress account. Opening accumulated

depreciation and current year depreciation charges are calculated on the restated property, plant

and equipment. The original date of purchase and the historical cost of the disposed assets should

also be determined such that the amount deducted is the restated amount of the assets disposed.

The depreciation charge in the income statement should be the one calculated on the restated

property, plant and equipment. If an entity capitalises interest in accordance with IAS 23, ____________________________________________________________________________________

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recognise the part of the capitalised borrowing cost that compensate for the inflation during the

same period as an expense in which those costs were incurred. The impact of inflation is usually

recognised in borrowing costs. It is not appropriate to restate the capital the capital expenditure

financed from the borrowing and to capitalise that part of the borrowing costs that compensate

for the inflation during the same period. That part of the borrowing costs is recognised as an

expense in the period in which the costs were incurred. Intangible assets are restated in the same

manner as property, plant and equipment.

Deferred income:

The ageing of the deferred income is considered as well as the transaction date to the balance

sheet date. Accumulated amortisation as well as the current amortisation is based on the restated

balance. The new balances of amortisations are then used to replace historical amortisation

credited to the income statement.

Restatement of shareholders’ equity;

At the beginning of the first period of application of IAS 29, the components of shareholders’

equity in the opening balance sheet excluding retained earnings are restated. Any revaluations

that arose from the previous periods should be eliminated. The restated opening balance of

retained earnings is the balancing figure derived from all other restated amounts in the restated

opening balance sheet. At the end of the first period and in subsequent periods, all components of

shareholders’ equity are restated by applying a general price index from the beginning of the

period, or dates on which the items arose, if later. This restatement forms part of the monetary

gain or loss calculation.

Any statutory revaluation reserve (that is not in accordance with IAS 16) arising in subsequent

periods is eliminated against the revalued assets. Current year restated net income is added to the

balance of the restated opening retained earnings.

Dividends paid during the current year should be restated by applying a general price index from

the date at which the shareholders’ right to receive payment is established to the balance sheet

date.____________________________________________________________________________________

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The historical cost income statement generally reports revenues and costs that were current when

the underlying transactions and event occurred. All items in the income statement should be

expressed in terms of the measuring unit current at the balance sheet date. All amounts should

therefore be restated by applying the change in the general price index from the dates when items

of income and expenses originated. Income statements are normally restated on a monthly basis.

Revenue;

A monthly breakdown of revenue should be obtained and restate each period using the

appropriate indices to year-end.

Cost of goods sold;

Monthly breakdown of the items included in the production cost are obtained and are restated,

with the exception of depreciation and raw materials, from the month when the costs were

incurred to the year-end. The raw materials used in the production will then be calculated by way

of a reconciliation of restated opening raw materials and closing raw materials balances. The

depreciation related to the production costs is calculated on the restated property, plant and

equipment and is used to replace the historical depreciation. The restated opening and closing

balances of inventories of finished goods are also used in this calculation of cost of goods sold.

Income taxes;

Details relating to taxation calculated on a monthly or quarterly basis is obtained and the

restatement for each month or quarter is made in terms of balance sheet date purchasing power,

using the increase in the general price index from the related month or quarter until the reporting

date.

Gain or loss on net monetary position;

The gain or loss on the net monetary position is included in net profit and is separately disclosed.

The gain or loss may be derived as the difference resulting from the restatement of non-

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monetary assets, owners’ equity, income statement items and the adjustment of index linked

assets and liabilities. It arises from the holding of monetary assets and liabilities.

At the end of the first period and in subsequent periods all components of owner’s equity are

restated by applying a general price index from the beginning of the period or the date of

contribution, if later. The movements for the period in owners’ equity are disclosed.

2.5 Summary

The literature quoted above clearly shows that historical financial statements in a

hyperinflationary economy are misleading when capital needs are to be maintained. The

literature also shows that the subject of when should an entity start applying the standard, the

general price index to use and when should an entity cease to apply this standard is a complex

and diverse issue that is very difficult if not impossible to determine or establish. This is

complicated by the fact that the application of the standard can be started at different dates by

entities in the same economy resulting in the issue of comparability being complicated as well.

Most of the conclusions by prior authors and the standard aims to eliminate the "money illusion,"

the euphoria associated with inflation, by reducing the accounts to "real terms" and to correct

conventional historical cost accounts for the understatement of inventory and plant used in

production, i.e. the cost of goods sold and depreciation, in order to prevent erosion of capital

during inflation. There is need to critically look into the restatement of financial statements and

come up with ways of determining their impact on financial statements. The next chapter looks

at how the effects of compliance are established, that is, methodology.

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CHAPTER 3

RESEARCH METHODOLOGY

3.0 Introduction

The chapter looks into the methods, ways and procedures, which were used by the researcher in

the collection of data both from the organizations and the target respondents. It highlights the

research methodology and research instruments that were used by the researcher to collect the

data that were relevant to the study. The researcher has incorporated discussions of the data

collection and analysis procedures used in the study.

3.1 Research design Sellziz et al (1981; 31) defined research design as “a planned deliberate arrangement of

conditions for analysis and collection of data in a manner that aims to combine relevance to the

research purpose with economy of procedure.” From the definitions given above, it can be

deduced that a research design is in reality the conceptual structure within which the research is

carried out. The research design gives a logical sequence of all the steps that were taken by the

researcher to conduct the research study. Its purposes are to obtain answers to research questions.

3.1.1 Descriptive research design

The research is descriptive in nature in that it seeks to explore the effects of inflation adjusted

financial statements in a hyperinflationary economy, interpret and describe them.

Babbie et al (1995; 56) defined descriptive research, as studies designed to obtain information

directed towards determining the nature of a situation, as it exists at the time of

study. Descriptive research design was used since it provided an accurate description of the

variables in the problem model. The descriptive research design was also used since management

already knew and understood the underlying relationships of the problem, and its ability to

answer the who, what, when and how questions.

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Nachimias et al (1996:56) concur that descriptive research is useful for exploratory studies and

are well suited for producing information about particular characteristics in a finite population.

The method is best suited because of the research’s focus on the effect of hyperinflation

accounting on entities.

3.2 Research instruments

Research instruments are the research tools that are used to collect data from the respondents.

For the purposes of this research, the researcher administered ten questionnaires and two

telephone interviews to solicit primary data. Also used in this study is secondary data where the

researcher observed and analysed the effects of restating financial statements from the published

financial statements and reports. The questionnaires were administered to the financial

accountants of the sample of entities used. The two telephone interviews conducted were

conducted for financial advisors of the two entities. In other words, the researcher used both

primary and secondary data. In an effort to solicit this information the researcher employed

questionnaires, conducted selected interviews, observations and analysis of the financial

statements. Primary is defined as something that originates from first hand knowledge of the

person or item referred in the data or from a first hand witness when secondary data refers to

what already exist in the form of publications such as reports, journals, magazines and

newsletters (Edmund 1998:47). Below are some of the reasons why the researcher had found it

fit to employ the aforesaid techniques.

3.2.1. Questionnaires

In an effort to gather data necessary for this research, the researcher sent some lists of questions

which answer the objectives of the research. Bless et al (1997:14) defined a questionnaire as ‘a

set of presentation as well as more or less precise indication of how to answer each question’.

Leedy (1980:6) stated that a questionnaire is a commonplace instrument for observing data

beyond the physical reach of the observer. The questionnaire presents information in writing to

the respondents. It also requires a written response. The questionnaires were given to accountants

of each of the companies under review. The researcher did use questionnaires because;

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a) They were found cheap and easy to administer in limited time.

b) Since the questionnaires were enlisted anonymity and privacy, this encouraged candid

responses as well as answers that are honest.

c) Convenience –respondents had the opportunity to respond to questions during their own

time outside pressure.

d) There was uniform across the situation that was being measured as the respondents

answered the same questions allowing for the easy analysis and interpretation of the data.

The researcher could not entirely rely on questionnaires alone because of weaknesses such as;

the possibility of low return rate of the answers and misinterpretations of the questions by the

respondents since no clarity would be sought. Interviews were conducted to get hold of these

weaknesses.

3.2.2 Interviews

The researcher held telephone interviews with the respondents who were asked to answer

questions. Conservations with the advisors of these entities through telephone to gather more in

depth information and cross validate questionnaire results were held. Interviews were found

advantageous in terms of; clarity of issues ensuring that respondents fully understood the

questions; enhancement of greater flexibility; exposition of areas that respondents were

unwilling to discuss and inconsistencies in responses, and the provision of a greater opportunity

to persuade respondents to give answers. However the researcher did note that there were

weaknesses that were inherent in telephone interviews such as; the expensiveness and time

consumption of the exercise, the curiosity of officers about the data they were giving and

reluctance by the respondents to give some information that was considered confidential despite

the effort by researcher to guarantee confidentiality.

3.2.3. Observation and analysis of financial statements

Following weaknesses not addressed by questionnaires and interviews, the researcher also

collected the published financial statements (secondary data) of one entity from each of the

sectors and analysed the differences posed by the effect of restating the financial statements.

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3.3 Sampling techniques

3.3.1 Population

A population is a group of individual persons, objects, or items from which samples are taken for

measurement for example a population of presidents or professors, books or students

( http://www.enterprise-impact.org.uk/wordfiles/sampling ). It refers to people who are to be

covered under the scheme of the study. For the purpose of this research, the population consists

of all Zimbabwe Stock Exchange listed companies and the end of the year 2006 there were

eighty -seven of them.

Considering the size of the population, that is, all eighty-seven ZSE listed companies

(http://www.zse.co.zw 23/11/07), questionnaires and interviews could not be sent to all of them.

Moreover financial statements of all these companies could not be analysed, as this would

require a considerable amount of time as well as financial resources. These limitations in terms

of time and financial resources did lead to the use of sampling. The research instruments could

not be employed to the whole population so was used only for a selected group of entities.

Sampling is the act, process, or technique of selecting a suitable sample, or a representative part

of a population for the purpose of determining parameters or characteristics of the whole

population ( http://social researchmethods.net//tutorial/mugo/tutorial.htm). When a sample is

chosen from the population it is expected that the information gathered from the sample will

allow generalisations to be made about the population. For this study, a sample was more

applicable than studying the whole population because it was less costly and less time

consuming. Sampling entails the selection of a small number of elements from a large group of

elements and expecting that the information gathered from a small group will allow judgments to

be made about the large group. It is less costly and less time consuming since it involves

studying a sample of the overall population to represent the whole population, hence it is more

applicable to evaluating customer value and satisfaction.

3.3.2. Sampling Procedure

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http://social/

http://www.zse.co.zw/

http://www.enterprise-impact.org.uk/wordfiles/sampling


Due to time constraints as well as financial limitations the researcher selected a sample which

gives accurate indication of the population’s characteristics being studied. In this study the

researcher used the stratified random sampling method to select respondents. A stratified sample

is obtained by independently selecting a separate simple random sample from each population

stratum. A population can be divided into different groups may be based on some characteristic,

in this case the nature of product or service

( http://www.enterprise-impact.org.uk/wordfiles/sampling ). Once the groups are there, random

sampling is then applied to each group where each element has an equal chance of being

selected. The researcher used the stratified random sampling because he wanted to select a

sample that was especially informative and representative of all the sectors in the economy. The

companies selected for this research purposes and their respective sectors are as follows:

Sector Entity Total number of entities

listed on the ZSE

Agro-processing Seed company

Chemco Holdings

12

Consumer Meikles Africa Ltd

Star Africa Ltd

17

Construction Murray and Roberts Ltd

Radar Holdings

12

Financial Kingdom Financial Holdings

CBZ Holdings Ltd

18

Mining Falcon Gold Ltd 5

Industrial Gulliver Consolidated Ltd

Tractive Power Holdings

TA Holdings Ltd

23

(Source: The Financial Gazette- Top Companies Survey 2006 Magazine)

3.3.3 Sampling size

The researcher used a sample size of twelve companies shown above, pulled out from each

industrial sector of the economy so that no sector of the economy is left in this survey. The

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http://www.enterprise-impact.org.uk/wordfiles/sampling


reason for selecting representatives from each sector is to help in the analysis of the extent to

which companies engaged in different business are affected by hyperinflation.

3.3.4 Pre-testing.

Before the researcher went to administer questionnaires to the intended samples, a few were sent

to respondents outside the sample to detect any weaknesses in their design. A few interviews

were also conducted to determine if there were any deficiencies in the design of the interview

questions. The exercise carried out was aimed at testing the suitability and clarity of the

instruments and ensure that the instruments generated the required information.

3.4 Data analysis procedures

This section briefly describes the approach that was used to organize, describe and analyse the

collected data. The researcher organized and presented the data using tables, bar graphs and pie

charts.

3.4.1 Tabulation

Data is presented in simple tables; this involves putting data into frequency distributions, thus

showing how frequent each response occurred. This enables data in other forms like pie charts,

bar graphs, tables and line graphs to be used to facilitate interpretation. In this study the

researcher presented some of the data that were gathered from the respondents using tables.

3.4.2 Percentage calculation

This makes it easier for readers to follow the compacted data and its presentation. For instance

where a certain number of respondents gave their responses, this number would then be

expressed as a percentage to improve clarity.

3.4.3 Graphic display of data

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This form allows a more summarized presentation of the data where any reader can quickly

make sense of the meaning of data collected. A very short explanation of the graph would follow

thus helping readers to easily follow through the presentation.

Bar graphs, pie charts and tables were the ones used, as they are not complicated forms of data

presentation.

3.4.4 Bar Charts

Pannereerselvam (2004; 48) defined a bar chart as “a graphical view of the given data such that

the frequency of each category is shown as a vertical strip against that category in proportion to

the heights of other such vertical strips.” The researcher also used bar charts to present data in

this study.

3.5. Summary

The aim of this chapter was to describe the research methodology that was used in this study.

The chapter described the research design, the research instruments and the sampling method

used in the study. The data collection plan and the data presentation and analysis procedures

were also highlighted thus paving way for chapter four, where the presentation, analysis of

gathered data was executed.

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CHAPTER 4

DATA PRESANTATION AND DISCUSSION

4.0. Introduction

The preceding chapter dealt with the methods that were brought into play by the researcher in

data assembling. This chapter focuses on data presentation and analysis. The data assembled

includes both qualitative and quantitative data so suitable materials were used to present each

category of this data. Data shown or presented is accompanied by a suitable description and

interpretation of the findings. The chapter provides a base on which the next chapter on

recommendations and conclusions shall be established. Analysis of data has been made with

regards to the instrument exploited.

4.1. Data analysis and presentation

Having collected data, the researcher ensured that the data was complete and accurate. The data was then organized and summarized using tables and graphs. The responses were categorized according to their contributions to providing answers to the sub problems thus answering the research questions.

4.2. Primary data: questionnaires and interviews

4.2.1 Questionnaire analysis

From the ten questionnaires submitted to the accountants of the entities under review since they

are the ones responsible for the financial reporting function, the following are their responses

question by question;

Questionnaire response;

Questionnaires sent out Returned responses Unreturned responses

Total 10 10 0

Percentage (%) 100 % 100 % 0 %

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All the questionnaires that were sent to the respondents were returned. In other words, the

response was 100%.

Question 1: Are you aware of IAS 29?

The responses to this question are as tabulated below:

Aware Not aware Total

Number 10 0 10

Everyone to whom the questionnaire was sent was aware of the standard and its requirements.

Question 2: As a listed company, has your entity complied with the requirements of IAS 29?

The result is as follows;

Six out of the ten selected entities (sample) had complied with the standard. From the analysis,

the majority of entities have complied with the standard.

Question 3: For how long have you been complying to the requirements of IAS 29?

Responses:

Year Since 2000 2002-2004 2005-2006

Number of responses 0 4 2

Percentage % 0% 40% 20%

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Most entities about 40% of them did comply to the requirements of IAS 29 between the two

years 2002 and 2004 may be as a result of the three year cumulative above 100% inflation rate.

20% complied to the requirements later.

Question 4: Was your compliance voluntary or mandatory?

Responses:

Mandatory Voluntary Total



Out of the six entities that did comply, only 34% complied voluntarily and the other 66%

complied because of a directive by the Institute of Chartered Accountants of Zimbabwe.

The data tabulated above can also be presented in a pie chart as follows:

Since the majority of entities (sample) complied on directive, this clearly shows that the business

community is reluctant to embrace the standard.

Question 5: Do you think historic cost statements are adequate to portray the true and fair view

of the financial status of the entity in a hyperinflationary economy?

Reponses;

Adequate Inadequate Indifferent

Number of responses 2 6 2____________________________________________________________________________________

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Sixty percent of the sample suggests that historic cost statements are inadequate to reflect the

true financial status of an entity in a hyperinflationary economy.

From the above graphical presentation, which shows responses from qualified practicing

accountants, it can be deduced that although the business community favours the historical cost

concept, the concept does not potray a true and fair view of the financial status of the entity in a

hyperinflationary economy.

QUESTION 6:Which of the following do you use or refer to when making business and other

decisions?

Historical Inflation adjusted

Number of responses 4 6

Percentage % 40 % 60 %

Out of the ten entities, six refer to inflation adjusted financial statements when making business

decisions. Empirical evidence prove that inflation adjusted financial statements are the most

ideal to use when making economic decisions in a hyperinflationary economy since 60% of the

respondents favour it. The data tabulated above can also be presented in a chart as below:

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This is a better way of presentation compared to tables since it allows ease of identification as

only two variables were used.

Question 7: Do you consider the restatement of financial statements in terms of IAS 29

beneficial in your circumstances?

Responses:

Not at all Restatement beneficial Indifferent



60% of the sample size suggested that the restatement of financial statements is of benefit to

them. The following pie chart shows the views of the respondents regarding the effects of

compliance to IAS 29.

CHART 1

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Question 8: Which problems is your entity encountering in its bid to adhere to the requirements

of IAS 29?

Responses to this question included;

a) Lack of adequate knowledge on IAS 29,

b) Unavailability of the exact records of ageing of items

c) Costs associated with restatement are too high.

Question 9: in your own opinion should compliance be made mandatory to all ZSE listed

companies?

Responses:

Compulsory Voluntary Total


Percentage % 70 % 30 % 100%

70% of the sample indicated in favour of IAS 29 being made compulsory.

4.2.2. Interview analysis

The interviews with the financial accountants of some entities had the objective of ascertaining

the effects and appreciation of restating financial statements. The following are the reasons why

others are considering restatement as beneficial and those against restatement;

For restatement or compliance:

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a) Institutional investors who normally constitute the majority on the ZSE are fully capable of

comprehending IAS 29 and would always desire to see restated financial statements so that

they may value their portfolios in inflationary terms.

b) Historical financial statements do not include information about the date of each transaction

and items are recognised in terms of an eroded dollar rather than in terms of consumption

units. As a result there is loss of information when historical amounts are used to describe the

original transactions.

c) Historical amounts mix dollars from periods with different consumption ratios, which

impairs comparability over time. Across firms, historical reporting further impairs

comparability because there is large variation among firm transactions dates and amounts.

Inflation adjusted amounts are comparable.

Against restatement:

a) Many individual shareholders do not fully comprehend inflation-adjusted information

and therefore base their decisions on historic cost data,

b) The costs of restating outweigh the benefits derived from restatement.

c) The intended users of financial statements do not use restated financial statements for

decision making neither do they understand them,

d) The determination of index to use is subjective as some private economists allege that the

government manipulates the actual index to lower levels and sometimes the products to

fill the basket are not available,

e) Shareholders are mainly concerned about what actually happened and not what could

have happened,

f) The shareholders get confused with restated financial statements arguing that an entity

may record a historic cost profit and yet a loss is reported in inflation adjusted terms

4.3. Secondary data: Analysis of financial statementsThis section sought to break down the financial statements into individual items and thereafter

observe the effect of IAS 29 on the individual financial statement items. It involves a review of

inflation adjusted financial statements and ascertain the effects of restating on which to draw

conclusions. A review of inflation adjusted financial statements of an entity from each of the

sectors; financial, consumer and industrial sectors has been carried out.____________________________________________________________________________________

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4.3.1 Financial sector inflation-adjusted results.

Effects on financial performance

The banking business is affected by inflation but the financial statements do not require

significant adjustments. Indeed, banks are the conduit for inflation; the expanded money supply

moves from the Reserve Bank of Zimbabwe to the public through banks, expanding bank assets

an liabilities in the process. From Chart 1 it can be seen that historical earnings are close and

parallel to inflation-adjusted earnings for the period under review. The decline in earnings per

share in 2005 was a result of the slashing of the last three zeros. The chart shows that the

inflation adjusted earnings shows the same pattern as the historical.

FIG.1

(Source: www.cbz.co.zw/archives)

Inflation adjustments reduced reported earnings. Banks are thought to be disadvantaged during

inflation because they experience a purchasing power loss on their net monetary assets since they

hold more monetary assets than monetary liabilities to the extent that they are not index-linked.

The resultant monetary loss is the major contributor in the difference between historical and

inflation adjusted profits. If the monetary loss were to be ignored, there would be no major

difference. ____________________________________________________________________________________

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http://www.cbz.co.zw/archives


Effects on financial position;

Substantially all assets and liabilities are monetary; hence they do not change in price as do non-

monetary assets. A bank's only non-monetary assets are normally its banking premises, which is

commercial real estate. It is a very minor percentage of total assets, although it may be a

significant, e.g., 50%, proportion of shareholder's equity. Plant and equipment must be replaced

at a higher cost than the historical cost of retired plant. The annual cash requirement is measured

by current cost depreciation, which may be regarded as a theoretical figure but it is the only

measure available. Bank premises will give raise to a current cost adjustment that is only 5 % to

10% of historic cost asset values in most cases. The chart below shows the book values per share

using current cost values and historic cost values. The difference is minor and can be attributed

to the premises that require restatement.

FIG.2

(Source: www.cbz.co.zw/archives)

Effects on cashflows;

Cash flow is the same under current cost and historical cost accounting. Inflation accounting

assumes that the first demand on that cash flow is capital maintenance. Funds for discretionary

expenditures -- dividends and growth -- are available only after providing for capital

maintenance. Total capital expenditures are split between replacement and growth. The net cash

flow to be financed is the same under either accounting method. Thus, inflation accounting

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http://www.cbz.co.zw/archives


merely rearranges the priority of cash expenditures. It does not reduce cash flow or increase the

amount of financing as compared with historical cost cash flow.

Inflation accounting is not very significant for banks (and other financial institutions). Historical

cost statements provide relevant information for inflation analysis because substantially all assets

and liabilities are monetary.

4.3.2 Industrial sector inflation-adjusted results

Firms in this category include those in the agro-processing industries, engineering and

construction. To determine the effects of inflation adjustments only one entity has been used

since the rate of stock turn and their asset structure is similar.

Effects on financial performance

Generally, in high inflation periods adjustments are large. The chart that follows indicate that

major adjustments were required for years 2005,2006 and 2007 since in these years inflation rate

was escalating at 613%, 1282% and 2100% by mid 2007 respectively.

Divergences between historical earnings and current cost earnings are important because they

give a different perspective on the outlook. They occur when there is a sharp change in the rate

of inflation. In years of high inflation reported earnings may continue to rise while current cost

earnings decline (2005 in fig.2). The reverse occurs when the inflation rate subsides. 2004 is the

most notable example of the effect. Inflation rate declined from 2003’s rate of 598.7% to 132%

in 2004.

The crux of inflation accounting is determination of the earnings that can be distributed without

consuming capital, as measured by maintenance of operating capability. In effect, entities should

retain sufficient earnings to absorb the current cost adjustments and still leave something for

growth. Holding gains are not considered distributable except upon liquidation of the firm.

Hence they do not weigh as heavily in investment decisions, except in special circumstances,

such as property companies.

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FIG. 3

(Source: www.ta-holdings.com/financials)

Effects on financial position

As inflation continues, holding gains accumulate and asset values rise. It is not practical

to revalue assets by market prices every year so current (replacement) cost is used as the

measure of value. In principle, this measurement basis is comparable to historical cost,

which is appropriate in a stable price environment. They are both accounting numbers.

The value of individual assets in the market place depends on many factors but cost

measures of value can provide useful approximations in many instances.

From the chart shown below, it can be seen that inflation adjusted book values are good

approximation of the value of a share. Thus inflation-adjusted statements give a fairer

view of the financial position of an entity hence better measure of the value of the firm

compared to historical cost values.

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http://www.ta-holdings.com/financials


FIG.4

(Source: www.ta-holdings.com/financials)

4.3.3 Consumer sector inflation-adjusted results

An analysis of historical and inflation adjusted statements of the consumer sector revealed that

earnings are also reduced as a result of restatement. The chart below shows that historical cost is

more than inflation adjusted one due to the same reasons given for that of industrial sector.

The earnings per share of an entity in the consumer sector behave the same way as that of one in

the financial sector. Inflation adjusted earnings are close and parallel to the historic cost earnings

may be due to the rate of stock turn. Stock does not take long before it is sold. It can also be

noted that adjustments for sales and purchases or stock are almost the same because of this faster

rate of stock turn.

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http://www.ta-holdings.com/financials


FIG.5

(Source: www.meiklesafrica.co.zw)

Effects on financial position

The effects of adjustments on the financial position of an entity depends to a greater extent on

the structure of its assets, that is, monetary and non-monetary assets. The effects on financial

position are the same as those of the industrial sector since they hold similar assets. Historic cost

basis undervalues the firm while the use of current cost basis reflects a closer value to the market

price. Replacement values become very useful in valuation of firms as well as when negotiating

for long-term finance or borrowings since the assets will be considered for collateral.

4.4 Summary

This short, and perhaps exhausting, review of inflation-adjusted financial trends has only touched

the surface of the analytical possibilities. Nonetheless we can draw some general conclusions

about the effects of compliance to IAS 29 on the financial results of the entities and the real

returns to the shareholder. The central concept is that capital and operating capability should be

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http://www.meiklesafrica.co.zw/


maintained in current cost terms before current earnings that can be distributed to stockholders

are recorded. The key points:

a) Inflation-adjusted financial statements accounting separates current operating income

from holding gains. Holding gains expand under inflation but their realization must await

sale or liquidation of the business. Hence they must be essentially discounted in the

market price. Unrealized gains or losses using the historic cost convention manifest

themselves in future when the assets are sold.

b) Compliance to IAS 29 does not change cash flow but it reallocates it between capital

maintenance and discretionary expenditures. In this inflationary era, the industrial

companies can be able to finance capital maintenance out of earnings, pay increasing

dividends, and finance investments for growth without, through, expanding debt leverage

in the balance sheet.

c) Adjusting financial statements for inflation does not provide useful information for

regulated utilities although it does show that the shareholder suffers a substantial erosion

of real capital.

d) IAS 29 has no major impacts on banks (and other financial institutions) as historical cost

statements provide relevant information for inflation analysis because substantially all

assets and liabilities are monetary.

In real terms, inflation does not affect all firms equally, but instead its effects depend on the

structure of firm’s monetary and non monetary assets and liabilities and the changing nature

of this structure over time.

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CHAPTER 5

SUMMARY, RECOMMENDATIONS AND CONCLUSIONS

5.0 IntroductionThis chapter summarises the findings of the research and provides recommendations on the

hyperinflation accounting problem

5.1 SummaryHereunder is an outline of the major findings of this research.

1) The research has shown that inflation-adjusted financial statements are based on the

capital maintenance concept and use the current cost accounting method. In brief, capital

assets are shown at current cost and income is usually calculated using current cost

depreciation, although there are variations. Standard costs are used for inventories and

these may be raised during the year if price changes are substantial. In any event, the

division or entity is not given credit for price variances during the year. These inflation-

adjusted systems are regarded as more rigorous measures of division or entity

performance. Older divisions enjoying lower historical cost depreciation are put on the

same basis as newer divisions -- both are required to show a return on the current value of

the assets in their custody. Formerly, a return on sales was usually the measure of

division performance. This approach can stimulate division managers to adopt more

aggressive pricing policies, improve turnover of receivables and inventory, and get rid of

assets and product lines. All of these measures can be adopted without adjusting for

inflation, of course, but current cost accounting apparently provides a sharper focus when

inflation persists.

2) Also proven by the research is that some of the industry groups are relatively least

affected by the current cost accounting adjustments to earnings and thereby may offer the

best chance of staying ahead of inflation, other things being equal. These are; banks,

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insurance companies, drugs-health care, toiletries and cosmetics and electronics.

Conversely the most severely affected and hence least attractive are rubber, automobiles,

non-ferrous metals and glass

3) The research established that restating historic cost items to match the prevalence of

hyperinflation in the economy has a negative effect on the profitability of the entity.

4) The research proved that historic cost reporting is inadequate in an environment

characterised by high inflation levels.

5) The research has also shown that restating historic cost items presents data in a more

prudent manner in hyperinflationary economies, therefore is best suited in Zimbabwe at

the moment.

6) The research established that judgemental tendencies in conforming to the requirements

of IAS 29 are inherent but the consistency in application of such adopted methods is far

more important than the precise accuracy of the resulting amounts.

7) The research has also established two major uses of inflation-adjusted data for investment

analysis can be established and these are as follows:

i. It can assist research by providing more systematic data for comparative analysis

of company earnings power under current price conditions -- inflationary or

stable. It eliminates the significant non-comparability between companies arising

from differences in inventory and depreciation accounting.

ii. It can provide useful insights to the relative effects of price changes on revenues,

costs, and financing requirements across industries and companies.

Also brought to surface by the research are the controversies and problems surrounding the

restatement of financial statements? Accounting executives were unwilling to fully embrace IAS

29 because of the following:

a) Shareholders are incapable of fully comprehending inflation-adjusted information

b) Industry has widely believed that the consumer price indices used in the restating process

do not reflect the real inflation levels in the economy; they are suppressed by the CSO so

as to reflect lower inflation levels.

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5.2 ConclusionThere are limitations to hyperinflation accounting and the failure to recognize can lead to

unnecessary complexity in some situations. Hyperinflation accounting cannot isolate or condense

into one earnings number all of the effects of inflation on a company. It is simply an improved

system of measurement that brings financial statements into harmony with current costs and

values. Such improved statements provide a foundation for analysis of a company's economic

earnings and financial position in a hyperinflationary environment, including any special effects

of inflation. Some companies fare better than others under inflationary conditions.

Hyperinflation accounting is simply more realistic.

5.3 RecommendationsHyperinflation is rendering historical cost accounting obsolete. The general price level has been

escalating for the past seven years and from the look of things will continue to rise until sound

macroeconomic policies are put in place. Hyperinflation accounting is conceptually a better

measurement system under these conditions.

Inflation accounting will have to deliver different messages than historical cost accounting from

time to time and these messages will have to prove meaningful. If the trend of inflation-adjusted

earnings merely parallels historical cost earnings at a lower level, they will not add much

information therefore cannot be prepared.

The future course of inflation will determine the pace of adoption. If the current rate of inflation

continues, interest in hyperinflation accounting should accelerate.

In a nutshell, all ZSE listed companies even those not listed should produce restated financial

statements as the primary financial statements. Those who may not understand restated financial

statements should cooperate by sending their staff and participating in the seminars and

workshops the ICAZ, IoDZ and ZSE will organize to enhance their understanding of the

application of the standard.

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REFERENCES

1. The journal of the institute of chartered accountants of Zimbabwe (May 2007)

2. PricewaterhouseCoopers. International Financial Reporting Standards Financial

Reporting in Hyperinflationary Economies – Understanding IAS 29.

PricewaterhouseCoopers (May 2006), http://www.pwc.com/gx/eng/about/svcs/corporatereporting/IAS29Publication06.pdf

3. Deloitte. Financial Reporting In Hyperinflationary Economies. Deloitte, Ias Plus,

Http://Www.Iasplus.Com/Standard/Ias29.Htm.

4. International Accounting Standards Board. IAS 29 Financial Reporting in

Hyperinflationary Economies. IASB, http://www.iasb.org/NR/rdonlyres/C2563EF2-89A8-

4ED7-82A3-E31EDF33E428/0/IAS29.pdf

5. Bar-Yosef 1983, “Historical earnings vs. Inflation Adjusted Earnings in the Dividend

Decision,” Financial Analysts Journal, Vol. 39, 3-12.

6. Baran A. T. Lakonishok and R. Ofer 1980 “ The Information content of General Price

Level adjusted Earnings: Some Empirical Evidence” The Accounting Review, Vol.

55,22-35.

7. Basu S et al “Do Financial Analysts Use Suffer From Inflation Illusion?” Working

Paper.

8. Beaver W. 1979 “Accounting for Inflation in an efficient market –The Impact of

Inflation on Accounting: A Global View” The International Journal of Accounting.

9. Berliner R, 1983 “Do Analysts use Inflation adjusted information?, Results of a survey”

Financial Analysts Journal, Vol. 39, Iss 2, 65-72.

10. Campbell, j et al 2004 “Inflation-illusion and Stock prices.” American Economic

Review, Papers and Proceedings, Vol 39.

11. Fama et al 1977, “Asset returns and Inflation” Journal of financial economics, vol.5.

12. Norby, W. 1983 “Application Of Inflation Adjusted Accounting Data”, Financial

Analysts Journal Vol.39.

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http://www.iasb.org/NR/rdonlyres/C2563EF2-89A8-4ED7-82A3-E31EDF33E428/0/IAS29.pdf

http://www.iasb.org/NR/rdonlyres/C2563EF2-89A8-4ED7-82A3-E31EDF33E428/0/IAS29.pdf

http://www.iasplus.com/standard/ias29.htm

http://www.pwc.com/gx/eng/about/svcs/corporatereporting/IAS29Publication06.pdf


13. Rivera, J. 1987. ‘Price adjusted financial information and investment returns in a

highly inflationary economy: An evaluation” Advances in international accounting, Vol.

1,287-304.

14. Zimmerman, J. 1974 ‘Price level restatements: A Technical note” Journal of accounting

research, Vol. 12, 372-382.

APPENDIX A:

Questionnaire

This questionnaire was designed to gather information for use in the topic-“The Effects of

Compliance to IAS 29 ‘Financial Reporting In Hyperinflationary Economies’ on financial

reporting (2000-2007): A Case for ZSE Listed Companies”.

Instructions;

Please read the question carefully.

Select the response that is applicable in your situation for each question and tick in the small

box adjacent to the response of your choice.

SECTION A:

1) Are you aware of IAS 29 “financial reporting in hyperinflationary economies’?

Aware Not aware

2) As a Zimbabwe stock exchange listed company, for how long have you been complying to

the requirements of IAS 29?

Since 2000 2002-2004 2005-2006

3) Was your compliance to IAS 29 been a result of voluntary or mandatory?

Mandatory Voluntary

4) Do you think historic cost financial statements are adequate to portray the true and fair view

of the financial status of the entity in a hyperinflationary economy?____________________________________________________________________________________

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Adequate Not adequate

5) Do you think the restatement of financial statements is achieving the desired financial

reporting objectives?

Not at all Partly Achieving

6) Which of the following basis do you use or refer to when making business and decisions?

Historical cost statements Inflation adjusted statements

7) How do you describe the following effects of inflation adjusted financial statements? Tick

in the box applicable in your circumstances.

Not Beneficial Beneficial Indifferent

i. Restating financial statements results in non-current and current assets being carried

at realistic values. How do you describe this

ii. Inflation adjusted financial statements make comparisons over time period and across

entities become valid. What do you think of this?

iii. Restating financial statements results in the analysis and interpretations of profit

trends and return on capital measurements become meaningful?

iv. Depreciation based on restated values is adequate a measure of the value of the asset

used and this will be sufficient if replacement prices have arisen

v. Inflation adjusted information reflects the erosion of capital caused by inflation and it

is desirable to provide for the replacement costs of stocks before recognising

distributable profit.

vi. Return on capital employed figure based on historic cost method is invalidated as

assets are undervalued compounded by an overvaluation of profit since cost of sales

overheads are understated thus when comparing profit on capital employed figure

there is double effect as the numerator is overstated and the denominator understated,

a different case with restated financial statements.

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vii. Inflation adjusted information recognises the monetary gain or loss as the loss or gain

in the purchasing power by an entity’s holding more or less monetary liabilities and

assets.

8) Which problems are you encountering in your organization’s bid to adhere to the requirements

of IAS 29.

Lack of adequate knowledge on IAS 29,

Unavailability of the exact records of ageing of items

Costs associated with restatement are too high.

Others, (specify)

…………………………………………………………………………………………

………………………………………………………………………………………….

9) In your own opinion should compliance to IAS 29 be made mandatory or voluntary to all

ZSE listed

companies?

Mandatory Voluntary

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APPENDIX B

Structured Interview Guide

1. Entities that report in hyperinflationary economies are required to restate their financial

statements at the measuring unit current at the balance sheet date to reflect the effects of

inflation as per the requirements of IAS 29, are you aware of IAS 29?

2. How far have you been complying to the requirements of this standard given the

hyperinflation that has crippled the economy?

3. Has the implementation of this standard of benefit in your financial reporting in our

circumstances?

4. In which areas of financial reporting or decision-making have you found the restating

financial statements useful and not useful?

5. What do you think about the inflation-adjusted reports’ ability of meeting financial reporting

objectives in any economy rocked with hyperinflation?

6. Are there any problems you think have been brought about by restating financial statements?

7. In your own opinion, should compliance to IAS 29 be made mandatory to all ZSE listed

companies?

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zimbveka approved project (ii) final

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