HomeAnalysisThe auction vs the other rate

The auction vs the other rate

Owen Mavhengere
accountant
THERE has been a lot of debate and excitement over the past week regarding exchange rates. This topic has been topical over the past two decades with every Zimbabwean having to understand and navigate rates and essentially be a “currency expert”.

Of course it takes more to be an expert but this Information Age and the ability to do an internet search on anything has allowed us to become self-taught experts.

The pandemic though, has taught me that it takes more than a few minutes on your mobile or other gadget to really gain an in-depth understanding on a specialist topic.

Even I do not believe myself to be all knowing in this field. I will however pull from my studies of International Financial Reporting Standards (IFRS or IFRSs) in particular International Accounting Standard (IAS) 21 — Effects of Changes in Exchange Rates.

Definitions per IAS21

I will just extract from the reporting standard, IAS21, and list a few interesting definitions to help set the tone. The following terms are used in the quoted standard with the meanings specified:

Closing rate — is the spot exchange rate at the end of the reporting period.

Exchange rate — is the ratio of exchange for two currencies.

Foreign currency — is a currency other than the functional currency of the entity.

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

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

Spot exchange rate — is the exchange rate for immediate delivery.

I selected the above few from the standard to just help set the tone, but I will endeavour to simplify the article to avoid turning this article into an accounting module. I must also reiterate that these are definitions per IFRS. I will go further and dissect some of the above definitions.

Functional currency and forex

This is the currency that most of an entity’s activities take place in for example sales, salaries, materials and other costs. According to the standards one does not necessarily select, which currency they choose to be their functional currency but rather it is somewhat dictated by factors, such as, which currency is the main currency in which the activities of the entity take place.

Sometimes judgement needs to be applied if it is not immediately obvious which currency is dominating with regards to the activities of the entity.

A good number of organisations, particularly those not in the export business will have the local ZWL as their functional currency, and the main foreign currency will be the USD.

 Spot rate

This is where things get interesting. Spot rate is the rate for immediate delivery. The word immediate then brings around various aspects in terms of what can be reasonably termed immediate.

The standard setters also considered this and even have a provision in terms of how to respond when there is a temporary lack of exchangeability (Para 26 for the more technical colleagues).

Again there is another key word there, being “temporary”. This then brings about questions around what to do if there is long term lack of exchangeability.

Currently, there are difficulties in accessing foreign currency due to its scarcity and high demand, therefore, there are challenges around exchangeability in the local market even on the auction market. Judgement still needs to be applied and this then becomes the source of major debates.

All of this then impacts on what we can define as a spot rate in terms of International Financial Reporting Standards.

But, why being hamstrung by international standards? One might then question why we are constrained by these IFRSs, we are after all a sovereign nation . . . but, let us remember we are part of a global village.

As a nation we intend to take our place on the global stage, and therefore we do make use of global and international standards, which allows an investor in any country to compare a Zimbabwean operation and a concern in any other country. We therefore cannot just up and disregard the standards.

 The auction versus the other rate

Just to expand on the auction rate and its ability to meet the definition of spot rate in terms of IFRS, we then realise that there is a challenge on immediate delivery for any random organisation, as there is limited foreign currency available.

Furthermore, the alternative exchange rate is also quite significantly ahead of the official rate. The gap has slightly narrowed as the official rate breach the 100 mark to average 105.6965 as of Tuesday the 16th of November 2021, but the other rate is still almost double the official rate.

The auction rate is the official and legal exchange rate applicable in terms of the law but as earlier alluded there are challenges around meeting the definitions of IFRS. This has been the source of dispute amongst all users of financial statements, that is, preparers, auditors, regulators, general users and other stakeholders.

Way forward?

Having seen that we are caught in between the standards, the auction, the parallel rates, the law and so on, there is a need to harmonise the varied positions. All stakeholders from government, the private sector and the public sector have a role to play.

This will then bridge the gap and allow us to return to normalcy and this will have a knock on effect on clean audit opinions. I also believe that there will also be noticeable change in the day to day lives of the ordinary citizen. This is because financial reporting merely captures what would have occurred or what is subsisting. The Financial Reporting Forum this week came up with recommendations which will assist in resolving the impasse. These recommendations will be touched on in a separate article.

Mavengere is the Technical Manager at the Institute of Chartered Accountants of Zimbabwe (ICAZ), which is the largest and longest standing PAO in Zimbabwe, having been established on 11 January 1918. Owen can be contacted on technical@icaz.org.zw or twitter: @OwenMavengere.

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