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

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)
ZIMBABWE OPEN UNIVERSITY, JUNE 2008.
_____________________________________________________________________________
_
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
____________________________________________________________________________________
PO568832A
ii

CHITUNGWIZA
091 2 835 580
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
----------------------------------------- ------------------------------------
____________________________________________________________________________________
PO568832A
iii

EXTERNAL EXAMINER DATE
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.
____________________________________________________________________________________
PO568832A
iv

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.
____________________________________________________________________________________
PO568832A
v

__________________________________________________________________________
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
____________________________________________________________________________________
PO568832A
vi

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
____________________________________________________________________________________
PO568832A
vii

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.
____________________________________________________________________________________
PO568832A
viii

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.
____________________________________________________________________________________
PO568832A
1

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
____________________________________________________________________________________
PO568832A
2

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.
____________________________________________________________________________________
PO568832A
3

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.
____________________________________________________________________________________
PO568832A
4

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.
____________________________________________________________________________________
PO568832A
5

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.
____________________________________________________________________________________
PO568832A
6

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)
The researcher used information from published financial statements, journals and other reports
from institutions such as the Central Statistics Office (CSO).
____________________________________________________________________________________
PO568832A
7

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
 IoDZ- Institute of Directors Of Zimbabwe
 ZSE- Zimbabwe Stock Exchange
____________________________________________________________________________________
PO568832A
8

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.
____________________________________________________________________________________
PO568832A
9

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
____________________________________________________________________________________
PO568832A
10

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,
____________________________________________________________________________________
PO568832A
11

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.
____________________________________________________________________________________
PO568832A
12

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
____________________________________________________________________________________
PO568832A
13

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.
____________________________________________________________________________________
PO568832A
14

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)
____________________________________________________________________________________
PO568832A
15

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
____________________________________________________________________________________
PO568832A
16

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
____________________________________________________________________________________
PO568832A
17

comparison of amounts from transactions and other events that occurred at different times, even
within the same accounting period, is misleading. [IAS 29:2]
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
____________________________________________________________________________________
PO568832A
18

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,
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
____________________________________________________________________________________
PO568832A
19

Prepaid expenses are restated from the date of the payments to the balance sheet date.
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.
____________________________________________________________________________________
PO568832A
20

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,
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.
____________________________________________________________________________________
PO568832A
21

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.
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;
____________________________________________________________________________________
PO568832A
22

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-
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.
____________________________________________________________________________________
PO568832A
23

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
____________________________________________________________________________________
PO568832A
24

already knew and understood the underlying relationships of the problem, and its ability to
answer the who, what, when and how questions.
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
____________________________________________________________________________________
PO568832A
25

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;
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.
____________________________________________________________________________________
PO568832A
26

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://socialresearchmethods.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.
____________________________________________________________________________________
PO568832A
27

3.3.2. Sampling Procedure
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
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.
____________________________________________________________________________________
PO568832A
28

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
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.
____________________________________________________________________________________
PO568832A
29

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.
CHAPTER 4
____________________________________________________________________________________
PO568832A
30

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 %
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
____________________________________________________________________________________
PO568832A
31

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%
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:
____________________________________________________________________________________
PO568832A
Implementation of IAS 29
0
1
2
3
4
5
6
7
Implemented IAS 29 Had not implemented
IAS 29
Number
32

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
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.
____________________________________________________________________________________
PO568832A
Cause of compliance
Mandatory
Voluntary
0 20 40 60
Adequate
Inadequate
Indiferrent
Responses(%)
33

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:
____________________________________________________________________________________
PO568832A
Preferable financial statements
Historical
Inflation adjusted
34

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
EFFECTS OF COMPLINACE TO IAS 29
beneficial
not beneficial
indifferent
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.
____________________________________________________________________________________
PO568832A
35

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:
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,
____________________________________________________________________________________
PO568832A
36

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 statements
This 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.
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.
____________________________________________________________________________________
PO568832A
37

FIG.1
CBZ HOLDINGS EPS TRENDS
(10,000)
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
20072006200520042003200220012000
YEAR
EPS($)
historical inflation adj.
(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.
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
____________________________________________________________________________________
PO568832A
38

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
CBZ BOOK VALUEPER SHARE
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
20072006200520042003200220012000
YEAR
VALUEPERSHARE
(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
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
____________________________________________________________________________________
PO568832A
39

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.
FIG. 3
____________________________________________________________________________________
PO568832A
40

TA HOLDINGS LTD EPS TRENDS
-
50
100
150
200
250
20072006200520042003200220012000
YEAR
EPS($)
Historical EPS Inflation adjusted EPS
(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.
FIG.4
____________________________________________________________________________________
PO568832A
41

TA HOLDINGS BK VALUE PER SHARE
-
1,000
2,000
3,000
4,000
5,000
6,000
20072006200520042003200220012000
YEAR
DOLLARPERSHARE
Historical Mkt price Inflation adjusted
(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.
____________________________________________________________________________________
PO568832A
42

FIG.5
MEIKLES AFRICA LTD E.P.S.TRENDS
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
20072006200520042003200220012000
YEAR
E.P.S.($)
(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.
____________________________________________________________________________________
PO568832A
43

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
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.
____________________________________________________________________________________
PO568832A
44

CHAPTER 5
SUMMARY, RECOMMENDATIONS AND CONCLUSIONS
5.0 Introduction
This chapter summarises the findings of the research and provides recommendations on the
hyperinflation accounting problem
5.1 Summary
Hereunder 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
____________________________________________________________________________________
PO568832A
45

ZIMBVEKA approved project (II) FINAL

ZIMBVEKA approved project (II) FINAL

Recommended

Recommended

More Related Content

Similar to ZIMBVEKA approved project (II) FINAL

Similar to ZIMBVEKA approved project (II) FINAL (20)

ZIMBVEKA approved project (II) FINAL