Zimbabwe's financial reporting puzzle: Old Mutual Limited calculates its own exchange rate for results, currency hits earnings

[Bulls n Bears]

Zimbabwe's financial reporting puzzle: Old Mutual Limited calculates its own
exchange rate for results, currency hits earnings

  



 

Results just released by Old Mutual Limited, South Africa's number two
insurer and the holding company of Old Mutual Zimbabwe, show the impact of
Zimbabwe's currency reforms on the accounts of companies operating in the
country.

 

Old Mutual's results from operations (RFO), its main measure of performance,
was R9.963 billion in 2018, down 4%. Apart from being the result of net
reserve movements and a general sluggins economy in South Africa and
elsewhere, Old Mutual said this decline was also a result of the change in
the functional currency in Zimbabwe.

 

"We delivered Adjusted Headline Earnings (AHE) of R11,512 million, a
decrease of 11% compared to the prior period. The primary cause of this was
the lower RFO, lower investment income in South Africa as a result of weaker
equity markets and in Zimbabwe, the change in functional currency in the
fourth quarter," the company said in results out on Monday.

 

Two major policy moves over the past five months have forced many companies
to reassess their reporting. First, in October, the Reserve Bank of Zimbabwe
<https://newzwire.live/rbzs-new-fca-ring-fence-explained/> separated RTGS
balances from foreign currency accounts. In January, the
<https://newzwire.live/rbz-finally-abandons-11-peg-in-currency-overhaul/>
RBZ then declared that RTGS balances and bond notes were now virtually a new
currency, the RTGS dollar. Central bank said this would act as the base
currency.

 

Zimbabwe currency: Bring out the calculator

 

According to CEO Peter Moyo, "consensus has developed to apply a change in
functional currency for our businesses operating in Zimbabwe from 1 October
2018", when the FCAs and RTGS accounts were ring-fenced. Old Mutual says the
change has reduced both its reported profits and net asset value in 2018.

 

As a result, to calculate its earnings from Zimbabwe, Old Mutual has had to
come up with its own exchange rate, 3.3 to the US dollar, to translate its
accounts for the last three months of 2018.

 

Explaining its calculations, Old Mutual says: "We have estimated a RTGS US
dollar exchange rate of 3.3 to 1 (RTGS rate) by assessing various inputs
that impact inflation. The inputs considered in this estimate include the
relative food and fuel prices and the official inflation rate. A further
observable input taken into consideration was the premium at which the Old
Mutual and PPC shares trade on the Zimbabwe stock exchange relative to the
Johannesburg Stock Exchange."

 

According to Old Mutual, the majority of its shareholder return from the
rest of Africa market - which excludes South Africa - is generated by
Zimbabwe. Equity markets have continued to be volatile, with a 40% rise in
the second half of the year. This resulted in substantial mark to market
gains. However, this was impacted by the currency changes.

"The positive investment returns generated in Zimbabwe equity markets was
impacted by the translation of shareholder investment return at the RTGS
rate for the last three months of the year," says Old Mutual.

 

Despite strong shareholder investment return generated in Zimbabwe during
the period which increased the asset base, there was a decrease of R3.1
billion or 22% in Old Mutual's Rest of Africa segment. This was largely a
result of the change in functional currency in Zimbabwe.

 

Old Mutual's grim outlook

 

Old Mutual has a dim outlook on the Zimbabwe economy. Real GDP growth "is
expected to be muted in our dominant Southern Africa markets as both Namibia
and Zimbabwe face economic headwinds".

 

The company said: "Although a new government under President Mnangagwa came
into power in the year, economic and political instability still persists in
Zimbabwe."

 

RFO for Zimbabwe increased by 22% from the prior year due to strong
performance across all lines of businesses, except for property and casualty
due to higher claims and increased operating expenses.

 

Tobacco merchants
<https://twitter.com/newswireZW/status/1101338697755062277> TSL Limited
announced recently that it had delayed release of its annual results pending
guidance from the Public Accountants and Auditor's Board (PAAB) on how to
present results. PAAB secretary-general Admire Ndurunduru said the board
would soon release a guide after talks with listed forms, the ZSE and the
Securities and Exchange Commission of Zimbabwe.

 

 

Source: https://newzwire.live/

 

 

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