Zim’s ZiG currency revolution: Navigating financial reporting in a new era

In a bold move to stabilise its economy and foster financial independence, Zimbabwe has introduced a unique approach by adopting gold backed currency called the Zimbabwe Gold (ZiG).

The decision to revert to a gold-backed currency has sparked discussions and speculation among financial analysts and economists worldwide, especially concerning its potential impact on financial reports within the nation.

This article is a contribution to the ongoing discussion.

Zimbabwe adopted the ZiG currency on April 4, 2024 to replace the Zimbabwean Dollar. This currency is backed by a basket of precious metals including about 2,5 tonnes of gold along with $100 million of foreign currency reserves held by the central bank.

The currency has gained more than 2 percent against the US dollar since its debut, data posted on the central bank’s website shows.

The introduction of a gold currency marks a significant departure from traditional fiat currencies and highlights Zimbabwe’s determination to break free from years of tangible asset like gold, the Government aims to instil confidence in the financial system and protect against inflationary pressures.

Impact on Financial Reports

The transition to a Gold standard currency is likely to have a profound impact on financial reporting within Zimbabwe. Companies operating in the country will need to reassess their accounting practices and methodologies to reflect the new currency dynamics accurately.

The statement of financial results, the statement of financial position, statement of changes in equity, cash flow statements and notes to the financial statements and income reports will undergo revisions to accommodate the valuation and transactions based on the gold standard.

It is very vital for entities operating in an inflationary economy like Zimbabwe to be aware of and comply with the provisions of IAS 29 and IAS 21 to ensure their financial reporting remains relevant, reliable and comparable despite the changes in inflation.

If a company operates in Zimbabwe and uses the Gold backed currency as transaction currency, the impact of IAS 21 is critical when preparing financial statements.

IAS 21 provides guidelines on how to account for foreign currency transactions and the translation of financial statements into a presentation currency (commonly the reporting currency of the company).

For a company in Zimbabwe using gold backed currency, the impact on IAS 21 could include:

Determining the functional currency: The company needs to assess whether the Gold backed currency is its functional currency, which is the currency of the primary economic environment in which the entity operates.

Foreign currency transactions: Any transactions denominated in foreign currencies (other than the gold currency in this case) need to be translated into the functional currency at the exchange rate on the transaction date.

Translation of financial statements: Financial statements prepared in the Gold currency may need to be translated into a presentation currency for reporting purposes, following the guidelines of IAS 21.

The specific impacts of using Zimbabwe Gold currency on IAS 21 would depend on the unique circumstances of the company, its operations and the currency environment in which it operates.

Proper application of IAS 21 ensures that financial statements accurately reflect the financial position and performance of the company despite operating in a specific currency like the Zimbabwe Gold currency.

Under the Zimbabwean environment with continuous changes in rates, organisations need to consider the implication of IAS29 on their financial reports.

IAS 29 requires entities to apply a specific set of rules when preparing their financial statements. These rules include restating financial statements in the reporting currency as if the economy were stable, ensuring that monetary amounts are corrected for changes in the general purchasing power of money and providing additional disclosures to help users understand the impact of inflation on the financial information presented.

In the case of Zimbabwe, which has a history of high changes in rates, the application of IAS 29 would be crucial for companies to accurately reflect the financial effects of inflation on their operations.

By following the requirements of IAS 29, entities can provide users of financial statements with a clearer picture of their financial position and performance in an environment where the value of money rapidly erodes due to hyperinflation.

In the context of Zimbabwe’s inflationary environment, the application of IAS 16 (Property, Plant and Equipment) and financial instruments standards like IAS 39 or IFRS 9 can be significantly impacted.

Here is a brief overview of the potential impact on these standards:

IAS 16 — Property, Plant and Equipment (Revaluation):

Due to inflationary changes, the historical cost of property, plant and equipment may become less relevant due to the erosion of the currency’s purchasing power.

Entities may choose to revalue their property, plant and equipment to reflect their current fair values.

However, under IAS 29, revaluations are not allowed for property, plant and equipment. Instead, entities are required to adjust these non-monetary items by applying the general pricing mechanism, which is similar to the restatement of historical cost.

The asset values on the statement of financial position may need to be adjusted for the effects of inflation in accordance with IAS 21 requirements, rather than through traditional revaluation methods.

Financial Instruments (IAS 39 or IFRS 9):

The valuation of financial instruments, such as derivatives, loans and investments, in a hyperinflationary environment could pose challenges due to the rapid changes in the value of money.

Under IAS 21, financial instruments are required to be measured in the reporting currency at the closing exchange rate at the reporting date, which may lead to significant fluctuations in values as a result of hyperinflation.

Entities may need to consider the impact of inflation on the classification and measurement of financial instruments, impairment assessments and fair value calculations in line with IAS 21 requirements.

In an economy like Zimbabwe with high changes in prices, entities applying IAS 16 and financial instruments standards must carefully consider the implications of inflation on the valuation and reporting of property, plant, equipment and financial instruments.

Compliance with IAS 21 is crucial to ensure that financial statements accurately reflect the effects of inflation and provide users with meaningful information about the entity’s financial position and performance.

Challenges and opportunities

While the shift to a gold-backed currency presents opportunities for increased transparency and stability in financial reporting, it also poses challenges for businesses accustomed to operating in a fiat currency environment. Companies will need to navigate exchange rate fluctuations, asset valuation complexities and compliance with new reporting standards.

Strategic adaptation

To mitigate the potential challenges and capitalise on the opportunities presented by the Zimbabwe Gold currency, businesses are advised to implement strategic measures. This may include conducting thorough financial audits, updating accounting systems and methodologies and providing training to staff to ensure compliance with the new reporting requirements.

Looking ahead

As Zimbabwe forges ahead with its ambitious currency reform, the impact on financial reports will continue to unfold. The success of the gold standard currency will depend on a harmonious collaboration between the Government, financial institutions and businesses to adapt and thrive in this new financial landscape.

Conclusion

The adoption of a gold currency in Zimbabwe represents a bold step towards financial resilience and stability. While the impact on financial reports may initially pose challenges for businesses, strategic adaptation and compliance with new reporting standards will pave the way for a more robust and transparent financial ecosystem in the nation. As Zimbabwe charts its course into this new era of currency, the world watches with anticipation to see the outcomes of this ground-breaking financial experiment.

Rtd Major S Zhou

Rtd Major Zhou is a senior lecturer at Great Zimbabwe University and has the following academic accolades: (FACCA, FCGI, MBA, MCOM ACC, B. TECH ACC, FORENSIC AUDITOR and PAAB).-ebsuinessweekly