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Old Mutual adopts hyperinflationary accounting for its Zimbabwe unit

by Staff reporter
23 Aug 2019 at 06:44hrs | Views
SOUTH AFRICAN-HEADQUARTERED insurance company, Old Mutual Limited (OML) says it will apply hyperinflationary accounting for its Zimbabwe business unit in light of the runaway inflation plaguing the economy.

The runaway inflation is being driven by the devaluing local currency which is increasing the prices of basic goods and services in the country, thus pushing inflation upwards. OML operates in Zimbabwe through Old Mutual Zimbabwe.

"During the first half of 2019, the group concluded that Zimbabwe was a hyperinflationary economy and made a decision to account for it as such. This decision was supported by a rapid increase in the inflation rate, which at the end of June 2019 was far in excess of 100% at 176%, the significant deterioration in the traded interbank RTGS dollar exchange rate over the period and the lack of access in Zimbabwe to foreign currency to pay foreign-denominated liabilities," OML said.

"We have applied hyperinflation accounting from October 1, 2018 and used the Zimbabwe Consumer Price Index (CPI) to inflation adjust reported numbers. The results, net assets and cash flows are then translated into rand at the closing rate of 1 RTGS to 2,13 ZAR. The closing rate used to translate the December 2018 results was 1 RTGS to 4,35 ZAR."

This comes despite Treasury announcing at the start of the month that they would no longer publish the annual inflation figures which stood at nearly 176% at the end of June.

However, renowned American economist Steve Hanke puts the annual inflation rate at 556%.

Old Mutual Zimbabwe chairman Johannes Gawaxab warned in the company's 2018 financial report that "the overall pace and magnitude of macro-economic revival was likely to depend significantly on the government's ability to sustainably rebuild public and investor confidence".

OML said until such time they were able to access capital by way of dividends from their business in Zimbabwe, they would manage it on a ring-fenced basis.

"Consequently, the results of this business have been removed from RFO (Results from Operations) and AHE (Adjusted Headline Earnings). The ability to access capital is exacerbated by the volatility that the hyperinflationary economy and the reporting thereof introduces," Old Mutual said.

"This adjustment has been applied from January 1, 2019 and we have restated comparatives to reflect this decision. The financial information in this trading statement is the responsibility of the board of directors and has not been reviewed or reported on by the group's external auditors."

Old Mutual Zimbabwe is a significant player in the local financial markets.

Meanwhile, embattled OML chief executive Peter Moyo has been given a further notice of termination of his employment contract.

In June, Moyo was fired by OML over conflict of interest issues with a firm he founded, where the former was the only institutional investor.

In response, Moyo took OML to the Gauteng High Court in Johannesburg, South Africa, challenging his termination, with the court later ruling that he be temporarily reinstated with immediate effect, declaring his dismissal unlawful.

In the same court filings, Moyo also sought to have the OML board declared "delinquent directors", which would prevent them from holding non-executive directorship positions for several years.

As such, the move taken by OML's board of directors was in direct defiance of the court order.

"It will remain important to finally resolve the dispute about the validity of the June notice of termination. However, irrespective of what might eventually happen in those legal proceedings, events following the June notice have made it clear that a continued employment relationship between Mr Moyo and Old Mutual is untenable," OML said.

"The directors have been appointed by shareholders and are required to take appropriate steps in the exercise of their fiduciary duties to the company. It is clearly in the best interests of the company and its stakeholders that the employment relationship with Mr Moyo should come to an end. For this reason, Old Mutual has now given Mr Moyo a further notice terminating his employment."

OML said the decision was taken following legal advice and on careful reflection by directors, with proper regard to their fiduciary duties to the company.

Source - newsday