Listed insurer Old Mutual Zimbabwe’s profit after tax for the year to December 31, 2019 declined to R312 million as the interims took a significant hit following the adoption of International Financial Reporting Standards (IFRS), which factor in hyperinflationary accounting.
For FY2018, Old Mutual Zimbabwe posted profit after tax of US$300,7 million.
Changes in Zimbabwe’s functional currency, from the United States dollar to the Zimbabwe dollar (ZWL), largely implemented during the course of 2019 has resulted in high inflation, which has necessitated local firms to apply hyperinflationary accounting.
And expectedly, companies have taken a hit.
Old Mutual Limited has resultantly reported a decline in profit:
“The results, net assets and cash flows of our business in Zimbabwe have been translated at the closing exchange rate of 1 ZWL$ to 0,835 ZAR, in line with the requirements of the provisions of IAS 21 for the translation of hyperinflationary economies.
“The translation of the results of Zimbabwe at closing rate rather than average rate has reduced the profit after tax by R312 million,” said the group in a statement accompanying its FY2019 results.
Zimbabwe’s currency adjustments commenced around October 2018 starting with the separation of the bank accounts and the introduction of the Real Time Gross Settlement (RTGS) dollar into the multi-currency system basket; and in February 2019 the authorities removed the 1:1 peg between the US dollar and the RTGS dollar and introduced the interbank foreign exchange market, and finally in June of the same year the Zimbabwe dollar was re-introduced as the sole legal tender and the multi-currency basket fell away.
Zimbabwe Public Accountants and Auditors Board (PAAB) confirmed the shift in functional currency and inflationary environment, and it recommended firms to adopt IFRS.
The South Africa-headquartered Old Mutual group, however, skated being weighed down by the under-performing Zimbabwe operation as it had since moved to ring-fence the entity.
“We removed this business from Adjusted Headline Earnings, effective January 1, 2019, and we have re-presented our comparatives to reflect this decision. Separate targets have been set for our executive management and the management team in Zimbabwe in respect of the performance of the business,” said the group.
Headline earnings per share is the main profit measure in South Africa.
Old Mutual Holdings’ adjusted headline earnings per share for FY2019 stood at 209,3 cents (US$0,1283), compared to 195,1 cents in the prior comparable period.
The group’s adjusted full-year profit rose by 7 percent.
Meanwhile, the group said its Zimbabwe division’s investment strategy had shifted to “value-preserving assets” due to the high inflation operating environment.
“We reviewed our investment strategy and weighted our portfolio towards asset classes deemed to better preserve value during periods of hyperinflation, and we continue to invest and transact in foreign currency where permissible as a natural hedge to the fast depreciating Zimbabwe dollar.”
With regards to the group’s investment portfolio, a re-evaluation of assets is largely expected after the country’s insurance and pensions regulator — the Insurance and Pensions Commission (IPEC) last week published valuation guidelines that have been necessitated by the currency changes.
Statutory Instrument 33 of 2019 (which effected the re-introduction of the Zimbabwe dollar) dictates moving from US dollars to Zimbabwe dollars at an exchange rate of 1:1; but that had played havoc on companies’ balance sheets and investment portfolios.