Review of 2010 Budget for Zimbabwe - Whereto from Now?

The Finance Minister, Hon. Tendai Biti, had a challenging and unenviable task of balancing growth prospects and current expenditure requirements. A challenging task indeed given the difficuties in mobilising funds to finance the anticipated/projected budget deficit of USD810 million. One shudders to think wether multilateral and bilateral support from insitutions and donors will be mobilised to fund part of the budget let alone the deficit given revenue inflows of USD1.4 billion.

A balancing act of presenting a pro-poor budget and need to stimulate growth. There were good concessions and stimulus though, including a vote to women and youth empowerment, PAYE Relief and Bonus of USD400, reforms to VAT and corporate tax reduction to 25%, reduction on customs duty for small vehicles albeit at the expense of the local motor manufacturing and dealer industry.

The proposed reforms to tax legislation is welcome but one hopes that this will be supported by reforms to the companies Act which is long over due. There is however confidence that the budget is a starting point beyond which we expect in 2011 to have more allocations to Capital Expenditure so that a mimimum of at least 20% is allocated to infrustructure.

There is however little incentive for people in the dispora right now to come and invest as the investment climate is not yet condusive much weighing down on the GPA developments. The same applies to donors who are literally waiting on the sidelines to see how things will proceed going forward.

I think the hope factor will drive the country and a lot of optimism too. A lot of attention on the key economy enablers such as water, transport , and electricity will go a long way in ensuring (a) availability and (b) competitively priced energy and water inputs into the manufacturing process. Already the signing of BIPPA with South Africa as a positive indication and as remuneration levels are adjusted to the region, skills retention will ensure the much needed skills for the local industry.

Like Martin Luther said " I have a dream..." one hopes politicians will retain their political daggers and focus on reforms especially with a key focus on the legistlation reforms, public finance management systems, parastatal reforms and clear debt clearance strategy to ensure that we are on a clear path to recovery. I am not a proponent of having Zimbabwe as part of the Highly indebted Countries as the structural adjustment programmes that come with such designation can be disastrous. History is litterd with such failures!

As south africa prepares for the World Cup in 2010, one hopes as a country we will benefit from the positive spin offs from that country but both government and the local industry have been slow in strategic positioning to reap the benefits of this event or is it much left for a little late!

We will be judged by future generations by what we could have done better to heal the world and make it a better place.

Dony Mazingaizo has an interest in IFRS and Financial Management

EMERGING IMPACT OF RISK MANAGEMENT ON TREASURY

Introduction and global context
The financial manager is faced with 3 major decisions, the dividend decision, investment decision and financing decision in an effort to increase shareholder value. The financing decision is the focus of treasury management.

The Subprime crisis that hit the United States of America in late 2007 to 2009, which later deteriorated into a global recession has resulted in many questions being asked and solutions being sought to come up with long term solutions to avert such a disaster in future.

In assessing the reasons for the Subprime crisis, among other factors, the failure of sound risk management practices in financial institutions[1] and modelling challenges was identified as key[2].

One of the major areas of focus lately has been on risk management and how accountants can make a contribution to risk identification and management[3].

Risk management is the identification and evaluation of actual and potential risk areas as they pertain to the company as a total entity, followed by a process of either avoidance, termination, transfer, tolerance (acceptance), exploitation, or mitigation (treatment)of each risk, or a response that is a combination or integration.

The ongoing recession has seen efforts towards recovery with liquidity injections, IFRS changes and efforts towards regulation of investment banks, hedge funds and credit rating agencies which were identified as key participants in the credit crunch.

Developing countries such as Zimbabwe have not been spared from the global recession with the liquidity crunch affecting the ongoing efforts towards recovery, recapitalisation of industry and infrastructure development.

Small organisations which previously did not have any risk management policies and procedures are being challenged by the environment to come up with their own and demystify risk management[4].

In Zimbabwe, the adoption of a multicurrency environment in early 2009 with the United States Dollars, Rands and Pula being some of the preferred currencies has resulted in companies refocusing their attention on risk, treasury management and internal controls in order to minimise loses and maximise the benefit of available working capital at the back of limited credit being offered by local banks and offshore markets.

Risk Management
Financial management principles assumes that businesses and their custodians are naturally risk averse and hence the need to minimise exposure to whatever risk as much as possible.

Enterprise Risk Management (ERM) is defined as comprehensive risk management that allows companies to identify, prioritise, and effectively manage their crucial risks. An ERM approach integrates risk solutions into all aspects of business practices and decision making processes[5].

There are essentially four key pillars of a sound risk management framework namely:
adequate board and senior management oversight;
sound risk management policies and operating procedures;
adequate management information systems;
strong risk management, monitoring and control capabilities and adequate internal controls.

Although some institutions address risk as part of their strategic plans, governance structures and project-specific business proposals, best practice in risk management in any institution requires risk to be enshrined in an Enterprise Risk Management (ERM) Policy or Framework championed by the Chief Risk Officer or risk department and approved by the board of directors.

In smaller organisations without stand alone risk functions, the CFO is responsible for monitoring and managing Enterprise Wide Risks.

Broadly considered, an ERM policy may identify the following:
responsibility of the board towards risk;
responsibility of management towards risk;
risk tolerance and appetite of an institution;
expertise required;
training needs;
management information systems (MIS) – addressing security, integrity and availability of information;
monitoring and reporting;
codes of conduct;
internal controls and segregation of duties;
exchange control regulations;
risk categories relevant to the organisation;
risk limits;
disaster recovery;
business continuity planning;
role of internal audit;
role of risk department; and
risk mitigation.

An ERM policy identifies the main risks that an institution is exposed to. Some of the major enterprise wide risks are:
strategic risk;
market risk;
operational risk;
legal risk;
reputation risk;
liquidity risk;
political risk;
technological risk;
sovereign risk;
credit risk and
compliance risk.

These risks are not cast in stone and an organisation needs to continuously assess emerging impact of other risks and lately environment risk has been a major risk given the focus on green reporting and environmentally friendly business practices.

Risks relevant to treasury management
Risk management in inextricably linked to treasury management and all organisations not only financial institutions have had to embrace sound risk management practices and in some cases revise the existing controls.

In practice, addressing risk management with relation to treasury can be done in the ERM framework of the organisation or through separate treasury management policies. The specific risks that are related to treasury include the following:
currency risk;
interest rate risk;
settlement risk;
concentration risk;
commodity risk;
equity risk;
credit risk;
fraud risk;
liquidity risks;
systematic risk;
systemic risk; and
off-balance sheet risk.

These risks can further be broken down into specific risks that are relevant to an institution for example in financial institutions; interest rate risk has the following sub-risks:
repricing risk;
basis risk;
yield curve risk; and
optionality risk.

Any sound guidelines on treasury related risks should focus not only on identifying the risks but on the following:
1. definition of risks;
2. potential impact assessment;
3. direction of risk/probability;
4. monitoring tools; and
5. mitigation/hedging strategies.


Treasury and internal control environment
The internal control environment for any treasury function needs careful consideration. An internal control environment encompasses the overall attitudes, awareness and actions of senior management towards internal controls.

Essentially the board of directors sets the tone of the internal control environment by approving and amending key policies and procedures in line with changes in the operating environment.

In a financial institution, there is need for segregation of duties with clear separation of front, middle office and back office to avoid the famous Nick Leason effect. A code of conduct guiding operations of treasury officers is key is this regard.

The Barings crisis and recently Societe Generale debacle continue to underscore the need for sound internal controls and secure Management Information Systems (MIS) which cannot be manipulated to cover losses.

Centralised treasury
The liquidity crunch being experienced by many companies because of the global recession has resulted in a key focus of centralised treasury to maximise deployment and investment of available cash resources. This is essential for holding companies with subsidiaries and plays a role in having a coordinated management to the risks associated with treasury.

Already developing countries are harnessing the advantages of establishing centralised treasury Departments. Big companies in Zimbabwe such as Delta Corporation, CFI Holdings, and African Sun have centralised treasury Departments to manage their working capital.

The key functions of centralised treasury are:
funding management;
liquidity management;
investment management; and
currency management.

Identification of the key risks associated with these functions and actively managing them is very important for any organisation and cannot be left for specialised personnel alone, accountants need to play a key role.

Risk Management and Financial Instruments Hedging
From an IFRS perspective, IAS 39: Financial Instruments: Recognition and Measurement requires institutions to make use of hedges if, among other things:
they are highly effective; and
in line with a documented hedging policy[6].

This further highlights the need for an ERM Policy/Framework to underpin any treasury activities undertaken by an organisation.

Risk management and King III
The King 3 guideline on corporate governance, developed by the Institute of Directors of Southern Africa to replace King 2 effective from March 2010 reinforces the importance of risk management and highlights:
the board’s responsibility for risk governance;
management’s responsibility for risk management;
risk assessment;
risk responses;
risk monitoring;
risk assurance; and
risk disclosure.


Conclusion
Risk management in general, and its impact on treasury in particular, has received growing attention due to the sub prime crisis and the liquidity crunch.

One key lesson emerging is that there is need for institutions irrespective of size to formalise and review their risk management structures in line with best practices.

King 3 Code of Corporate Governance actually recommends that the board of directors should review the implementation of the risk management plan at least once a year.

The benefits for organisations are immense including low insurance premiums, low exposure to risk, reduced shocks and contagion effects to systemic risk and reduced compliance costs to regulatory requirements (especially for financial institutions).

Robust risk management also ensure reduced allocations of capital for operational, credit and market risks in line with Basel II for financial institutions.


[1] ACCA Policy paper, September 2008 – Climbing Out of the Credit Crunch
[2] Bank of International Settlements (BIS) November 2008 – Supervisory guidance for assessing banks’ financial instruments fair value practices.
[3] ACCA & CFO Research Services, August 2009 – The CFO’s new environment
[4] ACCA July 2009 – The Risk Register, Basic Principles for Small Companies
[5] King Code of Governance for South Africa, 2009, Institute of Directors of Southern Africa.
[6] IAS39, Financial Instruments: Recognition & Measurement, paragraph 88

Dony Mazingaizo, ACCA has an interest in Financial Management and IFRS

Capital Appraisal - Adjusted NPV and Adjusted IRR

The sole objective of capital appraissal is to identify projects that add to shareholder value/shareholder wealth.

Its interesting to note the developments that have taken place in investment/Capital appraisal to cater for the deficiencies in the traditional appraisal methods such as NPV and IRR. With Adjusted NPV, projects that could be declined because of negative NPV can, with further analysis of the tax shield effects show overal positive NPV. Tax shield from interest rate is a critical component in financial management. This analysis can also assist financial managers to derive the Weighted Average cost of capital (WACC) where such information as the target capital structure is not readily apparent from the financial strategy and financial information of the business.

In environments with high tax rates such as Zimbabwe (30.9% corporate tax), the tax shield effect would require serious consideration in investment appraisal.

With the target growth rate of 4% (Ministry of inance) /3.7% World Bank for 2009, one would expect capital projects to slowly come back to the market and financial managers would have to advise management appropriately on any capital investments by due investment appraisal and taking into account qualitative & risk factors such as sovereign risk.

Dony Mazingaizo has an interest in IFRS and Financial Management

Cost of Capital in Zimbabwe

With the absence of meaninglul historical share performance, and government stock that can be termed risk free in the market, let alone long term government debt, one wonders whether portfolio theory and determination of cost of capital can be easily applied in Zimbabwe.

I would think companies make use of of payback periods more in our case as a dertermination of investment decision, if models such as NPV and IRR are used, probably a proxy of the South African market is used.

There is a clear indication that corporate finance principles in the stricktest sence face applicability challenges in Zimbabwe. In other economies for example, information on share performance can be tracked as far back as 1900. In Zimbabwe such information is scantly available and the local Central statistical office leaves a lot to be desired.

Universities which used be at the forefront of research in these and other related areas, are scantly resourced and many skills are being lost to the region and beyond.

Dony Mazingaizo has an interest in IFRS and Financial Management

IFRS for SMEs in Zimbabwe

The IFRS for SMEs were published by IASB in July 2009 and other Countries such as South Africa adopted the SME standards when they were still an exposure draft. The challenges bedevling the economy will poss serious challenges in the SME sector to be able to adopt the IFRS as some will not be able to meet the costs of training let alone implementing sound financial management systems for their businesses.

There is an opportunity for small businesses to formalise their financial reporting processes, facilitate access to finance and loans, and benefit from long term savings in less stringient IFRS reporting requirements.

Only about 400 disclosures are required instead of 3000 "full" IFRS disclosures. This is alongside simpler measurement and recognition requirements.

Dony Mazingaizo has an interest in IFRS and Financial Management

Sustainablity Reporting

Lately i had an opportunity of attending a presentation where Sustainability reporting trends in Zimbabwe were presented. It was amazing to note that not much is being done by Zimbabwean companies to comply with the Requirments of the Enviromental Management Act , Green Reporting Initiatives (GRI) and other sustainability reporting initiatives globally.

Unfortunately there could be serious compliance costs in the future if companies do not position themselves in this important area. With the world looking at green reporting and pressure groups such as Green Peace and Friends of the Earth pushing governments to the limit, African companies need to consider sustainability reporting as an integral part of their risk assessments and corporate strategy.

Dony Mazingaizo has an interest in IFRS and Financial Management

Zimbabwe 2009 Mid term Budget offers little reprive for Employees & Companies

The mid term budget presented by The Finance Minister on 16 July 2009 offered little reprive to employees with no downward revisions to the high PAYE. Further, the loan benefit was revised resulting in only US1000 loan amount being nontaxable. One would have expected amounts north of US5000 to ensure employees are cushioned from the high PAYE for those employers with a capacity to offer loans.

The targeted concessions for business were not enough although some reductions in import duty for some specific goods were offered. The government needs to do more to reduce duty while balancing inflows to the fiscus. This will ensure that the cost of production is competitive inorder to ensure companies compete favourably with other cheap imports such as in the clothing industry and meat industry. You need more concessions in the manufacturing sector if we are going to stimulate production and ensure a balance between inflows and outflows of money in the multi currency enviroment. This will ultimately positively impact on tax inflows into the fiscus.

One would not want a relapse of yester year where a farmer getting diesel at a subsidised price from NOCZIM found it easier to sell the diesel than farm.

It seems the budget was driven by representations from the various economic players implying that in future other sectors also need to be heard so that there is a holistic representation of the economic sectors in the budget leaving less room for arbitrage opportunities by fly by night investors.

Otherwise there is a lot of thought in the budget and some worthy revisions such as scrapping of the banking levy for the banking sector to have some relief. Hopefully the banking sector will respond by reducing charges and offering credit! inorder to stimulate production but understandably this will take time as balance sheets of banks need to be enhanced and probably a revision of the credit offering as what was done in South Africa through the National Credit Act. Banks are also cautious in line with the ongoing recession and lessions from the subprime crisis. Improvements in risk management systems of banks is also key in this regard.

Dony Mazingaizo, ACCA has an interest in financial management and IFRS

Challenges for raising credit in the face of less meaningful 2008 audited financials - The case of Zimbabwean Companies

While the obvious challenge exists for Zimbabwean firms trying to raise working capital and access credit lines in offshore markets using 2008 financial statements which are not meaningful in terms of the numbers, i think all hope is not lost.

Previously, companies in Zimbabwe may have viewed company valuations, due dilligence exercises and revaluation of assets as an academic and expensive exercise or one merely to meet regulatory prudential benchmarks. Now there is need to perform asset valuations and benefit from the strength of balance sheets that are more comperable to other companies in the region. To this end, coming up with audited half year accounts with revalued assets helps companies to approach prospective financiers and investors with more realistic numbers.

Companies also need to benefit from correct asset classifications and use i.e. investment category (IAS 40) or owner occupied (IAS 16) as this has a significant impact on reported earnings and capital e.g. for land and buildings.

These are times for quick wins and companies that report financials that reflect a true and fair view, underlying performance and investment potential are bound to win the hearts of any discerning offshore investor.

In addition one would expect real production to take place with capacity utilisation around 60-80% being acceptable by end of year. The government also needs to play ball in ensuring policy consistency, political stability, restructuring of the high and punitive tax regime and review of investment incentives such as tax holidays across the various economic sectors.

Dony Mazingaizo, BAcc Hons, ACCA, Dip IFRS, Dip Banking, BCompt Hons (UNISA), has special interest in IFRS and Financial Management

When a merger marriage goes wrong!

Who ever thought that the marriage between Kingdom Holdings and Meikles Africa could go wrong. It was not expected!!

There could be a number of reasons which include cultural shocks, leadership clashes and corporate governance challenges. A number of lessons can be leant from this and one glaring lesson is that, synegistic benefits in a merger go beyond the numbers!!

Wither to IFRS?

The globalization of business and finance has led more than 12,000 companies in more than 100 countries to adopt IFRS. In 2005, the European Union (EU) began requiring companies incorporated in its member states whose securities are listed on an EU-regulated stock exchange to prepare their consolidated financial statements in accordance with IFRS1. Australia, New Zealand and Israel have essentially adopted IFRS as their national standards. Canada, which previously planned convergence with U.S. Generally Accepted Accounting Principles (GAAP), now plans to require IFRS for publicly accountable entities in 2011. The Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) plan convergence by 2011. On November 11, 2008, Mexico announced it would adopt IFRS for all listed entities starting in 2012. (www.ifrs.com)

The recent subprime crises has challenged standard setting bodes to raise the the bar and purse convergence efforts more vigorously than before. It is becoming a glaring relality that IFRS is no longer an option even in the US but a business case and opportunity that needs to be explored. Other accounting authorities have mentioned that given the complexity and rapid developments in IFRS, there is need for companies to invest in Global Centres of Excellence especially those with cross boarder listings in order to offer timely business IFRS solutions that have a significant impact on strategy and operations. For example, implementing the revised IFRS 3, Business Combinations and IFRS 1, First Time adoption of Accounting Standards has implications on reported earning and IT platforms with a lot of integration required and process reingineering.

The filing of statutory returns to tax authorities, regulators such as SEC and Central Banks is also needs to be considered. These are indeed excting times giving an opportunity for global IFRS experts to offer business solutions to business.

Going forward, change will be the only constant as there are definately going to be a lot of changes and refinements especially to far value standards such as IAS 39, IAS 32 and also those standards that deal with consolidations and SPVs e.g. SIC 12, Considation of Special Purpose Entites

Dony Mazingazo, ACCA has special interest in IFRS and financial management

Financial reporting Challenges in Zimbabwe in 2009

Impact of dollarising the Zimbabwean Economy on financial reporting - accountants being hounded by yesteryear.

As accountants in international markets are grappling with the effects of the global recession with its attended challenges such as impairment of financial instruments, risk management and various IFRS revisions, accountants in Zimbabwe have been dealing with a different type of nightmare; the after effects of the yesteryear hyperinflation and impact of dollarisation on financial reporting.

The Government of Zimbabwe adopted a multi currency system at the beginning of 2009 with the United States Dollar, Rand and Pound being used as the preferred currencies by the transacting public and business.

The adoption of other currencies other than the local currency, which had virtually become useless by end of 2008, has brought much welcomed stability in business, with budgets and planning now making sense in boardrooms in the country. However, the changeover has resulted in serious accounting implications which have a bearing on the opening trial balances of businesses as at 1 January 2009. The question on accountants have had to deal with is how do you translate a Zimbabwean Dollar balance sheet into USD? What exchange rate is used? This challenge has been even more complicated for institutions with year ends after 31 Dec 2008 say 30 March 2009 resulting in cases in additional financial reporting costs.

To this end, accountants in Zimbabwe are still being hounded by IAS 21 as the functional and presentation currency of businesses has changed overnight from Zimbabwean dollars to US dollars or Rands.

The challenges of opening balances have implied that probably companies need to consult IFRS technical partners to ‘perform agreed upon procedures’ in order to come up with an opening balance sheet that reflects a ‘true and fair’ view. For institutions with significant Zimbabwean dollar balances as at 31 December 2008, this has meant that these may have been impaired and institutions need to consider the requirements of IAS 36: Impairment of Assets and IAS 39: Financial instruments, Recognition & measurement.

Dony Mazingaizo, ACCA, Dip IFRS, Dip Banking, BCompt (Hons) UNISA, BAcc (Hons) UZ, CTA has a keen interest in IFRS.

Financial Management in Africa

Africa entreprises have a long way in improving financial management capacity and leverage on the immense resources that are available on the continent. Significant strides have been made in the education sector in subsaharan africa but a lot needs to be done in improving financial systems, capacity building and thus strengthening accountability concerns especially in SMEs and public entreprises.

I have a great feeling that young people can do more in harnessing the opportunities of the global economy and thus assist in the improvements of financial management systems in their own jurisdictions and beyond borders.

A lot of potential remains uptapped and many organisations are utilising inadequdate financial management infrastructure. I have a passion for financial management and accountability and i believe more can be done to deliver in this critical area.